Notes
to the Condensed Consolidated Financial Statements
Three Months Ended March 31, 2017
(Unaudited)
Note
1.
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Nature
of Operations and Summary of Significant Accounting Policies
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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 condensed 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 condensed 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
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 well was plugged and abandoned in February 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. Subsequent
to the period ending March 31, 2017 the Company and Berwin Trading Limited agreed to extend the maturity date of the debenture
to June 20, 2017, in return for an annual interest rate increase from 9% to 13.5% per annum for the life of the debenture;
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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. The Company and Full Wealth Investment Hong Kong Limited
have been in discussions to extend the term of this debenture upon terms that are comparable to those for the Berwin Trading
Limited debenture and Full Wealth Investment Hong Kong Limited has acknowledged that its debenture is not deemed to be in
default.
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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 period ended March 31, 2017, Foothills produced limited revenues from its business
and principal properties and is currently an exploration stage company. Prior to January 2017, 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 March 31, 2017, Foothills had
rights to 45,648 acres of oil and gas property in the state of Wyoming, excluding 6,115 acres of the Ironwood prospect
that are subject to drilling a well in 2017.
Note
2 – Going Concern
The
Company has incurred an accumulated deficit of $4,134,093 through March 31, 2017, and had a working capital deficit of
$2,904,304 at March 31, 2017. The Company is subject to those material 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 the beginning of May 2017 and also provide the company additional working capital. 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
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 8 of Regulation S-X and are expressed in United States dollars
(USD). Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles
for complete annual financial statements. These statements reflect all adjustments, consisting of normal recurring adjustments,
which, in the opinion of management, are necessary for fair presentation of the information contained therein. Operating results
for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2017 or for any other future period. The condensed consolidated balance sheet at December 31, 2016 has been derived
from the audited consolidated financial statements at that date but does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements. These interim condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements of the Company for the period ended
December 31, 2016 and notes thereto included in the Company's annual report on Form 10-K. The Company follows the same accounting
policies in the preparation of interim reports as noted in the Company's annual report on Form 10-K.
Exploration
Stage
The
Company has produced minimal 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 March 31, 2017, the Company had rights
to 45,648 acres of oil and gas property in the state of Wyoming, excluding 6,115 acres of the 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 March 31, 2017, 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 condensed consolidated balance sheet. As of March 31, 2017, and December
31, 2016, the Company had restricted cash of $240,000 and $240,000 respectively; the $240,000 is being held in escrow for the
benefit of the State of Utah for certain properties located in Utah.
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.
As of March 31, 2017 the Company determined that no impairment was required for the period ended March
31, 2017 based on the guidance in Regulation S-X, Rule 4-10; SAB Topic 12.D; and FRC Section 406.01.c.
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(s)
– 5 years
Drilling
and production 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 condensed 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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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 March 31, 2017, 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 225,000 potentially dilutive shares, which include outstanding warrants, for the period ended March 31, 2017. The potential
shares are excluded from the determination of basic and diluted net loss per share as their effect is anti-dilutive.
Stock-Based
Compensation
All
share-based payments, including grants of stock to employees, directors and consultants, are recognized in the condensed 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 condensed 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 condensed 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 condensed 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 condensed 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 condensed 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 condensed consolidated financial statements.
Note
4.
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Share
Exchange Agreement
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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 its shares of common stock.
On
May 27, 2016, the Company entered into a 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 issued 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 $3.00 per share as to 400,000 shares;
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do
not have a cashless exercise feature; and
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are
not exercisable for one year from the date of issuance.
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Following
the closing of the Share Exchange transaction the Company had approximately 8,363,759 shares of common stock outstanding (excluding
the FPI Acquired Shares, which are deemed canceled following the Share Exchange), of which Wilshire and Alternus own in the aggregate
6,003,759 shares, or approximately 52% of the outstanding common stock. As of the date of this filing the Company has 25,000,000
shares of preferred stock authorized of which no shares are issued and outstanding.
Note
5 – Fixed Assets
As
of March 31, 2017, and December 31, 2016, fixed assets consisted of the following:
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March
31, 2017
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December
31, 2016
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(unaudited)
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Computer equipment and fixtures
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$
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22,453
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$
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22,453
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Vehicle
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69,446
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69,446
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Drilling Equipment
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265,578
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265,578
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Accumulated depreciation
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(18,837)
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(4,114)
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Fixed assets,
net
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$
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338,640
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$
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353,363
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Depreciation
and amortization expense for the three months ended March 31, 2017 and 2016 was $14,723 and $0, respectively.
Note
6 – 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. 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
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
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 three months ended March 31, 2017, the Company capitalized an additional $11,517 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.
During
the period ended March 31, 2017, 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 well was plugged and abandoned. The Company
recognized impairment of oil and gas property in amount of $1,272,753 during three month ended March 31, 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. Three of these wells have already
been worked over and brought back online with production averaging around 500 barrels per month during Q1 2017. The remaining
three 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 Greater Natural Buttes Field in Utah.
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.
On
December 30, 2016, in connection with the TBL acquisition (see Note 1), 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. $342,804
imputed interest was recorded as debt discount. $342,804 was determined using interest method based on the following assumptions:
(i) adjusted interest rate 4% (ii) expected life of 1.5 years. During the three months ended March 31, 2017, we amortized $57,134
debt discount into interest expense.
During the three months ended March 31,
2017 and 2016, we capitalized an additional $1,474,584 and $20,000 of oil and gas properties, respectively.
Note
7 - Asset Retirement Obligation
Our
asset retirement obligations relate to the abandonment of oil and gas wells. The amounts recognized are based on numerous estimates
and assumptions, including future retirement costs, inflation rates and credit adjusted risk-free interest rates. The following
shows the changes in asset retirement obligations:
Asset retirement obligations, January 1, 2017
|
|
$
|
-
|
|
Liabilities incurred during
the period
|
|
|
291,659
|
|
Release of liabilities associated with
the sale of oil properties
|
|
|
-
|
|
Liabilities settled during the year
|
|
|
-
|
|
Accretion
|
|
|
2,917
|
|
Asset retirement obligations, March
31, 2017
|
|
$
|
294,576
|
|
Depletion expense for the three months
ended March 31, 2017 and 2016 was $3,646 and $0, respectively.
Note
8 – Note Payable
On December 30, 2016, in connection with the
TBL acquisition (see Note 1), 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. $342,804 imputed interest was recorded as debt discount.
$342,804 was determined using the present value method based on the following assumptions: (i) adjusted interest rate 4% (ii)
expected life of 1.5 years. During the three months ended March 31, 2017, we amortized $57,134 debt discount into interest expense.
The Company has reduced the value of its oil and gas properties in the proportion of the debt discount allocated to the note.
Effective January 5, 2017, Foothills borrowed
$1,000,000 from Full Wealth Investment Hong Kong Limited, a limited liability company organized under the laws of Hong Kong. The
Company executed a promissory note, titled as a Debenture, with the lender dated as of December 30, 2016, with proceeds being
received by the Company on the above stated date. This loan is unsecured, bears interest at 9% per year and is due and payable
in 120 days from the receipt of fund. 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 used net proceeds
of this loan 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 activities. As of March 31, 2017, the balance of accrued
interest was $22,438. The Company and Full Wealth Investment Hong Kong Limited have been in discussions to extend the term of
this debenture upon terms that are comparable to those for the Berwin Trading Limited debenture and Full Wealth Investment Hong
Kong Limited has acknowledged that its debenture is not deemed to be in default.
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 6 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 March 31, 2017, 100,000 shares were
issued to each director. From the date of the agreement until March 31, 2017, these shares were valued at an aggregate of $2,281.
As of March 31, 2017, 50,000 common shares were issued for an aggregate of $616.
On
May 2, 2016, 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, Foothills effected a 4:1 forward split of its 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 March 31, 2017, 120,000 shares were issued to
the Company’s CEO. From the date of the agreement until March 31, 2017, these shares were valued at $1,368. As of March
31, 2017, 30,000 common shares were issued for a total value of $370.
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 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 6), at a purchase
price of $1.83 per share for an aggregate amount of $3,812,500.
During
three months ended March 31, 2017, the Company issued 175,000 shares of common stock to various third parties for services, valued
at $359,500.
As
of March 31, 2017, the Company had 14,074,612 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 vested 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 March 31, 2017, these
shares were valued at $42,586. As of March 31, 2017, 20,000 shares were issued Mr Lanclos in the amount of $13,400.
On
August 15, 2016, Foothills also granted Mr. Ovalle 100,000 restricted stock units (RSUs) of the Company of which (i) 20,000 shall
vested 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 March 31, 2017, these shares were valued at $41,852.
As of March 31, 2017, 20,000 shares were issued Mr. Ovalle in the amount of $13,400.
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 on May 27, 2016, 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 three months ended March 31, 2017:
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Balance outstanding, December 31, 2016
|
|
|
1,025,000
|
|
|
|
2.32
|
|
|
|
4.42
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, March 31,
2017
|
|
|
1,025,000
|
|
|
$
|
2.32
|
|
|
|
4.42
|
|
Exercisable, March 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
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.
On
February 27, 2017, the Company granted to Mr. Christopher Jarvis options to purchase 400,000 common shares at a strike price of
$1.99 per share, vesting quarterly over two years commencing with the first quarter following the 90-day probationary period.
The
fair value of 400,000 options was determined to be $616,055 on February 27, 2017, using the Black-Scholes option-pricing model
based on the following assumptions: (i) volatility rate of 129%, (ii) discount rate of 0%, (iii) zero expected dividend yield,
and (iv) expected life of 5 years.
On
February 27, 2017, the Company granted to Mr. Kevin Sylla options to purchase 1,200,000 common shares at a strike price of $1.99
per share, vesting quarterly over the term of three years.
The fair value
of 1,200,000 options was determined to be $1,986,902 on February 27, 2017, using the Black-Scholes option-pricing model based
on the following assumptions: (i) volatility rate of 129%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv)
expected life of 7 years.
The
following table summarizes all stock option activity for the three months ended March 31, 2017:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Balance outstanding, December 31, 2016
|
|
|
450,000
|
|
|
|
3.00
|
|
|
|
9.39
|
|
Granted
|
|
|
1,600,000
|
|
|
|
1.99
|
|
|
|
6.42
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, March 31,
2017
|
|
|
2,050,000
|
|
|
$
|
2.21
|
|
|
|
7.01
|
|
Exercisable, March 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
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 January 1, 2017, the Company increased Mr. Allaire’s salary to $10,000 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 1). As a result of the purchase and sale agreement
the Company acquired a $10,600 related party payable due to Equipment Solutions, Inc., which is owned by a director of the Company,
Alex Hemb. As of March 31, 2017, the balance was paid off.
Berwin Trading Limited
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 promissory
note, titled as a Debenture, with the lender dated as of December 30, 2016, with proceeds being received by the Company on the
above stated date. This loan is unsecured, bears interest at 9% per year and 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 used net proceeds of this loan 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 activities. As of March 31, 2017, the balance of accrued interest was $28,048.
Subsequent to the period ending March 31,
2017 the Company and Berwin Trading Limited agreed to extend the maturity date of the debenture to June 20, 2017, in return
for an annual interest rate increase from 9% to 13.5% per annum for the life of the debenture.
Note
11 – Commitments and Contingencies
Management
Additions and Changes
On
March 3, 2017, the Company announced the appointment of Christopher Jarvis and Kevin J. Sylla to its senior management team. Mr.
Jarvis is a current Director of Foothills Exploration and FPI and has taken on the full-time role of Executive Vice President
of Finance for the Company and Vice President of Risk Management for FPI. Mr. Sylla has been appointed Director and Chief Executive
Officer of FPI, which oversees the Company’s oil and gas operations. These appointments reinforce the Company’s team
of oil and gas industry professionals.
Christopher
Jarvis has over 20 years of capital markets and investments experience covering the equity, commodity, and fixed-income markets.
He engineered and executed energy risk management hedges for large multi-national companies and as a publishing analyst, he was
ranked #1 by Bloomberg’s BARR analyst ranking system. He has earned the designation of Chartered Financial Analyst (CFA)
and Chartered Market Technician (CMT) and routinely appears on CNBC, Fox Business News, and Reuters. He is a contributor to major
print media outlets including Reuters, Bloomberg and the Wall Street Journal as an oil and gas analyst. Mr. Jarvis earned a B.A.
in Art History from University of Massachusetts and M.B.A. from the University of Connecticut, with a concentration in Finance.
He is a member of the CFA Institute and also the Market Technician’s Association (MTA). He has been a member of the University
of Connecticut Financial Accelerator Advisory Board for the last 10 years and previously served as the Vice President of the Autism
Society of New Hampshire (2004-09). In addition to assuming his full-time role with the Company, Christopher Jarvis will remain
a Director of both Foothills Exploration and FPI.
Kevin
J. Sylla has served as Managing Director of Tiger Energy Operating, LLC, Tiger Energy Partners International, LLC, and Tiger Energy
Mineral Leasing, LLC, for the past five years and he will continue in those roles for the foreseeable future. Mr. Sylla played
a key advisory role in the successful combination and integration of Tiger properties into Foothills Exploration. He has over
10 years of oil and gas industry experience with extensive knowledge in business development, mergers and acquisitions, and management
of oil and gas field operations. Mr. Sylla has participated extensively in the financing, acquisition and development of numerous
domestic oil and gas properties. His acquisition experience has been focused on improving operating and financial efficiencies
with underperforming assets resulting in enhanced value creation. Mr. Sylla is the managing member of Wilshire Energy Partners,
LLC, a principal shareholder of the Company and has provided consulting services to the Company since its formation. Mr. Sylla
completed the Petroleum Land Management Program at Texas Christian University and earned his Energy & Finance Management Certification
from the University of Denver.
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 Tiger Energy Operating, LLC (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. As of December 31, 2016, the Company recorded a contingent liability in the amount
of $53,407.
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. A hearing for this matter was held on May 1, 2017, in Duchesne County, Utah, at
which a Company representative was present to comply with the court’s order to produce documents. Prior to the hearing,
TEO made an initial settlement offer, which was eventually rejected by the Plaintiffs. The matter remains unresolved as of the
filing of this report. As of December 31, 2016, the Company recorded a contingent liability in the
amount of $159,965.
Peak
Well Service, LLC
Peak
Well Service, LLC, filed mechanics and materialman’s 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. During the three months ended March 31, 2017, both
parties agreed to settle this legal action with a payment of $120,000 from the Company to Peak Well Service, LLC. As of March
31, 2017, the settlement has been satisfied and the liens have been released.
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
12.
|
Subsequent
Events
|
Subsequent to the period ending March 31, 2017 the Company and Berwin Trading Limited agreed to extend the
maturity date of a debenture in the amount of $1,250,000, originally made on December 30, 2016 and funded on January 6, 2017, with
interest accruing at a rate of 9% per annum and principal and interest due at the original maturity of May 6, 2017. The parties
agreed that the debenture will become due and payable on June 20, 2017, and the interest charged on the debenture will increase
from 9% per year to 13.5% per year for the life of the debenture.
Effective
May 1, 2017, we signed a 39-month lease for our Denver corporate office and effective April 1, 2017, we signed a 37-month lease
for our Houston division office.