ROK Resources Inc. — Annual Report 2019

Apr 30, 2020

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CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

MANAGEMENT’S REPORT

The accompanying consolidated financial statements and related financial information are the responsibility of management, and have been prepared in accordance with International Financial Reporting Standards. They include certain amounts that are based on estimates and judgments relating to matters not concluded by year‐end. Financial information presented elsewhere in this document is consistent with that contained in the consolidated financial statements.

In management’s opinion, the consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies adopted by management. If alternate accounting methods exist, management has chosen those policies it deems the most appropriate in the circumstances. Management has established systems of accounting and internal control that provide reasonable assurance that assets are safeguarded from loss or unauthorized use, and produce reliable accounting records for the preparation of financial information. Policies and procedures are maintained to support the accounting and internal control systems.

The independent external auditors, KPMG LLP, have conducted an examination of the consolidated financial statements on behalf of shareholders. The auditors have unrestricted access to the Company and the Audit Committee.

The Board of Directors, currently composed of four directors, three of which are independent, carries out its responsibility for the consolidated financial statements principally through its Audit Committee, consisting of three members. This Committee reviews the consolidated financial statements with management and the auditors, as well as recommends to the Board of Directors the external auditors to be appointed by the shareholders at each annual meeting. The Audit Committee meets at least quarterly to review and approve interim financial statements prior to their release and recommend their approval to the Board of Directors.

The Board of Directors on the recommendation of the Audit Committee has approved the consolidated financial statements and information as presented.

(signed) (signed)

Cameron Taylor President & Chief Executive Officer

Lynn Chapman Vice President of Finance & Chief Financial Officer

April 29, 2020 Regina, Saskatchewan

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KPMG LLP 205 5th Avenue SW Suite 3100 Calgary AB T2P 4B9 Tel (403) 691-8000 Fax (403) 691-8008 www.kpmg.ca

INDEPENDENT AUDITORS' REPORT

To the Shareholders of ROK Resources Inc.

Opinion

We have audited the consolidated financial statements of ROK Resources Inc. (the “Company”), formerly Petrodorado Energy Ltd., which comprise:

• the consolidated statements of financial position as at December 31, 2019, December 31, 2018 and January 1, 2018

• the consolidated statements of loss and comprehensive loss for the years ended December 31, 2019 and December 31, 2018

• the consolidated statements of changes in shareholders’ equity for the years ended December 31, 2019 and December 31, 2018

• the consolidated statements of cash flows for the years ended December 31, 2019 and December 31, 2018

• and notes to the consolidated financial statements, including a summary of significant accounting policies

(Hereinafter referred to as the “financial statements”).

In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2019, December 31, 2018 and January 1, 2018 and its consolidated financial performance and its consolidated cash flows for the years ended December 31, 2019 and December 31, 2018 in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “ Auditors’ Responsibilities for the Audit of the Financial Statements ” section of our auditors’ report.

We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.

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We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material Uncertainty Related to Going Concern

We draw attention to Note 2 in the financial statements, which indicates that the Company incurred a net loss and cash outflow from operations for the year ended December 31, 2019. Further, the Company has no assets currently capable of generating cash flow from operations and there is no guarantee that the Company will be successful in raising the capital required to fund ongoing operating and investing activities.

As stated in Note 2 in the financial statements, these events or conditions, along with other matters as set forth in Note 2 in the financial statements, indicate that a material uncertainty exists that may cast significant doubt on the Company's ability to continue as a going concern.

Our opinion is not modified in respect of this matter.

Emphasis of Matter – Retrospective Change in Presentation Currency

We draw attention to Note 3 to the financial statements which indicates that the Company has changed the presentation currency of the financial statements from US dollars to Canadian dollars and has applied that change on a retrospective basis.

Our opinion is not modified in respect of this matter.

Other Information

Management is responsible for the other information. Other information comprises:

• the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.

Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications that the other information appears to be materially misstated.

We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions as at the date of this auditors’ report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors’ report.

We have nothing to report in this regard.

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Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit.

We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

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• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represents the underlying transactions and events in a manner that achieves fair presentation.

• Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

• Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

The engagement partner on the audit resulting in this auditors’ report is Jason Stuart Brown.

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Chartered Professional Accountants

April 29, 2020 Calgary, Canada

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ROK RESOURCES INC.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Expressed in Canadian Dollars)	December 31, 2019	December 31,2018	January1,2018
		restated (1)	restated (1)
Assets
Current Assets
Cash and cash equivalents	1,250,300	1,439,962	1,925,862
Accounts receivable andprepaids	32,529	258	1,286
	1,282,829	1,440,220	1,927,148
Non‐current Assets
E&E assets(2)(Notes 7 & 8)	918,246	‐	‐
	2,201,075	1,440,220	1,927,148
Liabilities
Current Liabilities
Accounts payable and accrued liabilities	55,155	33,790	52,339
Non‐current Liabilities
Severance liability (Note 14)	100,000	‐	‐
	155,155	33,790	52,339
Shareholders' Equity
Share capital (Note 10)	87,210,218	86,110,218	86,110,218
Warrants (Note 10)	40,004	40,004	40,004
Contributed surplus	31,586,276	31,483,897	31,446,348
Deficit	(116,790,578)	(116,227,689)	(115,721,761)
	2,045,920	1,406,430	1,874,809
	2,201,075	1,440,220	1,927,148

Going concern (Note 2) Subsequent events (Note 17)

(1) Restated for change in presentation currency ‐ see Note 3

(2) Exploration and evaluation assets

See accompanying notes to the consolidated financial statements.

Approved by the Board of Directors:

(signed)

(signed)

Cameron Taylor Chairman of the Board of Directors

David Hergenhein Chairman of the Audit Committee

ROK RESOURCES INC.

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

For the years ended December 31

(Expressed in Canadian Dollars)	2019	2018
		restated (1)
Revenue:
Interest and other	17,807	18,683
Expenses and other items:
General and administrative	438,235	147,963
Business development (Note 9)	34,349	345,948
Foreign exchange loss (gain)	5,733	(6,849)
Stock‐based compensation(Note 10)	102,379	37,549
	580,696	524,611
Net loss and comprehensive loss	(562,889)	(505,928)
Lossper share – basic and diluted(Note 10)	(0.02)	(0.02)
Weighted average number of common shares outstanding	25,137,282	23,274,268

(1) Restated for change in presentation currency ‐ see Note 3

See accompanying notes to the consolidated financial statements.

ROK RESOURCES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31

(Expressed in Canadian Dollars)	2019	2018
		restated (1)
Cash flows provided by (used in):
Operating activities
Loss	(562,889)	(505,928)
Adjustments for:
Unrealized foreign exchange loss (gain)	3,840	(6,993)
Stock‐based compensation	102,379	37,549
Severance liability	100,000	‐
Change in non‐cash workingcapital(Note 16)	(26,509)	(17,521)
	(383,179)	(492,893)
Investing activities
Cash acquired on asset acquisition, net of transaction costs (Note 7)	198,065	‐
Expenditures on exploration and evaluation assets	(708)	‐
	197,357	‐
Foreign exchangegain(loss)on cash	(3,840)	6,993
Decrease in cash and cash equivalents	(189,662)	(485,900)
Cash and cash equivalents,beginningofyear	1,439,962	1,925,862
Cash and cash equivalents, end ofyear	1,250,300	1,439,962

Cash is defined as cash and cash equivalents.

(1) Restated for change in presentation currency ‐ see Note 3

See accompanying notes to the consolidated financial statements.

ROK RESOURCES INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Expressed in Canadian Dollars ‐ restated (1) )	Number of			Contributed
	Shares	Share Capital	Warrants	Surplus	Deficit	Total
Balance at December 31,2017	23,274,268	86,110,218	40,004	31,446,348	(115,721,761)	1,874,809
Net loss					(505,928)	(505,928)
Stock‐based compensation				37,549		37,549
Balance at December 31, 2018	23,274,268	86,110,218	40,004	31,483,897	(116,227,689)	1,406,430

(Expressed in Canadian Dollars)	Number of			Contributed
	Shares	Share Capital	Warrants	Surplus	Deficit	Total
Balance at December 31,2018	23,274,268	86,110,218	40,004	31,483,897	(116,227,689)	1,406,430
Net loss					(562,889)	(562,889)
Shares issued in the Transaction	20,000,000	1,100,000				1,100,000
Stock‐based compensation				102,379		102,379
Balance at December 31, 2019	43,274,268	87,210,218	40,004	31,586,276	(116,790,578)	2,045,920

(1) Restated for change in presentation currency ‐ see Note 3

See accompanying notes to the consolidated financial statements.

ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

1. REPORTING ENTITY

ROK Resources Inc. (“ROK” or the “Company”), formerly known as Petrodorado Energy Ltd., is a public company that is engaged in oil and gas exploration and development activities in Canada. The Company’s head office is located in Regina, Saskatchewan, Canada. The Company’s shares are listed and publicly traded on the TSX Venture Exchange (the “Exchange”) under the trading symbol “ROK”.

In recent years, the Company underwent a strategic reassessment which resulted in the disposal of all foreign operations and associated exploration blocks wherein the Company had a participating interest. The Company completed the asset acquisition of certain Saskatchewan land leases with prospective mineral rights (see Note 7) and continues to evaluate a strategic plan for the Company’s future operations. In conjunction with the completion of the acquisition of the Saskatchewan exploration and evaluation assets the Company changed its name to “ROK Resources Inc.”

2. GOING CONCERN

These consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to discharge its obligations and realize its assets in the normal course of operations for the foreseeable future. During the year ended December 31, 2019, the Company incurred a loss of $562,889 and used $383,179 of cash flows in its operating activities, which were financed principally from proceeds from past share issuances. As at December 31, 2019, the Company had a working capital balance of $1,227,674.

As the Company has no assets capable of generating net positive cash flow, it will continue to rely upon its remaining financial resources to fund administrative costs and the development of its oil and gas properties. These conditions indicate the existence of a material uncertainty that casts significant doubt about the Company’s ability to continue as a going concern. There is no guarantee that the Company will be successful in raising the capital required to fund ongoing operations and exploration and evaluation activities or that the terms of a financing, if any, will be acceptable to the Company. The decline of commodity pricing in March of 2020, the COVID‐19 global pandemic and its impact on the economy further increases the risk associated with obtaining the capital necessary to develop the Company’s oil and gas properties.

Management believes that the going concern assumption is appropriate for these consolidated financial statements and that the Company will be able to fund its operations during the upcoming year. Should the going concern assumption not be appropriate and the Company is not able to realize its assets and settle its liabilities in the normal course of operations, these consolidated financial statements would require adjustments to the amounts and classifications of assets and liabilities.

3. BASIS OF PRESENTATION

Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board ("IASB"). A summary of significant accounting policies is presented in Note 4.

These consolidated financial statements were approved and authorized for issuance by the Company’s Board of Directors on April 29, 2020.

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ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

Basis of measurement

These consolidated financial statements have been prepared on a going concern basis, under the historical cost basis, unless otherwise noted. The methods used to measure fair values are discussed in Note 6.

Functional and presentation currency

Unless otherwise stated, these consolidated financial statements are presented in Canadian dollars (“CAD”). The functional currency of the Company and its subsidiaries is the Canadian dollar, which is the primary economic environment in which the Company operates.

Change in presentation currency

On December 31, 2019, the Company changed its presentation currency from US Dollars (“USD”) to CAD to better reflect the Company’s business activities, the needs of investors and comparability to peers in the oil and gas industry. In making this change in presentation currency to CAD, the Company followed the guidance in IAS 21 “The Effects of Changes in Foreign Exchange Rates” and have applied the change retrospectively as if CAD had always been the Company’s presentation currency, as follows:

• Assets and liabilities have been translated into CAD at the rate of exchange prevailing at the respective reporting dates;

• The statements of loss and comprehensive loss were translated at the average exchange rates for the respective reporting periods, or at the exchange rates prevailing at the applicable transaction date;

• Equity transactions have been translated at the exchange rate prevailing at the date of the transaction; and

• Exchange differences arising on translation were recorded in accumulated other comprehensive loss (“AOCI”) in shareholders’ equity, resulting in the elimination of all previously presented AOCI in prior reporting periods.

The exchange rates used to restate comparative figures were as follows:

USD/CAD exchange rate	Dec 31, 2019	Dec 31, 2018	Jan 1, 2018
Closing rate at the reporting date	1.2988	1.3642	1.2545
Averarge rate for theyear	1.3269	1.2957	1.2986

All comparative period amounts included in the financial statements have been restated to the change in presentation currency.

4. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements, except for the adoption of new standards in 2019.

a) Basis of consolidation

Subsidiaries

These consolidated financial statements comprise the financial statements of the Company and its wholly‐owned subsidiaries controlled by the Company. Control exists when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

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ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

The following table summarizes the Company’s subsidiaries, their country of incorporation, and the Company’s ownership interest.

Subsidiaries	Country of Incorporation	Ownership	Interest
		2019	2018
ROK Resources Inc. (the"Private Company")1	Canada	100%	‐

• 1) In November 2019, the Company acquired the Private Company via the Transaction (see Note 7). The Company and the Private Company vertically amalgamated effective January 1, 2020.

Transactions eliminated on consolidation

All intercompany balances and transactions are eliminated upon consolidation in preparing the financial statements.

b) Foreign currency

The functional currency of the Company and its subsidiary is the Canadian dollar. Transactions in currencies other than each entity’s functional currency are initially recorded at the exchange rate as at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are converted to the Canadian dollar at the closing rate as at the date of the consolidated statement of financial position. All differences are recorded in net earnings or loss. Non‐monetary items are converted to the Canadian dollar using the historical exchange rates prevailing at the dates of the initial transactions.

c) Financial instruments

Financial instruments are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets and liabilities are not offset unless the Company has the current legal right to offset and intends to settle on a net basis or settle the asset and liability simultaneously.

The Company characterizes its fair value measurements into a three‐level hierarchy depending on the degree to which the inputs are observable, as follows:

• Level 1 inputs are quoted prices in active markets for identical assets and liabilities;

• Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly or indirectly; and

• Level 3 inputs are unobservable inputs for the asset or liability.

Classification and Measurement of Financial Assets

The initial classification of a financial asset depends upon the Company’s business model for managing its financial assets and the contractual terms of the cash flows. There are three measurement categories into which the Company classified its financial assets:

• Amortized Cost: Includes assets that are held within a business model whose objective is to hold assets to collect contractual cash flows and its contractual terms give rise on specified dates to cash flows that represent solely payments of principal and interest;

• Fair Value through Other Comprehensive Income ("FVOCI"): Includes assets that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets, where its contractual terms give rise on specified dates to cash flows that represent solely payments of principal and interest; or

• Fair Value Through Profit or Loss ("FVTPL"): Includes assets that do not meet the criteria for amortized cost or FVOCI and are measured at fair value through profit or loss. This includes all derivative financial instruments.

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ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

At initial recognition, the Company measures a financial asset at its fair value and, in the case of a financial asset not at FVTPL, including transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL are recorded as an expense in net earnings.

Financial assets are reclassified subsequent to their initial recognition only if the business model for managing those financial assets changes. The affected financial assets will be reclassified on the first day of the first reporting period following the change in the business model. A financial asset is derecognized when the rights to receive cash flows from the asset have expired or have been transferred and the Company has transferred substantially all the risks and rewards of ownership.

Impairment of Financial Assets

The Company recognizes loss allowances for Expected Credit Losses ("ECLs") on its financial assets measured at amortized cost. Due to the nature of its financial assets, the Company measures loss allowances at an amount equal to expected lifetime ECLs. Lifetime ECLs are the anticipated ECLs that result from all possible default events over the expected life of a financial asset. ECLs are a probability‐weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Company expects to receive). ECLs are discounted at the effective interest rate of the related financial asset. The Company does not have any financial assets that contain a financing component.

As at December 31, 2019, all of the Company's receivables were outstanding for less than 90 days. The average expected credit loss on the Company’s trade accounts receivable was nil.

Classification and Measurement of Financial Liabilities

A financial liability is initially classified as measured at amortized cost or FVTPL. A financial liability is classified as measured at FVTPL if it is held‐for‐trading, a derivative, or designated as FVTPL on initial recognition. The classification of a financial liability is irrevocable.

Financial liabilities at FVTPL are measured at fair value with changes in fair value, along with any interest expense, recognized in net earnings. Other financial liabilities are initially measured at fair value less directly attributable transaction costs and are subsequently measured at amortized cost using the effective interest method. Interest expense and foreign exchange gains and losses are recognized in net earnings. Any gain or loss on derecognition is also recognized in net earnings.

A financial liability is derecognized when the obligation is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same counterparty with substantially different terms, or the terms of an existing liability are substantially modified, it is treated as a derecognition of the original liability and the recognition of a new liability. When the terms of an existing financial liability are altered, but the changes are considered non‐ substantial, it is accounted for as a modification to the existing financial liability. Where a liability is substantially modified it is considered to be extinguished and a gain or loss is recognized in net earnings based on the difference between the carrying amount of the liability derecognized and the fair value of the revised liability. Where a liability is modified in a non‐substantial way, the amortized cost of the liability is remeasured based on the new cash flows and a gain or loss is recorded in net earnings.

Share Capital

Common shares are classified as shareholders’ equity. Incremental costs directly attributable to the issue of common shares are recognized as a deduction from shareholders’ equity, net of any tax effects.

d) Exploration and evaluation assets

All license acquisition, exploration and appraisal costs of technical services and studies, seismic acquisition, exploratory drilling and testing are initially capitalized by well, field, unit of account or specific exploration unit as

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ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

appropriate. Expenditures incurred during the various exploration and appraisal phases are carried forward, until the existence of commercial reserves and when the technical feasibility and commercial viability are demonstrable. Commercial reserves are typically considered to have been achieved when proven and/or probable reserves have been assigned. Commercial viability and technical feasibility are often demonstrated through the receipt by the Company of development licenses on oil and gas assets previously being evaluated under exploration licenses. If commercial reserves have been discovered and technical feasibility and commercial viability are demonstrable, the carrying value of the exploration and evaluation assets, after any impairment loss, are reclassified as oil and gas properties. If technical feasibility and commercial viability can not be demonstrated upon completion of the exploration phase, the carrying value of the exploration and evaluation costs incurred are expensed in the period this determination is made. Exploration and evaluation assets are not depleted or depreciated.

Exploration and evaluation assets are allocated to related cash‐generating units (“CGUs”) and are tested for impairment when indicators of impairment are present, and when exploration and evaluation assets are transferred to oil and gas properties.

Pre‐licence costs

Costs incurred prior to having obtained the legal rights to explore an area are expensed to the consolidated statement of income as they are incurred.

e) Oil and gas properties and other property, plant and equipment

Property, plant and equipment are stated at cost, less accumulated depletion and depreciation and accumulated impairment losses. The initial cost of an asset comprises its purchase price or construction cost, any cost directly attributable to bringing the asset into operation, including costs transferred from exploration and evaluation assets, the initial estimate of the decommissioning obligation, directly attributable general and administrative costs, and for qualifying assets, finance costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Expenditure on the construction, installation or completion of infrastructure facilities such as pipelines and the drilling of development wells, including unsuccessful development or delineation wells, is capitalized in oil and gas properties when they increased the future economic benefits embodied in the specific asset to which they relate. The costs of day to day servicing are expensed as incurred. Property, plant and equipment are grouped into CGUs for impairment testing purposes.

Depletion, depreciation and amortization

Oil and gas properties are depleted using the unit‐of‐production method by reference to the ratio of production in the year, before royalties, to the related proven and probable reserves as determined by independent petroleum engineers, taking into account estimated future development costs necessary to bring those reserves into production. The Company’s reserves are determined pursuant to National Instrument 51‐101, Standards of Disclosure for Oil and Gas Activities. For purposes of this calculation, natural gas is converted to equivalent volumes of crude petroleum based on the approximate energy equivalent ratio of six thousand cubic feet of natural gas to one barrel of crude oil. Future development costs are estimated taking into account the level of development required to produce the reserves. When significant parts of an item of property, plant and equipment have different useful lives, then they are accounted for and depreciated as separate components.

Furniture and equipment are depreciated over their estimated remaining lives using the declining balance method of depreciation. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount with any gain or loss recognized in earnings.

f) Impairment non‐financial assets

The Company assesses at each reporting date whether there is any indication that an asset may be impaired. Exploration and evaluation assets are assessed for impairment when they are reclassified to oil and gas properties and also if facts and circumstances suggest that the carrying amount exceeds the recoverable value, at which point

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ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

the Company estimates the asset’s recoverable amount. Exploration and evaluation assets are allocated to related CGU when they are assessed for impairment, both at the time of triggering events as well as at the time of their transfer to oil and gas properties. For non‐financial assets, the recoverable amount is the higher of an asset’s or CGU fair value less costs to sell and its value‐in‐use. Individual non‐financial assets are grouped into CGU for impairment assessment purposes, which is the lowest level at which there are identifiable cash inflows that are largely independent of the cash inflows of other groups of non‐financial assets. Where the carrying amount of a CGU exceeds its recoverable amount, the non‐financial asset is considered impaired and is written down to its recoverable amount.

Fair value less cost to sell is determined as the amount that would be obtained from the sale of a CGU in an arm’s length transaction between knowledgeable and willing parties, adjusted for incremental costs that would be directly attributable to the disposal of the asset. In assessing value‐in‐use, the estimated future cash flows expected to arise from the continued use of the CGU including any expansion prospects, and its eventual disposal, using assumptions that an independent market participant may take into account, are discounted to their present value using a pre‐tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company estimates the CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of loss.

g) Provisions

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. Provisions are determined by discounting the expected future cash flows at a pre‐tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Provisions are not recognized for future operating losses.

Decommissioning obligations

The Company’s activities give rise to dismantling, decommissioning and site disturbance remediation activities. Provision is made for the estimated cost of site restoration and capitalized in the relevant asset category. Decommissioning obligations are measured at the present value of management’s best estimate of expenditure required to settle the present obligation at the statement of financial position date. Subsequent to the initial measurement, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.

Changes in the estimated timing of decommissioning or decommissioning cost estimates, or discount rate are recognized prospectively by recording an adjustment to the decommissioning obligation, and a corresponding adjustment to the corresponding asset. The increase in the provision due to the passage of time is recognized as a finance cost. Actual costs incurred upon settlement of the decommissioning obligations are charged against the provision to the extent the provision was established.

h) Share‐based payments

The Company follows the fair‐value method for valuing stock options and other dilutive instruments granted to employees and directors. Under this method, the compensation cost is measured at the grant date using the Black‐ Scholes option pricing model and expensed over the vesting period of the instrument granted as stock‐based compensation expense with a corresponding increase to contributed surplus. The contributed surplus balance is

• 15 -

ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

reduced as stock options and other dilutive instruments are exercised with the amount previously recognized plus any consideration received credited to share capital. The portion of stock‐based compensation directly attributable to exploration and evaluation activities is capitalized to the corresponding asset. The Company has included an estimated forfeiture rate for stock options that will not vest, which is adjusted to reflect actual forfeitures upon final vesting of the award.

i) Income taxes

Current income tax

Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date.

Current income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statement of income. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

Deferred income tax

Deferred income tax is provided using the balance sheet method on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income taxes are recognized for all taxable temporary differences, except:

• Where deferred income tax arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting earnings nor taxable earnings or loss; and

• In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable earnings will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized. The carrying amount of deferred income tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable earnings will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each statement of financial position date and are recognized to the extent that it has become probable that future taxable earnings will allow the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the end of the reporting period.

Deferred income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statement of income. Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

• 16 -

ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

j) Earnings per share

Basic earnings per share information is computed by dividing the earnings by the weighted average number of shares outstanding during the reporting period. The Company utilizes the treasury stock method in the determination of the diluted per share amounts. Under this method, the diluted weighted average number of shares is calculated assuming the proceeds that arise from the exercise of outstanding, in‐the‐money options are used to purchase common shares of the Company at their average market price for the period. The weighted average number of shares outstanding is then adjusted by the net change.

k) Business combinations and goodwill

On the acquisition of a business, the acquisition method of accounting is used whereby the purchase consideration transferred is allocated to the identifiable assets, liabilities and contingent liabilities (identifiable net assets) on the basis of fair value at the date of acquisition. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of closing.

Goodwill is initially measured at cost being the excess of the cost of the business combination over the Company’s share in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. If the fair value attributable to the Company’s share of the identifiable net assets exceeds the fair value of the consideration, the Company reassesses whether it has correctly identified and measured the assets acquired and liabilities assumed and recognizes any additional assets or liabilities that are identified in that review. If an excess remains after reassessment, the Company recognizes the resulting gain in profit or loss on the acquisition date. After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

l) Finance costs and interest income

Finance costs comprise interest expense on borrowings, accretion of the discount on the decommissioning obligation, and any impairment losses recognized on financial assets.

Interest income is recognized as it accrues in profit or loss, using the effective interest method.

m) Use of estimates and judgements

The timely preparation of the financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future periods could require a material change in the financial statements. Accordingly, actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Significant estimates and judgments made by management in the preparation of these financial statements are outlined below.

Critical judgments in applying accounting policies

The following are the critical judgments that management has made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognized in these consolidated financial statements:

• i) Identification of cash‐generating units

• The Company’s assets are aggregated into cash‐generating units, for the purpose of calculating impairment, based on their ability to generate largely independent cash flows. By their nature, these estimates and assumptions are subject to measurement uncertainty and may impact the carrying value of the Company’s assets in future periods.

• 17 -

ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

ii) Exploration and evaluation assets

The application of the Company’s accounting policy for exploration and evaluation assets requires management to make certain judgments as to future events and circumstances as to whether economic quantities of reserves have been found in assessing economic and technical feasibility.

• iii) Income taxes

Judgments are made by management to determine the likelihood of whether deferred income tax assets at the end of the reporting period will be realized from future taxable earnings. To the extent that assumptions regarding future profitability change, there can be an increase or decrease in the amounts recognized in respect of deferred tax assets as well as the amounts recognized in profit or loss in the period in which the change occurs.

Key sources of estimation uncertainty

The following are the key assumptions concerning the sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing adjustments to the carrying amounts of assets and liabilities.

i) Business combinations

In a business combination, management makes estimates of the fair value of assets acquired and liabilities assumed as part of the acquisition transaction.

• ii) Share‐based payments

All equity‐settled, share‐based awards issued by the Company are recorded at fair value using the Black‐ Scholes option‐pricing model. In assessing the fair value of equity‐based compensation, estimates have to be made regarding the expected volatility in share price, option life, dividend yield, risk‐free rate and estimated forfeitures at the initial grant date.

• iii) Tax provisions

Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect amounts recognized in profit or loss both in the period of change, which would include any impact on cumulative provisions, and in future periods. Deferred tax assets (if any) are recognized only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse.

5. ACCOUNTING STANDARDS ADOPTIONS AND PRONOUNCEMENTS

New standards adopted on January 1, 2019

On January 1, 2019, the Company adopted IFRS 16 “Leases” to replace the existing guidance of IAS 17 “Leases”. The standard establishes principles and disclosures related to the amount, timing and uncertainty of cash flows arising from a lease. Given that the Company has no contractual obligations that would be determined as leases, no adjustments were required from the adoption of this standard.

6. DETERMINATION OF FAIR VALUES

A number of the Company’s accounting policies and disclosures require the determination of fair value, for both financial and non‐financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

• 18 -

ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

Property, plant and equipment and exploration and evaluation assets

The fair value of property, plant and equipment and exploration and evaluation assets recognized in a business combination and in assessing the recoverable value for impairment testing, is based on market values. The market value of property, plant and equipment and exploration and evaluation assets is the estimated amount for which the assets could be exchanged on the acquisition date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value of oil and natural gas interests included in property, plant and equipment is estimated with reference to the discounted cash flows expected to be derived from oil and natural gas production based on externally prepared reserve reports. The risk‐adjusted discount rate is specific to the asset with reference to general market conditions. The market value for exploration and evaluation assets is determined based on quoted market prices for similar assets, if available, or discounted cash flows expected to be derived from oil and natural gas production based on available resource reports. The discount rate is specific to the exploration and evaluation asset with reference to general market conditions.

Financial assets and liabilities

The fair value of financial assets and liabilities is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date, except for marketable securities which are fair valued based on quoted trading prices.

Stock options

The fair value of employee stock options is measured using a Black‐Scholes option pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility), weighted average expected life of the instruments (based on historical experience and general option and warrant behaviour), expected dividends, expected forfeiture rate and the risk‐ free interest rate (based on government bonds).

7. ACQUISITION TRANSACTION

On November 28, 2019, the Company completed the acquisition of ROK Resources Inc., a private Saskatchewan oil and gas company (the “Private Company”), pursuant to which the Company acquired all of the issued and outstanding shares of the Private Company. Under the terms of the transaction, former Private Company shareholders were issued an aggregate of 20,000,000 Class B Shares of the Company as consideration valued at $1.1 million. As a result of the transaction, the Company now holds interests in certain undeveloped land located in Saskatchewan on which it intends to conduct petroleum and natural gas exploratory work.

As the Private Company had no operations or substantive business activities nor any revenue‐generating assets, the transaction was accounted for as an acquisition of net assets with the following net fair values assigned:

Cash	$	210,975
Accounts receivable and prepaids		28,928
Exploration and evaluation assets		917,538
Accounts payable		(44,531)
Total net assets acquired	$	1,112,910
Share consideration (20,000,000 Class B Shares)	$	1,100,000
Transaction costs		12,910
Totalpurchaseprice	$	1,112,910

• 19 -

ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

8. EXPLORATION AND EVALUATION ASSETS

Exploration and Evaluation (“E&E”) assets consist of the following amounts:

Balance, December 31, 2018	$	‐
Acquisitions (Note 7)		917,538
Additions		708
Balance, December 31, 2019	$	918,246

The Company’s exploration and evaluation assets represent the recognized acquisition value and subsequent costs incurred in relation to the undeveloped land interests located in Saskatchewan on which it intends to conduct petroleum and natural gas exploratory work. During the year ended December 31, 2019, the Company did not identify any impairment triggers that exist for this exploration property.

9. BUSINESS DEVELOPMENT EXPENSES

Business development expenses relate to business initiatives towards the promotion, development, and growth of the Company’s operations and assets outside the normal course of the Company’s day‐to‐day endeavors. For the year ended December 31, 2019, the Company incurred business development expenses of $34,349 relating to efforts towards a strategic transaction.

For the year ended December 31, 2018, costs incurred in relation to a terminated amalgamation transaction with Western Atlas Resources Inc. (“WAR”) were recognized as part of business development expenses. These costs included, among other costs, a $250,000 payment to WAR upon termination of the amalgamation agreement in March 2018.

10. SHARE CAPITAL

Common shares

At December 31, 2019, the Company was authorized to issue an unlimited number of Class B Shares, with no par value, with holders of Class B Shares entitled to two votes per share and to dividends, if declared. Outstanding Class B Shares as of December 31, 2019, are as follows:

B Shares as of December 31, 2019, are as follows:
	Common shares		Amount
Balance, December 31, 2018 and 2017	23,274,268	$	86,110,218
Shares issued on asset acquisition (Note 7)	20,000,000		1,100,000
Balance, December 31, 2019	43,274,268	$	87,210,218

On November 28, 2019, the Company issued 20,000,000 Class B Shares to the former shareholders of the Private Company as consideration for 100% of the outstanding shares of the Private Company in accordance with the terms of the Transaction (see Note 7). The newly issued Class B Shares were valued at $0.055 per share for a total value of $1,100,000 based upon the market price of the Company’s Class B Shares on November 28, 2019.

Warrants

Pursuant to the non‐brokered private placement of units in June 2017, the Company issued 6,666,667 share purchase warrants. The warrants are exercisable at a price of C$0.15 per share until June 2022. A fair value of $40,004, net of issue costs, was recognized for the issuance of the share purchase warrants.

• 20 -

ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

Stock options

The Company has a stock option plan whereby options can be granted from time to time to directors, employees and consultants at the discretion of the Board of Directors. The number of options that can be granted is limited to 10% of the total shares issued and outstanding. Options issued typically vest one‐third on the date of the grant, one‐ third after one year following the date of the grant, and one‐third after two years following the grant date. Options issued expire five years following the date of the grant.

A summary of the changes in stock options is presented below:

		Weighted average	Weighted average
	Stock options	exercise price
Balance, December 31, 2017	668,000	$	0.65
Options issued	1,500,000		0.10
Balance, December 31, 2018	2,168,000		0.27
Expired options	(108,000)		3.50
Options issued	1,850,000		0.15
Balance, December 31, 2019	3,910,000	$	0.12
Exercisable, December 31, 2019	2,176,666	$	0.11

In July 2018, the Company granted 1,500,000 options to acquire common shares to certain directors and officers of the Company at a price of C$0.10 per common share. The options are for a five‐year term, expiring in July 2023, and vesting one‐third on date of grant, one‐third on the first anniversary date and one‐third on the second anniversary date from the date of grant.

In December 2019, the Company granted 1,850,000 options to acquire common shares to certain officers and employees of the Company at a price of $0.15 per common share. The options are for a five‐year term, expiring in December 2024, and vesting one‐third on date of grant, one‐third on the first anniversary date and one‐third on the second anniversary date from the date of grant.

The following summarizes information about stock options outstanding as at December 31, 2019:

	Number of options	Weighted average term to	Number of options
Exercise prices (C$)	outstanding	expiry (years)	exercisable
0.10	2,060,000	3.09	1,560,000
0.15	1,850,000	4.93	616,666
	3,910,000	3.96	2,176,666

The estimated fair value of options granted in 2019 and 2018 was based on a Black‐Scholes option pricing model with the following weighted average assumptions:

	December 2019	July 2018
Expected forfeiture rate	10%	10%
Risk‐free interest rate	1.48%	1.92%
Expected dividend yield	0%	0%
Expected stock price volatility	136%	137%
Expected option life	5 years	5 years
Fair value of optionsgranted	$0.122	$0.037

During the year ended December 31, 2019, the Company recognized $102,379 (December 31, 2018 ‐ $37,549) in stock‐based compensation expense. Recognized stock‐based compensation is recorded as an expense and as contributed surplus.

• 21 -

ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

Loss per share

For purposes of the loss per share calculations for the years ended December 31, 2019 and 2018, there is no difference between the basic loss per share and the diluted loss per share amounts. For the year ended December 31, 2019, 3,910,000 options and 6,666,667 warrants (December 31, 2018 ‐ 2,168,000 options and 6,666,667 warrants) were excluded as their impact was anti‐dilutive.

11. INCOME TAXES

Reconciliation of effective tax rate

Income tax expense varies from the amount that would be computed by applying the expected basic federal and provincial income tax rates for Canada for the year ended December 31, 2019 of 26.50% (December 31, 2018 ‐ 27.00%) to income before income taxes. A reconciliation of this difference is presented below.

		2019		2018
Loss before income taxes	$	(562,889)	$	(505,928)
Tax rate		26.50%		27.00%
Computed income tax recovery		(149,166)		(136,601)
Increase (decrease) in taxes:
Stock‐based compensation		27,131		10,138
Permanent difference on foreign exchange		‐		33,980
Change in unrecognized tax assets and other		122,035		92,483
Total tax expense	$	‐	$	‐

Unrecognized Deferred Tax Assets

Deferred tax assets have not been recognized in respect of the following deductible temporary differences:

		2019		2018
Non‐capital loss carryforwards	$	16,827,649	$	16,362,883
Capital loss carryforwards net of foreign exchange		98,913,492		98,913,494
Property, plant and equipment and other		2,444,681		2,448,463
	$	118,185,822	$	117,724,840

The non‐capital loss carryforwards are from Canada, which expire between 2028 and 2039. All the capital loss carryforwards presented above are also from Canada and have no expiration period. The deductible temporary differences presented in “Property, plant and equipment and other” do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profit will be available against which the group can utilise the benefits therefrom.

12. FINANCIAL RISK MANAGEMENT

The Company has exposure to the following risks from its use of financial instruments:

• Credit risk

• Liquidity risk

• Market risk

• 22 -

ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

This note presents information about the Company’s exposure to each of the above risks and the Company’s objectives, policies and processes for measuring and managing these risks, and the Company’s management of capital. The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Company’s activities.

Credit risk

Credit risk reflects the risk of loss if counterparties do not fulfill their contractual obligations. The carrying amount of cash and cash equivalents and accounts receivable represent the maximum credit exposure. At December 31, 2019, the Company had $6,144 in trade accounts receivable (December 31, 2018 ‐ $258), which consist of refundable tax balances. The Company does not consider any of its receivables presented on these financial statements to be past due. The Company held cash and cash equivalents of $1,250,300 as at December 31, 2019 (December 31, 2018 ‐ $1,439,962). The Company manages the credit exposure related to cash and cash equivalents by selecting counter parties based on credit ratings and monitors all investments to ensure a stable return, avoiding complex investment vehicles with higher risk.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due and describes the Company’s ability to access cash. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient cash resources in order to finance operations, fund capital expenditures, and to repay debt and other liabilities of the Company as they come due, without incurring unacceptable losses or risking harm to the Company’s reputation. The Company’s processes for managing liquidity risk include preparing and monitoring capital and operating budgets, coordinating and authorizing project expenditures, and authorization of contractual agreements. The Company seeks additional financing based on the results of these processes. The budgets are updated when required as conditions change.

The Company’s contractual obligations consist of accounts payable and accrued liabilities which are considered current in nature and due within one year, with the exception of long‐term liabilities of $100,000 which consist of severance owed to a former officer of the Company. This obligation must be satisfied by June 2021.

Market risk

Market risk is the risk or uncertainty that changes in price, such as commodity prices, foreign exchange rates, and interest rates will affect the Company’s net earnings and the value of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing returns. From time to time, the Company may utilize financial derivative contracts to manage market risks in accordance with the risk management policy that has been approved by the Board of Directors. There were no financial contracts or embedded derivatives outstanding at December 31, 2019 or 2018.

Commodity price risk

Commodity price risk is the risk that the fair value of the future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted by not only the US dollar, but also by world economic events that dictate the levels of supply and demand.

Foreign currency risk

Foreign currency risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign currency exchange rates. While the majority of the Company’s financing and administrative costs will be based and paid in Canadian dollars, some of the Company’s business transactions occur in currencies other than Canadian

• 23 -

ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

dollars. Therefore, the Company is exposed to the risk of fluctuations in foreign exchange rates between the Canadian dollar and foreign currencies, such as the US dollar (US$). As at December 31, 2019 and December 31, 2018, the Company had not entered into any foreign currency derivatives to manage its exposure to currency fluctuations. At December 31, 2019, the Company had balances within its cash in denominations of C$1.2 million and US$0.1 million (December 31, 2018 ‐ C$1.4 million and US$0.1 million).

The impact to the net loss for the year ended December 31, 2019, had the US$ to C$ exchange rate changed by 1 cent would amount to approximately $1,000 ($1,000 ‐ December 31, 2018).

Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in prevailing market interest rates. The Company is exposed to interest rate risk on its cash and cash equivalents and short‐term investments that have a floating interest rate. Fluctuations of interest rates for the periods ending December 31, 2019 and 2018 would not have had a significant impact on the annual consolidated financial statements.

Fair value of financial instruments

The Company’s financial instruments as at December 31, 2019, include cash and cash equivalents, accounts receivable, prepaids, and accounts payable and accrued liabilities.

The Company’s financial instruments recorded at fair value require disclosure about how the fair value was determined based on significant levels of inputs described in accordance with the following hierarchy:

Level 1 ‐ inputs are based on quoted market prices in active markets that the Company has the ability to access at the measurement date.

Level 2 ‐ inputs are based on quoted prices in the markets that are not active or based on prices that are observable for the asset or liability.

Level 3 ‐ inputs are based on unobservable market data for the asset or liability.

The Company aims to maximize the use of observable inputs when preparing calculations of fair value. Classification of each measurement into the fair value hierarchy is based on the lowest level of input that is significant to the fair value calculation.

The aforementioned financial instruments of the Company are classified as level 1 based on the nature of their observable inputs for fair value measurement. The fair value of cash and cash equivalents, accounts receivable, prepaids, accounts payable and accrued liabilities approximate their carrying amounts due to their short terms to maturity.

Capital management

The Company’s objectives when managing capital are to ensure the Company will have sufficient financial capacity, liquidity, and flexibility to fund the Company’s operations and potential strategic transactions for the foreseeable future (see Note 2). The Company is dependent upon funding these activities through a combination of available cash, debt and equity, which it considers to be the components of its capital structure as outlined below.

		2019		2018
Shareholders' equity	$	2,045,920	$	1,406,430
Cash and cash equivalents	$	1,250,300	$	1,439,962
Working capital (deficiency), excluding cash	$	(22,626)	$	(33,532)

The Company regularly monitors its capital structure and, as necessary, adjusts to changing economic circumstances and the underlying risk characteristics of its assets in order to meet current and upcoming obligations and

• 24 -

ROK RESOURCES INC. Notes to the Consolidated Financial Statements For the years ended December 31, 2019 and 2018

investments by the Company. The Company frequently reviews alternate financing options and arrangements to meet its current and upcoming commitments and obligations.

The Company's objectives when managing capital are: (i) to maintain a flexible capital structure, which optimizes the cost of capital at acceptable risk; and (ii) to maintain investor, creditor and market confidence in order to sustain the future development of the business. The Company’s share capital is not subject to external restrictions.

13. COMMITMENTS

A summary of the Company’s estimated financial commitments is as follows:

• Office space agreement up to April 2020 constituting a financial commitment of approximately $12,000 for the 2020 year.

• Fees and taxes related to the existing mineral leases held in Saskatchewan that equate to a total financial commitment of no more than $3,000 per year between 2020 and 2025 during the current exploration phase. Fees or royalties on production would only be derived once development of the existing mineral leases is realized and production has commenced.

The expenditures above represent the Company’s estimated cost to satisfy contract requirements and are based on the latest possible data available for each contract.

14. KEY MANAGEMENT COMPENSATION

The Company has determined that key management personnel consist of its managers, officers and directors. In addition to the salaries paid to company officers, these groups participate in the stock option plan. The total compensation expense, including salaries, fees and stock‐based compensation relating to key management personnel for the years ended December 31, 2019 and 2018, was as follows:

		2019		2018
Salary, fees and other benefits	$	151,935	$	33,425
Severance expense		160,000		‐
Stock‐based compensation*		79,924		37,549
	$	391,859	$	70,974

• Represents the amortized portion recognized in the consolidated financial statements.

$100,000 of the severance expense recognized for the year ended December 31, 2019, remains as a long‐term liability owed to a former officer of the Company. This obligation must be satisfied either when:

• 1) the Company successfully completes a financing in an aggregate amount in excess of $5 million, at which point the former officer has the option to receive the $100,000 severance payment in cash or shares; or

• 2) if no such financing is completed by June 2021, the former officer will be immediately entitled to receive $100,000 in cash.

15. SEGMENTED INFORMATION

The Company defines its reportable segments based on geographical locations. For the years ended December 31, 2018 and 2019, all assets and liabilities as well as operating results as presented within these financial statements represent operations within Canada.

• 25 -

ROK RESOURCES INC. Notes to the Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

16. SUPPLEMENTAL CASH FLOW INFORMATION

For the years ended December 31		2019		2018
Accounts receivable and prepaids	$	(32,271)	$	1,028
Accounts payable and accrued liabilities		21,365		(18,549)
Working capital adjustments related to the asset acquisition (Note 7)		(15,603)		‐
Change in non‐cash working capital		(26,509)		(17,521)
Relating to:
Operating activities		(26,509)		(17,521)
Change in non‐cash working capital	$	(26,509)	$	(17,521)

17. SUBSEQUENT EVENTS

Production Asset Acquisition

On April 22, 2020, the Company entered into a purchase agreement (the “Purchase Agreement”) to acquire certain producing oil and gas assets in Southeastern Saskatchewan. Closing of the acquisition is expected to occur on June 30, 2020 with an effective date of June 1, 2020, subject to the completion of a diligence review on the assets as well as the receipt of any necessary regulatory approvals. The total purchase price for the assets is $70,000. The Company has paid a deposit of $50,000 in connection with entering into the Purchase Agreement.

The acquisition properties are located within the Glen Ewen area of Southeast Saskatchewan. The acquired assets also include associated facilities and undeveloped land directly adjacent to the Company’s existing land base within the project area. As part of the Purchase Agreement, ROK has also entered into a third‐party processing agreement with the seller for a portion of the volumes on a fee basis. The acquisition package also contains associated liabilities, including future abandonment obligations and 27 suspended wells and 11 inactive facility sites, which will be evaluated for future reactivation.

COVID‐19 Pandemic

Subsequent to year‐end, there was a global outbreak of COVID‐19 (coronavirus), which has had a significant impact on businesses through the restrictions put in place by the Canadian, provincial and municipal governments regarding travel, business operations and isolation/quarantine orders. At this time, it is unknown the extent of the impact the COVID‐19 outbreak may have on the Company as this will depend on future developments that are highly uncertain and that cannot be predicted with confidence. These uncertainties arise from the inability to predict the ultimate geographic spread of the disease, and the duration of the outbreak, including the duration of travel restrictions, business closures or disruptions, and quarantine/isolation measures that are currently, or may be put, in place by Canada and other countries to fight the virus. While the extent of the impact is unknown, we anticipate this outbreak may cause reduced customer demand, supply chain disruptions, staff shortages, and increased government regulations, all of which may negatively impact the Company’s business and financial condition.

• 26 -