ITEM 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
The following discussion
should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this Report. The
discussions of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily
occur. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors,
such as those set forth under “Risk Factors” and elsewhere in this Report, our actual results may differ materially
from those anticipated in these forward-looking statements.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form
10-K contains forward-looking statements that involve assumptions, and describe our future plans, strategies, and expectations.
Such statements are generally identifiable by use of the words “may,” “will,” “should,” “expect,”
“anticipate,” “plan,” “estimate,” “believe,” “intend,” or “project”
or the negative of these words of other variations on these words or comparable terminology. These statements are expressed in
good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved
or accomplished.
By their very nature, forward-looking
statements require us to make assumptions that may not materialize or that may not be accurate. Forward-looking statements are
subject to known and unknown risks and uncertainties and other factors that may cause actual results, levels of activity and achievements
to differ materially from those expressed or implied by such statements. Such factors include, among others: changes in oil or
natural gas prices, the success of our drilling program, the timing of planned capital expenditures, availability of acquisitions,
uncertainties in estimating proved reserves and forecasting production results, operational factors affecting the commencement
or maintenance of producing wells, the condition of the capital markets generally, as well as our ability to access them, the proximity
to and capacity of transportation facilities, uncertainties regarding environmental regulations or litigation and other legal or
regulatory developments affecting our business, and the other factors discussed below and elsewhere in this prospectus and in other
documents that we file with or furnish to the SEC, all of which are difficult to predict. Forward-looking statements may include
statements about:
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our reserves or reserves that we may expect to develop;
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our cash flows and liquidity;
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our financial strategy, budget, projections and operating
results;
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oil and natural gas prices that we may realize;
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the timing and amount of future production of oil and natural
gas;
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the availability of drilling and production equipment;
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the availability of oil field labor;
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the amount, nature and timing of capital expenditures,
including future exploration and development costs;
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the availability and terms of capital;
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government regulation and taxation of the oil and natural gas industry;
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our marketing of oil and natural gas;
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our exploitation projects or our ability to make property acquisitions on terms that meet our acquisition criteria;
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our costs of exploiting and developing our properties and conducting other operations;
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general economic conditions;
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competition in the oil and natural gas industry;
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the effectiveness of our risk management and possible future hedging activities;
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environmental liabilities;
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our future operating results;
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estimated future reserves and the present value thereof; and
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our plans, objectives, expectations and intentions contained in this report that are not historical.
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Although we believe that
the expectations conveyed by the forward-looking statements are reasonable based on information available to us on the date such
forward-looking statements were made, no assurances can be given as to future results, levels of activity, achievements or financial
condition.
You should not place undue
reliance on any forward-looking statement and should recognize that these statements are predictions of future results, which may
not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from
historical results, due to the risks and uncertainties described above, as well as others not now anticipated. The impact of any
one factor on a particular forward-looking statement is not determinable with certainty as such factors are interdependent upon
other factors. The foregoing statements are not exclusive and further information concerning us, including factors that potentially
could materially affect our financial results, may emerge from time to time. We do not intend to update forward-looking statements
to reflect actual results or changes in factors or assumptions affecting such forward-looking statements, except as required by
law, including the securities laws of the United States and the rules and regulations of the SEC.
Unless otherwise noted,
the terms the “Company”, “Foothills Exploration”, “Foothills”, “we”, or “our”
refer to the ongoing business operations of Foothills Exploration, Inc. and our wholly-owned subsidiary, Foothills Petroleum, Inc.,
as well as, the past operations of Foothills Petroleum, Inc. The terms “Key Link Assets Corp.” or “Key Link”
refer to the operations of Key Link Assets Corp. prior to May 27, 2016.
History
Foothills
Exploration, Inc. was incorporated in the State of Delaware on May 13, 2010, under the name “Key Link Assets Corp.”
for the purpose of acquiring a portfolio of heavily discounted real estate properties in the Chicago metropolitan area. The Company
changed its focus and planned to acquire small and medium sized grocery stores in non-urban locales that are not directly served
by large national supermarket chains.
On
May 2, 2016, Foothills Petroleum Inc., a Nevada corporation (“FPI”) acquired approximately 14.1 million pre-split (56.4
million post-split) shares of the Company’s common stock constituting approximately 96% of our then issued and outstanding
shares (“FPI Acquired Shares”). As of May 16, 2016, we effected a 4:1 forward split of our shares of common stock.
On May 27, 2016, we entered into a Share Exchange Agreement with the shareholders of FPI, whereby we acquired all of the outstanding
shares of FPI for 4,500,000 shares and also issued 1,503,759 shares on automatic conversion of debt (please see discussion
below under Overview) for an aggregate of 6,003,759 shares of our common stock (the “Share Exchange”). As a result
of the Share Exchange, FPI became our wholly owned subsidiary and the FPI Acquired Shares were returned to treasury and deemed
cancelled.
Prior
to the Share Exchange, we had minimal assets and recognized no revenues from operations, and were accordingly classified as a shell
company. On June 24, 2016, we filed an amendment to our Current Report on Form 8-K originally filed on June 10, 2016, indicating
that we were no longer a shell company as defined by Rule12b-2 of the Exchange Act. In light of closing of the Share Exchange transaction
with FPI, the Company became actively engaged in oil and gas operations through its wholly owned subsidiary.
On
June 30, 2016, we completed a sale of 3,007,519 shares of our common stock to a single investor for proceeds totaling $2,000,000.
For a more complete description of this transaction please see our Form 8-K filed with the SEC on July 7, 2016.
On
August 4, 2016, we were advised that the Financial Industry Regulatory Association had approved (i) our name change from Key Link
Assets Corp. to Foothills Exploration, Inc., and (ii) a change of trading symbol from KYLK to FTXP. Please see our Form 8-K filed
with the SEC on August 9, 2016.
On
October 5, 2016, the Company launched its Exploration Division and opened new office in Houston to support the
division’s staff. The Company’s Exploration Division consists of geologists and petroleum engineers engaged in
the exploration and development of hydrocarbons and tasked with building a portfolio of high impact exploration projects in
the Gulf Coast region.
Overview
Foothills Exploration is
an independent oil and gas exploration company engaged in the acquisition and development of oil and natural gas properties, through
its wholly-owned subsidiary, Foothills Petroleum, Inc. (“FPI”). FPI is focused on acquiring producing and developmental
properties in the Rockies and Gulf Coast regions. FPI seeks to acquire non-core, dislocated and underdeveloped oil and gas assets
and maximize those assets to create shareholder value (the "Business").
On December 31, 2015, FPI
acquired the rights to 38,120 acres of oil and gas property in the state of Wyoming, through Foothills Exploration, LLC, a wholly
owned subsidiary acquired by FPI upon its organization in December 2015.
The Company’s principal
obligations include:
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A debenture in the amount of $1,250,000, plus interest accruing at a rate of 9% per annum issued to Berwin
Trading Limited with principal and interest due upon maturity on May 6, 2017;
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A second debenture in the amount of $1,000,000, plus interest accruing at a rate of 9% per annum issued to
Full Wealth Investment Hong Kong Limited (collectively the “Debentures”) with principal and interest due upon maturity
on May 5, 2017; and
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A promissory note in the amount of $6,000,000 to Total
Belief Limited (“TBL”), a direct wholly-owned subsidiary of New Times Energy Corporation Limited, in connection with
the assets acquired on December 30, 2016, with a maturity date of June 30, 2018. This promissory note accrues no interest during
its term and is due and payable in full on or before its maturity date.
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From its inception in December
2015 through December 31, 2016, Foothills has generated no revenue from its principal business operations and is currently still
an exploration stage company. Prior to January 2016, Foothills’ operations were focused mainly on administrative activities
connected to the identification and evaluation of potential oil and gas prospects and other potential leasehold acquisitions in
our geographical areas of interest.
On December 30, 2016, the
Company acquired various oil and gas assets in Utah from a subsidiary of New Times Energy Corporation Limited (“New Times”).
These assets included certain oil and gas wells throughout the Uinta Basin in Utah, on acreage with over 30 proven undeveloped
drilling locations, additional non-operating interest in other leases, and access to approximately 6,000 acres in the Uinta Basin
with proven and probable reserves and existing infrastructure in place. This purchase provides the Company with an entry point
into the Uinta Basin and a basis from which to seek other bolt-on acquisition opportunities in the Rockies. The transaction delivers
to the Company a licensed and bonded operator in Utah having bonds in place with the Bureau of Land Management (BLM), State of
Utah and Bureau of Indian Affairs (BIA).
Through this acquisition
from New Times, the Company also obtained six shut-in wells in the Natural Buttes Field, Utah. After the acquisition, these wells
were worked over and brought back online with production averaging around 500 barrels per month in January and February 2017. The
Company plans to work over the remaining four wells in the coming months.
The transaction provides
the Company with the rights to an agreement to acquire up to 6,000+ acres and up to 16 shut-in oil and gas wells with proved and
proved undeveloped reserves on Ute Tribal lands in the Uinta Basin. These properties provide in-field drilling potential, the ability
to bring online shut-in wells and behind pipe development. Five shut-in wells located on fee lands in the Altamont-Bluebell Field
that are undergoing title curative have the potential to achieve near term production with stimulation and the addition of surface
equipment.
Furthermore, this acquisition
delivered to the Company an additional 40% working interest in the Ladysmith Prospect, covering 3,060 acres in the Greater Green
River Basin, Wyoming, increasing the Company’s pre-acquisition working interest of 35% up to a total of 75%.
Lastly, through this acquisition,
the Company also acquired 13,166,667 shares of common stock, constituting 55.63% of the outstanding shares of Grey Hawk Exploration,
Inc. (“Grey Hawk”), a British Columbia, Canada company. Grey Hawk owns a non-operated working interest in two wells
in the southern portion of the Natural Buttes Field. These two wells are not currently producing.
A third party independent
study conducted on behalf of the Company in Q4 2016 estimates a total of 1.28 million barrels of net proved reserves for the Uinta
Basin properties from the Green River and Wasatch Formations.
To acquire these assets,
the Company paid a total consideration of $10.75 million in a combination of cash, stock and promissory note consisting of:
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2,083,334 shares of the Company’s restricted
common stock valued by the parties at $4,000,000 at an agreed upon price per share of $1.92; and a
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Promissory note in the principal amount of $6,000,000
due and payable in full 18 months from December 30, 2016 and accruing no interest during its term.
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For financial accounting purposes the 2,083,334
shares were valued at the closing market price on the day of the transaction, which was $1.83, accordingly the shares were presented
at a value of $3,812,501 on the Company’s financial statements for the year ended December 31, 2016.
Market Environment
Oil
pricing has declined significantly over the last 24-months from a 2014 high of over $120 a barrel and have, in the opinion of the
Company, created attractive new opportunities to acquire oil and gas assets at what we believe to be favorable pricing. The International
Energy Agency recently highlighted that capital expenditures on new energy (exploration) declined 16% year-over-year in 2014, followed
up by another 20% decline year-over-year in 2015. With oil prices falling below $30 a barrel at one point in 2016, and WTI trading
at about $40 a barrel on August 1, 2016, (and approximately $45 a barrel on November 9, 2016), the Company currently anticipates
a 3rd consecutive year of material spending cutbacks for new supply globally.
The
Energy Information Administration (EIA) in its January 12, 2016, U.S. short-term energy outlook highlighted that consumption for
gasoline increased by 270,000 barrels per day in 2015 to an average of 9.2 million barrels per day, representing a year-over-year
growth of 2.6% and just below the record high of 9.3 million barrels per day set in 2007. The EIA forecasts that total global demand
for petroleum will grow by 1.4 million barrels per day from 93.7 million per day in 2015 to 95.2 million per day by the end of
2016, and similar growth in 2017 to 96.6 million per day, where demand out strips supplies by the 4Q 2017. For these and other
reasons, Foothills’ medium to long-term outlook is for oil and gas prices to be at sustainably higher levels, but no assurance
can be given that this outlook will prove to be accurate.
Our Strategy
Foothills’
strategic objective is to build a portfolio of producing properties that have low operating costs, long lived reserves and upside
development potential. The Company’s goal is to build a land bank of over 200,000 acres of proven, probable and prospective
reserves during this period of relatively low commodity pricing. Foothills intends to accomplish this by acquiring oil and gas
properties with attractive valuation metrics and attractive geological risk/reward profiles that are well positioned to benefit
from an improvement in commodity prices.
The
Company’s primary focus is the Rocky Mountain and Gulf Coast regions, where its consultants and technical staff have successfully
conducted oil and gas operations. Management believes that the Company’s tight geographical focus and regional experience,
coupled with our strategic industry relationships will advantageously position Foothills to acquire high quality oil and gas assets
at attractive valuations in the current environment.
The
Company’s acquisitions and roll up strategy is based on identifying undercapitalized, yet attractive oil and gas assets selling
at a discount to intrinsic value. Foothills focuses on acquiring oil and gas assets that have existing production, with existing
infrastructure in place and future developmental potential. Once we acquire oil and gas assets, management expects to target adjacent
oil and gas properties with similar characteristics for bolt on acquisitions to increase our geographical acreage position. By
consolidating and exploiting additional acreage as part of its rollup strategy, management intends to achieve operating efficiencies
to maximize shareholder value.
Wyoming Properties
The principal Wyoming assets
owned by the Company consist of non-producing, yet prospective mineral leases spread across four key projects: (i) Springs, (ii)
Ladysmith, (iii) Paw Paw and (iv) Ironwood.
Springs Project
Consisting of 38,120 contiguous
acres, the Springs project is a multiple objective oil resource play in the Greater Green River Basin. The prospect’s unconventional
target is a Niobrara and Mowry fractured shale. Numerous oil and gas shows in the Niobrara and Mowry shales surround the prospect
acreage. Foothills has also identified and mapped several conventional drilling targets in the Muddy and Tensleep throughout the
prospect area. The Springs project has been reevaluated as a Paleozoic stacked carbonate, dolostone, sandstone resource play dominated
by pressure and thermal maturity. Seismic is currently being reviewed for licensing, a unit outline proposed and a BLM area and
depth study is underway to propose unit obligation wells for late summer 2017 drilling.
Ladysmith Project
Foothills owns a 75% working
interest in the Ladysmith Anticline prospect that is located in Fremont County, Wyoming. Total acreage position is 3,061 acres
located between the Great Divide/Greater Green River Basin and the Wind River Basin. The primary target zones are the variable
Phosphoria and Tensleep sandstone with secondary considerations in the Madison limestone and Flathead sandstone. The prospect generation
was based on licensed 2-D seismic comprising of two seismic lines covering the Chevron/Echo – Greater Green River Basin.
Development continues on the Ladysmith project with two applications for permit to drill (APD) in progress. Foothills’ has
conducted two BLM onsite inspections to date and the Company is currently reviewing access, drilling and development plans for
two wells. Work continues on a surface access use agreement, completion of drilling unit outline and a schedule for BLM area and
depth meeting in the near term.
Paw Paw Project
The Paw Paw project is
a 3-D seismic defined prospect, which covers 4,467 acres and is a direct analog to the highly productive Tensleep Formation “Enigma”
Field (EUR 3.7 million barrels of oil) located only two miles to the south. The Tensleep Formation has a history of prolific area
production with two nearby analogues. The Paw Paw project has potential from primary and secondary recovery of up to 2 million
barrels of oil. On December 11th, the Company completed drilling operations on the Paw Paw Federal #1 test well. The Big Horn County
Wyoming test well reached total depth in the Madison Formation and the Company successfully logged and acquired valid data to further
evaluate the project’s potential. The Company’s technical team and consulting geological firm, Geopinion® Inc.,
are meeting with Koch Exploration Company’s geoscientists to evaluate test well results and further interpret and analyze
3D seismic data in order to identify favorable potential future locations for possible commercial wells. The test well has been
temporarily abandoned while the parties continue to analyze results during the evaluation stage. Total test well costs to date
are approximately $730,000. No assurance can be given that evaluation of test well data obtained will result in further drilling
activity that will yield commercial production and as a result the Company’s activities on this project may result in a complete
loss of the costs incurred.
The Paw Paw Federal #1
test well reached total depth in the Madison Formation after drilling an anticipated stratigraphic section and thrust fault. Oil
shows were found in the Muddy, Phosphoria, and Madison formations. The Phosphoria is a regionally productive formation and could
end up being the secondary zone in sidetrack operations should that type of operation be deemed commercially economic. Upon evaluation
of the test well’s seismic structural position and analysis of modern well log data, the technical team will determine whether
a successful sidetrack operation is likely to yield commercial oil reserves from the Tensleep and any other sands with oil shows
and if the test well, which is temporarily abandoned, should be considered for re-entry. No assurance can be given that these precise
efforts by our experienced technical team and our further development efforts of the prospect, including further drilling activity
in 2017, will yield a commercially successful well.
Ironwood Project
The Ironwood Project is
a 6,115 acre updip field extension play. The adjacent “Cotton Creek” Field produced approximately 67 million barrels
of oil (“MMBO”) and 68 billion cubic feet of gas (“BCFG”) primarily from the Phosphoria Formation. Koch
Exploration’s evaluations and the Company’s preliminary analyses indicate that collectively potential estimated ultimate
recovery (“EUR”) is 5 MMBO. The Ironwood project has both vertical and horizontal development opportunities, with the
potential of 9 vertical wells using 80-acre spacing or 12 horizontal wells on 320-acre spacing. The Company intends to drill a
test well on the Ironwood prospect in 2017.
Plan of Operations
Over
the near-term with energy prices depressed, Foothills believes that it is well positioned to capitalize on the current low price
environment. Current energy prices have exposed attractive U.S. based assets that are poorly capitalized, which are now selling
at discounted prices, providing multiple entry points to acquire attractive high quality oil and gas assets. Foothills intends
to acquire dislocated as well as non-core oil and gas assets from larger exploration and production companies seeking to raise
cash to pay down debt and shore up their balance sheets.
In
addition to what management believes to be a favorable macroeconomic environment for acquiring attractive oil and gas assets, Foothills
intends to leverage its geographical focus in the Rockies and Gulf Coast. Foothills is focused on acquiring smaller operators in
a considerably fragmented oil and gas market and through consolidation, management believes Foothills can effectively scale its
production and acreage position and collectively unlock value in the acquired oil and gas assets thereby creating shareholder value.
Acquiring additional assets and companies
throughout Rockies
Foothills
is targeting acquisitions in tightly defined geographical areas of interest, which meet certain metrics and future development
potential to maximize shareholder value. Foothills anticipates that these acquisitions will be funded through the sale of common
stock, and from issuance of convertible debt, other institutional and private borrowing, as well as future reserve based borrowing
activities.
Retain Operational Control and Significant
Working Interest
In
its principal acquisition and development targets, Foothills expects to preserve operational control of its development and drilling
activities. As the operator for its projects, Foothills retains more control over the timing, selection and process of drilling
prospects and completion design, which enhances our ability to maximize return on invested capital and giving us greater control
over the timing, allocation and amounts of capital expenditures.
Leasing of Prospective Acreage
In
the course of our day-to-day business, Foothills regularly identifies drilling and development opportunities on additional acreage
in its areas of interest that have not yet been leased. Subject to securing additional capital, the Company may take the initiative
to lease prospective acreage in our areas of interest and may sell all or any portion of our leased acreage to other companies
seeking to participate in the drilling and development of the prospect acreage.
Government Regulations
Governmental Regulation
and Environmental Consideration
The
oil and gas business in the United States is subject to regulation by both federal and state authorities, particularly with respect
to pricing, allowable rates of production, marketing and environmental matters.
The
production of crude oil and gas has, in recent years, been the subject of increasing state and federal controls. No assurance can
be given that newly imposed or changed federal laws will not adversely affect the economic viability of any oil and gas properties
we currently own and/or may acquire in the future. Federal income and "windfall profit" taxes have in the past affected
the economic viability of such properties.
The
following discussion provides a brief overview of potential state and federal regulations. Because Foothills to date has acquired
specific properties, and because of the wider range of activities in which the Company expects to participate, management believes
that it is not practical currently to set forth in detail the potential impact federal and state regulations may have on our operations.
The Department of Energy
The
Department of Energy Organization Act (Pub. L. No. 95-91) became effective October 1, 1977. Under this Act various agencies, including
the Federal Energy Administration (FEA) and the Federal Power Commission (FPC), have been consolidated to constitute the cabinet-level
Department of Energy (DOE). The Economic Regulatory Administration (ERA), a semi-independent administration within the DOE, now
administers most of the regulatory programs formerly managed by the FEA, including oil pricing and allocation. The Federal Energy
Regulatory Commission (FERC), an independent agency within the DOE, has assumed the FPC's responsibility for natural gas regulation.
Crude Oil and Natural Gas Liquids Price
and Allocation Regulation
Pursuant
to Executive Order Number 12287, issued January 28, 1981, President Reagan lifted all existing federal price and allocation controls
over the sale and distribution of crude oil and natural gas liquids. Executive Order Number 12287 was made effective as of January
28, 1981, and consequently, sales of crude oil and natural gas liquids after January 27, 1981 are free from federal regulation.
The price for such sales and the supplier-purchaser relationship will be determined by private contract and prevailing market conditions.
Because of this action, oil that may be sold by us will be sold at deregulated or free market prices. At various times, certain
groups have advocated the reestablishment of regulations and control on the sale of domestic oil and gas.
State Regulations
Foothills’
production of oil and gas, if any, will be subject to regulation by state regulatory authorities in the states in which we may
produce oil and gas. In general, these regulatory authorities are empowered to make and enforce regulations to prevent waste of
oil and gas and to protect correlative rights and opportunities to produce oil and gas as between owners of a common reservoir.
Some regulatory authorities may also regulate the amount of oil and gas produced by assigning allowable rates of production.
Environmental Laws
Oil
and gas exploration and development are specifically subject to existing federal and state laws and regulations governing environmental
quality and pollution control. Such laws and regulations may substantially increase the costs of exploring for, developing, or
producing oil and gas and may prevent or delay the commencement or continuation of a given operation.
All
of our operations involving the exploration for or the production of any minerals are subject to existing laws and regulations
relating to exploration procedures, safety precautions, employee health and safety, air quality standards, pollution of streams
and fresh water sources, odor, noise, dust, and other environmental protection controls adopted by federal, state and local governmental
authorities as well as the right of adjoining property owners. We may be required to prepare and present to federal, state or local
authorities data pertaining to the effect or impact that any proposed exploration for or production of minerals may have upon the
environment. All requirements imposed by any such authorities may be costly, time consuming, and may delay commencement or continuation
of exploration or production operations.
It
may be anticipated that future legislation will significantly emphasize the protection of the environment, and that, as a consequence,
our activities may be more closely regulated to further the cause of environmental protection. Such legislation, as well as future
interpretation of existing laws, may require substantial increases in equipment and operating costs to us and delays, interruptions,
or a termination of operations, the extent to which cannot now be predicted.
Title to Properties
Foothills owns the interest
in its properties and also at times relies on contracts with the owner or operator of the property, pursuant to which, among other
things, the Company has the right to have its interest placed of record. As is customary in the oil and gas industry, we anticipate
that a preliminary title examination will be conducted at the time unproved properties or interests are acquired by us. Prior to
commencement of drilling operations on such acreage and prior to the acquisition of proved properties, Foothills will conduct a
title examination and attempt to cure extremely significant defects before proceeding with operations or the acquisition of proved
properties, as it may deem appropriate. Foothills properties are subject to royalty, overriding royalty and other interests customary
in the industry, liens incident to agreements, current taxes and other burdens, minor encumbrances, easements and restrictions.
Foothills is aware of material title defects or disputes with respect to several of the Utah properties acquired on December 30,
2016, and is currently working to cure title on said properties. To the extent that such defects or disputes exist and cannot be
cured, Foothills would suffer title failures, which could result in property valuation impairments and other material adverse consequences
to the operations of the company.
Results of Operations
FPI, the successor entity
as a result of the reverse acquisition of Key Link, was formed on December 17, 2015. Since FPI is the entity for which we present
financial and operating data in this report, operating results for the comparative period in 2015 are not meaningful.
Year ended December
31, 2016 compared to December 17, 2015 (date of inception) till December 31, 2015
Revenue
We had no revenues for
the years ended December 31, 2016 and for the period from December 17, 2015 (date of inception) to December 31, 2015. We can provide
no assurance that we will commence drilling and revenue producing operations or that such drilling and revenue operations, if commenced,
will be successful.
Operating Expenses
Selling, general
and administrative expenses consist primarily of salaries and related expenses for our management and personnel, and professional
fees, such as accounting, consulting and legal. Our total selling, general and administrative expenses for the year ended December
31, 2016 and for the period from December 17, 2015 (date of inception) to December 31, 2015, were $1,913,265 and $32,667, respectively.
Other Expenses
Interest
expenses for the year ended December 31, 2016 and for the period from December 17, 2015 (date of inception) to December 31, 2015,
were $27,873 and $789, respectively.
Net Loss
As a result of the foregoing,
during the year ended December 31, 2016 and for the period from December 17, 2015 (date of inception) to December 31, 2015, we
recorded a net loss of $1,941,138 and $33,456, respectively.
Liquidity and Capital Resources
As shown in the
accompanying financial statements, we incurred an accumulated loss of $1,974,594 through December 31, 2016, and have a
working deficit of $1,083,783 at December 31, 2016. The Company is subject to those risks associated with exploration stage
companies. The Company has sustained losses since inception and additional debt and equity financing will be required by the
Company to fund its development activities and to monetize economically recoverable oil and gas reserves.
On June 30, 2016, we entered
into a securities purchase agreement to sell 3,007,519 shares of our common stock to a single investor for proceeds totaling $2,000,000.
Management believes that
its existing cash on hand will only be sufficient to fund its operations for a short period of time. The Company also continues
to search for producing and/or additional productive properties and seeks to strategically lease additional acreage positions adjoining
leases currently owned by the Company. There can be no assurance that the Company's efforts will be successful, or that those efforts
will translate in a beneficial manner to the Company. The accompanying statements do not include any adjustments relating to the
recoverability and classification of assets and/or liabilities that might be necessary, should the Company be unable to continue
as a going concern.
Operating Activities
During the year ended
December 31, 2016 and for the period from December 17, 2015 (date of inception) to December 31, 2015, we used $1,055,962 and $200,000
of cash in operating activities, respectively. Non-cash adjustments included $11,563 and $0 related to stock compensation expense,
$51,397 and $0 related to stock payable to officers and directors, $4,114 and $0 in depreciation and amortization and net changes
in operating assets and liabilities of $818,102 and $166,544, respectively.
Investing Activities
During the year ended December
31, 2016, we used $917,661 net cash in investing activities for acquisition of an oil and gas property. This included cash payment
made for the acquisition of $75,000 and proceeds of $358,129 cash received in an acquisition. We also acquired $91,899 in equipment
and $1,108,891 in oil and gas property.
During the period from
December 17, 2015 (date of inception) to December 31, 2015, we placed $25,000 in restricted cash into a trust account to be used
to pay legal expenses.
Financing Activities
During the year ended December
31, 2016, we received $2,400,000 from financing activities, including $400,000 in proceeds from issuance of a convertible note
and $2,000,000 in proceeds from issuance of common stock.
During the period from
December 17, 2015 (date of inception) to December 31, 2015, we received $600,000 from issuance of a convertible note.
Off-Balance Sheet Arrangements
We do not have any off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are
material to investors.
Critical Accounting Policies
Our discussion and analysis
of our results of operations, liquidity and capital resources are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America (“GAAP”). In accordance with
GAAP, we are required to make estimates and assumptions that affect the reported amounts included in our financial statements.
We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.
On an ongoing basis, management reviews and refines those estimates.
Management’s judgments
are based on information including, but not limited to, historical experience, industry trends, conventional practices, expert
opinions, terms of existing agreements and information from outside sources. Judgments are subject to an inherent degree of uncertainty,
and therefore actual results could differ from these estimates.
ITEM 8. Financial Statements and Supplementary
Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOOTHILLS EXPLORATION, INC.
December 31, 2016
|
Page
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated Balance Sheets as of December 31, 2016 and 2015
|
F-2
|
|
|
Consolidated Statements of Operations for the years ended December 31, 2016 and the period from December 17, 2015 (date of inception) to December 31,2015
|
F-3
|
|
|
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016 and the period from December 17, 2015 (date of inception) to December 31,2015
|
F-4
|
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and the period from December 17, 2015 (date of inception) to December 31,2015
|
F-5
|
|
|
Notes to Consolidated Financial Statements
|
F-6
|
Report of Independent
Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Foothills Exploration, Inc.
We have audited the accompanying consolidated
balance sheets of Foothills Exploration, Inc. and subsidiaries (The “Company”) as of December 31, 2016, and 2015 and
the related statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2016 and from
inception (December 17, 2015) to December 31, 2015. Foothills Exploration, Inc.’s management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing 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 over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Foothills Exploration, Inc. and
subsidiaries as of December 31, 2016 and 2015, and the results of its operations and its cash flows the year ended December 31,
2016 and from inception (December 17, 2015) to December 31, 2015 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has suffered losses from operations, which raise substantial doubt about its ability to continue
as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ RBSM LLP
|
|
|
|
Henderson, Nevada
|
|
April 14, 2017
|
|
FOOTHILLS EXPLORATION, INC.
Consolidated Balance Sheets
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
801,377
|
|
|
$
|
375,000
|
|
Prepaid expenses
|
|
|
49,140
|
|
|
|
170,833
|
|
Total Current Assets
|
|
|
850,517
|
|
|
|
545,833
|
|
Fixed assets, net
|
|
|
353,363
|
|
|
|
-
|
|
Restricted cash
|
|
|
240,000
|
|
|
|
25,000
|
|
Bonds
|
|
|
295,000
|
|
|
|
-
|
|
Oil and gas property, proved and unproved
|
|
|
11,198,411
|
|
|
|
72,430
|
|
Total Assets
|
|
$
|
12,937,291
|
|
|
$
|
643,263
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
1,923,700
|
|
|
$
|
3,500
|
|
Related party payable
|
|
|
10,600
|
|
|
|
-
|
|
Accrued interest
|
|
|
-
|
|
|
|
789
|
|
Total Current Liabilities
|
|
|
1,934,300
|
|
|
|
4,289
|
|
Long-Term Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
6,000,000
|
|
|
|
600,000
|
|
Total Liabilities
|
|
|
7,934,300
|
|
|
|
604,289
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 25,000,000 shares authorized; no shares outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.0001 par value; 30,000,000 shares authorized; 13,779,612 and 4,500,000 shares issued and outstanding, respectively
|
|
|
1,378
|
|
|
|
450
|
|
Stock payable
|
|
|
51,397
|
|
|
|
-
|
|
Additional paid in capital
|
|
|
6,924,810
|
|
|
|
71,980
|
|
Accumulated deficit
|
|
|
(1,974,594
|
)
|
|
|
(33,456
|
)
|
Total stockholders’ equity
|
|
|
5,002,991
|
|
|
|
38,974
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
12,937,291
|
|
|
$
|
643,263
|
|
See accompanying notes to consolidated financial
statements.
FOOTHILLS EXPLORATION, INC.
Consolidated Statement of Operations
|
|
For the year ended
|
|
|
For the period from
inception (December 17,
2015) to
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
1,913,265
|
|
|
$
|
32,667
|
|
Total operating expenses
|
|
|
1,913,265
|
|
|
|
32,667
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,913,265
|
)
|
|
|
(32,667
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(27,873
|
)
|
|
|
(789
|
)
|
Total other expenses
|
|
|
(27,873
|
)
|
|
|
(789
|
)
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes
|
|
|
(1,941,138
|
)
|
|
|
(33,456
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,941,138
|
)
|
|
$
|
(33,456
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(0.23
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares – basic and diluted
|
|
|
8,422,180
|
|
|
|
2,250,000
|
|
See accompanying notes to consolidated financial
statements.
FOOTHILLS EXPLORATION, INC.
Consolidated Statements of Stockholders’
Equity
|
|
Common stock
|
|
|
Additional
Paid in
|
|
|
Stock
|
|
|
Accumulated
|
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Payable
|
|
|
Deficit
|
|
|
Equity
|
|
Balance as of December 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Assignment of rights, Oil and Gas property, Wyoming
|
|
|
4,500,000
|
|
|
|
450
|
|
|
|
71,980
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72,430
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(33,456
|
)
|
|
|
(33,456
|
)
|
Balance as of December 31, 2015
|
|
|
4,500,000
|
|
|
$
|
450
|
|
|
$
|
71,980
|
|
|
$
|
-
|
|
|
$
|
(33,456
|
)
|
|
$
|
38,974
|
|
KYLK Shares
|
|
|
58,809,000
|
|
|
|
5,881
|
|
|
|
(5,881
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock returned to treasury for cancellation
|
|
|
(56,449,000
|
)
|
|
|
(5,645
|
)
|
|
|
5,645
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock issued for notes payable
|
|
|
1,503,759
|
|
|
|
150
|
|
|
|
999,850
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
Shares issued for services
|
|
|
320,000
|
|
|
|
32
|
|
|
|
2,630
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,662
|
|
Shares issued for services
|
|
|
5,000
|
|
|
|
1
|
|
|
|
7,649
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,650
|
|
Common stock issued for cash
|
|
|
3,007,519
|
|
|
|
301
|
|
|
|
1,999,699
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
Common stock issued for acquisition
|
|
|
2,083,334
|
|
|
|
208
|
|
|
|
3,812,293
|
|
|
|
-
|
|
|
|
|
|
|
|
3,812,501
|
|
Warrants issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
2,144
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,144
|
|
Debt forgiveness
|
|
|
-
|
|
|
|
-
|
|
|
|
28,801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,801
|
|
Stock payable (RSUs)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,397
|
|
|
|
-
|
|
|
|
51,397
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,941,138
|
)
|
|
|
(1,941,138
|
)
|
Balance as of December 31, 2016
|
|
|
13,779,612
|
|
|
$
|
1,378
|
|
|
$
|
6,924,810
|
|
|
$
|
51,397
|
|
|
$
|
(1,974,594
|
)
|
|
$
|
5,002,991
|
|
See accompanying notes to consolidated financial
statements.
FOOTHILLS EXPLORATION, INC.
Consolidated Statement of Cash Flows
|
|
For the year ended
|
|
|
For the period from
inception (December 17,
2015) to
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,941,138
|
)
|
|
$
|
(33,456
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,114
|
|
|
|
-
|
|
Common stock issued for services
|
|
|
11,563
|
|
|
|
-
|
|
Stock payable
|
|
|
51,397
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
122,586
|
|
|
|
(170,833
|
)
|
Accounts payable and accrued liabilities
|
|
|
667,503
|
|
|
|
3,500
|
|
Accrued interest
|
|
|
28,013
|
|
|
|
789
|
|
Net cash used in operating activities
|
|
|
(1,055,962
|
)
|
|
|
(200,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Payment for restricted cash
|
|
|
-
|
|
|
|
(25,000
|
)
|
Cash received in acquisition
|
|
|
358,129
|
|
|
|
-
|
|
Payments made under acquisition
|
|
|
(75,000
|
)
|
|
|
-
|
|
Payments for purchase of fixed assets
|
|
|
(91,899
|
)
|
|
|
-
|
|
Payments for acquisition of oil and gas property
|
|
|
(1,108,891
|
)
|
|
|
-
|
|
Net cash from investing activities
|
|
|
(917,661
|
)
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
400,000
|
|
|
|
600,000
|
|
Proceeds from issuance of common stock
|
|
|
2,000,000
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
2,400,000
|
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
426,377
|
|
|
|
375,000
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, beginning of period
|
|
|
375,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, end of period
|
|
$
|
801,377
|
|
|
$
|
375,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Taxes and interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Non-cash investing and financing activities
|
|
$
|
-
|
|
|
$
|
-
|
|
Prepaid expense in shares
|
|
$
|
893
|
|
|
$
|
-
|
|
Accrued interest settled in shares
|
|
$
|
28,801
|
|
|
$
|
-
|
|
Conversion of notes payable
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
Accounts payable settled with restricted cash
|
|
$
|
25,000
|
|
|
$
|
-
|
|
Assets acquired in acquisition
|
|
$
|
10,817,668
|
|
|
$
|
-
|
|
Related party payable acquired in acquisition
|
|
$
|
(10,600
|
)
|
|
$
|
-
|
|
Liabilities acquired in acquisition
|
|
$
|
(613,297
|
)
|
|
$
|
-
|
|
Notes payable issued in acquisition
|
|
$
|
(6,000,000
|
)
|
|
$
|
-
|
|
Shares issued in acquisition
|
|
$
|
(3,812,500
|
)
|
|
$
|
-
|
|
Shares issued for acquisition of oil and gas property
|
|
$
|
-
|
|
|
$
|
(72,430
|
)
|
See accompanying notes to consolidated financial
statements.
Foothills Exploration, Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and
the period from December 17, 2015 (date of
inception) to December 31, 2015
Note 1 – Nature of the Business
Business
Foothills Exploration,
Inc., (“Company” or “Foothills Exploration”) was incorporated in the State of Delaware on May 13, 2010,
under the name of “Key Link Assets Corp.” for the purpose of acquiring a portfolio of heavily discounted real estate
properties in the Chicago metropolitan area. The Company changed its focus and planned to acquire small and medium sized grocery
stores in non-urban locales that are not directly served by large national supermarket chains.
On May 2, 2016, Foothills
Petroleum Inc., a Nevada corporation (“FPI”), acquired over 14.1 million pre-split (56.4 million post-split) shares
of the Company’s common stock constituting approximately 96% of our then issued and outstanding shares (“FPI Acquired
Shares”). As of May 16, 2016, we effected a 4:1 forward split of our shares of common stock.
On May 27, 2016, we
entered into a Share Exchange Agreement with shareholders of FPI whereby we acquired all of the outstanding shares of FPI in exchange
for 4,500,000 shares of our common stock and also issued 1,503,759 shares of our common stock on automatic conversion of debt (please
see discussion below under Overview) for an aggregate of 6,003,759 shares of our common stock (the “Share Exchange”).
As a result of the Share Exchange, FPI became our wholly owned subsidiary and the FPI Acquired Shares were returned to treasury
and deemed cancelled. For accounting purposes, this transaction is being accounted for as a reverse acquisition and has been treated
as a recapitalization of the Company with FPI considered the accounting acquirer, and the financial statements of the accounting
acquirer became the financial statements of the registrant. The completion of the Share Exchange resulted in a change of control.
The FPI Shareholders obtained approximately 96% of voting control on the date of Share Exchange. FPI was the acquirer for financial
reporting purposes and the Company was the acquired company. The consolidated financial statements after the acquisition include
the balance sheets of both companies at historical cost, the historical results of FPI and the results of the Company from the
acquisition date. All share and per share information in the accompanying consolidated financial statements and footnotes have
been retroactively restated to reflect the recapitalization.
Prior to the Share
Exchange, we had minimal assets and recognized no revenues from operations, and were accordingly classified as a shell company.
On June 24, 2016, we filed an amendment to our Current Report on Form 8-K originally filed on June 10, 2016, indicating that we
were no longer a shell company as defined by Rule 12b-2 of the Exchange Act. In light of closing the Share Exchange transaction
with the shareholders of FPI, the Company became actively engaged in oil and gas operations through its wholly owned subsidiary.
On August 4, 2016,
we were advised that the Financial Industry Regulatory Association had approved (i) our name change from Key Link Assets Corp.
to Foothills Exploration, Inc., and (ii) a change of trading symbol from KYLK to FTXP.
On December 12, 2016, the Company entered into
a participation agreement with Magna Operating, LLC, a privately held Houston-based independent exploration and production company
(“Magna Operating”), in relation to the Labokay prospect, covering approximately 240 acres in Calcasieu Parish, Louisiana.
As consideration for an assignment of interest
in and to the leases and the prospect, Foothills Petroleum Operating, Inc., a Nevada corporation and indirect wholly-owned subsidiary
of the Company (“FPOI”), tendered to Magna Operating the purchase price in the amount of $144,000. This amount covered
FPOI’s share of the land, lease, and administrative costs that Magna Operating incurred in generating and assembling the
Labokay prospect as of November 15, 2016. As further consideration for an assignment of working interest in and to the leases,
FPOI agreed to participate in the cost, risk, and expense of drilling the Labokay test well.
The Company drilled a total measured depth
of the Labokay Prospect well where hydrocarbons shows were present, but not in commercial quantities to warrant completion. The
Company disclosed that the well will be plugged and abandoned as required. The Company estimates well costs for the Labokay Prospect
at approximately $1.1 million including plugging and abandonment liability which it expects to incur during Q1 of 2017.
On December 30, 2016, the Company acquired
various oil and gas assets in Utah from Total Belief Limited, a wholly owned subsidiary of New Times Energy Corporation Limited.
These assets included certain oil and gas wells throughout the Uinta Basin in Utah on acreage with over 30 proven undeveloped drilling
locations, additional non-operating interest in other leases, and access to approximately 6,000 acres in the Uinta Basin with
proven and probable reserves and existing infrastructure in place. Through the acquisition, Foothills also obtained six shut-in
wells in the Natural Buttes Field, Utah. The transaction provides Foothills with the rights to an agreement to acquire up to 6,000+
acres and up to 16 shut-in oil and gas wells with proved and proved undeveloped reserves on Tribal lands in the Uinta Basin. This
acquisition delivers to the Company an additional 40% working interest in the Ladysmith Prospect covering 3,060 acres in the Greater
Green River Basin, Wyoming, bringing the Company’s total working interest in the prospect from 35% (pre-acquisition) up to
75%.
By this agreement, the Company acquired 13,166,667
shares, constituting 55.63% of the outstanding shares of Grey Hawk Exploration, Inc. (“Grey Hawk”), a British Columbia,
Canada company. Grey Hawk owns a non-operated working interest in two non-producing wells in the southern portion of the Natural
Buttes Field.
On December 30, 2016, the Company also acquired
the remaining 25% membership interest in TEPI from Green Stone Capital Partners Limited, a Cayman Islands limited liability company,
in exchange for assumption of Greenstone’s proportionate share of TEPI obligations and liabilities.
Nature of Operations
FPI, the Company’s
main operating subsidiary, was incorporated in Nevada in December 2015. Foothills is an independent oil and gas exploration company
with a focus on the acquisition and development of oil and gas properties in the Rockies and Gulf Coast. Foothills seeks to acquire
dislocated and underdeveloped oil and gas assets and maximize those assets to create shareholder value (the "Business").
The Company’s principal obligations include:
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A debenture in the amount of $1,250,000, plus interest accruing at a rate of 9% per annum issued to Berwin
Trading Limited with principal and interest due upon maturity on May 6, 2017;
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A second debenture in the amount of $1,000,000, plus interest accruing at a rate of 9% issued to Full Wealth
Investment Hong Kong Limited (collectively the “Debentures”) with principal and interest due upon maturity on or before
May 5, 2017; and
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A promissory note in the amount of $6,000,000 to Total Belief Limited (“TBL”), a direct
wholly-owned subsidiary of New Times Energy Corporation Limited, in connection with the assets acquired on December 30, 2016, with
a maturity date of June 30, 2018. This promissory note accrues no interest during its term and is due and payable in full on or
before its maturity date.
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From its inception
in December 2015, through the date of the Share Exchange, Foothills produced no revenues from its business and principal properties
and is currently an exploration stage company. Prior to January 2016, Foothills had minimal operations that were focused mainly
on administrative activities connected to the identification and evaluation of potential oil and gas prospects and other potential
leasehold acquisitions in our geographical areas of interest. As of December 31, 2016, Foothills had acquired the rights to 45,648
acres of oil and gas property in the state of Wyoming, excluding 6,115 acres of Ironwood prospect that are subject to drilling
a well in 2017. Please see Note 13, Subsequent Events, for additional acreage obtained subsequent to December 31, 2016.
Foothills’ technical team and strategic
advisors have a proven track record of finding, exploiting and developing oil resources in the Rockies and Gulf Coast, with a deep
technical and operational knowledge of the area.
Note 2 – Going Concern
As shown in the accompanying financial statements,
the Company has incurred an accumulated loss of $1,974,594 through December 31, 2016, and had working capital deficit of $1,083,783
at December 31, 2016. The Company is subject to those risks associated with exploration stage companies. The Company has sustained
losses since inception and additional debt and equity financing will be required by the Company to fund its development activities
and to monetize economically recoverable oil and gas reserves.
We are currently engaged in discussions with
financing sources seeking more than $5 million intended to repay or refinance amounts due at beginning of May 2017. Additionally,
other prospects are being evaluated for acquisition and will likely need additional capital in the form of equity or debt, including
possible bank debt that is significantly greater than $5 million. However, no assurance can be given that the Company will be able
to obtain additional financing to further its ongoing activities so that profitable operations can be attained. The Company also
continues to search for producing and/or additional productive properties and seeks to strategically lease additional acreage positions
adjoining leases currently owned by the Company. There can be no assurance that the Company's efforts will be successful, or that
those efforts will translate in a beneficial manner to the Company. These factors raise substantial doubt about the Company’s
ability to continue as a going concern within one year after the date that the financial statements are issued.
The accompanying statements do not include
any adjustments relating to the recoverability and classification of assets and/or liabilities that might be necessary, should
the Company be unable to continue as a going concern.
Note 3 – Summary of Significant Accounting
Policies
Principles of Consolidation
The financial statements include the accounts
of Foothills Exploration, Inc., and all of its direct and indirect wholly-owned subsidiaries. Intercompany balances and transactions
have been eliminated in consolidation.
Basis of Presentation and Functional Currency
These consolidated financial statements and
related notes are presented in accordance with accounting principles generally accepted in the United States of America, and are
expressed in United States dollars (USD).
Exploration Stage
The Company has not produced revenues from
its principal business and is still in the exploration stage. The Company is engaged in the acquisition, exploration, development
and production of oil and gas properties. As of December 31, 2016, the Company had acquired the rights to 45,648 acres of oil and
gas property in the state of Wyoming, excluding 6,115 acres of Ironwood prospect that are subject to drilling a well in 2017, through
its transaction with the shareholders of Foothills, its farmout agreement with Koch Exploration Company, and other acquisitions
made by the Company since its inception.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual
results could materially differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash equivalents. The carrying value of those investments approximates
their fair market value due to their short maturity and liquidity. Cash and cash equivalents include cash on hand and amount on
deposit with financial institutions, which amounts may at times exceed federally insured limits. The Company has not experienced
any losses on such accounts and it does not believe it is exposed to any significant credit risk. As of December 31, 2016, the
Company had no cash equivalents.
Restricted Cash
Cash and cash equivalents that are restricted
as to withdrawal or use under the terms of certain contractual agreements are recorded in
restricted cash
in the non-current
assets section of our consolidated balance
sheet. As of December 31, 2016, and 2015, the Company had restricted cash
of $240,000 and $25,000 respectively, a result of the cash held in an escrow account for the purpose of an acquisition.
Oil and Gas Properties
The Company follows the full cost method of
accounting for its investments in oil and gas properties. Under the full cost method, all costs associated with the exploration
of properties are capitalized into appropriate cost centers within the full cost pool. Internal costs that are capitalized are
limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken and
do not include any costs related to production, general corporate overhead, or similar activities. Cost centers are established
on a country-by-country basis.
Capitalized costs within the cost centers are
amortized on the unit-of-production basis using proved oil and gas reserves. The cost of investments in unevaluated properties
and major development projects are excluded from capitalized costs to be amortized until it is determined whether or not proved
reserves can be assigned to the properties. Until such a determination is made, the properties are assessed annually to ascertain
whether impairment has occurred. The costs of drilling exploratory dry holes are included in the amortization base immediately
upon determination that the well is dry.
For each cost center, capitalized costs are
subject to an annual ceiling test, in which the costs shall not exceed the cost center ceiling. The cost center ceiling is equal
to: (i) the present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration
of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas
reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be
incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation
of existing economic conditions; plus (ii) the cost of properties not being amortized; plus (iii) the lower of cost or estimated
fair value of unproven properties included in the costs being amortized; and less (iv) income tax effects related to differences
between the book and tax basis of the properties. If unamortized costs capitalized within a cost center, less related deferred
income taxes, exceed the cost center ceiling, the excess is charged to expense and separately disclosed during the period in which
the excess occurs. The Company will perform this test no less than each fiscal year beginning in 2017.
Capitalization
of Fixed Assets
The Company
capitalizes expenditures related to property and equipment, subject to a minimum rule, that have a useful life greater than one
year for: (1) assets purchased; (2) existing assets that are replaced, improved or the useful lives have been extended; or (3)
all land, regardless of cost. Acquisitions of new assets, additions, replacements and improvements (other than land) costing less
than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are expensed
as incurred.
Office equipment – 3 years
Vehicle – 5 years
Drill equipment – 7 years
Oil
and gas properties – 20 years
Asset Retirement Obligations
The asset retirement obligation relates to
the plug and abandonment costs when its wells are no longer useful. The Company determines the value of the liability by obtaining
quotes for this service and then estimating the increase it will face in the future. The Company then discounts the future value
based on an intrinsic interest rate that is appropriate. If costs rise more than what was expected there could be additional future
charges, however, Foothills monitors the costs of the abandoned wells and intends to adjust this liability as required.
Fair Value of Financial Instruments
For certain of the Company’s financial
instruments, including cash and equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities and short-term
debt, the carrying amounts approximate their fair values due to their short maturities. ASC Topic 820, “Fair Value Measurements
and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial
Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement
that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets
for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values
because of the short period of time between the origination of such instruments and their expected realization and their current
market rate of interest. The three levels of valuation hierarchy are defined as follows:
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Level 1, defined as observable inputs to the valuation
methodology are quoted prices for identical assets or liabilities in active markets.
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Level 2, defined as inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument.
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·
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Level 3 defined as unobservable inputs in which little
or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation
techniques in which one or more significant inputs or significant value drivers are unobservable.
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The Company analyzes all financial instruments
with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815.
As of December 31, 2016, the Company did not
identify any assets and liabilities that are required to be presented on the balance sheet at fair value.
Net Earnings (Loss) Per Common Share
The Company computes earnings per share under
ASC 260-10, “Earnings Per Share.” Basic earnings (loss) per share is computed by dividing the net income (loss) attributable
to the common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator)
during the reporting periods. Diluted loss per share is computed by increasing the denominator by the weighted average number of
additional shares that could have been outstanding from securities convertible into common stock (using the “treasury stock”
method), unless their effect on net loss per share is anti-dilutive. There were 1,475,000 potentially dilutive shares, which include
outstanding warrants and options, for the period ended December 31, 2016. The potential shares are excluded from the determination
of basic and diluted net loss per share as their effect is anti-dilutive.
Income Taxes
The Company accounts for income taxes using
the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts
of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Stock-Based Compensation
All share-based payments, including grants
of stock to employees, directors and consultants, are recognized in the consolidated financial statements based upon their estimated
fair values.
The Company’s accounting policy for equity
instruments issued to consultants and vendors in exchange for goods and services follows ASC Topic 505. As such, the value of the
applicable stock-based compensation is periodically re-measured and income or expense is recognized during their vesting terms.
The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which
a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s
performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is primarily
recognized over the term of the consulting agreement. In accordance with FASB guidance, an asset acquired in exchange for the issuance
of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s
balance sheet once the equity instrument is granted for accounting purposes.
Recent Accounting Pronouncements
In November 2015, the FASB issued Accounting
Standards Update No. 2015-17,
Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”). ASU 2015-17 requires
companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred
taxes into current and noncurrent amounts. The guidance is effective for financial statements issued for annual periods beginning
after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The guidance may be adopted
on either a prospective or retrospective basis. The Company does not expect the adoption of this guidance to have a material effect
on the Company’s consolidated financial statements.
In February 2016, the FASB issued Accounting
Standards Update No. 2016-02,
Leases
(Topic 842) ("ASU 2016-02"). ASU 2016-02 addresses the financial reporting
of leasing transactions. Under current guidance for lessees, leases are only included on the balance sheet if certain criteria,
classifying the agreement as a capital lease, are met. This update will require the recognition of a right-of-use asset and a corresponding
lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset
and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section
of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization
of the right-of-use asset in the statement of operations and the repayment of the principal portion of the lease liability will
be classified as a financing activity while the interest component will be included in the operating section of the statement of
cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption
is permitted. The Company has not yet completed the analysis of how adopting this guidance will affect its consolidated financial
statements.
In March 2016, the FASB issued Accounting Standards
Update No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"). ASU 2016-09
simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification
of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas of simplification
apply only to nonpublic entities. For public business entities, the amendments in ASU 2016-09 are effective for annual periods
beginning after December 15, 2016, and interim periods within those annual periods. The Company has not yet completed the analysis
of how adopting this guidance will affect its consolidated financial statements.
In January 2017, the FASB issued Accounting
Standards Update No. 2017-01,
Clarifying the Definition of a Business
("ASU 2017-01"). The standard clarifies
the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as
acquisitions of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. Under ASU 2017-01, to be considered a business, the assets in the transaction need to include
an input and a substantive process that together significantly contribute to the ability to create outputs. Prior to the adoption
of the new guidance, an acquisition or disposition would be considered a business if there were inputs, as well as processes that
when applied to those inputs had the ability to create outputs. Early adoption is permitted for certain transactions. Adoption
of ASU 2017-01 may have a material impact on the Company's consolidated financial statements if it enters into future business
combinations.
In January 2017, the FASB issued Accounting
Standards Update No. 2017-04,
Simplifying the Test for Goodwill Impairment
("ASU 2017-04"). ASU 2017-04 simplifies
the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase
price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December
15, 2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017. The Company does not anticipate the adoption of ASU 2017-04 will have a material
impact on its consolidated financial statements.
Other recent accounting pronouncements issued
by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future
consolidated financial statements.
Note 4 – Share Exchange Agreement
On May 2, 2016, Foothills Petroleum Inc., a
Nevada corporation ("FPI”) acquired over 14.1 million pre-split (56.4 million post-split) shares of Key Link’s
common stock from five persons constituting approximately 96% of our issued and outstanding shares (the "FPI Acquired Shares").
In conjunction with this purchase we incurred a charge of $316,035 for the purchase of these shares.
As of May 16, 2016, the Company effected a
4:1 forward split of our shares of common stock.
On May 27, 2016, the Company entered into a
Share Exchange Agreement ("Share Exchange Agreement") with the shareholders of FPI, whereby the Company acquired all
of the outstanding shares of FPI for an aggregate of 6,003,759 shares of common stock of which 4,500,000 shares of common stock
were issued to Wilshire Energy Partners, LLC, ("Wilshire") and 1,503,759 of shares of common stock were issuable to Alternus
Capital Holdings Ltd., a British Virgin Islands company ("Alternus") (the “Share Exchange”) for automatic
conversion of debt. As a result of the Share Exchange, FPI became the Company’s wholly owned subsidiary and the FPI Acquired
Shares were subsequently returned to treasury, deemed canceled and no longer outstanding.
The Company also exchanged warrants to purchase
700,000 shares of FPI’s common stock that were issued to Wilshire for a like amount of warrants to purchase shares of Key
Link’s common stock (the "Wilshire Warrants"). The Wilshire Warrants:
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have a term of five years;
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are exercisable at $1.25 per share as to 100,000 shares;
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are exercisable at $2.00 per share as to 200,000 shares;
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are exercisable at $3.00 per share as to 400,000 shares;
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do not have a cashless exercise feature; and
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are not exercisable for one year from the date of issuance.
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Following the closing of the Share Exchange
transaction the Company had approximately 8,363,759 shares of common stock outstanding (excluding the FPI Acquired Shares, which
are deemed canceled following the Share Exchange), of which Wilshire and Alternus own in the aggregate 6,003,759 shares, or approximately
52% of the outstanding common stock. As of the date of this filing the Company has 25,000,000 shares of preferred stock authorized
of which no shares are issued and outstanding.
Note 5 – Acquisition
On December 30, 2016, Foothills, through its
indirect wholly owned subsidiary, Foothills Exploration Operating, Inc. (“FEOI”) entered into a purchase and sale agreement
with Total Belief Limited (“TBL”), a British Virgin Islands limited liability company with its principal office at
Room 1402, 14/F, New World Tower I, 16-18 Queen’s Road Central, Hong Kong and a direct wholly-owned subsidiary of New Times
Energy Corporation Limited (“NTE”), a Bermuda limited liability company whose shares are listed on the Main Board of
The Stock Exchange of Hong Kong Limited. Under its agreement with TBL, the Company purchased membership interests in the companies
listed below, constituting all of the ownership interest and claims that TBL has or may have in these companies, as defined below.
Based on the closing of its agreement with
TBL, the Company acquired:
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Clear Elite Holdings Limited (“CEH”), a British
Virgin Islands limited liability company, which is the owner of 100% of the membership interests of Golden Giants Limited, a British
Virgin Islands limited liability company (“GGL”), which owns:
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100% of the membership interests of NTE-Utah, LLC, a Delaware
limited liability company (“NTE-Utah”), which in turn owns 100% of the membership interests of Tiger Energy Operating,
LLC (“TEO”), a Nevada limited liability company, which in turn owns 100% of the membership interests of Tiger Energy
Mineral Leasing, LLC (“TEML”), a Nevada limited liability company, with owned oil and gas leases, wells, related oil
and gas bonds, and oil and gas lease rights and options, found in approximately 280 acres in Uintah County, Utah, and cash assets
held by the entities; and
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750 units of membership interests (representing 75% total equity ownership) of Tiger Energy Partners
International, LLC (“TEPI”), a Nevada limited liability company with owned assets including:
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All rights and interests pertaining to the Global Settlement
Agreement (“GSA”) for the Uintah and Ouray Reservation between Mountain Oil & Gas, Inc. and certain entities affiliated
with it and the Ute Indian Tribe of the Uintah and Ouray Reservation, dated December 22, 2014;
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§
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All rights and interests acquired in the Purchase and Sale Agreements between TEPI and Mountain
Oil & Gas, Inc. dated April 16, 2012, and December 18, 2012;
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§
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All cash held in an attorney trust account earmarked for payments to certain vendors and other
creditors;
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§
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$240,000 cash held in escrow for State of Utah Department of Natural Resources Division of Oil,
Gas and Mining (DOGM); and
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§
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Cash balances in all company bank accounts.
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Prominent Sino Holdings Limited (“PSH”) and Value Train Investments Limited (“VTI”),
each a British Virgin Islands limited liability company, and each a direct wholly-owned subsidiary of TBL, and that together own
55.63% of the shares of Grey Hawk Exploration, Inc. (“Grey Hawk”), a British Columbia, Canada company, constituting
ownership of 13,166,667 Grey Hawk common shares. Grey Hawk owns a non-operated working interest in two non-producing wells in the
southern portion of the Natural Buttes Field.
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Under the acquisition agreement the parties
agreed to determine and pay the purchase price of $10.75 million for these assets and ownership interests as follows:
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A cash payment of $75,000 in connection with closing;
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Additional cash payment of $675,000 payable within 10 business
days following execution of the agreement;
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2,083,334 shares of restricted common stock of the Company
valued for accounting purposes at $3,812,500, or at price per share of $1.83 (valued by the parties at $4,000,000 at an agreed
upon price per share of $1.92); and
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A promissory note delivered at closing in the principal
amount of $6,000,000 that:
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has a term of 18 months from the Closing Date;
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accrues no interest during its term; and
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requires the entire principal amount to be due and payable upon maturity.
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The Company acquired these assets of TBL and
those of its subsidiaries subject to their respective debt obligations, other than for a promissory note, dated July 28, 2016,
originally issued by GGL to a third party, in the original principal amount of $3,422,353. Upon delivery of the $6,000,000 note
to TBL, the third party and TBL agreed that the $3,422,353 note has been satisfied in full and wholly discharged as to GGL.
The Company accounted for the acquisition of
these assets using the fair value method of accounting. Based on several factors including the purchase price, the value of the
consideration provided to the seller, and an independent valuation of the assets acquired less liabilities and future estimated
capital and operating expenditures to bring the assets to producing status. The Company then assigned the purchase price to the
assets acquired by class of assets.
Concurrently with the foregoing, the Company
also acquired the remaining 25% membership interests in TEPI from Green Stone Capital Partners Limited, a Cayman Islands limited
liability company, in exchange for assumption of Greenstone’s proportionate share of TEPI obligations and liabilities. Kevin
Sylla, who beneficially owns approximately 53% of Wilshire Energy Partners, LLC, a principal stockholder of the Company, and who
has served as Managing Director of TEPI and of TEO introduced the Company to TBL. Subsequently, Mr. Sylla was appointed director
and Chief Executive Officer of FPI effective March 1, 2017.
The total purchase price for the TBL acquisition
was allocated as follows:
Assets
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Cash
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$
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358,130
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Cash in escrow
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240,000
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Oil & gas properties
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10,016,990
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Drilling equipment
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265,578
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Investment
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100
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Bond deposits
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295,000
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Liabilities
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Accounts payable
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(389,325
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)
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Contingent Liabilities
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(213,372
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)
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Related party payable
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(10,600
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)
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Net assets acquired
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$
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10,562,501
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Note 6 – Fixed Assets
As of December 31, 2016, and 2015, fixed assets
consisted of the following:
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December 31, 2016
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December 31, 2015
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Computer equipment and fixtures
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$
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22,453
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$
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-
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Vehicle
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69,446
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-
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Drilling Equipment
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265,578
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-
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Accumulated depreciation
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(4,114
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)
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-
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Fixed assets, net
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$
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353,363
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$
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-
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Depreciation and amortization expense for the
year ended December 31, 2016 and for the period ended December 31, 2015 was $4,114 and $0, respectively.
Note 7 – Oil and Gas Properties
Upon organization of Foothills Petroleum Inc.,
on December 24, 2015, Wilshire Energy Partners, LLC, contributed its 100% membership interest in Foothills Exploration, LLC, a
Wyoming limited liability company, to FPI in exchange for 4,500,000 shares of FPI's common stock. At the time of contribution,
Wilshire Energy Partners, LLC, had acquired and owned the rights to 38,120 acres of oil and gas leases in the State of Wyoming
(as described above in Note 1, Nature of Operations). On completion of the Share Exchange, effective May 27, 2016, Wilshire Energy
Partners, LLC, exchanged its FPI shares for 4,500,000 shares of the Company's common stock. As a result, the Company owns 100%
of FPI and Foothills Exploration, LLC, is now a wholly owned indirect subsidiary of the Company that retains title to these oil
and gas leases. This transaction is treated as the founding transaction by the Company. The asset was valued at $72,430 at the
time of transfer based on costs associated with the payment of lease bonuses, fees and taxes paid during the formation of the asset.
On March 29, 2016, Foothills acquired a 35%
working interest in the Ladysmith Anticline prospect that is located in Fremont County, Wyoming. Total acreage position is 3,061
acres located between the Great Divide/Greater Green River Basin and the Wind River Basin, in return for covering certain costs
of operation in the amount of $20,000, and to a share of the working interest in the leases. The primary target zones are the variable
Phosphoria and Tensleep sandstone with secondary considerations in the Madison limestone and Flathead sandstone. The prospect generation
was based on licensed 2-D seismic comprised of two seismic lines covering the Chevron/Echo – Greater Green River Basin. The
asset is valued at $20,000 based on the agreement and consideration paid by the Company. During the year ended December 31, 2016,
the Company capitalized an additional $55,848
in costs related to this asset.
On December 12, 2016, the Company entered into
a participation agreement with Magna Operating, LLC, a privately held Houston-based independent exploration and production company
(“Magna Operating”), in relation to the Labokay prospect, covering approximately 240 acres in Calcasieu Parish, Louisiana.
As consideration for an assignment of interest in and to the leases and the prospect, Foothills Petroleum Operating, Inc., a Nevada
corporation and indirect wholly-owned subsidiary of the Company (“FPOI”), tendered to Magna Operating the purchase
price in the amount of $144,000. This amount covered FPOI’s share of the land, lease, and administrative costs that Magna
Operating incurred in generating and assembling the Labokay prospect as of November 15, 2016. As further consideration for an assignment
of working interest in and to the leases, FPOI agreed to participate in the cost, risk, and expense of drilling the Labokay test
well.
Subsequent to the period ended December 31,
2016, the Company drilled a test well on Labokay to the total measured depth of 8,795 feet, where hydrocarbons shows were present,
but not in commercial quantities to warrant completion. The Company disclosed that the well will be plugged and abandoned as required.
The Company estimates well costs for the Labokay test well at approximately $1.1 million, including plugging and abandonment liability
which it expects to incur during the first half of 2017.
On December 30, 2016, the Company acquired
various oil and gas assets in Utah from Total Belief Limited, a wholly owned subsidiary of New Times Energy Corporation Limited.
These assets included certain oil and gas wells throughout the Uinta Basin in Utah on acreage with over 30 proven undeveloped drilling
locations, additional non-operating interest in other leases, and access to approximately 6,000 acres in the Uinta Basin with
proven and probable reserves and existing infrastructure in place. This purchase provides us with an entry point into the Uinta
Basin and a basis from which to seek other bolt-on acquisition opportunities in the Rockies. The transaction delivers a licensed
and bonded operator in Utah having bonds in place with the BLM, State of Utah and BIA. Through the acquisition, Foothills also
obtained six shut-in wells in the Natural Buttes Field, Utah. Two of these wells have already been worked over and brought back
online with production averaging around 500 barrels per month in January and February 2017. The remaining four wells will be worked
over in the coming months with the goal of bringing additional production back online.
The transaction provides Foothills with the
rights to an agreement to acquire up to 6,000+ acres and up to 16 shut-in oil and gas wells with proved and proved undeveloped
reserves on Tribal lands in the Uinta Basin. These properties provide in-field drilling potential, the ability to bring online
shut-in wells and behind pipe development. Five shut-in wells located on fee lands in the Altamont-Bluebell Field that are undergoing
title curative also have the potential to achieve near term production with stimulation and the addition of surface equipment.
Furthermore, this acquisition delivers to the Company an additional 40% working interest in the Ladysmith Prospect covering 3,060
acres in the Greater Green River Basin, Wyoming, bringing the Company’s total working interest in the prospect from 35% (pre-acquisition)
up to 75%. Lastly through this transaction, the Company also acquired 13,166,667 shares of common stock, constituting 55.63% of
the outstanding shares of Grey Hawk Exploration, Inc. (“Grey Hawk”), a British Columbia, Canada company. Grey Hawk
owns a non-operated working interest in two non-producing wells in the southern portion of the Natural Buttes Field.
On December 30, 2016, concurrent with the TBL
transaction, the Company also acquired the remaining 25% membership interests in TEPI from Green Stone Capital Partners Limited,
a Cayman Islands limited liability company, in exchange for assumption of Greenstone’s proportionate share of TEPI obligations
and liabilities.
Note 8 – Notes Payable
On December 24, 2015, Foothills entered into
a convertible promissory note in the amount of $600,000 with Alternus. The two-year note matures on December 23, 2017, and accrues
interest at 8% per year. By its terms the note was automatically required to convert the outstanding principal and interest due
under the terms of the note upon a merger or other combination occurring between Foothills and an entity with shares listed for
trading (“Pubco”). The conversion price in the note was established at $0.665 per share, (the “Conversion Price”).
On April 5, 2016, and under substantially similar terms described herein, Foothills received an additional $400,000 from Alternus.
Under the agreements between Alternus and Foothills, Alternus had the right but not the obligation to subscribe for an aggregate
of up to $3,500,000 of convertible notes which, in the event of that full subscription would convert into not less than 30% of
the outstanding shares of Pubco. At May 27, 2016, the date of the Share Exchange, Alternus had invested $1,000,000 and, based on
the Conversion Price, 1,503,759 shares of Common Stock of Pubco (Key Link) were issued in full satisfaction of its two notes.
Alternus transferred to Berwin Trading
Limited its right to purchase the remaining $2,500,000 in equity in the Company at substantially the same terms as the conversion
of the convertible note purchase agreement. Berwin agreed to purchase $2,000,000 or 3,007,519 common shares and completed the documents
related to the purchase of equity on June 30, 2016, and funded its investment on July 6, 2016. The additional investment option
has expired.
On December 30, 2016, in connection with the
TBL acquisition (see Note 5), Foothills entered into a promissory note in the amount of $6,000,000 with Total Belief Limited. This
note matures on June 30, 2018, and accrues no interest during its term.
Note 9 – Common Stock
On December 24, 2015, Foothills issued 4,500,000
shares of its common stock to Wilshire Energy Partners, LLC, as more fully discussed in Note 7 of these financial statements.
On December 24, 2015, Foothills entered into
a convertible promissory note in the amount of $600,000 with Alternus. The two-year note matures on December 23, 2017, and accrues
interest at 8% per year. By its terms, the note was automatically required to convert the outstanding principal and interest due
under the terms of the note upon a merger or other combination occurring between Foothills and an entity with shares listed for
trading (“Pubco”). The conversion price of the note was established at $0.665 per share (the “Conversion Price”).
On April 5, 2016, and under substantially similar terms described herein, Foothills received an additional $400,000 from Alternus.
On May 27, 2016, the shareholders of Foothills entered into the Share Exchange Agreement with Key Link, pursuant to which the principal
amount of the notes together with any accrued, but unpaid interest was converted into the shares of the Company at a conversion
price of $0.665 per share. The total number of shares issued to Alternus pursuant to the conversion of their note was 1,503,759.
All accrued interest was waived and recorded as additional paid in capital.
Effective April 1, 2016, Foothills appointed
two directors to its board. Each director was granted 125,000 shares of its common stock (the "Foothills Directors Shares"),
vesting according to the following schedule: (i) 40% vesting ninety (90) days from the appointment date; (ii) 20% vesting one hundred
eighty (180) days from the appointment date; (iii) 20% vesting two hundred seventy (270) days following the appointment date; (iv)
20% vesting three hundred sixty (360) days following the Effective Date. As of December 31, 2016, 100,000 shares were issued to
each director. These shares were valued at $1,665.
On May 2, 2016, Foothills
Petroleum Inc., a Nevada corporation ("FPI”) acquired 14,112,250 pre-split shares of the common stock of Key Link Assets
Corp. (“Key Link” or the “Company”) from five persons constituting approximately 96% of our issued and
outstanding shares (the "FPI Acquired Shares"). These shares were acquired for cash of $316,035, which was expensed in
the period it was incurred.
As of May 16, 2016, we effected a 4:1 forward
split of our shares of common stock. All references to the number of shares issued and outstanding in these financial states have
been retrospectively restated for the forward split.
The 14,112,250 pre-split
shares were converted into 56,449,000 shares post-split, and were returned to treasury for cancellation. A total of 2,360,000 shares
remained outstanding held by the shareholders of the merged public company post the reverse merger acquisition.
On May 2, 2016, after obtaining the FPI Acquired
Shares, FPI caused the Company to appoint its two non-executive directors to the Board of the Company. These directors exchanged
their rights to the FPI Directors Shares for Company shares having substantially the same terms and provisions. On May 2, 2016,
the Company also granted 150,000 restricted shares of its common stock to its CEO as a part of his compensation package. The shares
have the same vesting schedule as directors’ shares described above. As of December 31, 2016, 120,000 shares were issued
to the Company’s CEO. These shares were valued at $999.
During the year ended December 31, 2016, the
Company issued 5,000 shares to a service provider pursuant to a consulting agreement with said service provider. The shares were
valued at $7,650.
On May 27, 2016, we
entered into a Share Exchange Agreement ("Share Exchange Agreement") with the shareholders of FPI whereby we acquired
all of the outstanding shares of FPI for an aggregate of 6,003,759 shares of our common stock, of which 4,500,000 shares of our
common stock were issued to Wilshire Energy Partners, LLC, ("Wilshire") and 1,503,759 of our shares of common stock were
issuable to Alternus (“Share Exchange”). As a result of the Share Exchange, FPI became our wholly owned subsidiary
and the FPI Acquired Shares were to be returned to treasury, deemed canceled and no longer outstanding. We also exchanged warrants
to purchase 700,000 shares of Foothills’ common stock, that were issued to Wilshire on May 4, 2016, for a like amount of
warrants to purchase shares of the Company’s common stock (the "Wilshire Warrants"). The Wilshire Warrants:
|
·
|
have a term of five years;
|
|
·
|
are exercisable at $1.25 per share as to 100,000 shares;
|
|
·
|
are exercisable at $2.00 per share as to 200,000 shares;
|
|
·
|
are exercisable at $3.00 per share as to 400,000 shares;
|
|
·
|
do not have a cashless exercise feature; and
|
|
·
|
are not exercisable for one year.
|
On June 30, 2016, we entered into a Securities
Purchase Agreement with Berwin Trading Limited, a British Virgin Islands company (“Berwin”), pursuant to which we sold
and agreed to issue 3,007,519 shares of our common stock, $0.0001 par value, at a purchase price of $0.665 per share for an aggregate
amount of $2,000,000.
On December 30, 2016, we issued 2,083,334 shares
of common stock in connection with the TBL acquisition (see Note 7), at a purchase price of $1.83 per share for an aggregate amount
of $3,812,500.
As of December 31, 2016, the Company had 13,779,612 shares of common
stock issued and outstanding.
Restricted Stock Units (RSUs)
Effective August 11, 2016, and on August 15,
2016, Foothills granted Mr. Lanclos 100,000 restricted stock units (RSUs) of the Company of which (i) 20,000 shall vest 180 days
from August 15, 2016, (ii) another 20,000 shall vest 270 days from August 15, 2016, and (iii) the remaining 60,000 shall vest 365
days from August 15, 2016. The Company has a right, but not an obligation to repurchase all or any portion of RSUs granted to the
executive at a purchase price of $0.665 per share if executive’s employment with the Company is terminated for any reason
within 30 months of start of employment on August 15, 2015. As of December 31, 2016, these shares were valued at $26,066.
On August 15, 2016, Foothills also granted
Mr. Ovalle 100,000 restricted stock units (RSUs) of the Company of which (i) 20,000 shall vest 180 days from August 15, 2016, (ii)
another 20,000 shall vest 270 days from August 15, 2016, and (iii) the remaining 60,000 shall vest 365 days from August 15, 2016.
The Company has a right, but not an obligation to repurchase all or any portion of RSUs granted to the executive at a purchase
price of $0.665 per share if executive’s employment with the Company is terminated for any reason within 30 months of start
of employment on August 15, 2015. As of December 31, 2016, these shares were valued at $25,333.
Warrants
On May 27, 2016, the Company granted to Wilshire
Energy Partners, LLC, warrants (“Wilshire Warrants”) to purchase (i) 100,000 common shares at a strike price of $1.25
per share, (ii) 200,000 common shares at a strike price of $2.00 per share and (iii) 400,000 common shares at a strike price of
$3.00 per share. The Wilshire Warrants commence to be exercisable on the earlier of (i) 12-month anniversary of the closing of
a going public transaction or (ii) June 30, 2017, and expire on June 1, 2021.
On May 27, 2016, the Company granted to an
unrelated party warrants to purchase (i) 125,000 common shares at a strike price of $1.25 per share, (ii) 100,000 common shares
at a strike price of $2.00 per share and (iii) 100,000 common shares at a strike price of $3.00 per share. The warrants commence
to be exercisable on the earlier of (i) 12-month anniversary of the closing of a going public transaction or (ii) June 30, 2017,
and expire on June 1, 2021.
The fair value of all warrants was determined
to be $2,144, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 120%, (ii)
discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 5 years.
The following table summarizes all stock warrant
activity for the year ended December 31, 2016:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Balance outstanding, December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted
|
|
|
1,025,000
|
|
|
|
2.32
|
|
|
|
4.42
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, December 31, 2016
|
|
|
1,025,000
|
|
|
$
|
2.32
|
|
|
|
4.42
|
|
Exercisable, December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Options
On May 19, 2016, the Company granted to each
of its three directors options to purchase (i) 50,000 common shares at a strike price of $2 per share, vesting when the Company
achieves and maintains a total average daily production level of 100 barrels of oil equivalent per day (“boe/d”) for
at least 30 days, (ii) 50,000 common shares at a strike price of $3 per share, vesting when the Company achieves and maintains
a total average daily production level of 200 boe/d for at least 60 days, and (iii) 50,000 common shares at a strike price of $4
per share, vesting when the Company achieves and maintains a total average daily production level of 500 boe/d for at least 90
days.
The following table summarizes all stock option
activity for the year ended December 31, 2016:
|
|
Number of
Option
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Balance outstanding, December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted
|
|
|
450,000
|
|
|
|
3.00
|
|
|
|
9.39
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, December 31, 2016
|
|
|
450,000
|
|
|
$
|
3.00
|
|
|
|
9.39
|
|
Exercisable, December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Note 10 – Related Party Transactions
Wilshire Energy Partners, LLC, and Aegis
International, LLC
Effective as of December 18, 2015, in connection
with the then formation and organization of Foothills Petroleum Inc., Wilshire Energy Partners, LLC (“Wilshire”), Aegis
International, LLC (“Aegis”), and Foothills entered into a Business Development Services Agreement (“BDSA”).
Under the BDSA the parties agreed that:
|
1.
|
Wilshire would transfer its 100% membership interest in
Foothills Exploration LLC, a Wyoming limited liability company (“FEL”) to Foothills, and that Foothills would issue
4.5 million shares of its common stock to Wilshire on its organization or as soon thereafter as may be practicable.
|
|
2.
|
Wilshire would endeavor in good faith, with the assistance
of Aegis, to obtain $3 million to $3.5 million of financing in the form of equity and/or convertible notes to implement the business
plan that was under formation on behalf of Foothills.
|
|
3.
|
Aegis would perform the following business development
services:
|
|
·
|
provide senior management principally in the form of services
of B.P. Allaire;
|
|
·
|
deliver or oversee administrative services on day to day basis;
|
|
·
|
assist in securing a chief financial officer;
|
|
·
|
formulate, craft and deliver a detailed business plan including forecasts;
|
|
·
|
formulate or assist in formulating, budgets and other financial information;
|
|
·
|
recruit or assist in recruiting experienced executive directors with proven track records whose backgrounds will be attractive to the oil and gas community and potential investors;
|
|
·
|
create and deliver a website that depicts the Foothills operations; and
|
|
·
|
provide such other services as may be appropriate and necessary to implement and execute upon the business plan of Foothills.
|
|
4.
|
For its services as outlined under the BDSA, Foothills would pay to Aegis from funds received, $150,000 through December 31, 2016, (the “Foothills Initial Organizational Term”). As of December 31, 2016, this payment was made in full.
|
|
5.
|
Following the Foothills Initial Organizational Term, Foothills on an at-will basis shall pay B.P. Allaire $5,000 per month for his services as chief operating officer and executive director, on terms subject to cancellation, on 30 days’ notice, by either of Foothills or B.P. Allaire. Effective September 1, 2016, the Company increased Mr. Allaire’s salary to $7,000 per month.
|
|
6.
|
Wilshire would assign, effective no later than December 29, 2015, all right, title and interest in FEL in exchange for 4.5 million shares of common stock of Foothills.
|
In furtherance of the BDSA, Wilshire assigned
FEL to Foothills on its organization in exchange for 4.5 million shares of Foothills, and Foothills thereby acquired control of
the Springs Prospect, owned by FEL, consisting of 38,120 contiguous acres. Foothills regards the Springs Prospect as a valuable
multiple objective oil resource play in the Greater Green River Basin of Wyoming. Through Wilshire’s assistance, Foothills
entered into two agreements with Alternus, whereby Foothills obtained a total of $1,000,000 of financing in the form of convertible
notes that upon completion of the Share Exchange were converted, at $0.665 per share, into 1,503,759 shares of the Company’s
common stock.
In connection with the hiring of Ritchie Lanclos
as Executive Vice President of the Company and Vice President of Exploration of FPI, and Eleazar Ovalle as Executive Vice President
of the Company and Vice President of Geology and Geophysical of FPI, FPI agreed to pay Wilshire, one of our principal shareholders,
pursuant to a Services Agreement entered into by and between FPI and Wilshire, a fee of 25% of the gross annual salary, including
all cash and equity compensation, but excluding any bonuses to be received by Mr. Lanclos and Mr. Ovalle. In the event either of
Mr. Lanclos or Mr. Ovalle leaves FPI of his own volition or is terminated for cause within 90 days from commencement of their employment,
Wilshire shall refund FPI 100% of fees received, minus $2,500.
Alternus Capital Holdings Limited
On December 24, 2015, FPI entered into a convertible
promissory note in the amount of $600,000 with Alternus. The two-year note originally matured on December 23, 2017, and accrued
interest at 8% per year. By its terms the note was automatically required to convert the outstanding principal and interest due
under the terms of the note upon a merger or other combination occurring between FPI and an entity with shares listed for trading,
which occurred on May 27, 2016. The conversion price of the note was established at $0.665 per share (the “Conversion Price”),
subject to adjustment as described below. On April 5, 2016, and under substantially similar terms described herein, FPI received
an additional $400,000 from Alternus. Under the agreements between Alternus and Foothills, Alternus had the right but not the obligation
to subscribe for an aggregate of up to $3,500,000 of convertible notes, which, in the event of that full subscription, would convert
into not less than 30% of the then outstanding shares of the “public” company. Through May 27, 2016, the date the Share
Exchange, Alternus had invested $1,000,000 and based on the Conversion Price was issued 1,503,759 shares of the Company’s
common stock in full satisfaction of its two notes. All accrued interest was waived and recorded as additional paid in capital.
On December 30, 2016, Foothills, through its
indirect wholly owned subsidiary Foothills Exploration Operating, Inc. (“FEOI”), entered into a purchase and sale agreement
with Total Belief Limited (see Note 5). The Company acquired $10,600 related party payable due to Equipment Solution Inc., which
is owned by a director of the Company, Mr. Hemb.
Note 11 - Income Taxes
Deferred income taxes reflect the net tax effects
of 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 as of December 31, 2016, and 2015
are summarized below.
In assessing the potential realization of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during
the periods in which those temporary differences become deductible. As of December 31, 2016, and 2015, management was unable to
determine if it is more likely than not that the Company’s deferred tax assets will be realized, and has therefore recorded
an appropriate valuation allowance against deferred tax assets at such dates.
No federal tax provision has been provided
for the years ended December 31, 2016, and 2015 due to the losses incurred during such periods. Reconciled below is the difference
between the income tax rate computed by applying the U.S. federal statutory rate and the effective tax rate for the years ended
December 31, 2016, and 2015.
|
|
2016
|
|
|
2015
|
|
Net operating loss carryforward
|
|
$
|
(671,362
|
)
|
|
$
|
(11,375
|
)
|
Stock based compensation
|
|
|
3,931
|
|
|
|
-
|
|
Fair value of options
|
|
|
281
|
|
|
|
-
|
|
Total deferred tax assets
|
|
|
(667,150
|
)
|
|
|
(11,375
|
)
|
Valuation allowance
|
|
$
|
667,150
|
|
|
$
|
11,375
|
|
Net deferred tax asset
|
|
|
-
|
|
|
|
-
|
|
|
|
2016
|
|
|
2015
|
|
U.S federal statutory income tax
|
|
|
-34.00
|
%
|
|
|
-34.00
|
%
|
State tax, net of federal tax benefit
|
|
|
-5.80
|
%
|
|
|
-5.80
|
%
|
Stock based compensation
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Change in valuation allowance
|
|
|
39.80
|
%
|
|
|
39.80
|
%
|
Effective tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
At December 31, 2016, the Company has available
net operating loss carryforwards for federal and state income tax purposes of approximately $667,150 and $11,375, respectively,
which, if not utilized earlier, expire through 2036.
Note 12 – Commitments and Contingencies
On August 18, 2016, the Company appointed Ritchie
Lanclos as Executive Vice President of the Company and as Vice President of Exploration of its wholly owned subsidiary, Foothills
Petroleum, Inc. (“FPI”), and appointed Eleazar Ovalle as Executive Vice President of the Company and Vice President
of Geology & Geophysical of FPI.
FPI has agreed to pay Mr. Lanclos an annual
salary of $84,000 upon successful completion of a 90 day probationary period. Mr. Lanclos was entitled to receive a $10,000 signing
bonus upon commencement of employment and will also be entitled to receive bonuses that will be based on performance standards
that will be established by FPI. Mr. Lanclos will receive 100,000 restricted stock units (RSUs) of the Company of which (i) 20,000
shall vest 180 days from August 15, 2016, (ii) another 20,000 shall vest 270 days from August 15, 2016, and (iii) the remaining
60,000 shall vest 365 days from August 15, 2016. Upon approval of the Company’s Board of Directors, Mr. Lanclos may become
eligible to participate in the Company’s equity incentive plan, should one be established.
FPI has agreed to pay Mr. Ovalle an annual
salary of $84,000 upon successful completion of a 90 day probationary period. Mr. Ovalle was entitled to receive a $10,000 signing
bonus upon commencement of employment and will also be entitled to receive bonuses that will be based on performance standards
and goals that will be established by FPI. Mr. Ovalle will receive 100,000 restricted stock units (RSUs) of the Company of which
(i) 20,000 shall vest 180 days from August 15, 2016, (ii) another 20,000 shall vest 270 days from August 15, 2016, and (iii) the
remaining 60,000 shall vest 365 days from August 15, 2016. Upon approval by the Company’s Board of Directors, Mr. Ovalle
may become eligible to participate in the Company’s equity incentive plan, should one be established.
In connection with the hiring of Ritchie Lanclos
and Eleazar Ovalle and pursuant to a Services Agreement dated August 15, 2016, by and between FPI and Wilshire, FPI agreed to pay
Wilshire, one of our principal shareholders, a fee of 25% of the gross annual salary, including all cash and equity compensation,
but excluding any bonuses to be received by Mr. Lanclos and Mr. Ovalle. FPI has agreed to pay Wilshire a total of $50,000 for its
services in recruiting Messrs. Lanclos and Ovalle to the Company and FPI management teams. In the event either of Mr. Lanclos or
Mr. Ovalle leaves FPI of his own volition or is terminated for cause within 90 days from commencement of their employment, Wilshire
shall refund FPI 100% of fees received, minus $2,500.
On September 2, 2016, Shawn P. Clark resigned
as Interim Chief Financial Officer and member of the Board of Directors of Foothills. In connection with Mr. Clark’s resignation,
there were no disagreements with the Company, known to an executive officer of the Company, as defined in 17 CFR 240.3b-7, on any
matter relating to the Company’s operations, policies or practices.
Legal proceedings
SCI Welding & Oilfield Service vs.
Tiger Energy Operating LLC. (Case Number 169000023, Eighth District Court-Roosevelt Duchesne County, State of Utah)
This case concerns the collection of unpaid
debt owed by TEO concerning the workover of wells in Duchesne County, Utah. SCI Welding was granted a judgment in the amount of
$67,470 on April 27, 2016. A garnishment was filed by SCI resulting in their collection of $17,063 prior to our acquisition of
TEO. Presently, writs of execution have been issued against TEO properties in Duchesne and Uintah Counties, Utah. In addition,
the writs seek execution upon various land parcels in Duchesne and Uintah Counties, Utah.
Graco Fishing & Rental Tools, Inc.
vs. Tiger Energy Operating LLC., (Case No. 160800005 Eighth Judicial District Court in and for Duchesne County, State of Utah)
This case concerns the collection of unpaid
debt owed by TEO for services performed by plaintiff. A default judgment in the amount of $159,965 was obtained on June 1, 2016,
against TEO, for unpaid accounts in connection with its workover of wells in Duchesne County, Utah. Graco has filed a writ of execution
against the A Rust 2, Dye-Hall 2-21 A1, Wilkins 1-24 A5 and Rust 3-22A-4 wells located in Duchesne County. A Motion to Set Aside
a sheriff’s sale concerning these properties was filed based on the fact that TEO is not the owner of these properties. This
matter is set for hearing on April 17, 2017.
Peak Well Service, LLC
Peak Well Service, LLC, filed mechanics
and materialmans liens against the Wilkins, Rust 2 Well, Dye Hall 2, Rust 3, and Josie 1 wells for unpaid accounts in connection
with work performed on these wells. Subsequent to December 31, 2016, both parties agreed to settle this legal action with a payment
of $120,000 from the Company to Peak Well Service, LLC.
Other than as noted above, we are not currently
a party to any other material legal proceedings. However, legal claims are inherently uncertain, and we cannot assure you that
we will not be adversely affected in the future by legal proceedings.
Note 13 – Subsequent Event
Effective January 5, 2017, Foothills Exploration,
Inc., (the “Company”), borrowed $1,000,000 from Full Wealth Investment Hong Kong Limited, a limited liability company
organized under the laws of Hong Kong and effective January 6, 2017, the Company borrowed $1,250,000 from Berwin Trading Limited,
a British Virgin Islands limited liability company. The Company executed a separate promissory note, titled as a Debenture, with
each lender dated as of December 30, 2016, with proceeds being received by the Company on the above stated dates. These loans are
unsecured, bear interest at 9% per year and each is due and payable in 120 days from the receipt of funds. If any amount payable
is not paid when due, any such overdue amount shall bear interest at the default rate of 11% from the date of such non-payment
until such amount is paid in full. The Company plans to use net proceeds of these loans to satisfy certain obligations under a
Purchase and Sale Agreement with Total Belief Limited, dated December 30, 2016, for general working capital and to support certain
target drilling activity.
Subsequent to March 31, 2016, we issued 175,000
shares of common stock to third parties for services.
Note 14 - Supplemental Oil and Gas Reserve Information (Unaudited)
Results of operations from oil and gas producing activities
The following table shows the results of operations from the Company’s
oil and gas producing activities. For the year ended December 31, 2016, the Company had no revenue from oil and gas
producing activities.
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
Production revenues
|
|
$
|
—
|
|
Production costs
|
|
|
—
|
|
Depletion and depreciation
|
|
|
—
|
|
Income tax
|
|
|
—
|
|
Results of operations for producing activities
|
|
$
|
—
|
|
Capitalized costs
The following table summarizes the Company’s capitalized costs
of oil and gas properties:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
Properties subject to depletion
|
|
$
|
11,198,411
|
|
Accumulated depletion
|
|
|
—
|
|
Net capitalized costs
|
|
$
|
11,198,411
|
|
Costs incurred in property acquisition, exploration and development
activities
The following table summarizes the Company’s costs incurred
in property acquisition, exploration and development activities for the year ended December 31, 2016:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
Acquisition of properties
|
|
$
|
10,462,220
|
|
Exploration costs
|
|
|
736,191
|
|
Development costs
|
|
|
—
|
|
Net capitalized costs
|
|
$
|
11,198,411
|
|
Estimated quantities of proved reserves
Our ownership interests in estimated quantities
of proved oil and gas reserves all of which are located in the United States are summarized below. Proved reserves are
estimated quantities of oil and gas that geological and engineering data demonstrate with reasonable certainty to be recoverable
in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those that
are expected to be recovered through existing wells with existing equipment and operating methods.
Oil reserves are stated in thousands of standard
barrels [“MSTB”], natural gas reserves are stated in thousands of cubic feet [“MCF”] and combined oil and
gas reserves are stated in thousands of barrels of oil equivalent [“MBOE”]. Geological and engineering estimates of
proved oil and gas reserves developed at one point in time by an independent third party petroleum reserves engineering firm are
highly interpretive, inherently imprecise and subject to ongoing revisions that may be substantial in amount. Although every reasonable
effort is made to ensure that the reserve estimates are accurate, by their nature reserve estimates are generally less precise
than other estimates presented in connection with financial statement disclosures.
|
|
|
|
|
December 31, 2016
|
|
|
|
|
Proved Reserves
|
|
Total Proved
Non-Producing
|
|
|
Proved
Undeveloped
|
|
|
Total
Proved
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil MSTB’s
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Natural Gas Liquids MSTB’s
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Natural Gas MCF’s
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Oil Equivalents MBOE’s
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revisions of previous estimates
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil MSTB’s
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Natural Gas Liquids MSTB’s
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Natural Gas MCF’s
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Oil Equivalents MBOE’s
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of minerals in place
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil MSTB’s
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil MSTB’s
|
|
|
—
|
|
|
|
-
|
|
|
|
—
|
|
Natural Gas Liquids MSTB’s
|
|
|
—
|
|
|
|
-
|
|
|
|
—
|
|
Natural Gas MCF’s
|
|
|
—
|
|
|
|
-
|
|
|
|
—
|
|
Oil Equivalents MBOE’s
|
|
|
—
|
|
|
|
-
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil MSTB’s
|
|
|
193
|
|
|
|
1,429
|
|
|
|
1,622
|
|
Natural Gas Liquids MSTB’s
|
|
|
—
|
|
|
|
-
|
|
|
|
—
|
|
Natural Gas MMCF’s
|
|
|
97
|
|
|
|
714
|
|
|
|
811
|
|
Oil Equivalents MBOE’s
|
|
|
212.4
|
|
|
|
1,571.8
|
|
|
|
1,784.2
|
|
Proved non-producing and proved undeveloped
reserves at December 31, 2016 totaled 212.4 MBOE’s and 1,571.8 MBOE’s, respectively. Total proved reserves at December 31,
2016 totaled 1,784.2 MBOE’s and consisted of approximately 91% oil and 9% gas.
The Company intends to review annually its
proved undeveloped reserves to ensure an appropriate plan for development exists. The Company considers proved undeveloped reserves
only if it plans to convert these reserves to proved developed producing reserves within five years from the date they were first
acquired. The Company plans to develop all the remaining locations that comprise the 1,784.2 MBOE of proved reserves within five
years. However, the decision to deploy capital and the timing of those expenditures is contingent on many different factors. The
Company estimates capital expenditures of approximately $19.75 million will be sufficient to develop these reserves. The development
plan assumes a continued gradual improvement in commodity pricing and general market conditions within the oil and gas industry.
The calculation of proved undeveloped reserves
requires the Company to make predictions regarding future acquisitions and discoveries and the impact they may have on the Company’s
overall development plan of properties it currently owns. Management anticipates that the development plan will be revised to reflect
changes in the oil and gas industry, including changing markets and prices, new investment opportunities, and other key factors
and such revisions will result in changes to its proved undeveloped reserves. Consequently, the timing of capital expenditures
will be heavily dependent upon the Company’s interpretation of market opportunities, which are influenced by projections
of future commodity prices and other key industry factors. Each year management expects to review our five-year development plan
to maximize the value of our investment in oil and gas assets and in turn also to enhance shareholder value.
At December 31, 2016, the Company expects its
development plan to generally perform as follows:
|
|
Estimated Conversion of
Proved Undeveloped Reserves
|
|
|
|
CAPEX (000’s)
|
|
|
MBOE
|
|
2017
|
|
$
|
4,120.0
|
|
|
|
22.806
|
|
2018
|
|
$
|
6,175.0
|
|
|
|
155.948
|
|
2019
|
|
$
|
9,500.0
|
|
|
|
231.795
|
|
2020
|
|
|
—
|
|
|
|
270.064
|
|
2021
|
|
|
—
|
|
|
|
211.554
|
|
For the year ended December 31, 2016, the Company had no wells in
production and earned no revenue from the sale of oil or natural gas. All properties were either proved non-producing or proved
undeveloped.
In 2016, the Company invested approximately
$11,198,411 in its oil and gas properties. The Company has approximately $353,363 of net fixed assets on hand and existing infrastructure
on the ground in Utah, which will be utilized to facilitate the exploitation and development of proved non-producing and proved
undeveloped reserves over the next five years. At year end the Company’s review of proved undeveloped reserves revealed challenges
but the Company maintains its belief that reserves will be developed within five years of their acquisition. In addition, the Company
anticipates raising additional funds through the sale of common stock, debt and cash generated from the Company’s financing
activities, including public, private and institutional offerings in capital market transactions and future reserve based lending
activities to develop all of its proved non-producing and proved undeveloped reserves within the next five-years. Additionally,
the Company also believes that it has the ability to joint venture to develop any of its assets.
Standardized measure of discounted future net cash flows
The standardized measure of discounted
future net cash flows from our proved non-producing and proved undeveloped reserves for the periods presented in the financial
statements is summarized below.
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
Future net production revenue
|
|
$
|
74,093,600
|
|
Future operating costs
|
|
|
(17,313,400
|
)
|
Future capex costs
|
|
|
(19,750,000
|
)
|
Future net cash flows before tax
|
|
|
37,030,200
|
|
Future income taxes (
assuming 34% corporate tax rate
)
|
|
|
(12,590,268
|
)
|
Future net cash flows after tax
|
|
|
24,439,932
|
|
10% annual discount for estimating of future cash flows
|
|
|
(14,908,800
|
)
|
Standardized measure of discounted net future cash flows
|
|
$
|
9,531,132
|
|
Changes in standardized measure of discounted future net cash
flows
For the year ended December 31, 2016, the Company
had no wells in production and earned no revenue from the sale of oil or natural gas. All assets were recently acquired and the
Company has had a limited operating history with its current asset base and as such is unable to form reasonable estimates at the
present time. The Company expects to update this section in subsequent reports providing more substantive explanations for changes
in its standardized measure of discounted future net cash flows.