NOTES
TO FINANCIAL STATEMENTS
For
the years ended March 31, 2016 and 2015
1.
ORGANIZATION AND BUSINESS OPERATIONS
PetroTerra
Corp. (the “Company”) was incorporated under the laws of the State of Nevada, on July 25, 2008. The Company is in
the development stage as defined under Accounting Codification Standard or ACS, Development Stage Entities (“ASC-915”).
The Company has not generated any revenue to date and consequently its operations are subject to all risks inherent in the establishment
of a new business enterprise. For the period from inception on July 25, 2008 through March 31, 2016, the Company has accumulated
losses of $2,630,517.
2.
GOING CONCERN
The
financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets
and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred losses since
inception resulting in an accumulated deficit of $2,630,517 as of March 31, 2016 and further losses are anticipated in the development
of its business raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue
as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary
financing to meet its obligations and repay its liabilities, which have arisen from normal business operations as they come due.
Management intends to finance operating costs over the next twelve months with existing cash on hand loans from our director and/or
private placements of common stock.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United
States of America and are presented in US dollars.
These
statements reflect all adjustments, including of normal recurring adjustments, which, in the opinion of management, are necessary
for fair presentation of the information contained therein.
Development
Stage Activities
The
Company is a development stage enterprise. All losses accumulated since the inception of the Company have been considered as part
of the Company’s development stage activities.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
Use
of Estimates and Assumptions
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. In management’s opinion, all adjustments necessary for a fair
statement of the results for the interim periods have been made and all adjustments are of a normal recurring nature.
Foreign
Currency Translation
The
Company’s functional currency and its reporting currency is the United States dollar.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock
Split
On
July 1, 2015, the Company
filed a Certificate of Change with the Secretary of State of the State of Nevada to effect a
reverse stock split of its outstanding and authorized shares of common stock at a ratio of 1 for 2.5 (the “Reverse Stock
Split”).
As
a result of the Reverse Stock Split, the Company’s authorized shares of common stock were decreased from 100,000,000 to
40,000,000 shares and its authorized shares of preferred stock were decreased from 10,000,000 to 4,000,000 shares. Upon the effectiveness
of the Reverse Stock Split, which occurred on July 1, 2015, the Company’s issued and outstanding shares of common stock
was decreased from approximately 66,125,000 to 26,450,000 shares, all with a par value of $0.001. The Company has no outstanding
shares of preferred stock. Accordingly, all share and per share information has been restated to retroactively show the effect
of the Reverse Stock Split.
Stock-based
Compensation
In
September 2009, the FASB issued ASC-718, “Stock Compensation”. ASC-718 requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of
the award. Under ASC-718, the Company must determine the appropriate fair value model to be used for valuing share-based payments,
the amortization method for compensation cost and the transition method to be used at date of adoption.
Income
Taxes
Income
taxes are accounted for under the assets and liability method. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating losses and tax credit carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
Basic
and Diluted Loss Per Share
The
Company computes loss per share in accordance with ASC-260, “Earnings per Share” which requires presentation of both
basic and diluted earnings per share on the face of the statement of operations. Basic loss per share is computed by dividing
net loss available to common stockholders by the weighted average number of outstanding shares of common stock during the period.
Diluted loss per share gives effect to all dilutive potential shares of common stock outstanding during the period. Dilutive loss
per share excludes all potential shares of common stock if their effect is anti-dilutive. The Company has no potential dilutive
instruments and accordingly basic loss and diluted loss per share are equal.
Fiscal
Periods
The
Company’s fiscal year end is March 31.
Recent
accounting pronouncements
In
January 2016, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”)
2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities,” which amends the guidance in U.S. generally accepted accounting principles on the classification and measurement
of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities
under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU
clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized
losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after
December 15, 2017, and are to be adopted by means of a cumulative-effect adjustment to the balance sheet at the beginning of the
first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record
fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other
comprehensive income. The Company is currently evaluating the impact of adopting this standard.
In
November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,”
which simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified
as noncurrent in a classified statement of financial position. This ASU is effective for financial statements issued for annual
periods beginning after December 16, 2016, and interim periods within those annual periods. The adoption of this standard will
not have any impact on the Company’s financial position, results of operations and disclosures.
In
August 2014, the FASB issued a new U.S. GAAP accounting standard that provides guidance about management’s responsibility
to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related
footnote disclosures. The new accounting standard requires management to assess an entity’s ability to continue as a going
concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The new accounting
standard is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.
Early application is permitted. The Company does not expect the adoption of this standard to have a material impact on the consolidated
financial statements.
Revenue
Recognition
The
Company will recognize revenue in accordance with ACS - 605, “Revenue recognition”, ASC-605 requires that four basic
criteria be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred;
(3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and
(4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the
collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other
adjustments are provided for in the same period the related sales are recorded. The Company will defer any revenue for which the
product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that
the product has been delivered or no refund will be required.
Oil
and Gas
The
Company complies with ASC 932, “Extractive Activities - Oil and Gas”. The Company has capitalized exploratory well
costs, and has determined that there are no suspended well costs that should be impaired. The Company reviews its long-lived assets
for impairments when events or changes in circumstances indicate that impairment may have occurred.
Website
The
Company capitalizes the costs associated with the development of the Company’s website pursuant to ASC - 350, “Goodwill
and Other”. Other costs related to the maintenance of the website are expensed as incurred. Amortization is provided over
the estimated useful lives of three years using the straight-line method for financial statement purposes. The Company commenced
amortization upon completion of the Company’s fully operational website. Amortization expense for the year ended March 31,
2016 and 2015 totaled $9,934 and $8,768 respectively.
Property
and Equipment
Property
and equipment are carried at cost. Expenditures for major renewals and betterments that extend the useful lives of property and
equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization
of property and equipment is provided using the straight-line method for financial reporting purposes at rates based on the following
estimated useful lives:
Classification
|
|
Useful
Life
|
Computer
equipment
|
|
3
Years
|
Website
design
|
|
3
Years
|
Patents
and trademarks
|
|
15
Years
|
Depreciation
expense for the year ended March 31, 2016 and 2015 totaled $924 and $994, respectively.
Equipment
Equipment
is recorded at cost. Depreciation is computed for financial reporting purposes utilizing the straight-line method over the estimated
useful lives of the related asset.
Advertising
The
Company follows the policy of charging the costs of advertising to expenses incurred. The Company incurred $0 in advertising costs
during the years ended March 31, 2016 and 2015, respectively.
4.
ACQUISITION OF OIL AND GAS PROPERTIES
On
November 18, 2013, the Company entered into an assignment of lease (the “Agreement”) whereby Ardmore Investments Inc.
(“Ardmore”) assigned to the Company its rights under a certain purchase agreement (the “Purchase Agreement”),
dated August 8, 2013, between Ardmore and Pioneer Oil and Gas (“Pioneer”) involving the sale of 5,905.54 acres of
oil and gas leases located in the Central Utah Thrust Belt in Beaver County and Sevier County, Utah and currently owned by Pioneer
(the “Leases”). Per the terms of the Agreement, we issued to Ardmore 250,000 shares of our common stock on November
18, 2013, and, in order to complete the assignment contemplated by the Agreement, we will issue to Ardmore an additional 250,000
shares of our common stock upon the transfer to us of ownership in the Leases which must occur on or before April 12, 2014. Furthermore,
on December 12, 2013 and February 12, 2014, the Company made two installment payments of $100,000 each to Pioneer with an additional
$100,000 installment payment required on April 12, 2014. Upon completion of the final installment the leases were conveyed to
the Company.
Due
to the lack of an active market of the Company’s common stock, the fair value of the common stock transferred was determined
based on the price at which the Company’s shares were being sold in a private placement active during the time period.
Impairment
The
Company determined that there was a material impairment of the land lease agreements and recorded an impairment of the asset of
$737,500 in the year ended March 31, 2016.
5.
COMMON STOCK
The
Company’s authorized capital consists of 40,000,000 shares of common stock and 4,000,000 shares of preferred stock, both
with a par value of $0.001 per share.
On
July 1, 2015, the Company effectuated a reverse stock split of its outstanding and authorized shares of common stock at a ratio
of 1 for 2.5. As a result of the Reverse Stock Split, the Company’s authorized shares of common stock were decreased from
100,000,000 to 40,000,000 shares and its authorized shares of preferred stock were decreased from 10,000,000 to 4,000,000 shares.
Upon the effectiveness of the Reverse Stock Split, which occurred on July 1, 2015, the Company’s issued and outstanding
shares of common stock was decreased from 66,124,593 to 26,449,868 shares, all with a par value of $0.001. The Company has no
outstanding shares of preferred stock. Accordingly, all share and per share information has been restated in this Report to retroactively
show the effect of the Reverse Stock Split.
On
April 12, 2014, in connection with the Agreement, the Company issued to Ardmore 100,000 shares of our common stock.
On
May 7, 2014, the Company sold a total of 80,000 shares of common stock for gross proceeds of $150,000.
On
June 30, 2014 the Company authorized the issuance of 20,000 shares of common stock to the Chief Operating Officer for consulting
services. The fair value of the shares of common stock was $37,500.
On
August 22, 2014 the Company sold a total of 193,548 shares of common stock for gross proceeds of $150,000.
On
September 2, 2014, the Company authorized the issuance of 20,000 shares of common stock to a third party entity for consulting
services. The fair value of the shares of common stock was $20,500.
On
September 16, 2014, the Company authorized the issuance of 20,000 shares of common stock to the Company’s newly appointed
Chief Operating Officer for consulting services. The fair value of the shares of common stock was $20,500.
On
October 24, 2014 the Company sold 58,824 shares of common stock for gross proceeds of $50,000.
On
November 17, 2014, the Company entered into a private placement for 32,258 shares of common stock for gross proceeds of $50,000.
On December 8, 2014, the Company received $37,500 of the proceeds, however, the remaining $12,500 was received on January 8, 2015,
wherein, the Company issued the shares.
On
January 29, 2015, the Company entered into a private placement for 26,316 shares of common stock for gross proceeds of $37,500.
On
February 2, 2015, the Company authorized the issuance of 20,000 shares of common stock for consulting services. The fair value
of the shares of common stock was $42,000.
On
February 10, 2015, the Company entered into a private placement for 46,377 shares of common stock for gross proceeds of $80,000.
On
February 13, 2015, the Company issued 160,000 shares of common stock as per the Employment Agreement between the Company and John
Barton. The fair value of the shares of common stock was $336,000.
On
March 13, 2015, the Company authorized the issuance of 20,000 shares of common stock to the Chief Operating Officer for consulting
services. The fair value of the shares of common stock was $35,000.
On
April 27, 2015, the Company sold a total of 21,918 shares of common stock to an investor for gross proceeds of $40,000.
On
June 1, 2015, the Company sold a total of 58,823 shares of common stock to an investor for gross proceeds of $50,000.
On
June 12, 2015, the Company sold a total of 52,174 shares of common stock to an investor for gross proceeds of $30,000.
On
August 5, 2015, the Company sold a total of 75,862 shares of common stock to an investor for gross proceeds of $22,000.
On
August 12, 2015, the Company sold a total of 75,000 shares of common stock to an investor for gross proceeds of $30,000.
On
September 11, 2015, the Company sold a total of 142,857 shares of common stock to an investor for gross proceeds of $50,000.
On
September 14, 2015, the Company sold a total of 105,263 shares of common stock to an investor for gross proceeds of $40,000.
On
September 16, 2015, the Company authorized the issuance of 40,000 shares of common stock to the Company’s Chief Operating
Officer for consulting services. The fair value of the shares of common stock was $17,600.
On
October 13, 2015, the Company sold a total of 54,790 shares of common stock to an investor for gross proceeds of $40,000.
On
October 22, 2015, the Company entered into a private placement for 108,700 shares of common stock for gross proceeds of $100,000.
On November 10, 2015, the Company received $50,000 of the proceeds. On January 29, 2016, the private placement was amended and
the parties agreed that the investor would reduce its investment by $10,000 to an aggregate of $90,000 and would be issued an
aggregate of 97,826 shares of common stock. The remaining $40,000 was received on January 29, 2016, wherein, the Company issued
the shares.
On
October 26, 2015, the Company authorized the issuance of 50,000 shares of common stock to the Company’s Chief Operating
Officer for consulting services. The fair value of the shares of common stock was $48,000.
On
February 9, 2016, the Company issued a restricted stock grant of 160,000 shares of common stock to John Barton, the Company’s
Chief Executive Officer, in accordance with his employment agreement dated February 4, 2014, The restricted stock grant will vest
10 months following the issuance.
As
of March 31, 2016, the Company had 27,251,466 shares of common stock issued and outstanding.
6.
INCOME TAXES
As
of March 31, 2016, the Company had net operating loss carry forwards of approximately $2,630,517 that may be available to reduce
future years’ taxable income through 2034. Future tax benefits which may arise as a result of these losses have not been
recognized in these financial statements, as their realization is determined not likely to occur. Accordingly, the Company has
recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards.
Deferred
tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial
statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between
financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences
are expected to reverse
A
reconciliation of tax expense computed at the statutory federal tax rate income (loss) from operations before income taxes to
the actual income tax expense is as follows:
|
|
2016
|
|
|
2015
|
|
Tax provision (benefits)
computed at the statutory rate
|
|
$
|
(468,100
|
)
|
|
$
|
(371,900
|
)
|
Nondeductible expense
|
|
|
(800
|
)
|
|
|
(1,100
|
)
|
|
|
|
(467,300
|
)
|
|
|
(370,800
|
)
|
Increase in valuation allowance for
deferred tax assets
|
|
|
467,300
|
|
|
|
370,800
|
|
Income tax expense benefit
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
income taxes include the net tax effects of net operating loss (NOL) carry forwards and the temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant
components of the Company’s deferred tax assets are as follows:
|
|
2016
|
|
|
2015
|
|
Stock based compensation
|
|
$
|
-
|
|
|
$
|
-
|
|
Net
operating loss carryover
|
|
|
958,000
|
|
|
|
491,000
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax
assets
|
|
|
958,000
|
|
|
|
491,000
|
|
Valuation allowance
|
|
|
(958,000
|
)
|
|
|
(491,000
|
)
|
Net deferred
tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company has provided a valuation reserve against the full amount of the net deferred tax assets; because in the opinion of management,
it is more likely than not that these tax assets will not be realized.
The
Company’s NOL and tax credit carryovers may be significantly limited under the Internal Revenue Code (IRC). NOL and tax
credit carryovers are limited under Section 382 when there is a significant “ownership change” as defined in the IRC.
During the fiscal year ended March 31, 2016 and in prior years, the Company may have experienced such ownership changes, which
could impose such limitations.
The
limitation imposed by the IRC would place an annual limitation on the amount of NOL and tax credit carryovers that can be utilized.
When the Company completes the necessary studies, the amount of NOL carryovers available may be reduced significantly. However,
since the valuation allowance fully reserves for all available carryovers, the effect of the reduction would be offset by a reduction
in the valuation allowance.
The
company files income tax returns in the U.S. federal jurisdiction, and the State of Colorado.
7.
RELATED PARTY TRANSACTIONS
Chief
Executive Officer
The
Company has received advances from certain of its officers and other related parties to meet short term working capital needs.
These advances may not have formal repayment terms or arrangements. As of March 31, 2016 and March 31, 2015, the total amount
loaned to the Company by a director was $10,118. The loan is non-interest bearing, due upon demand and unsecured.
The
Company has an employment agreement with the Company’s Chief Executive Officer whereby the Company provides for compensation
of $10,000 per month. A total salary of $120,000 expensed during each of the years ended March 31, 2016 and 2015. The total balance
due to the Chief Executive Officer for accrued salaries at March 31, 2016 and March 31, 2015, was $41,250 and $25,000, respectively.
Chief
Operating Officer
On
October 26, 2015, the Company renewed its independent contractor agreement with Arrow Peak Minerals and Royalty LLC (“Arrow”)
so that Kurt Reinecke would continue to act in the role of the Company’s Chief Operating Officer. The agreement is for a
term of one year and will pay Arrow an aggregate of $90,000 over the term. Arrow is also entitled to receive an aggregate of 150,000
shares of common stock to be earned as follows: (i) 50,000 shares were issued upon execution of the agreement; (ii) 50,000 shares
will be issued upon the six month anniversary of the commencement of the agreement; and (iii) 50,000 shares will be issued upon
the one year anniversary of the commencement of the agreement.
8.
COMMITMENTS AND CONTINGENCIES
Land
Lease Agreements
As
detailed in the “Acquisition of Oil and Gas Properties” - Note 4, the Company is obligated to issue Ardmore Investments
an additional 250,000 shares of common stock upon the transfer of ownership of the Leases on or before April 12, 2014. Furthermore,
an installment payment is due to Pioneer in the amount of $100,000 on April 12, 2014. Upon completion of the final installment
the leases will be conveyed to the Company.
9.
SUBSEQUENT EVENT
The
Company has evaluated subsequent events from March 31, 2016 through the filing of these financial statements. There are no significant
subsequent events, except as disclosed below;
Officer
Restricted stock grant
On
April 28, 2016, the Company issued a restricted stock grant of 50,000 shares of common stock to our Chief Operating Officer, in
accordance with his employment agreement dated October 26, 2015,
Officer
Conversion of stock
On
June 3, 2016, the Company issued 1,022,122 shares in exchange for payment of outstanding compensation due to John Barton in the
amount of $71,250 and outstanding loans payable of $10,118.