Greenfire Resources Ltd. — Annual Report 2023

Apr 12, 2024

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F/A

(Amendment No. 1)

(Mark One)

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

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

For the fiscal year ended December 31 , 2023

OR

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

OR

☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-41810

Greenfire Resources Ltd.

(Exact name of Registrant as specified in its charter)

Not applicable	Alberta
(Translation of Registrant’s name into English)	(Jurisdiction of incorporation or organization)

1900 – 205 5th Avenue SW

Calgary , Alberta T2P 2V7

(403) 264-9046

(Address of principal executive offices)

Robert Logan

1900 – 205 5th Avenue SW

Calgary , AB T2P 2V7

(403) 465-2321

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

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

Title of each class	Trading Symbols	Name of each exchange on which registered
Common Shares	GFR	New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

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Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

On December 31, 2023, the issuer had 68,642,515 common shares, without par value, outstanding.

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

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒

Indicate by check mark whether the registrant: (1) has filed all reports required 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 ☒

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

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Emerging growth company	☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ☐ International Financial Reporting Standards as issued by the International Accounting Standards Board ☒ Other ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

This annual report on Form 20-F is incorporated by reference into the registrant’s Registration Statements on Form S-8 File No. 333-277054.

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EXPLANATORY STATEMENT

This Amendment on Form 20-F/A (this “Amendment”) is being filed by Greenfire Resources Ltd. (the “Company” “we,” “our,” or “us”) to amend our annual report on Form 20-F for the fiscal year ended December 31, 2023, originally filed with the U.S. Securities and Exchange Commission on March 27, 2024 (the “Original Filing”), solely to (i) correct a typographical error in the tenure statement in the audit report of Deloitte LLP and minor typographical changes in notes 5, 14 and 15 to the Company’s financial statements included in the Original Filing to align with a previously filed version of the Company’s financial statements and (ii) to file the consent of McDaniel & Associates Consultants Ltd. (“McDaniel”) to the incorporation by reference into our registration statement on Form S-8 of McDaniel’s reports auditing the Company’s reserves data that were included in the Original Filing. In addition, we are including a new currently dated consent of Deloitte LLP.

As required by Rule 12b-15 of the Securities and Exchange Act of 1934, as amended, we are also filing or furnishing the certifications required under Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 as exhibits to this Amendment.

This Amendment makes no other changes to the Original Filing other than as described above. The filing of this Amendment and the inclusion of newly executed certifications and consents should not be understood to mean that any other statements or disclosure contained in the Original Filing are true and complete as of any date subsequent to the date of the Original Filing, except as expressly noted above.

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PART III

ITEM 18. FINANCIAL STATEMENTS

Our Annual Financial Statements are included at the end of this Amendment.

ITEM 19. EXHIBITS

Exhibit Number	Description
12.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
12.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
13.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.4	Consent of Deloitte LLP.
15.5	Consent of McDaniel & Associates Consultants Ltd.
101. INS	Inline XBRL Instance Document.
101.SCH	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase
Document.
101.DEF	Inline XBRL Taxonomy Definition Linkbase Document.
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase
Document
104	Cover Page Interactive Data File (formatted as Inline
XBRL and contained in Exhibit 101)

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SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this report on its behalf.

| GREENFIRE
RESOURCES LTD. — By: | /s/
Robert Logan |
| --- | --- |
| Name: | Robert Logan |
| Title: | Chief Executive Officer |

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INDEX TO FINANCIAL STATEMENTS

	Page
Audited Financial Statements of Greenfire Resources Ltd.
Report of Independent Registered Public Accounting Firm (PCAOB ID: 1208 )	F-2
Consolidated Balance Sheets as at December 31, 2023 and December 31, 2022.	F-3
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2023, December 31, 2022 and December 31, 2021	F-4
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2023, December 31, 2022 and December 31, 2021	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, December 31, 2022 and December 31, 2021	F-6
Notes to Consolidated Financial Statements	F-7
Supplementary Information for Greenfire Resources Ltd. – oil and gas.	F-36

| Audited Financial Statements of Japan Canada Oil
Sands Limited | |
| --- | --- |
| Report of Independent Registered Public Accounting Firm | F-43 |
| Balance Sheets as at September 17, 2021, December 31, 2020 and January 1, 2020 | F-44 |
| Statements of Comprehensive Income (Loss) for the period ended September 17, 2021 and for the year ended December 31, 2020 | F-45 |
| Statements of Changes in Shareholders’ Equity (Deficit) for the period ended September 17, 2021 and for the year ended December 31, 2020 | F-46 |
| Statements of Cash Flows for the period ended September 17, 2021 and for the year ended December 31, 2020 | F-47 |
| Notes to Financial Statements | F-48 |

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Greenfire Resources Ltd.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Greenfire Resources Ltd. and subsidiaries (the “Company”) as at December 31, 2023 and 2022, the related consolidated statements of comprehensive income (loss), changes in shareholders’ equity and cash flows, for each of the three years in the period ended December 31, 2023, 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 at December 31, 2023 and 2022, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2023, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

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 audits. 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 audits 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 audits, 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 audits 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 audits 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 audits provide a reasonable basis for our opinion.

/s/ Deloitte LLP

Chartered Professional Accountants

Calgary , Canada

March 20, 2024

We have served as the Company’s auditor since 2021.

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Greenfire Resources Ltd. 2023 Annual Financial Statements | F- 2

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Greenfire Resources Ltd.

Consolidated Balance Sheets

As at December 31 — ($CAD thousands)	note	2023	2022
Assets
Current assets
Cash and cash equivalents	7	$ 109,525	$ 35,363
Restricted cash	8	-	35,313
Accounts receivable	14	34,680	34,308
Inventories	9	13,863	14,568
Prepaid expenses and deposits		5,746	3,975
		163,814	123,527
Non-current assets
Property, plant and equipment	10	941,374	963,050
Deferred income tax asset	12	68,295	87,681
		1,009,669	1,050,731
		1,173,483	1,174,258
Liabilities
Current liabilities
Accounts payable and accrued liabilities	22	59,850	46,569
Current portion of long-term debt	15	44,321	63,250
Warrant liability	20	18,630	-
Taxes payable	5	1,063	-
Current portion of lease liabilities	11	6,002	98
Risk management contracts	14	417	27,004
		130,283	136,921
Non-current liabilities
Long-term debt	15	332,029	191,158
Lease liabilities	11	7,722	865
Decommissioning liabilities	13	8,449	7,543
		348,200	199,566
		478,483	336,487
Shareholders’ equity
Share capital	5,19	158,515	15
Contributed surplus	5,19	9,788	44,674
Retained earnings (deficit)		526,697	793,082
		695,000	837,771
		$ 1,173,483	$ 1,174,258

Commitments and contingencies (note 18)

See accompanying notes to the consolidated financial statements

These Consolidated Financial Statements were approved by the Board of Directors.

Robert Logan, Director Derek Aylesworth, Director

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Greenfire Resources Ltd.

Consolidated Statements of Comprehensive Income (Loss)

($CAD thousands, except per share amounts)		Year ended December 31, 2023		Year ended December 31, 2022
Revenues
Oil sales	16	$ 675,970		$ 998,849	$	270,674
Royalties	16	( 23,706	)	( 50,064	)	( 9,543	)
Oil sales, net of royalties		652,264		948,785		261,131
Gain (loss) on risk management contracts	14	16,405		( 121,478	)	( 39,291	)
		668,669		827,307		221,840
Expenses
Diluent expense		304,740		368,015		94,623
Transportation and marketing		55,673		67,842		24,057
Operating expenses		148,965		160,826		59,710
General and administrative		11,536		9,836		3,285
Stock-based compensation		9,808		1,183		-
Financing and interest	17	110,214		77,074		25,050
Depletion and depreciation	10	68,054		68,027		27,071
Exploration and other expenses		3,852		1,825		350
Other (income) expenses		( 2,905	)	( 206	)	8,373
Transaction costs	5,6	12,172		2,769		10,318
Listing expense	5	106,542		-		-
Gain on revaluation of warrants	20	( 34,973	)	-		-
Gain on acquisitions	6	-		-		( 693,953	)
Foreign exchange (gain) loss		( 8,724	)	26,099		1,512
Total expenses		784,954		783,290		( 439,604	)
Net income (loss) before taxes		( 116,285	)	44,017		661,444
Income tax recovery (expense)	12	( 19,386	)	87,681		-
Net income (loss) and comprehensive income (loss)		$ ( 135,671	)	$ 131,698	$	661,444
Net income (loss) per share
Basic 1	19	$ ( 2.49	)	$ 2.69	$	15.52
Diluted 1	19	$ ( 2.49	)	$ 1.88	$	13.75

1 For the years ended December 31, 2022 and 2021 the Company’s basic and diluted earnings per share is the net income per common share of Greenfire Resources Inc (see Note 1), and the weighted average common shares outstanding has been recast by the applicable exchange ratio following the completion of the De-Spac Transaction with MBSC (Note 5.)

See accompanying notes to the consolidated financial statements

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Greenfire Resources Ltd. 2023 Annual Financial Statements | F- 4

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Greenfire Resources Ltd.

Consolidated Statements of Changes in Shareholders’ Equity

($CAD Thousands, except per share amounts)					Year ended December 31, 2021
Share capital
Balance, beginning of year	$	15	$	15	$ -
Issuance on exercise of bond warrants	5,19	38,911		-	-
Issuance to MBSC shareholders	5,19	62,959		-	-
Issuance of shares for PIPE investment	5,19	56,630		-	-
Shares issued during year	19	-		-	15
Balance, end of year		158,515		15	15
Contributed surplus
Balance, beginning of year		44,674		43,491	-
Stock based compensation	19	9,808		1,183	-
Exercise of performance warrants	5,19	( 1,203	)	-	-
Issuance and exercise of bond warrants	5,19	( 43,491	)	-	43,491
Balance, end of year		9,788		44,674	43,491
Retained earnings (deficit)
Balance, beginning of year		793,082		661,384	( 60	)
Common shares repurchased and cancelled	5,19	( 41,464	)	-	-
Dividend on De-Spac transaction	5,19	( 59,388	)	-	-
Exercise of bond warrants	5,19	4,580		-	-
Exercise of performance warrants	5,19	1,202		-	-
Issuance of warrants	20	( 35,644	)	-	-
Net income (loss) and comprehensive (loss)		( 135,671	)	131,698	661,444
Balance, end of year		526,697		793,082	661,384
Total shareholders’ equity	$	695,000	$	837,771	$ 704,890

See accompanying notes to the consolidated financial statements

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Greenfire Resources Ltd.

Consolidated Statements of Cash Flows

($CAD Thousands, except per share amounts)				Year ended December 31, 2022
Operating activities
Net income (loss)	$	( 135,671	)	$ 131,698	$	661,444
Items not affecting cash:
Deferred income taxes	12	19,386		( 87,681	)	-
Gain on acquisitions	6	-		-		( 693,953	)
Unrealized (gain) loss on risk management contracts	14	( 26,587	)	( 8,673	)	35,677
Foreign exchange (gain) loss		( 8,967	)	26,099		1,512
Depletion and depreciation	10	67,893		67,868		27,996
Stock based compensation	19	9,808		1,183		-
Other non-cash expenses		68		66		3,769
Accretion	13	906		743		298
Amortization of debt issuance costs	17	43,478		29,854		2,152
Debt redemption premium	15,17	19,152		-		-
Gain on revaluation of warrants	20	( 34,973	)	-		-
Listing expense	5	106,542		-		-
Change in non- cash working capital	24	25,513		3,570		( 6,910	)
Cash provided by operating activities		86,548		164,727		31,985
Financing activities
Issuance of long-term debt net of issuance costs	15	382,454		-		365,591
Repayment of long-term debt	15	( 294,647	)	( 123,612	)	-
Debt redemption premium	15,17	( 19,152	)	-		-
Issuance of common shares	19	67,115		-		15
Common shares repurchased	5,19	( 41,464	)	-		-
Dividend on De-Spac transaction	5,19	( 59,388	)	-		-
De-Spac transaction costs	5,19	( 34,817	)	-		-
Payment of lease liabilities	11	( 99	)	( 26	)	-
Cash provided (used) by financing activities		2		( 123,638	)	365,606
Investing activities
Property, plant and equipment expenditures	10	( 33,428	)	( 39,592	)	( 4,594	)
Cash and cash equivalents acquired in acquisitions	6	-		-		6,918
Acquisitions	6	-		-		( 366,454	)
Restricted cash	8	35,313		( 26,613	)	( 8,140	)
Change in non-cash working capital (accrued additions to PP&E)	24	( 13,988	)	2,459		35,742
Cash used in investing activities		( 12,103	)	( 63,746	)	( 336,528	)
Exchange rate
impact on cash and cash equivalents held in foreign currency		( 285	)	( 2,849	)	( 194	)
Change in cash and cash equivalents		74,162		( 25,506	)	60,869
Cash and cash equivalents, beginning of year		35,363		60,869		-
Cash and cash equivalents, end of year	$	109,525		$ 35,363	$	60,869

See accompanying notes to the consolidated financial statements

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Greenfire Resources Ltd.

Notes to the Consolidated Financial Statements

1. CORPORATE INFORMATION

Greenfire Resources Ltd. (the “Company” or “Greenfire”) was incorporated under the laws of Alberta on December 9, 2022. On September 20, 2023, the Company participated in a De-Spac transaction involving a number of entities, including Greenfire Resources Inc. (“GRI”) and M3-Brigade Acquisition III Corp (“MBSC”) (the “De-Spac Transaction”). Refer to Note 5 De-Spac Transaction for additional information. These audited consolidated financial statements are comprised of the accounts of Greenfire and its wholly owned subsidiaries, GRI and MBSC. The prior period amounts presented are those of GRI, which continued as the operating entity, concurrent with recapitalization. As of January 1, 2024, GRI was amalgamated with Greenfire Resources Operation Corporation (“GROC”).

The Company and its subsidiaries are engaged in the exploration, development and operation of oil and gas properties, focused primarily in the Athabasca oil sands region of Alberta. The Company’s corporate head office is located at 1900, 205 5th Avenue SW, Calgary, AB T2P 2V7.

1. BASIS OF PRESENTATION AND STATEMENT OF COMPLIANCE

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). In these consolidated financial statements, all dollars are expressed in Canadian dollars, which is the Company’s functional currency, unless otherwise indicated. These consolidated financial statements have been prepared on a historical cost basis, except for certain financial instruments which are measured at fair value. The consolidated financial statements were approved by the Board of Directors on March 20, 2024.

1. MATERIAL ACCOUNTING POLICIES

Principles of consolidation

These consolidated financial statements consist of financial records of the Company and its wholly owned subsidiaries. The Company has two direct subsidiaries, MBSC and GROC which are 100% wholly owned by the Company, as well as several indirect subsidiaries, including, Hangingstone Expansion Limited Partnership (“HELP”) and Hangingstone Demo Limited Partnership (“HDLP”), which were formed by GROC and their general partners Hangingstone Expansion General Partner (“HEGP”) and Hangingstone Demo General Partner (“HDGP”), respectively. The units of HELP and HDLP are allocated at 99.99% to GROC for both entities and 0.01% to HEGP and HDGP, respectively. HEGP and HDGP are wholly owned subsidiaries of GROC, along with Greenfire Resources Employment Corporation. Intercompany transactions and balances between the entities are eliminated upon consolidation.

Joint arrangements

The Company undertakes certain business activities through joint arrangements. Interests in joint arrangements have been classified as joint operations. Joint control exists for contractual arrangements governing the Company’s assets whereby Greenfire has less than 100 per cent working interest, all of the partners have control of the arrangement collectively, and spending on the project requires unanimous consent of all parties that collectively control the arrangement and share the associated risks. A joint operation is established when the Company has rights to the assets and obligations for the liabilities of the arrangement. The Company only recognizes its proportionate share in assets, liabilities, revenues and expenses associated with its joint operations.

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Cash and cash equivalents

Cash and cash equivalents include cash-on-hand, deposits held with banks, and other short-term highly liquid investments such as bankers’ acceptances, commercial paper, money market deposits or similar instruments, with a maturity of 90 days or less.

Foreign currency translation

Foreign currency transactions are translated into Canadian Dollars at exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange on the balance sheet date. Any resulting exchange differences are included in the Consolidated Statement of Comprehensive Income (Loss). Nonmonetary assets and liabilities denominated in a foreign currency are measured at historical cost and are translated into the functional currency using the rates of exchange as at the dates of the initial transactions.

Operating segments

The Company has one reportable operating segment which is made up of its oil sands operations based on geographic location (Athabasca oil sands region of Alberta, Canada), nature of the products sold and integration of facilities and operations. The chief operating decision maker is the President and CEO, who reviews operating results at this level to assess financial performance and make resource allocation decisions. The Company determines its operating segments based on the differences in the nature of operations, products sold, economic characteristics and regulatory environments and management. All of the Company’s non-current assets are located in and revenue is earned in Canada.

Financial instruments

Financial assets and financial liabilities are recognized in the Company’s balance sheet when the Company becomes a party to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially measured at fair value, except for trade receivables that do not have a significant financing component which are measured at transaction price. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

Financial assets

All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

All recognized financial assets are measured subsequently in their entirety at either amortized cost or fair value, depending on the classification of the financial assets.

Financial assets that meet the following conditions are measured subsequently at amortized cost:

● the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and

● the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

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Financial assets that meet the following conditions are measured subsequently at fair value through other comprehensive income (FVTOCI):

● the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets; and

● the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

By default, all other financial assets are measured subsequently at fair value through profit or loss (FVTPL).

Classifications are not changed subsequent to initial recognition, except in limited circumstances.

Credit risk arises from the potential that the Company may incur a loss if a counterparty fails to meet its obligations in accordance with agreed terms. Financial assets are assessed at each reporting date to determine whether there is any evidence that credit losses are expected. Credit loss of financial assets is determined by assessing and measuring the expected credit losses of the instruments at each reporting period. The Company measures expected credit losses using a lifetime expected loss allowance model for all trade receivables and contract assets. The credit-loss model groups receivables based on similar credit risk characteristics and the number of days past due in order to estimate and recognize bad debt expenses. When measuring expected credit losses, the Company considers a variety of factors including: evidence of the debtor’s financial condition, history of collections, the term of the receivable and any recent and expected future changes in economic conditions. The Company has not experienced any write-offs of uncollectible receivables; as a result, there are no expected credit losses recognized as at December 31, 2023 ( nil for 2022 and 2021).

Financial liabilities

On initial recognition, financial liabilities are classified at amortized cost or FVTPL. A financial liability is classified as FVTPL if it is classified as held-for-trading, is a derivative or is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest expense, are recognized in profit or loss. Other financial liabilities are subsequently measured at amortized cost using the effective interest method. Interest expense and foreign exchange gains and losses are recognized in profit or loss. A financial liability is derecognized when its contractual obligations are discharged or canceled or expire. The Company also derecognizes a financial liability when its terms are modified and the cash flows of the modified liability are substantially different, in which case a new financial liability based on the modified terms is recognized at fair value. On derecognition of a financial liability, the difference between the carrying amount extinguished and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recognized in profit or loss.

The Company may, from time to time, enter into certain financial derivative contracts to manage exposure from fluctuating commodity prices, interest rates or foreign exchange rates between the Canadian and US dollar. Such risk management contracts are not used for trading or speculative purposes. The Company has not designated its risk management contracts as effective hedges and has not applied hedge accounting even though the Company considers all financial derivate contracts to be economic hedges, as such all r isk management contracts have been recorded at fair value with changes in fair value being recorded through profit or loss.

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Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants who are independent, knowledgeable and willing and able to transact would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. The Company is able to classify fair value balances based on the observability of these inputs. The authoritative guidance for fair value measurements establishes three levels of the fair value hierarchy, defined as follows:

● Level 1 : Unadjusted, quoted prices for identical assets or liabilities in active markets;

● Level 2 : Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly for substantially the full term of the asset or liability; and

● Level 3 : Significant, unobservable inputs for use when little or no market data exists, requiring a significant degree of judgment.

The following table summarizes the method by which the Company measures its financial instruments on the consolidated balance sheets and the corresponding hierarchy rating for their derived fair value estimates:

Financial Instrument	Classification & Measurement
Cash and cash equivalents	Amortized cost
Restricted cash	Amortized cost
Accounts receivable	Amortized cost
Risk management contracts	FVTPL
Accounts payable and accrued liabilities	Amortized cost
Warrant liability	FVTPL
Long-term debt	Amortized cost

The carrying values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable and accrued liabilities included on the consolidated balance sheets approximates the fair values of the respective assets and liabilities due to the short-term nature of those instruments.

The estimated fair value of long-term debt has been determined based on period-end trading prices of long-term borrowings on the secondary market (level 2), for further information please refer to Note 15.

The warrants issued were classified as financial liabilities due to a cashless exercise feature and are measured at fair value upon issuance and at each subsequent reporting period with the changes in fair value recorded in the consolidated statement of income (loss). The fair value of these warrants is determined using the Black-Scholes option valuation model.

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Common shares are classified as shareholders’ equity. The Company may issue share purchase warrants as a part of debt and/or equity financings. These financial instruments are assessed at the date of issue, based on their underlying terms and conditions, as to whether they are an equity instrument or a derivative financial instrument and if determined to be an equity instrument they are initially recognized in shareholder’s equity at fair value on date of issue. Classifications are not changed after initial recognition and only reassessed when there is a modification in the terms and conditions of the underlying share purchase warrant. Incremental costs directly attributable to the issuance of equity instruments as a deduction from equity, net of any tax effects.

Revenue

Revenue is measured based on consideration to which the Company expects to be entitled in a contract with a customer. The Company recognizes revenue primarily from the sale of diluted and non- diluted bitumen. Revenue is recognized when its single performance obligation is satisfied. This occurs when the product is delivered, control of the product and title or risk of loss transfers to the customer at contractually specified transfer points. This transfer coincides with title passing to the customer and the customer taking physical possession of the commodity. The Company principally satisfies its single performance obligations at a point in time. Transaction prices are determined at inception of the contract and allocated to the performance obligations identified. Payment is generally received in the following month after the sale has occurred.

The Company sells its production pursuant to fixed and variable-priced contracts. The transaction price for variable-priced contracts is based on the commodity price, adjusted for quality, location, or other factors, whereby each component of the pricing formula can be either fixed or variable, depending on the contract terms. Revenue is recognized when a unit of production is delivered to the contract counterparty. The amount of revenue recognized is based on the agreed upon transaction. Royalty expenses are recognized as production occurs.

The Company has long-term marketing agreements with a single counterparty (“Sole Petroleum Marketer”), which has exclusive marketing rights over the Company’s production and diluent purchases at Hangingstone Expansion (“Expansion”), until October 2028 and at Hangingstone Demo (“Demo”), until April 2026. Fees paid to the Sole Petroleum Marketer as part of these agreements include marketing, incentive and royalty fees. These fees are expensed as incurred as transportation and marketing expenses. In addition, the Sole Petroleum Marketer provided letters of credit in support of the Company’s long-term transportation commitment until November 2023. As a result of these marketing agreements, the Company is exposed to concentration and credit risks, as all sales are to a single counterparty.

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Inventories

Inventories consist of crude oil products and warehouse materials and supplies. The carrying value of inventory includes direct and indirect expenditures incurred in the normal course of business in bringing an item or product to its existing condition and location. The Company values inventories at the lower of cost and net realizable value on a weighted average cost basis. Net realizable value is the estimated selling price less applicable selling expenses. If the carrying value exceeds net realizable value, a write-down is recognized. A change in circumstances could result in a reversal of the write-down for the inventory that remains on hand in a subsequent period.

Property, plant and equipment (“PP&E”)

PP&E is measured at the cost to acquire, less accumulated depletion and depreciation, and net of any impairment losses. The Company begins capitalizing oil exploration costs after the right to explore has been obtained and includes land acquisition costs, geological and geophysical activities, drilling expenditures and costs incurred for the completion and testing of exploration wells. The Company capitalizes all subsequent investments attributable to the development of its oil assets if the expenditures are considered a betterment and provide a future benefit beyond one year. Costs of planned major inspections, overhaul and turnaround activities that maintain PP&E and benefit future years of operations are capitalized and depreciated on a straight-line basis over the period to the next turnaround. Recurring planned maintenance activities performed on shorter intervals are expensed. Replacements of equipment are capitalized when it is probable that future economic benefits will flow to the Company. The Company’s capitalized costs primarily consist of pad construction, drilling activities, completion activities, well equipment, processing facilities, gathering systems and pipelines. Borrowing costs attributable to long-term development projects are also capitalized.

Capitalized costs are classified as exploration and evaluation (“E&E”) assets if technical feasibility and commercial viability have not yet been established. Technical feasibility and commercial viability are generally deemed to exist when proved reserves are present and the Company has sanctioned the project for commercial development. Capitalized costs are classified as PP&E assets if they are attributable to the development of oil reserves after technical feasibility and commercial viability have been achieved. Once the technical feasibility and commercial viability of E&E assets have been established, the E&E assets are tested for impairment and reclassified to PP&E. The majority of the Company’s PP&E is depleted using the unit-of-production method relative to the Company’s estimated total recoverable proved plus probable (2P) reserves. The depletion base consists of the historical net book value of capitalized costs, plus the estimated future costs required to develop the Company’s estimated recoverable proved plus probable reserves. The depletion base excludes E&E and the cost of assets that are not yet available for use in the manner intended by Management. Corporate assets and other capitalized costs are depreciated over their estimated useful lives primarily using the declining-balance method.

There were no E&E costs as at December 31, 2023, 2022 and 2021.

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Provisions and contingent liabilities

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the statement of financial position date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. The Company’s provisions primarily consist of decommissioning liabilities associated with dismantling, decommissioning, and site disturbance remediation activities related to its oil assets.

At initial recognition, the Company recognizes a decommissioning asset and corresponding liability on the balance sheet. Decommissioning liabilities are measured at the present value of expected future cash outflows required to settle the obligations at the balance sheet date, using managements best estimate of expenditures required to settle the liability. Decommissioning liabilities are measured based on the estimated future inflation rate and then discounted to net present value using a credit adjusted risk-free discount rate. Any change in the present value, as a result of a change in discount rate or expected future costs, of the estimated obligation is reflected as an adjustment to the provision and the corresponding item of property, plant and equipment. The liability for decommissioning costs is increased each period through the unwinding of the discount, which is included in finance and interest costs in the consolidated statements of comprehensive income (loss). Decommissioning liabilities are remeasured at each reporting period primarily to account for any changes in estimates or discount rates. Actual expenditures incurred to settle the obligations reduce the liability.

Contingent liabilities reflect a possible obligation that may arise from past events and the existence of which can only be confirmed by the occurrence or non-occurrence of one or more uncertain future events, not wholly within the control of the Company. Contingent liabilities are not recognized on the balance sheet unless they can be measured reliably and the possibility of an outflow of economic benefits in respect of the contingent obligation is considered probable. Disclosure of contingent liabilities is provided when there is a less than probable, but more than remote, possibility of material loss to the Company.

Impairment of non-financial assets

For the purpose of estimating the asset’s recoverable amount, PP&E assets are grouped into Cash Generating Units (“CGU”). A CGU is the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets. The Company’s PP&E assets are currently held in two CGUs. Our Hangingstone Expansion and Demo assets represent our two CGU’s at December 31, 2023 and December 31, 2022.

PP&E assets are reviewed at each reporting date to determine whether there is any indication of impairment. If indicators of impairment exist, the recoverable amount of the asset or CGU is estimated as the greater of value-in-use (“VIU”) and fair value less costs of disposal (“FVLCOD”). VIU is estimated as the discounted present value of the expected future cash flows from continuing use of the asset or CGU. FVLCOD is the amount that would be realized from the disposition of an asset or CGU in an arm’s length transaction between knowledgeable and willing parties. An impairment loss is recognized in earnings or loss if the carrying amount of the asset or CGU exceeds its estimated recoverable amount.

At each reporting period, PP&E, E&E and right-of-use (“ROU”) assets are tested for impairment reversal at the CGU level when facts and circumstances suggest that the recoverable amount of the CGU may exceed the carrying value. Impairment reversal is limited to the carrying amount which would have been recorded had no historical impairment been recorded.

Business combinations

Business combinations are accounted for using the acquisition method of accounting in which identifiable assets acquired and liabilities assumed in a business combination are recognized and measured at their fair value at the date of the acquisition. If the cost of the acquisition is less than the fair value of the net asset acquired, the difference is recognized in net income (loss). If the cost of the acquisition is greater than the fair value of the net assets acquired, the difference is recognized as goodwill.

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Leases

A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. A lease obligation and corresponding ROU asset are recognized at the commencement of the lease. Lease liabilities are initially measured at the present value of the unavoidable lease payments and discounted using the Company’s incremental borrowing rate when an implicit rate in the lease is not readily available. Interest expense is recognized on the lease obligations using the effective interest rate method. The ROU assets are recognized at the amount of the lease liabilities, adjusted for lease incentives received and initial direct costs, on commencement of the leases. ROU assets are depreciated on a straight-line basis over the lease term. The Company is required to make judgments and assumptions on incremental borrowing rates and lease terms. The carrying balance of the leased assets and lease liabilities, and related interest and depreciation expense, may differ due to changes in market conditions and expected lease terms. Short-term and low value leases have not been included in the measurement of lease liabilities.

Income taxes

Income tax is comprised of current and deferred tax. Income tax expense (recovery) is recognized in the consolidated statement of comprehensive income (loss) except to the extent that it relates to share capital, in which case it is recognized in equity. Current tax is the expected tax payable (receivable) on the taxable income (loss) for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognized using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business combination and does not affect profit, other than temporary differences that arise in shareholder’s equity. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted at the reporting date.

Deferred tax assets and liabilities are offset on the consolidated balance sheet if there is a legally enforceable right to offset and they relate to income taxes levied by the same tax authority. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are not recognized until such time that it is more likely than not that the related tax benefit will be realized.

Stock-based compensation

The Company’s stock-based compensation plans for employees consist of performance warrants. The Company’s stock-based compensation plans are accounted for as equity-settled share-based compensation plans. The fair values of the equity settled awards are initially measured at the date of issuance using the Black-Scholes model using an estimated forfeiture rate, volatility, dividend yield, risk-free rate and expected life. The fair value is recorded as stock-based compensation over the vesting period with a corresponding amount reflected in contributed surplus. When performance warrants are exercised, the cash proceeds along with the amount previously recorded as contributed surplus are recorded as share capital.

Per share information

Basic per share information is calculated using the weighted average number of common shares outstanding during the year. Diluted per share information is calculated using the basic weighted average number of common shares outstanding during the year, adjusted for the number of shares that could have had a dilutive effect on net income during the year had in the-money and outstanding equity compensation units been exercised.

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New and amended IFRS Accounting Standards that are effective for the current year

In the current year, the Company has applied a number of amendments to IFRS that are mandatorily effective as of January 1, 2023. These adopted amendments are as follows, with their adoption having no significant impact on the Company’s consolidated financial statements.

Amendments to IAS 1 – Presentation of Financial Statements

The amendments change the requirements in IAS 1 with regard to disclosure of accounting policies. The amendments replace all instances of the term ‘significant accounting policies’ with ‘material accounting policy information’. Accounting policy information is material if, when considered together with other information included in an entity’s financial statements, it can reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements.

Amendments to IAS 12 – Income Taxes

The amendments introduce a further exception from the initial recognition exemption. Under the amendments, an entity does not apply the initial recognition exemption for transactions that give rise to equal taxable and deductible temporary differences. Depending on the applicable tax law, equal taxable and deductible temporary differences may arise on initial recognition of an asset and liability in a transaction that is not a business combination and affects neither accounting profit nor taxable profit.

Future accounting pronouncements

The Company plans to adopt the following amendments that are effective for annual periods beginning on or after January 1, 2024. The pronouncements will be adopted on their respective effective dates; however, each is not expected to have a material impact on the financial statements.

A mendments to IAS 1 – Presentation of Financial Statements - Classification of Liabilities as Current or Non-current

The amendments clarify that the classification of liabilities as current or non-current is based on rights that are in existence at the end of the reporting period, specify that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability, explain that rights are in existence if covenants are complied with at the end of the reporting period, and introduce a definition of ‘settlement’ to make clear that settlement refers to the transfer to the counterparty of cash, equity instruments, other assets or services.

Amendments to IAS 1 – Presentation of Financial Statements - Classification of Liabilities as Current or Non-current

The amendments specify that only covenants that an entity is required to comply with on or before the end of the reporting period affect the entity’s right to defer settlement of a liability for at least twelve months after the reporting date (and therefore must be considered in assessing the classification of the liability as current or noncurrent). Such covenants affect whether the right exists at the end of the reporting period, even if compliance with the covenant is assessed only after the reporting date (e.g. a covenant based on the entity’s financial position at the reporting date that is assessed for compliance only after the reporting date).

1. ACCOUNTING JUDGEMENTS AND ESTIMATES

The timely preparation of the consolidated financial statements requires that management make estimates and assumptions and use judgement regarding the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during that period. Such estimates primarily relate to unsettled transactions and events as of the date of the consolidated financial statements. The estimated fair value of financial assets and liabilities are subject to measurement uncertainty. In addition, climate change and the evolving worldwide demand for alternative sources of energy that are not sourced from fossil fuels could result in a change in assumptions used in determining the recoverable amount and could affect the carrying value of the related assets. As these issues advance and regulations change, future financial performance may be impacted. This also presents uncertainty and risk with respect to the Company, its performance and estimates and assumptions. The timing in which global energy markets transition from carbon-based sources to alternative energy or when new regulatory practices may be implemented is highly uncertain.

The ongoing geopolitical risks and conflicts have resulted in significant commodity price volatility and increased the level of uncertainty in the Company’s future cash flow. The Company’s gains and losses from its commodity price risk management contracts is likely to be volatile in the current market environment and there is greater emphasis on ensuring operations is uninterrupted and production volumes are delivered to meet these obligations. Additionally, the higher degree of commodity price volatility may increase systemic risk to the global commodities trading and banking businesses, which in turn may increase the Company’s counterparty risk. The Company has not experienced impairment of its receivables and currently has no information that indicates there is elevated risk of impairment in the future.

Accordingly, actual results may differ materially from estimated amounts as future confirming events occur. Significant judgements, estimates and assumptions made by management in the preparation of these consolidated financial statements are outlined below.

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Inventories

The Company evaluates the carrying value of its inventory at the lower of cost and net realizable value. The net realizable value is estimated based on current market prices that the Company would expect to receive from the sale of its inventory.

Decommissioning liabilities

The provision for decommissioning liabilities is based upon numerous assumptions including settlement amounts, inflation factors, credit-adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. Actual costs and cash outflows could differ from the estimates as a result of changes in any of the above noted assumptions.

Risk management contracts

The Company utilizes commodity risk management contracts to manage commodity price risk on oil sales and operating expenses. The Company may also utilize foreign exchange risk management contracts to reduce its exposure to foreign exchange risk associated with its interest payments on its US dollar denominated term debt. The calculated fair value of the risk management contracts relies on external observable market data including quoted forward commodity prices and foreign exchange rates. The resulting fair value estimates may not be indicative of the amounts realized at settlement and as such are subject to measurement uncertainty.

Deferred income taxes

The provision for income taxes is based on judgments in applying income tax law and estimates on the timing and likelihood of reversal of temporary differences between the accounting and tax bases of assets and liabilities. The provision for income taxes is based on the Company’s interpretation of the tax legislation and regulations which are also subject to change. The Company recognizes a tax provision when a payment to tax authorities is considered more likely than not. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Income tax filings are subject to audits and reassessments and changes in facts, circumstances and interpretations of the standards which may result in a material increase or decrease in the Company’s provision for income taxes.

Long-term debt

The measurement of the current portion of long-term debt includes assumptions of expected excess cashflows that are based on management’s estimates.

Bitumen reserves

The estimation of reserves involves the exercise of judgment. Forecasts are based on engineering data, estimated future prices, expected future rates of production and the cost and timing of future capital expenditures, all of which are subject to many uncertainties and interpretations. The Company expects that over time its reserves estimates will be revised either upward or downward based on updated information such as the results of future drilling and production. Reserves estimates can have a significant impact on net earnings, as they are a key component in the calculation of depletion and for determining potential asset impairment.

Impairments

CGUs are defined as the lowest grouping of assets that generate identifiable cash inflows that are largely independent of the cash inflows of other assets or groups of assets. The classification of assets into CGUs requires significant judgment and interpretations with respect to the integration between assets, the existence of active markets, external users, shared infrastructures, and the way in which management monitors the Company’s operations. The recoverable amounts of CGUs and individual assets have been determined as the higher of the CGUs or the asset’s fair value less costs of disposal and its value in use. These calculations require the use of estimates and significant assumptions and are subject to changes as new information becomes available including information on future commodity prices, expected production volumes, quantity of proved and probable reserves and discount rates as well as future development and operating expenses. Changes in assumptions used in determining the recoverable amount could affect the carrying value of the related assets and CGUs.

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Property, plant and equipment

Producing assets within PP&E are depleted using the unit-of-production method based on estimated total recoverable proved plus probable reserves and future costs required to develop those reserves. There are several inherent uncertainties associated with estimating reserves. By their nature, these estimates of reserves, including the estimates of future prices and costs, and related future cash flows are subject to measurement uncertainty, and the impact on the consolidated financial statements of future periods could be material.

Share purchase warrants

The Company has and may, from time to time, issue share purchase warrants (“warrants”) as a part of debt and or equity financings. These warrants may be initially classified as shareholders’ equity or a derivative financial liability based on the terms and conditions of the underlying agreement. The determination of fair value of the share purchase warrants are primarily derived from the fair value of the underlying common shares. The determination of which methodology is most appropriate to determine the fair value of these warrants involves judgement.

The estimation of fair value could be determined using the binomial model, the Black Scholes model, the residual method or a relative fair value method depending on the terms of the warrant. The inputs to any of these models require estimates related to share price, share price volatility, interest rates, cash flow multiples, dividend yields, and expected life, all subject to judgment and estimation uncertainty due to both internal and external market factors. Changes in assumptions can impact the fair value estimated for such warrants.

1. De-Spac Transaction

On September 20, 2023, Greenfire, GRI, MBSC, DE Greenfire Merger Sub Inc. (“DE Merger Sub”) and 2476276 Alberta ULC (“Canadian Merger Sub”), completed a De-Spac Transaction pursuant to a business combination agreement dated December 14, 2022, as amended (the “Business Combination Agreement”) with MBSC. DE Merger Sub and Canadian Merger Sub were incorporated in December 2022 for the purposes of completing the De-Spac Transaction.

Pursuant to the De-Spac Transaction (i) Canadian Merger Sub amalgamated with and into GRI pursuant to a statutory plan of arrang ement (the “Plan of Arrangement”) under the Business Corporations Act (Alberta), with GRI continuing as the surviving corporation and becoming a direct, wholly-owned subsidiary of Greenfire and (ii) DE Merger Sub merged with and into MBSC pursuant to a Delaware statutory merger (the “Merger) with MBSC continuing as the surviving corporation and becoming a direct, wholly-owned subsidiary of Greenfire.

As a result of the De-Spac Transaction, the following occurred:

● Of the GRI 8,937,518 common shares outstanding, 7,996,165 were converted to 43,690,534 common shares of Greenfire and 941,353 were cancelled in exchange for cash consideration of $ 70.8 million. Cash consideration was comprised of a dividend paid of $ 59.4 million and $ 11.4 million for shares repurchased and cancelled by the Company. The $ 70.8 million cash consideration was recorded as a reduction to retained earnings.

● 312,500 outstanding GRI bondholder warrants were exchanged for 3,225,810 GRI common shares of which 2,886,048 were converted to 15,769,183 common shares of Greenfire and 339,245 were cancelled in exchange for cash consideration of $ 25.5 million. This $ 25.5 million was recorded as a reduction to retained earnings. In conjunction with the share conversion and cancellation, $ 43.5 million was reclassified from contributed surplus to share capital ($ 38.9 million) and retained earnings ($ 4.6 million).

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● Of the 739,912 GRI performance warrants outstanding, 661,971 were converted into 3,617,016 Greenfire performance warrants and 77,941 were cancelled for cash consideration of $ 4.5 million, which was the fair value of the warrants. The $ 4.5 million was recorded as a reduction to retained earnings. In conjunction with the cancellation, $ 1.2 million was reclassified from contributed surplus to retained earnings.

● Greenfire issued an additional 5,000,000 Greenfire warrants to former GRI shareholders, GRI bond warrant holders and performance warrant holders that entitle the holder of each warrant to purchase one common share of Greenfire. The warrants were recorded as a warrant liability on the consolidated balance sheet, see Note 20.

● 755,707 MBSC Class A common shares held by MBSC’s public shareholders were converted into 755,707 Greenfire common shares.

● 4,250,000 Class B MBSC common shares were converted into 4,250,000 Greenfire common shares.

● 2,526,667 MBSC private placements warrants were converted into 2,526,667 Greenfire warrants, which were recorded as a warrant liability on the consolidated balance sheet, see Note 20.

● Concurrent with the execution of the Business Combination Agreement, the Company and MBSC had entered into subscription agreements with certain investors (the “PIPE Investors”) pursuant to which the PIPE Investors agreed to purchase Class A common shares of MBSC at a purchase price of US$ 10.10 per share. MBSC issued 4,177,091 Class A common shares to the PIPE Investors for proceeds of $ 56.6 million (US$ 42.2 million) which were converted into Greenfire common shares at the closing of the De-Spac Transaction.

Greenfire has been identified as the acquirer for accounting purposes. As MBSC does not meet the definition of a business under IFRS 3 Business Combinations, the transaction is accounted for pursuant to IFRS 2, Share Based Payment. On closing of the De-Spac Transaction, the Company accounted for the excess of the fair value of Greenfire common shares issued to MBSC shareholders as consideration, over the fair value of MBSC’s identifiable net assets at the date of closing, resulting in $ 106.5 million (US$ 79.4 million) being recognized as a listing expense. The fair value of MBSC Class B common shares exchanged for Greenf ire common shares was measured at the market price of MBSC’s publicly traded Class A common shares on September 20, 2023, which was US$ 9.37 per share. The fair value of MBSC Class A common shares exchanged for Greenfire common shares was measured at the market price of MBSC’s publicly traded Class A common shares on September 20, 2023, which was US$ 9.37 per share. As part of the De-Spac Transaction, Greenfire acquired marketable securities held in trust, prepaid expenses, accrued liabilities, taxable payable, other liabilities, warrant liability and deferred underwriting fees. The following table reconciles the elements of the listing expense:

($ thousands)
Total fair value of consideration deemed to have been issued by Greenfire:
4,250,000 MBSC Class B common shares at US$ 9.37 per common share (US$ 39.8 million)	$ 53,454
755,707 MBSC Class A common shares at US$ 9.37 per common share (US$ 7.1 million)	$ 9,505
Less the following:
Fair value of identifiable net assets of MBSC
Marketable securities held in Trust Account	10,485
Prepaid expenses and deposits	8
Accounts payable and accrued liabilities	( 16,262	)
Warrant liability	( 17,960	)
Other liability	( 5,369	)
Deferred underwriting fee	( 13,422	)
Taxes payable	( 1,063	)
Fair value of identifiable net assets of MBSC	( 43,583	)
Total listing expense	$ 106,542

The listing expense is presented in the Consolidated Statement of Comprehensive Income (Loss). For the year ended December 31, 2023, the Company expensed $ 12.2 million (2022 - $ 2.8 million) in transaction costs related to the De-Spac.

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1. ACQUISITIONS

Acquisition	Acquisition date	Cash consideration ($thousands)
GHOPCO	April 5, 2021	$ 19,721
JACOS	September 17, 2021	346,733
December 31, 2021		$ 366,454

The Company acquired all the assets of GHOPCO on April 5, 2021 for total cash consideration of $ 19.7 million. The assets acquired from GHOPCO include oil sands property located in the Hangingstone area of the Athabasca region. The acquisition has been accounted for as a business combination using the acquisition method of accounting. The assets and liabilities assumed are recorded at the estimated fair value on the acquisition date of April 5, 2021.

The Company acquired all the issued and outstanding common shares of JACOS on September 17, 2021 for total cash consideration of $ 346.7 million. The assets acquired from JACOS include various oil sands properties located in the Hangingstone area of the Athabasca region, which contain various working interest participants. One of the properties acquired, which is a developed and producing oil sands property and generates all of the acquired revenues, includes a 75 % interest in a joint operation. The acquisition has been accounted for as a business combination using the acquisition method of accounting. The assets and liabilities assumed are recorded at the estimated fair value on the acquisition date of September 17, 2021.

Both acquisitions were undertaken to increase the Company’s production and reserve base in the Athabasca region, which is its core focus area.

The net assets acquired is based on the estimated fair value of the underlying assets and liabilities acquired as follows:

($ thousands)	GHOPCO Amount
Net assets acquired:
PP&E	$ 159,000	$	851,389	$	1,010,389
Deferred tax asset	-		32,435		32,435
Cash and cash equivalents	2,507		4,412		6,919
Accounts receivable	188		56,671		56,859
Inventories	-		8,992		8,992
Other current assets	1,111		7,846		8,957
Accounts payable and accrued liabilities	( 1,847	)	( 27,221	)	( 29,068	)
Other current liabilities	-		( 684	)	( 684	)
Decommissioning liabilities	( 217	)	( 1,740	)	( 1,957	)
Deferred tax liability	( 32,435	)	-		( 32,435	)
Net assets acquired	128,307		932,100		1,060,407
Less: Gain on acquisitions	108,586		585,367		693,953
Total cash purchase consideration	$ 19,721	$	346,733	$	366,454

There was $ 10.3 million of acquisition transaction costs incurred by the Company and expensed through earnings in the year ended December 31, 2021.

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A gain of $ 108.6 million was recognized on the acquisition of GHOPCO and a gain of $ 585.4 million was recognized on the acquisition of JACOS. These gains were driven by an increase in oil prices between the offer and closing dates, and optimized views on production and proved and probable reserves. In addition, the market was distressed from low oil prices due to volatility associated with the COVID-19 pandemic at the time of the acquisition.

The estimated proved and probable oil reserves and related cash flows were discounted at a rate based on what a market participant would have paid, which was based on market metrics on recent market transactions at the date of acquisition.

1. CASH AND CASH EQUIVALENTS

As at December 31, 2023, the Company held cash and cash equivalents of $ 109.5 million (December 31, 2022- $ 35.4 million). The credit risk associated with the Company’s cash and cash equivalents was considered low as the Company’s balances were held with large Canadian chartered banks.

1. RESTRICTED CASH AND CREDIT FACILITY

During the year ended December 31, 2023, the Company had a $ 46.8 million credit facility with its Petroleum Marketer (“Credit Facility”), used for issuing letters of credit related to long-term pipeline transportation agreements. The terms required the Company to contribute cash to a cash-collateral account (“Reserve Account”) over 24 months, starting in October 2021. As at December 31, 2022, the Company held $ 35.3 million in restricted cash. During the year ended December 31, 2023, the Company contributed $ 8.0 million in restricted cash to the Reserve Account. On November 8, 2023 $ 43.3 million of restricted cash was released. This release was due to entering a letter of credit facility guaranteed by Export Development Canada (“EDC Facility”), leading to the termination of both the Credit and Demand Facility (see Note 15).

9. INVENTORIES

As at December 31 ($ thousands)	2023	2022
Oil inventories	$ 6,183	$ 7,560
Warehouse materials and supplies	7,680	7,008
Inventories	$ 13,863	$ 14,568

During the year ended December 31, 2023, approximately $ 567.1 million (December 31, 2022 - $ 559.8 million. 2021 -$ 149.8 million) of inventory was recorded within the respective cost components, which are composed of operating expenses, diluent expense, transportation expense and depletion and depreciation in the consolidated statements of comprehensive income (loss). For the years ended December 31, 2023, 2022 and 2021 the Company had no inventory write downs.

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1. PROPERTY, PLANT AND EQUIPMENT (“PP&E”)

($ thousands)	Developed and producing	Right-of-use assets	Corporate assets
Cost
Balance as at December 31, 2020	$ -	$ -	$ -	$	-
Acquisitions	1,010,014	-	375		1,010,389
Expenditures on PP&E	4,507	-	87		4,594
Change in decommissioning liabilities	2,133	-	-		2,133
Balance as at December 31, 2021	1,016,654	-	462		1,017,116
Additions	39,425	-	167		39,592
Right-of-use asset additions	-	969	-		969
Change in decommissioning liabilities	1,237	-	-		1,237
Balance as at December 31, 2022	1,057,316	969	629		1,058,914
Expenditures on PP&E	33,439	-	( 11	)	33,428
Right-of-use asset additions	-	12,789	-		12,789
Balance as at December 31, 2023	1,090,755	13,758	618		1,105,131
Accumulated Depletion, Depreciation and Amortization
Balance as at December 31, 2020	-	-	-		-
Depletion and depreciation (1)	27,949	-	47		27,996
Balance as at December 31, 2021	27,949	-	47		27,996
Depletion and depreciation (1)	67,623	60	185		67,868
Balance as at December 31, 2022	95,572	60	232		95,864
Depletion and depreciation (1)	67,580	183	130		67,893
Balance as at December 31, 2023	163,152	243	362		163,757
Net book Value
Balance at December 31, 2022	961,744	909	397		963,050
Balance at December 31, 2023	$ 927,603	$ 13,515	$ 256	$	941,374

(1) As at December 31, 2023 $ 161 of DD&A was capitalized to inventory (December 31, 2022- $ 766 and 2021 - 925 ).

No indicators of impairment were identified at December 31, 2023 and 2022, and as such no impairment test was performed.

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1. LEASE LIABILITIES

The Company has recognized the following leases:

($ thousands) — Balance, beginning of year	2023 — $ 963	$	-	$	-
Additions	12,789		970		-
Interest expense	71		19		-
Payments	( 99	)	( 26	)	-
Balance, end of year	$ 13,724	$	963	$	-
Current portion	$ 6,002	$	98	$	-
Non-current portion	$ 7,722	$	865	$	-

The Company’s minimum lease payments are as follows:

As at December 31 ($ thousands) — Within 1 year	2023 — $ 6,002	$	98
Within 2 to 5 years	9,252		581
Later than 5 years	1,015		492
Minimum lease payments	16,269		1,171
Amounts representing finance charges	( 2,545	)	( 208	)
Present value of net minimum lease payments	$ 13,724	$	963

During the year ended December 31, 2022, the Company entered into a 7-year term finance lease for new office space, which has been recognized as a right-of-use asset and lease liability at inception in the consolidated balance sheets. During the year ended December 31, 2023, the initial 7-year lease was extended an additional 3 years. The liability was measured at the present value of the remaining lease payments discounted at the Company’s estimated incremental borrowing rate.

During the year ended December 31, 2023, the Company entered into a 2-year drilling contract under which the Company has committed to drill 550 days over 2 years. The lease liability was measured at the present value of the day rate payments discounted at the Company’s estimated incremental borrowing rate.

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1. INCOME TAXES

The following table reconciles the expected income tax expense (recovery) calculated at the Canadian statutory rate of 23 % (2022 and 2021 – 23 %) to the actual income tax expense (recovery).

($ thousands) — Income (loss) before taxes	Year ended December 31, 2023 — $ ( 116,285	)	Year ended December 31, 2022 — $ 44,017		Year ended December 31, 2021 — $ 661,444
Expected statutory income tax rate	23.00	%	23.00	%	23.00	%
Expected income tax expense (recovery)	( 26,746	)	10,124		152,132
Gain on business combination	-		-		( 159,609	)
Permanent differences	24,149		7,327		15,401
Unrecognized deferred income tax (asset) liability	21,983		( 105,132	)	( 7,924	)
Deferred income tax expense (recovery)	$ 19,386		$ ( 87,681	)	$ -

($ thousands)	Year ended December 31, 2023		Year ended December 31, 2022		Year ended December 31, 2021
Deferred tax asset (liability) related to:
Oil producing assets related to property, plant & equipment	$ ( 135,800	)	$ ( 145,838	)	$ ( 157,900	)
Resource related pools	10,647		11,478		9,815
Corporate non-capital losses carried forward	285,325		291,078		329,650
Corporate capital tax losses carried forward	2,609		3,211		270
Unrealized loss (gain) on financial derivatives	96		6,211		8,206
Share issuance costs	2,594		683		-
Senior secured debenture	6,793		1,792		( 3,052	)
Deferred tax asset not recognized	( 103,969	)	( 80,934	)	( 186,989	)
Deferred tax asset	$ 68,295		$ 87,681		$ -

The Company has approximately $ 1.8 billion in tax pools and loss carry forwards in the year ended December 31, 2023 (December 31, 2022 – $ 1.8 billion) including approximately $ 1.4 billion in non-capital losses available for immediate deduction against future income. The Company’s non-capital losses have an expiry profile between 2033 and 2043.

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As at December 31, 2023 the Company had the following federal income tax pools, which may be used to reduce taxable income in future years, limited to the applicable rates of utilization:

($ thousands)		Amount
Undepreciated capital cost	7 - 100	$ 328,682
Canadian oil and gas property expenditures	10	10,230
Canadian development expenditures	30	34,632
Federal income tax losses carried forward (1) (2)	100	1,376,813
Other (3)	Various	90,103
		$ 1,840,460

(1) Federal income tax losses carried forward expire in the following years 2033 - $ 4.3 million; 2034 - $ 58.7 million; 2035 - $ 30.0 million; 2037 - $ 36.2 million; 2038 - $ 8.3 million; 2039 - $ 1,238.0 million; 2042 - $ 2.9 million; 2043 - $ 3.6 million.

(2) Provincial income tax losses carry forward is $ 985.0 million which is lower than the federal income tax losses carried forward due to differences in historical claims at the provincial level.

(3) Other includes $ 27.6 million in capital losses that have been recognized at the full amount as at December 31, 2023.

As at December 31, 2023, the Company has $ 27.6 million (December 31, 2022 – $ 2.8 million) of capital losses carried forward that can only be claimed against taxable capital gains.

1. DECOMMISSIONING LIABILITIES

The Company’s decommissioning liabilities result from net ownership interests in oil assets including well sites, gathering systems and processing facilities. The Company estimates the total undiscounted escalated amount of cash flows required to settle its decommissioning liabilities to be approximately $ 206.5 million (December 31, 2022- $206.5 million). A credit-adjusted discount rate of 12 % (December 31, 2022-12%) and an inflation rate of 2.0 % (December 31, 2022- 2.0 %) were used to calculate the decommissioning liabilities. A 1.0 % change in the credit-adjusted discount rate would impact the discounted value of the decommissioning liabilities by approximately $ 1.1 million with a corresponding adjustment to PP&E or net income (loss). The decommissioning liabilities are estimated to be settled in periods up to year 2071.

A reconciliation of the decommissioning liabilities is provided below:

As at December 31 ($ thousands)	2023	2022	2021
Balance, beginning of year	$ 7,543	$ 5,517	$ -
Initial recognition	-	-	1,957
Change in estimated future costs	-	1,283	3,262
Accretion expense	906	743	298
Balance, end of year	$ 8,449	$ 7,543	$ 5,517

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1. FINANCIAL INSTRUMENTS, FAIR VALUES AND RISK MANAGEMENT

a) Fair Values of Financial Instruments

As at December 31 — ($ thousands)	2023 — Fair Value	Carrying Value	2022 — Fair Value	Carrying Value
Financial assets at amortized cost:
Cash	109,475	109,475	35,363	35,363
Restricted cash	50	50	35,313	35,313
Accounts receivable	34,680	34,680	34,308	34,308
Financial liabilities at amortized cost:
Accounts payable and accrued liabilities	59,850	59,850	46,569	46,569
Long-term debt (Note 15)	394,082	396,780	315,718	295,173
Financial liabilities at fair value through profit or loss
Risk management contracts	417	417	27,004	27,004
Warrant liability	18,630	18,630	-	-

The fair value of long-term debt was determined based on estimates as at December 31, 2023 and 2022 and is expected to fluctuate given the volatility in the debt markets.

Risk management contracts are level 2 in the fair value hierarchy. The estimated fair value of risk management contracts is derived using third-party valuation models which require assumptions concerning the amount and timing of future cash flows and discount rates. Management’s assumptions rely on external observable market data including forward prices for commodities. The observable inputs may be adjusted using certain methods, which include extrapolation to the end of the term of the contract.

Warrant liabilities are a level 3 in the fair value hierarchy is calculated using a Black-Scholes calculation.

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b) Commodity Risk Management

The Company is exposed to commodity price risk on its oil sales due to fluctuations in market prices. The Company continues to execute a consistent risk management program that is primarily designed to reduce the volatility of revenue and cash flow, generate sufficient cash flows to service debt obligations, and fund the Company’s operations. The Company’s risk management liabilities may consist of hedging instruments such as fixed price swaps and option structures, including costless collars on WTI, WCS differentials, condensate differential, natural gas and electricity swaps. The Company does not use financial derivatives for speculative purposes.

During the year ended December 31, 2023, the Company’s obligations under its New Notes (see note 15) includes a requirement to implement a 12-month forward commodity price risk management program encompassing not less than 50% of the hydrocarbon output under the proved developed producing reserves (“PDP”) forecast in the Company’s most recent reserves report, as determined by a qualified and independent reserves evaluator. This requirement is assessed on a monthly basis for the duration of time that the New Notes remain outstanding.

The Company’s commodity price risk management program does not involve margin accounts that require posting of margin with increased volatility in underlying commodity prices. Financial risk management contracts are measured at fair value, with gains and losses on re-measurement included in the consolidated statements of comprehensive income (loss) in the period in which they arise.

The Company’s financial risk management contracts are subject to master netting agreements that create the legal right to settle the instruments on a net basis. The following table summarizes the gross asset and liability positions of the Company’s individual risk management contracts that are offset in the consolidated balance sheets:

As at December 31 — ($ thousands)	2023 — Asset	Liability		2022 — Asset	Liability
Gross amount	$ -	$ ( 417	)	$ 21,375	$	( 48,379	)
Amount offset	-	-		( 21,375	)	21,375
Risk Management contracts	$ -	$ ( 417	)	$ -	$	( 27,004	)

The following table summarizes the financial commodity risk management gains and losses:

($ thousands) — Realized gain (loss) on risk management contracts	Year ended December 31, 2023 — $ ( 10,182	Year ended December 31, 2022 — $ ( 122,408	)	Year ended December 31, 2021 — $ ( 3,614	)
Unrealized gain (loss) on risk management contracts	26,587	930		( 35,677	)
Gain (loss) on risk management contracts	$ 16,405	$ ( 121,478	)	$ ( 39,291	)

As at December 31, 2023, the following financial commodity risk management contracts were in place:

Term	WTI- Costless Collar — Volume (Bbls)	Put Strike Price (US$/Bbl)	Call Strike Price ($US/Bbl)	Natural Gas- Fixed Price Swaps — Volume (GJ)	Swap Price ($/GJ)
Q1 2024	877,968	$ 60.00	$ 77.00	455,000	$ 2.97
Q2 2024	877,968	$ 60.00	$ 74.55	-	-
Q3 2024	887,800	$ 62.00	$ 92.32	-	-
Q4 2024	887,800	$ 59.46	$ 87.58	-	-

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Subsequent to December 31, 2023, Greenfire terminated the above WTI Costless Collar risk management contracts and entered into the following financial commodity risk management contracts:

Term	WTI- Costless Collar — Volume (Bbls)	Put Strike Price (US$/Bbl)	Call Strike Price ($US/Bbl)	WTI Fixed Price Swaps — Volume (bbls/d)	Swap Price (US$/bbl))
Jan – Dec 2024	-	-	-	11,500	$ 70.94
Q1 2025	640,700	$ 57.97	$ 84.22	-	-

The following table illustrates the potential impact of changes in commodity prices on the Company’s net income, before tax, based on the financial risk management contracts in place at December 31, 2023:

As at December 31, 2023 — ($ thousands)	Change in WTI — Increase of $5.00/bbl	Decrease of $5.00/bbl	Change in Natural Gas — Increase of $1.00/GJ	Decrease of $1.00/GJ
Increase (decrease) to fair value of commodity risk management contracts	-	-	$ 455	$ ( 455	)

The Company’s commodity risk management contracts are held with two large reputable financial institution. As a result, the Company concluded that credit risk associated with its commodity risk management contracts is low.

c) Credit Risk

As at December 31 ($ thousands)	2023	2022
Trade receivables	$ 22,452	$ 22,428
Joint interest receivables	12,228	11,880
Accounts receivable	$ 34,680	$ 34,308

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s accounts receivable. The Company is primarily exposed to credit risk from receivables associated with its oil sales. The Company manages its credit risk exposure by transacting with high-quality credit worthy counterparties and monitoring credit worthiness and/or credit ratings on an ongoing basis. Trade receivables from oil sales are generally collected on 25th day of the month following production. Joint interest receivables are typically collected within one to three months of the invoice being issued. The Company has not previously experienced any material credit losses on the collection of accounts receivable.

At December 31, 2023, and December 31, 2022 the Company was exposed to concentration risk associated with its outstanding trade receivables and joint interest receivables balances. Of the Company’s trade receivables at December 31, 2023, 100 % was receivable from a single company each (December 31, 2022- 100 % was receivable from two companies at approximately 64 % and 36 % each). At December 31, 2023, 100 % of the Company’s joint interest receivables were held by a single company (December 31, 2022- 100 % by a single company). Maximum exposure to credit risk is represented by the carrying amount of accounts receivable on the balance sheet. Subsequent to December 31, 2023, the Company has received $ 4.4 million from its joint interest partner, with the remaining outstanding balance expected to be paid within a reasonable time, as a result there are no material financial assets that the Company considers past due and no accounts have been written off.

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d) Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company’s objective in managing liquidity risk is to maintain sufficient available reserves to meet its financial obligations at any point in time. The Company expects to achieve this objective through prudent capital spending, an active commodity risk management program and through strategies such as continuously monitoring forecast and actual cash flows from operating, financing and investing activities, and available credit facilities. Management believes that future cash flows generated from these sources will be adequate to settle Greenfire’s financial liabilities.

The following table details the Company’s contractual maturities of its financial liabilities at December 31, 2023, and December 31. 2022:

($ thousands)	Year ended December 31, 2023 — Less than one year	Greater than one year	Year ended December 31, 2022 — Less than one year	Greater than one year
Accounts payable and accrued liabilities	$ 59,850	$ -	$ 46,569	$ -
Risk management contracts (1)	417	-	27,004	-
Lease liabilities (1)	6,002	7,722	98	1,075
Long-term debt (2)	44,321	332,029	63,250	231,921
Total financial liabilities	$ 110,590	$ 339,751	$ 136,921	$ 232,996

(1) Amounts represent the expected undiscounted cash payments.

(2) Amounts represent undiscounted principal only and exclude accrued interest and transaction costs.

As at December 31, 2023 all material financial liabilities are current except for the long-term portion of the New Notes (Notes 15 and 21) and drilling contract (Note 11). In addition, the Company has provisions and other liabilities as disclosed in Note 20. The Company’s future unrecognized commitments are disclosed in Note 18.

e) Foreign Currency Risk Management

Foreign currency risk is the risk that a variation in exchange rates between the Canadian dollar and foreign currencies will affect the fair value or future cash flows of the Corporation’s financial assets or liabilities. The Corporation has U.S. dollar denominated long-term debt as described in Note 15. As of December 31, 2023, a 10 % change to the value of the Canadian dollar relative to the US dollar would result in a foreign exchange gain (loss) of approximately $ 39.7 million (December 31, 2022 - $ 29.3 million, December 31, 2021 - $ 39.6 million).

f) Interest Rate Risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company is exposed to interest rate risk related to borrowings drawn under the Senior Credit Facility, as the interest charged on the credit facility fluctuates with floating interest rates, Currently no amounts are drawn on the Senior Credit Facility. The New Notes and letters of credit issued are subject to fixed interest rates and are not exposed to changes in interest rates.

1. LONG-TERM DEBT

Senior Secured Notes

On September 20, 2023 in conjunction with the closing of the De-Spac Transaction and the issuance of the New Notes as described below, GRI redeemed the outstanding balance of $ 294.6 million (US$ 217.9 million) on the US$ 312.5 million 12 % senior notes that were issued on August 12, 2021 (the “2025 Notes”) at a redemption premium of 106.5 %. The total premium paid as a result of the early redemption was $ 19.2 million (US$ 14.2 million) plus accrued interest of $ 3.4 million (US$ 2.5 million). Unamortized debt costs of $ 42.1 million were also expensed in conjunction with the extinguishment of the debt.

On September 20, 2023, Greenfire issued US$ 300 million of senior secured notes (the “New Notes”). The New Notes bear interest at the fixed rate of 12.00 % per annum, payable semi-annually on April 1 and October 1 of each year commencing on April 1, 2024, and mature on October 1, 2028. The New Notes are secured by a first priority lien on substantially all the assets of the Company and its wholly owned subsidiaries. Subject to certain exceptions and qualifications, the indenture governing the New Notes contain certain covenants that limited the Company’s ability to, among other things, incur additional indebtedness, pay dividends, redeem stock, make certain restricted payments, and dispose and transfers of assets. The indenture governing the New Notes contains minimum hedging requirements of 50 % of the forward 12 calendar month PDP forecasted production as prepared to the Canadian standard using NI 51-101 until principal debt is less than US$ 100 million and limit capital expenditures to CAD$ 100 million annually until the principal outstanding is less than US$ 150 million. The New Notes are not subject to any financial covenants.

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Under the indenture governing the New Notes, the Company is required to redeem the New Notes at 105 % of the principal amount plus accrued and unpaid interest with 75 % of Excess Cash Flow (as defined in the New Notes Indenture) every six-months, with the first payment due by August 15, 2024. If consolidated indebtedness is less than US$ 150 million, the required redemption is reduced to 25 % of Excess Cash Flow to be paid for every six-month period until the principal owing on the New Notes is US$ 100 million

The Company is exposed to foreign exchange rate fluctuations on the principal value and interest payments in respect of its New Notes. As of December 31, 2023, a 10 % change to the value of the Canadian dollar relative to the US dollar would result in a foreign exchange gain (loss) of approximately $ 39.7 million (December 31, 2022 - $ 29.3 million, December 31, 2021 - $ 39.6 million).

The New Notes are subject to fixed interest rates and are not exposed to changes in interest rates.

As at December 31, 2023, the carrying value of the Company’s long-term debt was $ 376.48 million and the fair value was $ 394.1 million (December 31, 2022 carrying value – $ 254.4 million, fair value – $ 315.7 million).

As at December 31, 2023 the Company was compliant with all covenants.

As at December 31 ($ thousands)	2023
US dollar denominated debt:
Redeemed 12.00 % senior notes issued at 96.5 % of par (US$ 217.9 million at December 31, 2022) (1)	$ -	$	295,173
Unamortized debt discount and debt issue costs	-		( 40,765	)
New 12.00 % senior notes issued at 98 % of par (USD$ 300 million at December 31, 2023) (1)	396,780		-
Unamortized debt discount and debt issue costs	( 20,430	)	-
Total term debt	$ 376,350	$	254,408
Current portion of long-term debt	44,321		63,250
Long-term debt	$ 332,029	$	191,158

(1) The U.S. dollar denominated debt was translated into Canadian dollars as at period end exchange rates.

Greenfire may redeem some or all of the New Notes after October 1, 2025, at 100 % of the principal amount of the notes being redeemed, plus accrued and unpaid interest plus a “make whole” premium, as set out in the table below. In addition, at any time before October 1, 2025, the Company may redeem up to 40 % of the aggregate principal amount of the notes using the net proceeds from certain equity issuances as a redemption price equal to 112 % of the principal amount plus accrued and unpaid interest.

The following table discloses the redemption amount including the “make whole” premium on redemption of the New Notes:

On or after October 1, 2025 to October 1, 2026	106.0
On or after October 1, 2026 to October 1, 2027	103.0
On or after October 1, 2027	100.0

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Senior Credit Facility

On September 20, 2023, Greenfire entered into a reserve-based credit facility (the “Senior Credit Facility”) comprised of an operating facility and a syndicate facility. Total credit available under the Facility is $ 50 million comprising of $ 20 million operating facility and $ 30 million syndicated facility.

The Senior Credit Facility is a committed facility available on a revolving basis until September 20, 2024, at which point in time it may be extended at the lender’s option. If the revolving period is not extended, the undrawn portion of the facility will be cancelled and any amounts outstanding would be repayable at the end of the non-revolving term, being September 30, 2025. The Revolving Facility is subject to a semi-annual borrowing base review, occurring in May and November of each year. The borrowing base is determined based on the lender’s evaluation of the Company’s petroleum and natural gas reserves and their commodity price outlook at the time of each renewal.

The Senior Credit Facility is secured by a first priority security interest on substantially all the assets of the Corporation and is senior in priority to the New Notes. The Senior Credit Facility contains certain covenants that limit the Company’s ability to, among other things, incur additional indebtedness, create or permit liens to exist, make certain restricted payments, and dispose of or transfer assets. The Senior Credit Facility is not subject to any financial covenants.

As at December 31, 2023, amounts borrowed under the Senior Credit Facility bear interest at a floating rate based on the applicable Canadian prime rate, US base rate, secured overnight financing rate or bankers’ acceptance rate, plus a margin of 2.75 % to 6.25 % based on Debt to EBITDA ratio. A standby fee on the undrawn portion of the Senior Credit Facility ranges from 0.6875 % to 1.5625 % based on Debt to EBITDA ratio. As at December 31, 2023, the Company had no amounts drawn under the Senior Credit Facility.

Letter of Credit Facility

During the fourth quarter of 2023, Greenfire entered into an unsecured $ 55 million letter of credit facility with a Canadian bank that is supported by a performance security guarantee from the EDC Facility. The EDC Facility is available on a demand basis and letters of credit issued under this facility incur an issuance and performance guarantee fee of 4.25 %. As at December 31, 2023, the Company had $ 54.3 million in letters of credit outstanding under the Letter of Credit Facility.

1. REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company’s revenue from contracts with customers consists of diluted and non-diluted bitumen sales.

Greenfire’s oil sales include blended bitumen sales from the Expansion Asset and the Demo Asset as well as non-diluted bitumen sales trucked from the Demo Asset. At the Demo Asset, each barrel can be transported to several locations, including both pipeline and rail sales points, depending on the economics of each option at the time of sale. Greenfire’s oil sales are generally sold under variable price contracts and are based on the commodity market price, adjusted for quality, location or other factors. Greenfire is required to deliver nominated volumes of oil to the contract counterparty. Each barrel equivalent of commodity delivered is considered to be a distinct performance obligation. The amount of revenue recognized is based on the agreed transaction price and is recognized as performance obligations are satisfied, therefore resulting in revenue recognition in the same month as delivery. Revenues are typically collected on the 25th day of the month following production.

| ($ thousands) | Year
ended December 31, 2023 | Year
ended December 31, 2022 | Year
ended December 31, 2021 |
| --- | --- | --- | --- |
| Diluted bitumen sales | $ 652,812 | $ 890,400 | $ 212,225 |
| Bitumen sales | 23,158 | 108,449 | 58,449 |
| Oil sales | $ 675,970 | $ 998,849 | $ 270,674 |

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1. FINANCING AND INTEREST

($ thousands)	Year ended December 31, 2023	Year ended December 31, 2022	Year ended December 31, 2021
Accretion on long-term debt	$ 106,435	$ 74,176	$ 22,186
Other and cash interest	2,873	2,155	1,926
Accretion on decommissioning liabilities	906	743	298
Financing and interest expense	$ 110,214	$ 77,074	$ 25,050

The total interest and finance expense of $ 108.3 million during the year ended December 31, 2023, included $ 42.1 million of accelerated unamortized debt related costs and $ 19.2 million of debt redemption premiums on the redemption of the 2025 Notes.

1. COMMITMENTS AND CONTINGENCIES

The following table summarizes the Company’s estimated future unrecognized commitments associated with firm transportation agreements as at December 31, 2023:

($ thousands)	Remaining 2024	2025	2026	2027	2028	Beyond 2028	Total
Transportation	31,880	30,561	28,956	29,044	29,170	203,198	352,809
Total	$ 31,880	$ 30,561	$ 28,956	$ 29,044	$ 29,170	$ 203,198	$ 352,809

1. SHARE CAPITAL AND WARRANTS

Share capital

As at December 31, 2023 the Company’s authorized share capital consists of an unlimited number of common shares without a nominal or par value. The following table along with note 5 summarizes the changes to the Company’s common share capital:

		Amount($000’s)
Shares outstanding
Balance, December 31, 2021 and 2022	1	$ 15
Issuance of new common shares per De-Spac Transaction	43,690,533	-
Issuance for exercise of bond warrants	15,769,183	38,911
Issuance to MBSC shareholders – Class A and Class B	5,005,707	62,959
Issuance of new common shares for PIPE investment	4,177,091	56,630
Balance, December 31, 2023	68,642,515	$ 158,515

Bondholder warrants

As at December 31, 2022, GFI had 312,500 bondholder warrants outstanding which entitled the holders of these warrants, in aggregate, the right to purchase 25 % of GFI’s issued and outstanding common shares commencing October 18, 2021 at $ 0.01 per shares. As at December 31, 2022, the bondholders had the right to acquire 2,983,866 common shares of GRI at $ 0.01 per share based on an exchange ratio of 9.55 .

On September 20, 2023, with the closing of the De-Spac Transaction the 312,500 outstanding bondholder warrants were exchanged into 3,225,810 GRI common shares of which 2,886,565 were exchanged for 15,769,183 common shares of Greenfire and 339,245 were cancelled in exchange for cash consideration of $ 25.5 million.

As at December 31, 2023 there were no bondholder warrants remaining.

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Per share amounts

The Company uses the treasury stock method to determine the dilutive effect of performance and bondholder warrants. Under this method, only “in-the-money” dilutive instruments impact the calculation of diluted income (loss) per share. Net income (loss) per share was calculated using the historical weighted average shares outstanding, scaled by the applicable exchange ratio following the completion of the De-Spac Transaction.

The following table summarizes the Company’s basic and diluted net income (loss) per share:

Weighted average shares outstanding- basic	Year ended December 31, 2023 — 54,425,083		Year ended December 31, 2022 — 48,911,099	Year ended December 31, 2021 — 42,609,296
Dilutive effect of bond and performance warrants	-		21,019,068	5,488,834
Weighted average shares outstanding- diluted	54,425,083		69,930,167	48,098,130
Basic $ per share	$ ( 2.49	)	$ 2.69	$ 15.52
Diluted $ per share	$ ( 2.49	)	$ 1.88	$ 13.75

In computing the diluted net loss per share for the year ended December 31, 2023, the Company excluded the effect of 7,526,667 New Greenfire Warrants and 3,617,016 Performance Warrants as their effect in anti-dilutive. (December 31, 2022 and 2021 no warrants were excluded).

Performance warrants

In February 2022, the Company implemented a warrant plan (“Performance Warrants”) as part of the Company’s long-term incentive plan for employees and service providers. These Performance Warrants had both performance and time vesting criteria before there is the ability to exercise the option to purchase one common share of the Company for each Performance Warrant. On September 20, 2023 with the closing of the De-Spac Transaction there were 739,912 GRI performance warrants outstanding, 661,971 were converted into 3,617,016 Greenfire performance warrants and 77,941 were cancelled for cash consideration of $ 4.5 million.

The table below summarizes the outstanding warrants as if the warrant exchange ratio used to exchange GRI common shares into Greenfire common shares had occurred on January 1, 2022 and equates to the total common shares issuable to performance warrant holders:

Number of Warrants		Weighted Average Exercise Price $US	Number of Warrants		Weighted Average Exercise Price $US
Performance Warrants outstanding
Balance, beginning of period	3,895,449	$	2.89	-	$	-
Performance warrants issued	186,257		8.35	4,159,546		2.91
Performance warrants forfeited	( 38,820	)	3.34	( 264,097	)	3.13
Performance warrants cancelled	( 425,870	)	3.15	-		-
Balance, end of period	3,617,016	$	3.15	3,895,449	$	2.89
Common shares issuable on exchange	3,617,016		-	3,895,449		-

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The fair market value of the performance warrants was $ 11.0 million on the date of issuance. The exchange of the GRI performance warrants to Greenfire performance warrants did not result in an increase to the fair value of the warrants, therefore no additional expense was recorded. The fair value of each performance warrant was estimated on its grant date using the Black Scholes Merton valuation model with the following assumptions:

Average risk-free interest rate	4.2 %	1.46 %
Average expected dividend yield	-	-
Average expected volatility 1	70 %	60 %
Average expected life (years)	2 - 5	3 - 5

1 Expected volatility has been based on historical share volatility of similar market participants

The performance warrants expire 10 years after the issuance date. On September 20, 2023, with the closing of the De-Spac Transaction, all outstanding performance warrants vested and became exercisable. As a result, the remaining unrecognized fair market value of the performance warrants was immediately recorded as stock-based compensation, and a total of $ 9.2 million was expensed. For the year ended December 31, 2023, the Company recorded $ 9.8 million (2022-$ 1.2 million, 2021 -$ nil ) of stock-based compensation related to the performance warrant plan.

1. WARRANT LIABILITY

On September 20, 2023, Greenfire issued 5,000,000 warrants to GRI common shareholders, bond warrant holders and performance warrant holders (the “New Greenfire Warrants”). The New Greenfire Warrants expire 5 years after issuance and entitle the holder of each warrant to purchase one common share of Greenfire at a price of US$ 11.50 . Greenfire, can at its option, require the holder of the New Greenfire Warrants to exercise on a cashless basis. The 5,000,000 New Greenfire Warrants issued to the former GRI common shareholders and bondholders are to be treated as a derivative financial liability in accordance with IFRS 9 – Financial Instruments and were measured at fair value in accordance with IFRS 13 – Fair Value Measurement. These New Greenfire Warrants had a fair value of $ 35.6 million at the date of issuance and were recorded as a liability with a corresponding amount booked to retained earnings. The New Greenfire Warrants will be reassessed at the end of each reporting period with subsequent changes in fair value being recognized through the statement of comprehensive income (loss).

In addition, Greenfire as part of the De-Spac Transaction assumed and exchanged 2,526,667 MBSC Class B Private Warrants for 2,526,667 New Greenfire Warrants. The New Greenfire Warrants issued to the MBSC Class B warrant holders were deemed to be an exchange of two financial liabilities at fair value. The fair value of the MBSC Class B Private Warrants was $ 18.0 million. Both sets of warrants have an exercise price of US$ 11.50 with both underlying securities trading at or valued at a similar price. As both sets of warrants are deemed to be economically equivalent, no gain or loss was recorded on the exchange. The exchanged warrants will be reassessed at the end of each reporting period with subsequent changes in fair value being recognized through the statement of comprehensive income (loss).

On December 31, 2023, the 7,526,667 outstanding New Greenfire Warrants were revalued based on the closing share price of US$ 4.86 per common share of Greenfire During the year ended December 31, 2023, the fair value of the warrant liability decreased by $ 35.0 million. The following table reconciles the warrant liability.

($ thousands)	Year ended December 31, 2023 — Number of Warrants	Amount	Number of Warrants		Amount
Balance, beginning of year	-	$ -		-	$ -
Warrants issued	5,000,000	35,644		-	-
MBSC warrants converted	2,526,667	17,959
Change in fair value	-	( 34,973	)	-	-
Balance, end of period	7,526,667	$ 18,630		-	$ -
Common shares issuable on exercise	7,526,667	-		-	-

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The fair value of each warrant was estimated on its grant date using the Black Scholes Merton valuation model with the following assumptions:

Average risk-free interest rate	4.2 %
Average expected dividend yield	-
Average expected volatility (1)	70 %
Average expected life (years)	5

(1) Expected volatility has been based on historical share volatility of similar market participants

1. CAPITAL MANAGEMENT

The Company’s net managed capital consists primarily of cash and cash equivalents, long-term debt and shareholders’ equity. The current priorities for managing liquidity risk include managing working capital to ensure interest and debt repayment, and to fund the Company’s operations and the capital program. In the current commodity price environment and in conjunction with the Company’s commodity price risk management program, management believes its current capital resources and cash flow will allow the Company to meet its current and future obligations over the next 12 months. Capital expenditures and debt repayment are expected to be funded by cash-on-hand and out of cash flow. The Company’s capital structure consists of the following:

As at December 31 ($ thousands) — Face value of term debt (Note 15)	2023 — $ 396,780	$	295,173
Shareholders’ equity	712,940		837,771
Working capital, excluding current portion of term debt, warrant liability and risk management contracts	( 96,899	)	( 76,860	)
Net managed capital	$ 1,012,821	$	1,056,084

Net managed capital is not a standardized measure and may not be comparable with the calculation of similar measures by other companies.

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1. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The components of accounts payable and accrued liabilities were:

As at December 31 ($ thousands)	2023	2022
Trade payables	$ 6,303	$ 3,367
Accrued payables	35,994	30,401
Accrued employee annual incentive plans	4,435	4,463
Accrued interest payable	13,118	8,338
Accounts payable and accrued liabilities	$ 59,850	$ 46,569

1. RELATED PARTY TRANSACTIONS

The Company’s related parties primarily consist of key management personnel. The Company considers directors and officers of Greenfire Resources Ltd. as key management personnel.

($ thousands)	Year ended December 31, 2023	Year ended December 31, 2022	Year ended December 31, 2021
Salaries, benefits, and director fees	$ 3,808	$ 1,978	$ 873

1. SUPPLEMENTAL CASH FLOW INFORMATION

The following table reconciles the net changes in non-cash working capital and other liabilities from the consolidated balance sheet to the consolidated statement of cash flows:

($ thousands) — Change in accounts receivable	Year ended December 31, 2023 — $ ( 372	)	Year ended December 31, 2022 — $ 9,654		Year ended December 31, 2021 — $ ( 43,962	)
Change in inventories	705		1,349		( 15,917	)
Change in prepaid expenses and deposits	( 1,763	)	6,537		( 10,512	)
Change in accounts payable and accrued liabilities	13,048		( 10,859	)	57,367
Working capital acquired (note 6)	-		-		41,856
	11,618		6,681		28,832
Other items impacting change in non-cash working capital: Unrealized foreign exchange loss in accounts payable	( 93	)	( 652	)	-
	11,525		6,029		28,832
Related to operating activities	25,513		3,570		( 6,910	)
Related to investing activities (accrued additions to PP&E)	( 13,988	)	2,459		35,742
Net change in non-cash working capital	$ 11,525		$ 6,029		$ 28,832
Cash interest paid (included in operating activities)	$ ( 39,955	)	$ ( 51,129	)	$ ( 1,926	)
Cash interest received (included in operating activities)	$ 2,976		$ 620		$ 21

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Supplementary information for Greenfire Resources Ltd. – oil and gas (unaudited)

SUPPLEMENTARY INFORMATION FOR GREENFIRE RESOURCES LTD. – OIL AND GAS

SUPPLEMENTARY OIL AND GAS INFORMATION FOR THE FISCAL YEAR ENDED DECEMBER 31, 2023 (UNAUDITED)

This supplementary crude oil and natural information is provided in accordance with the United States Financial Accounting Standards Board (“FASB”) Topic 932- “Extractive Activities- Oil and Gas” and where applicable, financial information is prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

The information set out herein is unaudited and is presented on a consolidated basis net of the Company’s share. For the purposes of determining proved oil and natural gas reserves under SEC requirements as at December 31, 2023, 2022 and 2021, the Company used the 12-month average price, defined by the SEC as the unweighted 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.

Reserve Information

The Company’s 2023, 2022 and 2021 year-end reserves evaluations were conducted by McDaniel & Associates Consultants Ltd. (“ McDaniel ”) with an effective date of December 31, 2023, December 31, 2022 and December 31, 2021, respectively. McDaniel evaluated 100% of the Company’s reserves located in Alberta, Canada.

Proved reserves. Proved reserves are those quantities of bitumen, which, by analysis of geoscience 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. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

Developed reserves. Developed reserves are reserves that can be expected to be recovered:

i. Through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and

ii. Through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

Undeveloped reserves. Undeveloped reserves are reserves of any category that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

The Company cautions users of this information as the process of estimating reserves is subject to uncertainty. The reserves are based on economic and operating conditions. Therefore, changes can be made to future assessments as a result of a number of factors, which can include new technology, changing economic conditions and development activity. Net reserves presented in this section represent the Company’s working interest share of the gross remaining reserves, after deduction of any crown, freehold and overriding royalties. Such royalties are subject to change by legislation or regulation and can also vary depending on production rates, selling prices and timing of initial production.

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Summary of Corporate Reserves

The following tables are summaries of the Company’s estimated proved reserves at December 31, 2023, 2022, and 2021 as reconciled between the three years:

Constant Prices and Costs (unaudited)
Net Proved Developed and Proved Undeveloped Reserves (1)
December 31, 2020
Developed	0		0
Undeveloped	0		0
Total – December 31, 2020	0		0
Extensions & Discoveries	0		0
Improved Recovery	0		0
Technical Revisions	0		0
Acquisitions	172,580		172,580
Dispositions	0.0		0.0
Production – 2021	( 2,820	)	( 2,820	)
December 31, 2021	169,760		169,760

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(1) Numbers may not add due to rounding.

(2) Bitumen, as defined by the SEC, “is petroleum in a solid or semi-solid state in natural deposits with a viscosity greater than 10,000 centipoise measured at original temperature in the deposit and atmospheric pressure, on a gas free basis.” Under this definition, all of the Company’s thermal and primary heavy crude oil reserves have been classified as bitumen.

Constant Prices and Costs (unaudited)
Net Proved Developed and Proved Undeveloped Reserves (1)
December 31, 2021
Developed	37,792		37,792
Undeveloped	131,968		131,968
Total – December 31, 2021	169,720		169,720
Extensions & Discoveries	0.0		0.0
Improved Recovery	0.0		0.0
Technical Revisions	( 16,431	)	( 16,431	)
Acquisitions	0.0		0.0
Dispositions	0.0		0.0
Production – 2022	( 7,117	)	( 7,117	)
December 31, 2022	146,212		146,212

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(1) Numbers may not add due to rounding.

(2) Bitumen, as defined by the SEC, “is petroleum in a solid or semi-solid state in natural deposits with a viscosity greater than 10,000 centipoise measured at original temperature in the deposit and atmospheric pressure, on a gas free basis.” Under this definition, all of the Company’s thermal and primary heavy crude oil reserves have been classified as bitumen.

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Constant Prices and Costs (unaudited)
Net Proved Developed and Proved Undeveloped Reserves (1)
December 31, 2022
Developed	30,440		30,440
Undeveloped	115,773		115,773
Total – December 31, 2022	146,212		146,212
Extensions & Discoveries	5,297		5,297
Improved Recovery	0		0
Technical Revisions	7,282		7,282
Acquisitions	0		0
Dispositions	0		0
Production – 2023	( 6,212	)	( 6,212	)
December 31, 2023	152,579		152,579
December 31, 2023
Developed	27,598		27,598
Undeveloped	124,981		124,981
Total – December 31, 2023	152,579		152,579

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(1) Numbers may not add due to rounding.

(2) Bitumen, as defined by the SEC, “is petroleum in a solid or semi-solid state in natural deposits with a viscosity greater than 10,000 centipoise measured at original temperature in the deposit and atmospheric pressure, on a gas free basis.” Under this definition, all of the Company’s thermal and primary heavy crude oil reserves have been classified as bitumen.

In 2021, the Company’s production, net of royalties, was 2.8 MMBOE after the acquisitions of the Demo Asset and Expansion Asset.

In 2021, the Company’s proved reserves increased by 172.6 MMBOE, which was the result of the acquisitions of the Demo Asset and Expansion Asset.

In 2022, the Company’s production, net of royalties, was 7.1 MMBOE.

In 2022, the Company’s proved reserves decreased by 16.4 MMBOE, which was the result of:

(i) a decrease of 26.2 MMBOE resulting from higher prices used in 2022 causing higher royalty rates, which reduces net reserves volumes, offset by

(ii) revisions, other than price, of 9.8 MMBOE, approximately 15% of which (1.5 MMBOE) attributed to positive performance revisions at the producing pads and approximately 85% of which (8.3 MMBOE) attributed to increased operating costs (non-energy and updates in the TIER regulatory costs) and capital costs during the reporting period (as capital costs increase, net reserves volumes increases because royalties decrease).

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In 2023, the Company’s production, net of royalties, was 6.2 MMBOE.

In 2023, the Company’s proved reserves increased by 6.4 MMBOE, which was the result of:

(i) increase of 5.3 MMBOE from extensions due to the inclusion of additional undeveloped wells at the Demo property that were not previously included in reserves.

(ii) increase of 9.3 MMBOE due to lower realized prices causing lower royalty rates, which increases net reserves volumes, offset by

(iii) revisions other than price of -2.0 MMBOE, where -2.7 MMBOE attributed to negative performance revisions at the producing pads and changes to the undeveloped development plan were partially offset by +0.7 MMBOE due to increased operating costs and capital costs during the reporting period (as capital and operating costs increase, net reserves volumes increases because royalties decrease).

Steam generation represents a large proportion of the Company’s capital and operating costs. Therefore, development plans anticipate that, in order to make the most efficient use of the Company’s steam generating and oil treating facilities, the drilling and steaming of new wells would take place over 30 years. Development of the Company’s proved undeveloped reserves will take place in an orderly manner as additional well pairs are drilled to use available steam when existing well pairs reach the end of their steam injection phase. The forecasted production of the Company’s proved reserves extends approximately 31 years. This approach means that it will take longer than five years to develop most of the Company’s proved undeveloped reserves.

Proved reserves are estimated based on the average first-day-of-month prices during the 12-month period for the respective year.

The average prices used to compute proved reserves at December 31, 2023 were WTI: $78.21 per bbl, WCS: CAD$79.89 per bbl, Edmonton C5+ CAD$104.16 per bbl, Henry Hub: $2.59 per MMBtu, and AECO Spot: CAD$2.84 per MMBtu.

The average prices used to compute proved reserves at December 31, 2022 were WTI: $94.14 per bbl, WCS: CAD$97.68 per bbl, Edmonton C5+ CAD$120.59 per bbl, Henry Hub: $6.25 per MMBtu, and AECO Spot: CAD$5.62 per MMBtu.

The average prices used to compute proved reserves at December 31, 2021 were WTI: $66.55 per bbl, WCS: CAD$66.43 per bbl, Edmonton C5+ CAD$83.96 per bbl, Henry Hub: $3.64 per MMBtu, and AECO Spot: CAD$3.57 per MMBtu. Prices for bitumen, oil, diluent and natural gas are inherently volatile.

Changes to the Company’s proved undeveloped reserves during 2021 are summarized in the table below:

December 31, 2020	0
Extensions and discoveries	0
Technical revisions	0
Acquisitions	131,968.2
Conversions to developed	0
December 31, 2021	131,968.2

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(1) Numbers may not add due to rounding.

Changes to the Company’s proved undeveloped reserves during 2022 are summarized in the table below:

December 31, 2021	131,968
Extensions and discoveries	0
Technical revisions	( 16,196	)
Conversions to developed	0
December 31, 2022	115,773

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(1) Numbers may not add due to rounding.

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Changes to the Company’s proved undeveloped reserves during 2023 are summarized in the table below:

December 31, 2022	115,773
Extensions and discoveries	5,297
Technical revisions	6,998
Conversions to developed	( 3,087	)
December 31, 2023	124,981

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(1) Numbers may not add due to rounding.

In 2021, the Company’s proved undeveloped reserves increased by approximately 132 MMBOE, which was the result of the acquisitions of the Demo Asset and the Expansion Assets.

In 2022, the Company’s proved undeveloped reserves decreased by 16.2 MMBOE, which was the result of:

(i) A decrease of 23.8 MMBOE resulting from higher prices used in 2022 causing higher royalty rates, which reduces net reserves volumes, offset by

(ii) Positive revisions, other than price, of 7.6 MMBOE attributed to increased operating costs (non-energy and updates in the TIER regulatory costs) and capital costs during the reporting period (as capital costs increase, net reserves volumes increases because royalties decrease).

In 2023, the Company’s proved undeveloped reserves increased by 9.2 MMBOE, which was the result of:

(i) increase of 5.3 MMBOE from extensions due to the inclusion of additional undeveloped wells at the Demo property that were not previously included in reserves

(ii) increase of 8.5 MMBOE resulting from lower realized prices causing lower royalty rates , offset by

(iii) revisions other than price of -1.5 MMBOE, where -2.4 MMBOE attributed to negative performance revisions at the producing pads and changes to the undeveloped development plan were partially offset by +0.9 MMBOE due to increased operating costs and capital costs during the reporting period (as capital and operating costs increase, net reserves volumes increases because royalties decrease).

(iv) movement of 3.1 MMBOE from undeveloped into proven developed producing due to eight Refill wells drilled in 2023

No changes to the reserve booking have been made as a result of the removal of uneconomic or undeveloped locations due to changes in a previously adopted development plan.

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Reserves

The future net revenues and net present values presented in this summary were calculated using constant prices and costs based on the average first-day-of-the-month petroleum product prices for the 12 months of 2023, 2022 and 2021, with no inflation of operating or capital costs, and were presented in Canadian dollars. All of the future net revenues and net present value estimates in this summary are presented before income taxes. A 10% discount factor was applied to the future net cash flows. Future development costs used in the calculation of future net revenue includes the costs to settle the asset retirement obligations for each period presented. The future net revenues presented in this summary may not necessarily represent the fair market value of the reserves estimates. The Company’s management does not rely upon the following information in making investment and operating decisions. Such decisions are based upon a wide range of factors, including estimates of probable as well as proved reserves, and varying price and cost assumptions considered more representative of a range of possible economic conditions that may be anticipated. The prescribed discount rate of 10 % may not appropriately reflect interest rates.

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The following table summarizes the standardized measure of discounted future net cash flows relating to proved reserves, for the years ended December 31, 2023, 2022 and 2021:

| (CAD$ in millions) (unaudited) | For the year ended
December 31, — 2023 | 2022 | | 2021 | | |
| --- | --- | --- | --- | --- | --- | --- |
| Future cash inflows | 8,072 | | 10,276 | | 7,168 | |
| Future production costs | 2,771 | | 3,491 | | 2,448 | |
| Future development/abandonment costs | 1,208 | | 1,274 | | 1,144 | |
| Deferred income taxes | 774 | | 1,053 | | 361 | |
| Future net cash flows | 3,320 | | 4,458 | | 3,215 | |
| Less 10 % annual discount factor | ( 1,728 | ) | ( 2,361 | ) | ( 1,778 | ) |
| Standardized measure of discounted future net cash flows | 1,592 | | 2,097 | | 1,437 | |

The following table reconciles the changes in standardized measure of future net cash flows discounted at 10 % per year relating to proved bitumen, heavy oil and natural gas producing reserves:

| (CAD$ in millions) (unaudited) | For the year ended
December 31, — 2023 | 2022 | | 2021 | | |
| --- | --- | --- | --- | --- | --- | --- |
| Standardized measure of discounted future net cash flows at beginning of year | 2,097 | | 1,437 | | 0 | |
| Oil and gas sales during period net of production costs and royalties (1) | ( 459 | ) | ( 726 | ) | ( 179 | ) |
| Changes due to prices (2) | ( 567 | ) | 1,175 | | 0 | |
| Development costs during the period (3) | 33 | | 39 | | 5 | |
| Changes in forecast development costs (4) | ( 27 | ) | ( 149 | ) | ( 401 | ) |
| Changes resulting from extensions, infills and improved recovery (5) | 94 | | 0 | | 0 | |
| Changes resulting from discoveries (2) | 0 | | 0 | | 0 | |
| Changes resulting from acquisition of reserves (5) | 0 | | 0 | | 1,486 | |
| Changes resulting from disposition of reserves (5) | 0 | | 0 | | 0 | |
| Accretion of discount (6) | 240 | | 149 | | 0 | |
| Net change in income tax (7) | 253 | | ( 682 | ) | ( 209 | ) |
| Changes resulting from other changes and technical reserves revisions plus effects on timing (8) | ( 71 | ) | 864 | | 735 | |
| Standardized measure of discounted future net cash flows at end of year | 1,592 | | 2,097 | | 1,437 | |

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(1) Company actual before income taxes, excluding general and administrative expenses.

(2) The impact of changes in prices and other economic factors on future net revenue.

(3) Actual capital expenditures relating to the exploration, development and production of oil and gas reserves.

(4) The change in forecast development costs.

(5) End of period net present value of the related reserves.

(6) Estimated as 10 percent of the beginning of period net present value.

(7) The difference between forecast income taxes at beginning of period and the actual taxes for the period plus forecast income taxes at the end of the period

(8) Includes changes due to revised production profiles, development timing, operating costs, royalty rates and actual prices received versus forecast, etc.

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Greenfire Resources Ltd. 2023 Annual Financial Statements | F- 41

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The following table summarizes net capitalized costs relating to petroleum and natural gas producing activities, as at December 31, 2023, 2022 and 2021:

(CAD$ in millions) (unaudited)	As of December 31, — 2023	2022		2021
Proved oil and gas properties	1,091		1,058		1,017
Unproved oil and gas properties	0		0		0
Total capitalized costs	1,091		1,058		1,017
Accumulated depletion and depreciation	( 163	)	( 96	)	( 28	)
Net Capitalized Costs	928		962		989

The following table summarizes costs incurred in petroleum and natural gas property acquisitions, exploration and development activities, for the years ended December 31, 2023, 2022 and 2021:

| (CAD$ in millions) (unaudited) | For the year ended
December 31, — 2023 | 2022 | 2021 |
| --- | --- | --- | --- |
| Property acquisition (disposition) costs | | | |
| Proved oil and gas properties – acquisitions | 0.0 | 0 | 1,010 |
| Proved oil and gas properties – dispositions | 0.0 | 0 | 0 |
| Unproved oil and gas properties | 0.0 | 0 | 0 |
| Exploration costs | 0.0 | 0 | 0 |
| Development costs | 33 | 41 | 7 |
| Total Expenditures | 33 | 41 | 1,017 |

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Greenfire Resources Ltd. 2023 Annual Financial Statements | F- 42

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of Greenfire Resources Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Japan Canada Oil Sands Limited (the “Company”) as at September 17, 2021, December 31, 2020 and January 1, 2020, the related statements of comprehensive income (loss), shareholders’ equity (deficit), and cash flows, for the period ended September 17, 2021 and the year ended December 31, 2020, 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 at September 17, 2021, December 31, 2020 and January 1, 2020, and its financial performance and its cash flows for the period ended September 17, 2021 and year ended December 31, 2020, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

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 audits. 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 audits 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 audits, 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 audits 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 audits 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 audits provide a reasonable basis for our opinion.

/s/ Deloitte LLP

Chartered Professional Accountants

Calgary, Canada

April 21, 2023

We have served as the Company’s auditor since 2022.

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Japan Canada Oil Sands Limited Balance Sheets

As at ($CAD 000’s)	note	September 17, 2021
Assets
Current assets
Cash and cash equivalents	6	$ 4,412	$	46,743	$	159,591
Restricted cash		500		—		672
Accounts receivable	7	56,517		29,113		30,565
Inventories	8	7,438		7,440		18,550
Due from related parties		—		6		18
Prepaid expenses and deposits		4,285		2,594		2,446
		73,152		85,896		211,842
Non-current assets
Property, plant and equipment	9	298,457		292,855		640,757
Right of use asset	10	487		841		1,372
		298,944		293,696		642,129
Total assets		$ 372,096	$	379,592	$	853,971
Liabilities
Current liabilities
Accounts payable and accrued liabilities		27,149		51,838		56,260
Current portion of long-term debt	16	—		76,392		77,928
Current portion of lease liability	10	521		544		493
Due to related parties		—		1,007		1,009
		27,670		129,781		135,690
Non-current liabilities
Long-term debt	16	—		608,249		698,144
Long-term lease liability	10	—		335		879
Decommissioning obligation	12	7,920		7,728		7,147
		7,920		616,312		706,170
Total liabilities		35,590		746,093		841,860
Shareholders’ equity
Share capital	22	1,609,045		1,010,871		1,010,871
Retained earnings (deficit)		(1,272,539	)	(1,377,372	)	(998,760	)
		336,506		(366,501	)	12,111
Total equity and liabilities		$ 372,096	$	379,592	$	853,971

Commitments and contingencies (note 19)

Subsequent events (note 23)

See accompanying notes to the financial statements

These Financial Statements were approved by the Board of Directors.

Robert Logan, Director David Phung, Director

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Japan Canada Oil Sands Limited Statements of Comprehensive Income (Loss)

($CAD 000’s, except per share amounts)	note	Period ended September 17, 2021
Revenues
Oil sales		$ 382,635	$	279,248
Royalties		(7,178	)	(2,019	)
Oil sales, net of royalties		375,457		277,229
Interest income	13	43		925
Other income	13	985		1,684
		376,485		279,838
Expenses
Diluent expense	17	171,174		158,272
Transportation and marketing	17	27,853		39,368
Operating expenses	17	56,479		67,409
General and administrative		6,793		5,680
Financing and interest	18	11,154		21,602
Depletion and depreciation	9,10	78,267		108,379
Impairment (recovery)	9	(73,252	)	270,000
Exploration		(383	)	3,352
Foreign exchange gain		(6,433	)	(15,612	)
Total expenses		271,652		658,450
Net income (loss) and comprehensive income (loss)		$ 104,833	$	(378,612	)
Net income (loss) per share
Basic	22	$ 3.46	$	(12.50	)
Diluted	22	$ 3.46	$	(12.50	)

See accompanying notes to the financial statements

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Japan Canada Oil Sands Limited Statements of Changes in Shareholders’ Equity (Deficit)

($CAD 000’s)	note	Period Ended September 17, 2021
Share capital
Beginning balance	22	$ 1,010,871	$	1,010,871
Capital contributions	22	645,674		—
Return of capital		(47,500	)
Ending balance		1,609,045		1,010,871
Deficit
Beginning balance		(1,377,372	)	(998,760	)
Net income (loss)		104,833		(378,612	)
Ending balance		(1,272,539	)	(1,377,372	)
Total shareholders’ equity		$ 336,506	$	(366,501	)

See accompanying notes to the financial statements

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Japan Canada Oil Sands Limited Statements of Cash Flows

($CAD 000’s)	note	Period Ended September 17, 2021
Operating activities
Net income (loss)		$ 104,833	$	(378,612	)
Items not affecting cash:
Depletion and depreciation	9,10	78,267		108,379
Impairment (recovery)	9	(73,252	)	270,000
Inventory markdown		(226	)	(438	)
Accretion	12	320		444
Unrealized foreign exchange gain		(6,238	)	(15,512	)
Amortization of debt issuance costs	16,18	2,887		321
Decommissioning obligation settlements		(52	)	(31	)
Other non-cash items		(76	)	(50	)
Change in non-cash working capital	21	(61,929	)	8,812
Cash generated from (used) by operating activities		44,534		(6,687	)
Financing activities
Repayment of long-term debt	16	(341,432	)	(79,086	)
Lease liability payments	10	(358	)	(493	)
Capital contributions	22	304,570		—
Return of capital		(47,500	)
Cash used by financing activities		(84,720	)	(79,579	)
Investing activities
Property, plant and equipment expenditures	9	(9,757	)	(27,478	)
Change in non-cash working capital (accrued additions to PP&E)		6,866		(2,622	)
Cash used in investing activities		(2,891	)	(30,100	)
Exchange rate impact on cash and cash equivalents held in foreign currency		1,246		2,846
Change in cash and cash equivalents	6	(41,831	)	(113,520	)
Cash and cash equivalents, beginning	6	46,743		160,263
Cash and cash equivalents, end	6	$ 4,912	$	46,743

See accompanying notes to the financial statements

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. CORPORATE INFORMATION

Japan Canada Oil Sands Limited (“JACOS” or the “Company”) is a corporation incorporated under the Canada Business Corporations Act. The Company is engaged in the exploration, development and operation of oil and gas properties, and focuses primarily in the Athabasca oil sands region of Alberta. The Company’s corporate head office was located at 2300, 639 5 Ave SW, Calgary, Alberta T2P 0M9. The Company was a wholly-owned subsidiary of Canada Oil Sands Co., Ltd. (“CANOS” or the “Parent Company”). The overall ownership structure of JACOS and related parties of JACOS is as follows:

| Company
Name | Relationship
to JACOS | Purpose |
| --- | --- | --- |
| Japan
Petroleum Exploration Co Ltd (Japex) | Parent
of CANOS | Debt
guarantee fees |
| Canada
Oil Sands Ltd (CANOS) | Parent
of JACOS | Expat
services and plant and equipment reimbursements |
| Japex
Canada Ltd | Subsidiary
of Japex | Administrative
cost reimbursements for corporate filings |
| JGI
Inc. | Subsidiary
of Japex | Geological
exploration services |
| Japex
Montney Ltd | Subsidiary
of Japex | Administrative
cost reimbursement for payroll services |

1. BASIS OF PRESENTATION AND STATEMENT OF COMPLIANCE

The financial statements represent the Company’s initial presentation of its results and financial position under International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). The financial statements were prepared in accordance with IFRS as issued by the IASB.

A summary of Company’s significant accounting policies under IFRS is presented in Note 3. These policies have been retrospectively and consistently applied except where specific exemptions permitted an alternative treatment upon transition to IFRS in accordance with IFRS 1 as disclosed in Note 5.

An explanation of how the transition to IFRS has affected the reported balance sheet, changes to shareholders’ equity, income and comprehensive income (loss), and cash flows of the Company is provided in Note 5.

On September 17, 2021 the Company was acquired by Greenfire Resources Inc. As a result, these financial statements present the Company’s financial position at September 17, 2021 and the results of its financial performance and changes in its financial position for the period then ended. Comparative information presented in these financial statements is for the twelve-month fiscal year which ended December 31, 2020. As such, certain amounts in the financial statements are not entirely comparable.

In these financial statements, all dollars are expressed in Canadian dollars, which is the Company’s functional currency, unless otherwise indicated. These financial statements have been prepared on a historical cost basis, except for certain financial instruments which are measured at their estimated fair value.

These financial statements were approved by the Board of Directors on April 19, 2023.

1. SIGNIFICANT ACCOUNTING POLICIES

Joint arrangements

The Company undertakes certain business activities through joint arrangements. Interests in joint arrangements have been classified as joint operations. A joint operation is established when the Company has rights to the assets and obligations for the liabilities of the arrangement. The Company only recognizes its proportionate share in assets, liabilities, revenues and expenses associated with its joint operations.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES (cont.)

Foreign currency translation

Foreign currency transactions are translated into Canadian Dollars at exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities that are denominated in foreign currencies are translated to the functional currency using the exchange rate as of the balance sheet date. The resulting translation differences arising from monetary assets and liabilities denominated in foreign currencies are included in the Statement of Comprehensive Income (Loss).

Operating segments

The Company determines its operating segments based on the differences in the nature of operations, products sold, economic characteristics and regulatory environments and management. As the Company only has operations in the Athabasca region, the Company has determined that the Company’s assets, liabilities and operating results for the development and production of bitumen from the oil sands located in the Athabasca region is the Company’s only operating segment.

Financial instruments and fair value measurement

Fair value is the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants in its principal or most advantageous market at the measurement date.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are further categorized using a three-level hierarchy that reflects the significance of the lowest level of inputs used in determining fair value:

● Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

● Level 2 — Pricing inputs are other than quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or indirectly observable as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value, and volatility factors, which can be substantially observed or corroborated in the marketplace.

● Level 3 — Valuations in this level are those with inputs for the asset or liability that are not based on observable market data.

At each reporting date, the Company determines whether transfers have occurred between levels in the hierarchy by reassessing the level of classification for each financial asset and financial liability measured or disclosed at fair value in the financial statements based on the lowest level of input that is significant to the fair value measurement as a whole. Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy.

The following table summarizes the method by which the Company measures its financial instruments on the balance sheets and the corresponding hierarchy rating for their derived fair value estimates:

Financial Instrument	Fair Value Hierarchy	Classification & Measurement
Cash and cash equivalents	Level 1	Amortized cost
Restricted cash	Level 1	Amortized cost
Accounts receivable	Level 2	Amortized cost
Due from related parties	Level 2	Amortized cost
Accounts payable	Level 2	Amortized cost
Due to related parties	Level 2	Amortized cost
Long-term bank loans payable	Level 2	Amortized cost

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES (cont.)

Financial Instruments

Classification and Measurement of Financial Instruments

JACOS’s financial assets and financial liabilities are classified into two categories: Amortized Cost and Fair Value through Profit and Loss (“FVTPL”). The classification of financial assets is determined by their context in the Company’s business model and by the characteristics of the financial asset’s contractual cash flows. The Company does not classify any of its financial instruments as Fair Value through Other Comprehensive Income.

Financial assets and financial liabilities are measured at fair value on initial recognition, which is typically the transaction price, unless a financial instrument contains a significant financing component. Subsequent measurement is dependent on the financial instrument’s classification.

● Amortized Cost Cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued liabilities, and long-term debt are measured at amortized cost. The contractual cash flows received from the financial assets are solely payments of principal and interest and are held within a business model whose objective is to collect the contractual cash flows. The financial assets and financial liabilities are subsequently measured at amortized cost using the effective interest method.

● FVTPL Risk management contracts, all of which are derivatives, are measured initially at FVTPL and are subsequently measured at fair value with changes in fair value immediately charged to the statements of comprehensive income (the “statements of income”). The Company did not have any risk management contracts as at September 17, 2021, December 31, 2020 or January 1, 2020.

Impairment of Financial Assets

Impairment of financial assets carried at amortized cost is determined by measuring the assets’ expected credit loss (“ECL”). Accounts receivable are due within one year or less; therefore, these financial assets are not considered to have a significant financing component and a lifetime ECL is measured at the date of initial recognition of the accounts receivable. ECL allowances have not been recognized for cash and cash equivalents due to the virtual certainty associated with their collection.

The ECL pertaining to accounts receivable is assessed at initial recognition and this provision is re-assessed at each reporting date. ECLs are a probability-weighted estimate of possible default events related to the financial asset (over the lifetime or within 12 months after the reporting period, as applicable) and are measured as the difference between the present value of the cash flows due to JACOS and the cash flows the Company expects to receive, including cash flows expected from collateral and other credit enhancements that are a part of contractual terms. The carrying amounts of financial assets are reduced by the amount of the ECL through an allowance account and losses are recognized as an impairment of financial assets in the statements of income.

Based on industry experience, the Company considers its commodity sales and joint interest accounts receivable to be in default when the receivable is more than 90 days past due. Once the Company has pursued collection activities and it has been determined that the incremental cost of pursuing collection outweighs the benefits, JACOS derecognizes the gross carrying amount of the financial asset and the associated allowance from the balance sheets.

Derecognition of Financial Liabilities

A financial liability is derecognized when the obligation under the liability is discharged or canceled or expires. If an amendment to a contract or agreement comprises a substantial modification, JACOS will derecognize the existing financial liability and recognize a new financial liability, with the difference recognized as a gain or loss in the statements of income. If the modification results in the derecognition of a liability any associated fees are recognized as part of the gain or loss. If the modification is not deemed to be substantial, any associated fees adjust the liability’s carrying amount and are amortized over the remaining term.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES (cont.)

Derivative instruments and hedging activities

The Company periodically enters into derivative contracts to manage its exposure to commodity price and foreign exchange risks. These derivative contracts, which are generally placed with major financial institutions, may take the form of forward contracts, futures contracts, swaps, or options. The reference prices, upon which the commodity derivative contracts are based, reflect various market indices that have a high degree of historical correlation with actual prices received by the Company for its oil production.

Derivatives are initially recognized at fair value on the date a contract is entered into and are subsequently re-measured at their fair value. The Company’s derivative instruments, while providing effective economic hedges, are not designated as hedges for accounting purposes. Changes in the fair value of any derivatives that are not designated as hedges for accounting purposes are recognized within net income (loss) and comprehensive income (loss) consistent with the underlying nature and purpose of the derivative instruments.

Revenue

Revenue is measured based on consideration to which the Company expects to be entitled in a contract with a customer. The Company recognizes revenue primarily from the sale of diluted bitumen. Revenue is recognized when performance obligations are satisfied. This occurs when the product is delivered, control of the product and title or risk of loss transfers to the customer. Transaction prices are determined at inception of the contract and allocated to the performance obligations identified. Payment is generally received in the following one month to three months after the sale has occurred.

The Company sells its production pursuant to fixed and variable-priced contracts. The transaction price for variable-priced contracts is based on the commodity price, adjusted for quality, location, or other factors, whereby each component of the pricing formula can be either fixed or variable, depending on the contract terms. Revenue is recognized when a unit of production is delivered to the contract counterparty. The amount of revenue recognized is based on the agreed upon transaction.

Royalty expenses are recognized as production occurs.

Interest income

Interest income on cash and cash equivalents and restricted cash, is recorded as earned. For outstanding investments that mature in future periods, income is accrued up to the end of the applicable reporting period based on the terms and conditions of the individual instruments.

Cash and cash equivalents

The Company considers all cash on hand, depository accounts held by banks, money market accounts and highly liquid investments with an original maturity of three months or less to be cash equivalents. The types of financial instruments in which the Company currently invests in include term deposits and guaranteed investment certificates.

Accounts receivable

Accounts receivable are amounts due from customers from the rendering of services or sale of goods in the ordinary course of business. Accounts receivables are classified as current assets if payment is due within one year or less. Accounts receivables are recognized initially at fair value and subsequently measured at amortized cost.

Inventories

Inventories consist of crude oil products and warehouse materials and supplies. The carrying value of inventory includes direct and indirect expenditures incurred in the normal course of business in bringing an item or product to its existing condition and location. The Company values inventories at the lower of cost and net realizable value on a weighted average cost basis. Net realizable value is the estimated selling price less applicable selling expenses. If the carrying value exceeds net realizable value, a write-down is recognized. A change in circumstances could result in a reversal of the write-down for the inventory that remains on hand in a subsequent period.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES (cont.)

Property, plant and equipment (“PP&E”)

PP&E is measured at cost to acquire, less accumulated depletion and depreciation, and net of any impairment losses. The Company begins capitalizing oil exploration costs after the right to explore has been obtained and includes land acquisition costs, geological and geophysical activities, drilling expenditures and costs incurred for the completion and testing of exploration wells. The Company capitalizes all subsequent investments attributable to the development of its oil assets if the expenditures are considered a betterment and provide a future benefit beyond one year. The Company’s capitalized costs primarily consist of pad construction, drilling activities, completion activities, well equipment, processing facilities, gathering systems and pipelines. Borrowing costs attributable to long-term development projects are also capitalized.

Capitalized costs are classified as exploration and evaluation (“E&E”) assets if technical feasibility and commercial viability have not yet been established. Technical feasibility and commercial viability are generally deemed to exist when proved reserves are present and the Company has sanctioned the project for commercial development. Capitalized costs are classified as PP&E assets if they are attributable to the development of oil reserves after technical feasibility and commercial viability have been achieved. Once the technical feasibility and commercial viability of E&E assets have been established, the E&E assets are tested for impairment and reclassified to PP&E. The majority of the Company’s PP&E is depleted using the unit-of-production method relative to the Company’s estimated total recoverable proved plus probable (“2P”) reserves. The depletion base consists of the historical net book value of capitalized costs, plus the estimated future costs required to develop the Company’s estimated recoverable proved plus probable reserves. The depletion base excludes E&E and the cost of assets that are not yet available for use in the manner intended by Management. Corporate assets and other capitalized costs are depreciated over their estimated useful lives primarily using the declining-balance method .

There were no E&E costs as at September 17, 2021, December 31, 2020 or January 1, 2020.

Provisions and contingent liabilities

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the statement of financial position date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. The Company’s provisions primarily consist of decommissioning liabilities associated with dismantling, decommissioning, and site disturbance remediation activities related to its oil assets.

At initial recognition, the Company recognizes a decommissioning asset and corresponding liability on the balance sheet. Decommissioning obligations are measured at the present value of expected future cash outflows required to settle the obligations. Decommissioning liabilities are measured based on the approximate historical inflation rate and then discounted to net present value using a credit adjusted risk-free discount rate. Any change in the present value, as a result of a change in discount rate or expected future costs, of the estimated obligation is reflected as an adjustment to the provision and the corresponding item of property, plant and equipment. The liability for decommissioning costs is increased each period through the unwinding of the discount, which is included in finance and interest costs in the statements of comprehensive income (loss). Decommissioning liabilities are remeasured at each reporting period primarily to account for any changes in estimates or discount rates. Actual expenditures incurred to settle the obligations reduce the liability.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES (cont.)

Contingent liabilities reflect a possible obligation that may arise from past events and the existence of which can only be confirmed by the occurrence or non-occurrence of one or more uncertain future events, not wholly within the control of the Company. Contingent liabilities are not recognized on the balance sheet unless they can be measured reliably and the possibility of an outflow of economic benefits in respect of the contingent obligation is considered probable. Disclosure of contingent liabilities is provided when there is a less than probable, but more than remote, possibility of material loss to the Company.

Impairment of non-financial assets

For the purpose of estimating the asset’s recoverable amount, PP&E assets are grouped into cash generating units (“CGU”s). A CGU is the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets. The Company’s PP&E assets are currently held in one CGU.

PP&E assets are reviewed at each reporting date to determine whether there is any indication of impairment. If indicators of impairment exist, the recoverable amount of the asset or CGU is estimated as the greater of value-in-use (“VIU”) and fair value less costs of disposal (“FVLCOD”). VIU is estimated as the discounted present value of the expected future cash flows from continuing use of the asset or CGU. FVLCOD is the amount that would be realized from the disposition of an asset or CGU in an arm’s length transaction between knowledgeable and willing parties. An impairment loss is recognized in earnings or loss if the carrying amount of the asset or CGU exceeds its estimated recoverable amount.

At each reporting period, PP&E, E&E and right-of-use assets are tested for impairment reversal at the CGU level when there are indicators that a previous impairment recorded has been reversed. Impairment reversal is limited to the carrying amount which would have been recorded had no historical impairment been recorded.

Leases

A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. A lease obligation and corresponding right-of-use asset are recognized at the commencement of the lease. Lease liabilities are initially measured at the present value of the unavoidable lease payments and discounted using the Company’s incremental borrowing rate when an implicit rate in the lease is not readily available. Interest expense is recognized on the lease obligations using the effective interest rate method. The right-of-use assets are recognized at the amount of the lease liabilities, adjusted for lease incentives received and initial direct costs, on commencement of the leases. Right-of-use assets are depreciated on a straight-line basis over the lease term. The Company is required to make judgments and assumptions on incremental borrowing rates and lease terms. The carrying balance of the leased assets and lease liabilities, and related interest and depreciation expense, may differ due to changes in market conditions and expected lease terms. Short-term and low value leases have not been included in the measurement of lease liabilities.

Income taxes

Income tax is comprised of current and deferred tax. Income tax expense is recognized in the statement of income (loss) except to the extent that it relates to share capital, in which case it is recognized in equity. Current tax is the expected tax payable (receivable) on the taxable income (loss) for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognized using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business combination and does not affect profit, other than temporary differences that arise in shareholder’s equity. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted at the reporting date.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES (cont.)

Deferred tax assets and liabilities are offset on the balance sheet if there is a legally enforceable right to offset and they relate to income taxes levied by the same tax authority. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilized. Deferred tax assets are reviewed at each reporting date and are not recognized until such time that it is more likely than not that the related tax benefit will be realized.

Per share information

Basic per share information is calculated using the weighted average number of common shares outstanding during the year. Diluted per share information is calculated using the basic weighted average number of common shares outstanding during the year, as the Company did not have shares which could have had a dilutive effect on net income during the year.

Investment tax credits

Investment tax credits are deducted from the related expenditures when there is reasonable assurance that they are recoverable.

Transportation

In order to facilitate pipeline transportation, the Company uses condensate as diluent for blending with the Company’s bitumen. Transportation costs include expenses related to third-party pipelines and terminals used to transport blended bitumen.

1. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

The timely preparation of the financial statements requires that management make estimates and assumptions and use judgement regarding the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during that period. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. The estimated fair value of financial assets and liabilities are subject to measurement uncertainty. Accordingly, actual results may differ materially from estimated amounts as future confirming events occur. Significant judgements, estimates and assumptions made by management in the preparation of these financial statements are outlined below.

Inventories

The Company evaluates the carrying value of its inventory at the lower of cost and net realizable value. The net realizable value is estimated based on current market prices less selling costs that the Company would expect to receive from the sale of its inventory.

Decommissioning obligations

The provision for decommissioning obligations is based upon numerous assumptions including settlement amounts, inflation factors, credit-adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. Actual costs and cash outflows could differ from the estimates as a result of changes in any of the above noted assumptions.

Income Taxes

The provision for income taxes is based on judgments in applying income tax law and estimates on the timing and likelihood of reversal of temporary differences between the accounting and tax bases of assets and liabilities. The provision for income taxes is based on the Company’s interpretation of the tax legislation and regulations which are also subject to change. Deferred tax assets are recognized when it is considered probable that deductible temporary differences will be recovered in future periods, which requires management judgment. Deferred tax liabilities are recognized when it is considered probable that temporary differences will be payable to tax authorities in future periods, which requires management judgment. Income tax filings are subject to audit and re-assessment and changes in facts, circumstances and interpretations of the standards may result in a material change to the Company’s provision for income taxes. Estimates of future income taxes are subject to measurement uncertainty. Deferred income tax assets are assessed by management at the end of the reporting period to determine the likelihood that they will be realized from future earnings.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (cont.)

Bitumen reserves

The estimation of reserves involves the exercise of judgment. Forecasts are based on engineering data, estimated future prices, expected future rates of production and the cost and timing of future capital expenditures, all of which are subject to many uncertainties and interpretations. The Company expects that over time its reserves estimates will be revised either upward or downward based on updated information such as the results of future drilling and production. Reserves estimates can have a significant impact on net earnings, as they are a key component in the calculation of depletion and for determining potential asset impairment.

Impairments

CGU’s are defined as the lowest grouping of assets that generate identifiable cash inflows that are largely independent of the cash inflows of other assets or groups of assets. The classification of assets into CGU’s requires significant judgment and interpretations with respect to the integration between assets, the existence of active markets, external users, shared infrastructures, and the way in which management monitors the Company’s operations. The recoverable amounts of CGU’s and individual assets have been determined as the higher of the CGU’s or the asset’s fair value less costs of disposal and its value in use. These calculations require the use of estimates and significant assumptions and are subject to changes as new information becomes available including information on future commodity prices, expected production volumes, quantity of proved and probable reserves and discount rates as well as future development and operating costs. Changes in assumptions used in determining the recoverable amount could affect the carrying value of the related assets and CGU’s.

Property, plant and equipment

Producing assets within PP&E are depleted using the unit-of-production method based on estimated total recoverable proved plus probable reserves and future costs required to develop those reserves. There are several inherent uncertainties associated with estimating reserves. By their nature, these estimates of reserves, including the estimates of future prices and costs, and related future cash flows are subject to measurement uncertainty, and the impact on the financial statements of future periods could be material.

Joint arrangements

Judgement is required to determine when the Company has joint control of a contractual arrangement, which requires a continuous assessment of the relevant activities and when the decisions in relation to those activities require unanimous consent. Judgement is also required to classify a joint arrangement as either a joint operation or a joint venture when the arrangement has been structured through a separate vehicle. Classifying the arrangement requires the Company to assess its rights and obligations arising from the arrangement. Specifically, the Company considers the legal form of the separate vehicle, the terms of the contractual arrangement and other relevant facts and circumstances. This assessment often requires significant judgement, and a different conclusion on joint control, or whether the arrangement is a joint operation or a joint venture, may have a material impact on the accounting treatment.

Leases — estimating the incremental borrowing rate

The Company cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (“IBR”) to measure lease liabilities. The IBR is the rate of interest that the Company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Company ‘would have to pay’, which requires estimation when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. The Company estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (cont.)

Other

The COVID-19 pandemic, which began in early 2020, continues to create uncertainty and negatively impact the commodity price environment by suppressing the continued recovery in global economic activity and demand for hydrocarbon products. It continues to be difficult to forecast and account for the risk posed by the COVID-19 pandemic.

1. FIRST-ADOPTION OF IFRS

These financial statements, for the period ended September 17, 2021 are the first financial statements the Company has prepared in accordance with IFRS. For the periods from January 1, 2011, up to and including the year ended December 31, 2020, the Company prepared its financial statements in accordance with US GAAP.

Accordingly, the Company has prepared financial statements that comply with IFRS applicable as at September 17, 2021, together with the comparative period data for the year ended December 31, 2020, as described in the summary of significant accounting policies. In preparing the financial statements, the Company’s opening balance sheet was prepared as at January 1, 2020, the Company’s date of transition to IFRS. This note explains the principal adjustments made by the Company in restating its US GAAP financial statements, including the balance sheet as at January 1, 2020 and the financial statements as of, and for, the year ended December 31, 2020 and the period ended September 17, 2021.

Exemptions applied

IFRS 1 First-time Adoption of International Financial Reporting Standards sets forth guidance for the initial adoption of IFRS. Under IFRS 1 the standards are applied retrospectively at the transitional balance sheet date with all adjustments to assets and liabilities recognized in retained earnings unless certain exemptions are applied. The Company has applied the following optional exemptions to its opening balance sheet dated January 1, 2020:

● The estimates at January 1, 2020, and at December 31, 2020, are consistent with those made for the same dates in accordance with US GAAP (after transitional adjustments to reflect any differences in accounting policies). The estimates used by the Company to present these amounts in accordance with IFRS reflect conditions at January 1, 2020, the date of transition to IFRS and as at December 31, 2020.

The Company has assessed the classification and measurement of financial assets on the basis of the facts and circumstances that exist at January 1, 2020.

The Company has elected to measure oil and gas assets at January 1, 2020 on the following basis:

● Deemed costs

● IFRS requires that property, plant and equipment associated with oil and natural gas development and production be monitored and depreciated at a more granular level than was required under full costs accounting allowable under US GAAP. Upon adoption of IFRS the Company elected to use fair value as deemed cost of PP&E. The fair value was determined using fair value less cost to sell based on a discounted future cash flows of proved plus probable reserves using forecast prices and costs.

● Leases

● Lease liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at January 1, 2020. Hindsight was applied in determining the lease term for leases with extension options. Right-of-use assets were measured at the amount equal to the lease liabilities, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the balance sheet immediately before January 1, 2020

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. FIRST-ADOPTION OF IFRS (cont.)

● Decommissioning Liabilities

● The Company has measured all decommissioning obligations at January 1, 2020. There is no difference between this amount and the US GAAP carrying amount and therefore no adjustment has been made to retained earnings in respect of this exemption.

● The adoption of IFRS has not changed the Company’s actual cash flows, it has resulted in changes to the Company’s reported financial position and results of operations. In order to allow the users of the financial statements to better understand these changes, the Company’s balance sheets at January 1, 2020, and December 31, 2020 as prepared under US GAAP and statements of comprehensive income for the year ended December 31, 2020, as prepared under US GAAP, have been reconciled to IFRS, with the resulting differences explained.

Balance Sheet As at January 1, 2020

($CAD thousands)	note					IFRS
Assets
Current assets
Cash and cash equivalents	$	159,591	$	—		$ 159,591
Restricted cash		672				672
Accounts receivable		30,565		—		30,565
Inventories		18,550		—		18,550
Due from related parties		18		—		18
Prepaid expenses and deposits		2,446		—		2,446
		211,842		—		211,842
Non-current assets
Property, plant and equipment	A	1,500,757		(860,000	)	640,757
Right of use asset	C	—		1,372		1,372
Deferred tax	D	67,673		(67,673	)	—
		1,568,430		(926,301	)	642,129
Total assets	$	1,780,272	$	(926,301	)	$ 853,971
Liabilities
Current liabilities
Accounts payable and accrued liabilities		56,260		—		56,260
Current portion of long-term debt		77,928		—		77,928
Current portion of lease liability	C	—		493		493
Due to related parties		1,009		—		1,009
		135,197		493		135,690
Non-current liabilities
Long-term debt		698,144		—		698,144
Long-term lease liability	C	—		879		879
Decommissioning obligations		7,147		—		7,147
		705,291		879		706,170
Total liabilities		840,488		1,372		841,860
Shareholders’ equity
Share capital		1,010,871		—		1,010,871
Deficit	A	(71,087	)	(927,673	)	(998,760	)
		939,784		(927,673	)	12,111
Total equity and liabilities	$	1,780,272	$	(926,301	)	$ 853,971

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. FIRST-ADOPTION OF IFRS (cont.)

Balance Sheet As at December 31, 2020

($CAD thousands)	note					IFRS
Assets
Current assets
Cash and cash equivalents	$	46,743	$	—		$ 46,743
Accounts receivable		29,113		—		29,113
Inventories		7,440		—		7,440
Due from related parties		6		—		6
Prepaid expenses and deposits		2,594		—		2,594
		85,896		—		85,896
Non-current assets
Property, plant and equipment	A,B	1,443,639		(1,150,784	)	292,855
Right of use asset	C	—		841		841
Deferred tax		67,247		(67,247	)	—
		1,510,886		(1,217,190	)	293,696
Total assets	$	1,596,782	$	(1,217,190	)	$ 379,592
Liabilities
Current liabilities
Accounts payable and accrued liabilities		51,838		—		51,838
Current portion of long-term debt		76,392		—		76,392
Current portion of lease liability	C	—		544		544
Due to related parties		1,007		—		1,007
		129,237		544		129,781
Non-current liabilities
Long-term debt		608,249		—		608,249
Long-term lease liability	C	—		335		335
Decommissioning obligations		7,728		—		7,728
		615,977		335		616,312
Total liabilities		745,214		879		746,093
Shareholders’ equity
Share capital		1,010,871		—		1,010,871
Deficit	A,B,C	(159,303	)	(1,218,069	)	(1,377,372	)
		851,568		(1,218,069	)	(366,501	)
Total equity and liabilities	$	1,596,782	$	(1,217,190	)	$ 379,592

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. FIRST-ADOPTION OF IFRS (cont.)

Statement of comprehensive income For the year ended December 31, 2020

($CAD thousands, except per share amounts)	note			Effect of transition to IFRS		IFRS
Revenue
Oil sales	$	279,248		$ —		$ 279,248
Royalties		(2,019	)	—		(2,019	)
		277,229		—		277,229
Interest income		925		—		925
Other income		1,684		—		1,684
		279,838		—		279,838
Expenses
Diluent expense		158,272		—		158,272
Transportation and marketing		39,368		—		39,368
Operating expenses		67,409		—		67,409
General and administrative	C	6,250		(570	)	5,680
Financing and interest	C	21,525		77		21,602
Depletion and depreciation	B,C	87,064		21,315		108,379
Impairment	A	—		270,000		270,000
Exploration and other expenses		3,352		—		3,352
Foreign Exchange loss/(gain)		(15,612	)	—		(15,612	)
		367,628		290,822		658,450
Loss before income taxes	$	(87,790	)	$ (290,822	)	$ (378,612	)
Deferred income taxes		427		(427	)	—
Net loss and comprehensive loss	$	(88,217	)	$ (290,395	)	$ (378,612	)
Loss per share
Basic	$	(2,91	)	$ (9.58	)	$ (12.49	)
Diluted	$	(2.91	)	$ (9.58	)	$ (12.49	)

A Impairment of property, plant and equipment (“PP&E”)

In accordance with IFRS, impairment tests of PP&E must be performed at the CGU level as opposed to the entire PP&E balance which was required under US GAAP through the full cost ceiling test. Impairment is recognized if the carrying value exceeds the recoverable amount for a CGU. Upon adoption of IFRS the Company elected to use fair value as deemed cost of PP&E. The fair value was determined using fair value less cost to sell based on a discounted future cash flows of proved plus probable reserves using forecast prices and costs. A fair value adjustment of $860 million was recognized on transition as of January 1, 2020.

For the year ended December 31, 2020, as a result of decreased forward oil prices which impacted the fair value less costs to sell derived from the Company’s reserves, an impairment charge of $270 million was recognized based on discounted future cash flows of proved plus probable reserves using forecast prices and costs at 16 percent.

B Depletion of PP&E

Upon transition to IFRS, the Corporation adopted a policy of depleting bitumen interests on a unit of production basis over proved plus probable reserves. The depletion policy under the previous GAAP was based on units of production over proved reserves. In addition, under US GAAP future development costs were not included in the depletion calculation. There was no impact of this difference on adoption of IFRS as at January 1, 2020 as a result of the IFRS 1 election, as discussed in note above. For the year ended December 31, 2020 depletion and depreciation was increased by $20.7 million as a result of changes to the depletion calculation.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. FIRST-ADOPTION OF IFRS (cont.)

C Leases

Under US GAAP, the Company had not adopted ASC 842 Leases. As a result, leases were classified as a finance lease or an operating lease. Operating lease payments are recognized as an operating expense in profit or loss on a straight-line basis over the lease term. Under IFRS, as explained in Note 3, a lessee applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets and recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. At the date of transition to IFRS, the Company applied the transitional provision and measured lease liabilities at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at the date of transition to IFRS. Right-of-use assets were measured at the amount equal to the lease liabilities adjusted by the amount of any prepaid or accrued lease payments. As a result, the Company recognized an increase of $1.4 million in lease liabilities and $1.4 million in right-of-use assets. In addition, depreciation increased by $0.5 million, finance costs increased by $0.1 million and general and administration costs decreased by $0.6 million for the period ended December 31, 2020.

D Deferred tax

The various transitional adjustments resulted in various temporary differences. According to the accounting policies in Note 3, the Company has to recognize the tax effects of such differences. Deferred tax adjustments are recognized in correlation to the underlying transaction either in retained earnings or a separate component of equity.

E Statement of cash flows

Under US GAAP, a lease is classified as a finance lease or an operating lease. Cash flows arising from operating lease payments are classified as operating activities. Under IFRS, a lessee generally applies a single recognition and measurement approach for all leases and recognizes lease liabilities. Cash flows arising from payments of principal portion of lease liabilities are classified as financing activities. Therefore, cash outflows from operating activities decreased by $0.1 million and cash outflows from financing activities increased by the same amount for the period ended December 31, 2020.

F Functional currency

Under IFRS, the framework used to determine the functional currency is similar to that used to determine the currency of measurement under US GAAP; however, under IFRS, the indicators for determining the functional currency are broken down into primary and secondary indicators. Primary indicators are closely linked to the primary economic environment in which the entity operates. Secondary indicators provide supporting evidence to determine an entity’s functional currency. Primary indicators receive more weight under IFRS than US GAAP. In 2019 the Company’s revenue contracts had changed from primarily being US dollar denominated to Canadian dollar denominated. The change in revenue contracts resulted in cash flows being driven primarily by the Canadian dollar. Due to the change in the primary economic environment in which the Company operates, management has concluded that the functional currency of the Company under IFRS is the Canadian dollar. Under US GAAP, the functional currency of the Company was the US dollar.

Accordingly, all non-monetary assets and liabilities have been converted to the Canadian dollar at their respective historical rates.

6. CASH AND CASH EQUIVALENTS

As at September 17, 2021, the Company held cash of $4.4 million and $0.5 million in restricted cash (December 31, 2020 — cash of $46.7 million, January 1, 2020 — cash of $159.6 million and $0.7 million restricted cash). The credit risk associated with the Company’s cash and cash equivalents was considered low as the Company’s balances were held with large Canadian or Provincial chartered banks.

JACOS has long-term pipeline transportation contracts in place which are subject to credit requirements requiring letters of credit to guarantee future payments under the contracts. Prior to the corporate divestiture to Greenfire Resources Inc. JACOS had approximately $51 million in letters of credit outstanding in relation to these long-term pipeline transportation agreements. The annual guarantee fees incurred is calculated at an interest rate of 0.8%.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. ACCOUNTS RECEIVABLE

As at ($000’s)	September 17, 2021	December 31, 2020	January 1, 2020
Accounts receivable	$ 56,517	$ 29,113	$ 30,565

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s accounts receivable. The Company is primarily exposed to credit risk from receivables associated with its oil sales. The Company’s customer base consisted of large integrated energy companies. The Company manages its credit risk exposure by transacting with high-quality credit worthy counterparties and monitoring credit worthiness and/or credit ratings on an ongoing basis.

At September 17, 2021, December 31, 2020 and January 1, 2020, credit risk from the Company’s outstanding accounts receivable balances was considered low due to a history of collections and the receivables that were held by credit worthy counterparties. There were no overdue balances for the above ending periods.

1. INVENTORIES

As at ($000’s)	September 17, 2021	December 31, 2020	January 1, 2020
Oil inventories	$ 5,559	$ 5,703	$ 17,114
Warehouse materials and supplies	1,879	1,737	1,436
Inventories	$ 7,438	$ 7,440	$ 18,550

During the period ended September 17, 2021, approximately $171 million (December 31, 2020 — $158 million) of purchased inventory was recorded in diluent expense in the statements of comprehensive income (loss).

1. PROPERTY, PLANT AND EQUIPMENT (“PP&E”)

$(000’s)	Petroleum properties and related equipment		Furniture and other equipment	Total
Cost
Balance as at January 1, 2020	637,755		3,002	640,757
Expenditures on PP&E	27,385		310	27,695
Balance as at December 31, 2020	665,140		3,312	668,452
Expenditures on PP&E	9,755		2	9,757
Balance as at September 17, 2021	674,895		3,314	678,209
Accumulated DD&A
Balance as at January 1, 2020	—		—	—
Depletion and depreciation	105,075		522	105,597
Impairment	270,000		—	270,000
Balance as at December 31, 2020	375,075		522	375,597
Depletion and depreciation	77,083		324	77,407
Impairment reversal	(73,252	)	—	(73,252	)
Balance as at September 17, 2021	378,906		846	379,752
Net book Value
Balance at January 1, 2020	637,755		3,002	640,757
Balance at December 31, 2020	290,065		2,790	292,855
Balance at September 17, 2021	295,989		2,468	298,457

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. PROPERTY, PLANT AND EQUIPMENT (“PP&E”) (cont.)

For the period ended September 17, 2021, due to increases in forward oil prices, a test for impairment reversal was completed. The recoverable value was based on fair value less costs of disposal (“FVLCOD”). FVLCOD is the amount that would be realized from the disposition of an asset or CGU in an arm’s length transaction between knowledgeable and willing parties. As JACOS had a sales agreement is place with Greenfire Resources Inc., the asset was written up to the value assigned in the agreement, which was approximately $298.5 million.

At December 31, 2020, due to the continued depressed oil prices as a result of the COVID-19 pandemic, the Company determined that there were indicators of impairment for its CGU. The recoverable amount was not sufficient to support the carrying amount which resulted in an impairment of $270 million. The recoverable amount was based on its FVLCOD which was estimated using a discounted cash flow model of proved plus probable cash flows from an independent reserve report prepared as at December 31, 2020.

The recoverable amount of the Company’s CGU was calculated at December 31, 2020 using the following benchmark reference prices for the years 2021 to 2028 adjusted for commodity differentials specific to the Company. The prices and costs subsequent to 2029 have been adjusted for inflation at an annual rate of 2%.

	2021	2022	2023	2024	2025	2026	2027	2028
WCS heavy oil (CA$/bbl)	$ 45.16	$ 49.67	$ 53.95	$ 57.92	$ 59.09	$ 60.26	$ 61.47	$ 62.70
WTI crude oil (US$/bbl)	$ 48.00	$ 51.50	$ 54.50	$ 57.79	$ 58.95	$ 60.13	$ 61.33	$ 62.56

The following table demonstrates the sensitivity of the estimated recoverable amount of the Company’s CGU to possible changes in key assumptions inherent in the estimate.

$(000’s)	Amount	Impairment	Change in discount rate of 1%	Change in diluted bitumen pricing of $2.50
Hangingstone Expansion CGU	$ 290,065	$ 270,000	$ 21,500	$ 87,500

1. LEASES

The Company has recognized the following leases:

$(000’s)	Total
Lease obligation at January 1, 2020	$ 1,372
Interest expense	77
Payments	(570	)
Balance as at December 31, 2020	879
Interest expense	32
Payments	(390	)
Balance as at September 17, 2021	$ 521

The Company has recognized the following right of use asset:

$(000’s)	Total
Right of use at January 1, 2020	$ 1,372
Depreciation	(531	)
Balance as at December 31, 2020	841
Depreciation	(354	)
Balance as at September 17, 2021	$ 487

The Company incurs lease payments related to its head office. The lease will expire in July 2022. The Company has recognized a lease liability measured at the present value of the remaining lease payments using the Company’s weighted-average incremental borrowing rate of 7%.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. INCOME TAXES

The Company has $1.6 billion in unclaimed federal tax deductions and $1.2 billion in unclaimed provincial tax deductions that are available indefinitely to be applied against income generated from oil and gas activities.

The Company has obtained investment tax credits, which will expire as follows:

$(000’s)
2039	$ 143
Total	$ 143

Although management considers the investment tax credits claimed to be reasonable and appropriate, they are subject to assessment in the future at such time as they are used to reduce income taxes otherwise payable and portions of the claims could be disallowed.

The Company has accumulated Federal Non-Capital Loss Carryforward that will expire as follows:

$(000’s)
2035	$ 38,453
2036	187,478
2037	58,725
2038	29,991
2040	36,168
2041	1,232,793
Total	$ 1,583,608

The Company has accumulated Provincial Non-Capital Loss Carryforward that will expire as follows:

$(000’s)
2036	$ 76,903
2037	58,725
2038	29,991
2040	25,968
2041	999,628
Total	$ 1,191,215

Income tax expense is summarized as follows:

$(000’s) — Income (loss) before taxes	104,833		For the year ended December 31, 2020 — (378,612	)
Expected statutory income tax rate	23	%	24	%
Expected income tax expense (recovery)	24,112		(90,867	)
Permanent differences	(731	)	(1,530	)
Effect of Alberta provincial tax rate change	—		12,877
Unrecognized deferred tax assets	(23,381	)	79,520
Deferred income tax expense (recovery)	$ —	$	—

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. DECOMMISSIONING OBLIGATIONS

The Company’s decommissioning obligations result from net ownership interests in oil assets including well sites, gathering systems and processing facilities. The Company estimates the total undiscounted escalated amount of cash flows required to settle its decommissioning obligations to be approximately $97 million. A credit-adjusted discount rate of 7% and an inflation rate of 1.8% were used to calculate the decommissioning obligations. A 1.0% change in the credit-adjusted discount rate would impact the discounted value of the decommissioning obligations by approximately $0.3 million with a corresponding adjustment to PP&E or net income (loss). The decommissioning obligations are estimated to be settled in periods up to year 2075.

A reconciliation of the decommissioning liabilities is provided below:

As at $(000’s) — Beginning balance	September 17, 2021 — $ 7,728	$	7,147
Change in estimate	(75	)	167
Liabilities settled in the year	(53	)	(30	)
Accretion expense	320		444
Ending balance	$ 7,920	$	7,728

1. OTHER INCOME AND EXPENSES

$(000’s) — Interest income	$ 43	$ 925
Gross overriding royalty	935	39
Other	50	1,645
Other income	$ 1,028	$ 2,609

1. FINANCIAL RISK MANAGEMENT

The Company is exposed to financial risk on its financial instruments including cash and cash equivalents, short-term investments, accounts receivable, due from related parties, prepaid expenses and deposits, accounts payable and due to related parties, and long-term banks loans payable. The Company manages its exposure to financial risks by operating in a manner that minimizes its exposure to the extent practical. The Company’s financial instruments as at September 17, 2021 and December 31, 2020 include accounts receivable, accounts payable and accrued liabilities. The fair value of accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to its short-term maturity.

The main financial risks affecting the Company are discussed below:

Credit risk

Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial instruments on hand as at the balance sheet date. The Company’s financial instrument subject to credit risk is accounts receivable.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset on the balance sheet. On an ongoing basis, the Company assesses whether there should be any impairment of the financial instruments. There are no material financial instruments that the Company considers past due.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. FINANCIAL RISK MANAGEMENT (cont.)

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The Company actively manages its liquidity through cost control and debt management policies. Such strategies include continuously monitoring forecast and actual cash flows. The Company relies on additional funding from Canada Oil Sands Co, Ltd (Parent Company). The nature of the oil and gas industry is very capital intensive. As a result, the Company prepares annual capital expenditure budgets and utilizes authorizations for expenditures for projects to manage capital expenditures. Please refer to note 16 “Long-term Debt” for additional information on liquidity risk.

Accounts payable is considered due to suppliers in one year or less while bank debt is repaid in semi-annual equal installments, which began in June 2020 and will end in December 2029. Further, interest is paid semi-annually on the outstanding principal amount during the term of the loan.

Market risk

Market risk is the risk of loss that might arise from changes in market factors such as interest rates, foreign exchange rates and equity prices.

● Interest rate risk

Interest rate risk arises because of the fluctuation in interest rates. The Company’s objective in managing interest rate risk is to minimize the interest expense on liabilities and debt. The Company does not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates.

● Foreign currency risk

The Company’s debt is denominated in US dollars. As well, the Company has certain revenue contracts which are denominated and settled in US dollars. The Company manages the risk of foreign exchange fluctuations by monitoring its’ US dollar cash flow. The net carrying value of these US dollar denominated balances is as follows:

As at $(000’s CAD)	September 17, 2021	December 31, 2020	January 1, 2020
Cash	$ 2,198	$ 37,302	$ 120,256
Accounts Receivable	$ 16,023	$ 6,577	$ 14,767
Long-term debt	—	$ 684,641	$ 776,073

If there was a 1% strengthening or weakening of the Canadian dollar against the US dollar, the corresponding impact would be as follows:

As at $(000’s CAD)	September 17, 2021	December 31, 2020	January 1, 2020
Cash	$ 22	$ 373	$ 1,203
Accounts receivable	$ 160	$ 66	$ 148
Long-term debt	—	$ 6,846	$ 7,761

● Commodity price risk

Commodity price risk arises due to fluctuations in commodity prices. Management believes it is prudent to manage the variability in cash flows by occasionally entering into hedges. The Company utilizes various types of derivatives and financial instruments, such as swaps and options, and fixed-price normal course of business purchase and sale contracts to manage fluctuations in cash flows. As at September 17, 2021, the Company has no outstanding derivatives in place.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. CAPITAL MANAGEMENT

The Company’s capital consists primarily of shareholders equity, working capital and long-term debt. The Company manages its capital structure to maximize financial flexibility by making adjustments in light of changes in economic conditions and the risk characteristics of the underlying assets. Each potential investment opportunity is assessed to determine the nature and amount of capital required together with the relative proportions of debt and equity to be deployed to ensure that the Company will be able to continue as a going concern and to provide a return to shareholders through exploring and developing its assets. As the Company is in the early stages of these activities, it will meet its capital requirements through continued funding from the existing shareholder or the ultimate parent company. The Company does not presently utilize any quantitative measures to monitor its capital and is not subject to any externally imposed capital requirements.

1. LONG-TERM DEBT

As at $(000’s CAD)	September 17, 2021	December 31, 2020
US dollar denominated debt:
LIBOR plus 0.1%	$ —	$ 343,764	$	389,640
LIBOR plus 1.0%	—	$ 343,764	$	389,640
Amortization of debt issuance costs and issuer discount	—	(2,887	)	(3,207	)
Total term debt	$ —	$ 684,641	$	776,073
Current portion of long-term debt	$ —	$ 76,392	$	77,928
Long-term debt	$ —	$ 608,249	$	698,144

Interest is paid semi-annually on the outstanding principal amount during the life of the loan. The principal repayment schedule included semi-annual equal installments, which began in June 2020 and was scheduled to end in December 2029.

As a condition of Greenfire Resources Inc. acquiring all of the issued and outstanding shares of the Company, all outstanding bank debt was required to be settled prior to September 17, 2021. In order to facilitate the settlement of the outstanding loans, on September 9, 2021 CANOS contributed additional capital to the Company, thus increasing the value of their stated capital. Approximately $305 million of the debt was repaid with the remaining balance of $341 million in debt being assumed by the Parent Company. No additional shares were issued.

1. DILUENT, TRANSPORTATION & MARKETING AND OPERATING EXPENSES

$(000’s) — Diluent expense	$ 171,174	$ 158,272
Transportation and marketing	27,853	39,368
Operating expenses	56,479	67,409
Total expenses	$ 255,506	$ 265,049

Diluent, transportation & marketing and operating expenses are costs incurred in the field that are required in order to produce and get bitumen to a sales market.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. FINANCING AND INTEREST

$(000’s) — Accretion on long-term debt	$ 7,455	$ 13,791
Guarantee fees	3,348	7,290
Interest on settlement of lease liability	31	77
Accretion on decommissioning liabilities	320	444
Financing and interest expense	$ 11,154	$ 21,602

1. COMMITMENTS AND CONTINGENCIES

The Company has lease commitments related to office premises (Note 10). The Company also has transportation agreements mainly related to pipeline transportation services. Future minimum amounts payable under these commitments are as follows:

$(000’s) — Office leases	155	361	—	—	—	—	—	516
Transportation	7,804	30,027	30,111	30,231	29,175	28,110	249,569	405,567
Total	7,959	30,388	30,111	30,231	29,175	28,110	249,569	406,083

The Company is currently involved in legal claims associated with the normal course of operations and it believes that any liabilities that might arise from such matters, to the extent not provided for, are not likely to have a material effect on its financial statements .

1. RELATED PARTY TRANSACTIONS

The following related party transactions occurred in the normal course of business and are recorded as income (expense) or capital items in the Company’s financial statements.

$(000’s) — Operating, general and administrative expenses and financing (a)	$ (3,140	)	$ (4,888	)
Exploration expenses (b)	(89	)	—
Plant and equipment expenditure (c)	(15	)	(47	)
Other income (d)	11		12
Reimbursement for costs incurred on behalf of related parties (e)	82		50
Services provided by management (f)	(493	)	(4,922	)

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(a) These costs were paid to the Parent Company for expat services and to Japan Petroleum Exploration Co., Ltd. for guarantee fees.

(b) All exploration expenses were paid to JGI, Inc.

(c) Reimbursements to the Parent Company for plant and equipment costs.

(d) The Company also provided accounting and other management services to Japex Canada Ltd and Japex Montney Ltd.

(e) Reimbursement from the Parent Company and Japex Montney Ltd. for miscellaneous costs which were incurred by the Company.

(f) One of the Company’s external directors is employed by Bennett Jones L.L.P. The firm provides legal advisory services to the Company. The above amounts represent amounts paid to Bennett Jones L.L.P. for legal services.

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. RELATED PARTY TRANSACTIONS (cont.)

The following related party amounts were outstanding:

As at $(000’s)	September 17, 2021	December 31, 2020	January 1, 2020
Due from:
Japex Canada Ltd.	$ —	$ 6	$ 18
	$ —	$ 6	$ 18
Due to:
Japan Petroleum Exploration Co., Ltd.	$ —	$ 712	$ 788
Canada Oil Sands Co., Ltd.	—	235	221
JGI, Inc.	—	60	—
	$ —	$ 1,007	$ 1,009

The corporation considers directors and officers of the Company as key management personnel.

$(000’s) — Salaries, benefits, and director fees	$ 3,886	$ 3,207

1. SUPPLEMENTAL CASH FLOW INFORMATION

The following table reconciles the net changes in non-cash working capital and other liabilities from the balance sheet to the statement of cash flows:

$(000’s) — Change in accounts receivable	$ (27,404	)	$ 1,452
Change in inventories	(278	)	9,298
Change in due from related parties	6		12
Change in prepaid expenses and deposits	(1,691	)	(148	)
Change in accounts payable and accrued liabilities	(24,689	)	(4,422	)
Change in due to related parties	(1,007	)	(2	)
	$ (55,063	)	$ 6,190
Related to operating activities	$ (61,929	)	$ 8,812
Related to investing activities (accrued additions to PP&E)	6,866		$ (2,622	)
Net change in non-cash working capital	$ (55,063	)	$ 6,190
Cash interest paid (included in operating activities)	$ 7,947		$ 20,837
Cash interest received (included in operating activities)	$ 43		$ 925

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Japan Canada Oil Sands Limited Notes to the Financial Statements

1. SHARE CAPITAL

31,000,000 common shares are authorized to be issued.

$(000’s)	Period ended September 17, 2021 — Number of shares	Amount	Number of shares		Amount
Shares outstanding
Balance, beginning of period	30,302,083	$ 1,010,871		30,302,083	$ 1,010,871
Return of capital	—	(47,500	)	—	—
Capital contribution	—	645,674		—	—
Balance, end of period	30,302,083	$ 1,609,045		30,302,083	$ 1,010,871

As a condition of Greenfire Resources Inc. acquiring all of the issued and outstanding shares of the Company, The JBIC loan and Mizuho loan were required to be settled prior to September 17, 2021. In order to facilitate the settlement of the outstanding loans, on September 9, 2021 CANOS contributed additional capital to the Company, thus increasing the value of their stated capital. This was completed with two separate transactions. In the first transaction CANOS provided JACOS with a $305 million capital contribution to repay the half of the outstanding loans. In the second transaction CANOS assumed the remaining outstanding debt of $341 million in exchange for additional stated capital in JACOS. No additional shares were issued with the transactions. In August 2021, $47.5 million of capital was returned to CANOS.

Weighted average shares outstanding-basic and diluted	30,302,083	30,302,083

1. SUBSEQUENT EVENTS

In the first half of 2021 the Company initiated a strategic alternatives process. Such alternatives may have included a corporate sale or sale of the Company’s assets. On September 17, 2021, Greenfire Resources Inc. acquired all the issued and outstanding common shares of the Company in exchange for $346 million.

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