NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Organization, going concern, and significant accounting policies
Business
Foothills
Exploration, Inc., (“Company”, “Foothills Exploration”, or “Foothills”) 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 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, the Company entered into a Share Exchange Agreement with shareholders of FPI.
Prior
to the Share Exchange, the Company had minimal assets and recognized no revenues from operations and was accordingly classified
as a shell company. In light of closing the Share Exchange transaction with the shareholders of FPI, the Company became actively
engaged in oil and gas operations and is no longer a shell company.
The
consolidated balance sheets include the accounts of the Company, and its wholly-owned direct and indirect subsidiaries, Foothills
Exploration, Inc. (“FTXP”), Foothills Petroleum, Inc. (“FPI”), Foothills Exploration, LLC (“FEL”),
Foothills Petroleum Operating, Inc. (“FPOI”), Foothills Exploration Operating, Inc. (“FEOI”), Tiger Energy
Partners International, LLC (“TEPI”), Tiger Energy Operating, LLC (“TEO”), and Tiger Energy Mineral Leasing,
LLC (“TEML”).
The
Company’s oil and gas operations are conducted by its wholly owned indirect subsidiaries. FEL is a qualified oil and gas
operator in the states of Wyoming and Colorado, and TEO is a qualified oil and gas operator in the state of Utah.
The
Company’s operating entities have historically employed, and will continue in the future to employ, on an as-needed basis,
the services of drilling contractors, other drilling related vendors, field service companies and professional petroleum engineers,
geologists, and landmen as required in connection with future drilling and production operations.
Going
Concern
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America, which contemplate continuation of the Company as a going concern. The Company has incurred recurring
losses from inception through December 31, 2018, has a working capital deficit at December 31, 2018, of $16,084,225, and has limited
sources of revenue. These conditions have raised substantial doubt as to the Company’s ability to continue as a going concern
for one year from the issuance of the financial statements. These financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
To
address these matters, the Company is actively meeting with investors for possible equity investments, including business combinations;
investigating other possible sources to refinance our existing debt; and in continuing discussions with various individuals and
groups that could be willing to provide capital to fund operations and growth of the Company.
Note
2 - 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
including Foothill Petroleum, Inc., Foothills Petroleum Operating, Inc., Foothills Exploration Operating, Inc., Foothills Exploration
LLC, Tiger Energy Partners International, LLC, Tiger Energy Operating, LLC and Tiger Energy Mineral Leasing, LLC. 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).
Use
of Estimates
The
preparation of financial statements in conformity with GAAP 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(s) of the financial
statements and the reported amounts of revenues and expenses during the reporting period(s). Management bases its estimates on
historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken
as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions
used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience
and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results
could differ from those estimates. Significant estimates include those related to assumptions used in impairment testing of long-term
assets, accruals for potential liabilities and valuing equity instruments issued for services. Actual results could differ from
those estimates.
Reclassifications
Certain
reclassifications have been made to amounts in prior year to conform to the current year presentation. All reclassifications have
been applied consistently to the periods presented and had no effects on previously reported results of operations.
Cash
and Cash Equivalents
Cash
and cash equivalents include all highly liquid debt instruments with maturity of three months or less.
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. At the years ended December 31, 2018 and
2017, the Company had restricted cash of $120,000 and $240,000, respectively. This amount is being held in escrow for the benefit
of the State of Utah for certain properties located in Utah, covered under a certain Modification to Stipulated Order between
the Utah Division of Oil, Gas and Mining and TEPI dated August 1, 2014 (Case No. SI/TA-102). These funds held in escrow, will
be released to the Company once the Company finishes its reclamation of the various wells in question. During July and August
2018, $120,000 was released to the Company when we finished reclamation of two wells.
Accounts
receivable and allowance for doubtful accounts
Accounts
receivable are stated at the historical carrying amount net of an allowance for uncollectible accounts. The carrying amount of
the Company’s accounts receivable approximates fair value because of the short-term nature of the instruments. The Company
routinely assesses the collectability of all material trade and other receivables.
Trade
accounts receivable comprise receivables from joint interest owners which are recorded when the Company incurs expenses on behalf
of the non-operator interest owners of the properties the Company operates.
The
Company’s oil and gas revenues receivable comprise receivables from purchasers of the Company’s production of oil
and gas and other hydrocarbons and from operators of properties in which the Company has a non-operated interest, as well as from
joint interest owners of properties the Company operates. During the year ended December 31, 2018, the company accrued $31,924
of net revenue receivable from EOG Resources, Inc. (“EOG”), the operator of two wells in which the Company has a 21.62%
working interest, which the Company has been informed that EOG will apply to unpaid invoices of the Company’s share of costs
to drill two wells until EOG has recovered those costs. During the year ended December 31, 2018, those costs were $1,868,370.
See Note 4 – Property and Equipment.
The
Company’s reported balance of accounts receivable, net of allowance for doubtful accounts, represents management’s
estimate of the amount that ultimately will be realized in cash or used in the future to offset an operator’s joint interest
billings.
The
Company reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical payment trends, the
age of the receivables and knowledge of the individual customers or joint interest owners. When the analysis indicates, management
increases or decreases the allowance accordingly. However, if the financial condition of our customers were to deteriorate, additional
allowances might be required.
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 unproved 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.
Support
Facilities and Equipment
Our
support facilities and equipment are generally located in proximity to certain of our principal fields. Depreciation of these
support facilities is calculated on a units-of-production basis.
Maintenance
and repair costs that do not extend the useful lives of property and equipment are charged to expense as incurred.
Proved
Reserves
Estimates
of the Company’s proved reserves included in this report are prepared in accordance with US GAAP and guidelines from the
United States Securities and Exchange Commission (“SEC”). The Company’s engineering estimates of proved oil
and natural gas reserves directly impact financial accounting estimates, including depreciation, depletion, and amortization expense
and impairment. Proved oil and natural gas reserves are the estimated quantities of oil and natural gas reserves that geological
and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under period-end
economic and operating conditions. The process of estimating quantities of proved reserves is very complex, requiring significant
subjective decisions in the evaluation of all geological, engineering and economic data for each reservoir. The accuracy of a
reserves estimate is a function of: (i) the quality and quantity of available data; (ii) the interpretation of that data; (iii)
the accuracy of various mandated economic assumptions, and (iv) the judgment of the persons preparing the estimate. The data for
a given reservoir may change substantially over time as a result of numerous factors, including additional development activity,
evolving production history and continual reassessment of the viability of production under varying economic conditions. Changes
in oil and natural gas prices, operating costs, and expected performance from a given reservoir also will result in revisions
to the amount of the Company’s estimated proved reserves. The Company engages independent reserve engineers to estimate
its proved reserves.
Fixed
Assets
The
Company capitalizes expenditures related to property and equipment not directly associated with our production of oil and gas,
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.
Depreciation
is calculated using the straight-line method over the estimated useful lives of the assets.
Office
equipment – 3 years
Vehicle(s)
– 5 years
Land
– not depreciated
Asset
Retirement Obligations
The
Company follows the provisions of the Accounting Standards Codification ASC 410 - Asset Retirement and Environmental Obligations.
The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount
of the long-lived asset. The Company’s asset retirement obligations relate to the abandonment of oil and gas producing facilities
and facilities that support the production of oil and gas. The amounts recognized are based upon numerous estimates and assumptions,
including future retirement costs, future inflation rates and the credit-adjusted risk-free interest rate. After recording these
amounts, the ARO will be accreted to its future estimated value using the same assumed cost of funds, and the capitalized costs
are depreciated on a unit-of-production basis. Both the accretion and the depreciation will be included in depreciation, depletion
and amortization expense on our consolidated statements of operations.
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:
|
●
|
Level
1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in
sufficient frequency and volume to provide pricing information on an ongoing basis
|
|
|
|
|
●
|
Level
2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially
the full term of the asset or liability. This category includes those derivative instruments that the Company values using
observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative
instruments, can be derived from observable data, or supported by observable levels at which transactions are executed in
the marketplace.
|
|
|
|
|
●
|
Level
3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement
and less observable from objective sources (i.e. supported by little or no market activity). Level 3 instruments include derivative
warrant instruments. The Company does not have sufficient corroborating evidence to support classifying these assets and liabilities
as Level 1 or Level 2.
|
The
Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities
from Equity,” and ASC 815. The carrying amounts of the Company’s financial assets and liabilities, including cash,
prepaid expenses, accounts payable, accrued expenses, and other current liabilities, approximate their fair values because of
the short maturity of these instruments. The fair value of notes payable and convertible notes approximates their fair values
since the current interest rates and terms on these obligations are the same as prevailing market rates.
Certain
of the Company’s debt and equity instruments include embedded derivatives that require bifurcation from the host contract
under the provisions of ASC 815-40, Derivatives and Hedging. The estimated fair value of the derivative warrant instruments was
calculated using a Black Scholes valuation model.
The
following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for
at fair value on a recurring basis as of December 31, 2018 and 2017:
|
|
Carrying
|
|
|
Fair Value Measurement at
|
|
|
|
Value
|
|
|
December 31, 2018
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets, debt and equity instruments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative liabilities, debt and equity instruments
|
|
|
661,320
|
|
|
|
—
|
|
|
|
—
|
|
|
|
661,320
|
|
|
|
|
|
|
Fair Value Measurement at
|
|
|
|
Carrying Value
|
|
|
December 31, 2017
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets, debt and equity instruments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative liabilities, debt and equity instruments
|
|
|
458,387
|
|
|
|
—
|
|
|
|
—
|
|
|
|
458,387
|
|
The
Company did not identify any other assets and liabilities that are required to be presented on the consolidated balance sheet
at fair value.
Revenue
Recognition
The
Company recognizes revenue in accordance with the requirements of ASC 606, which directs that it should recognize revenue when
a customer obtains control of promised goods or services for an amount that reflects the consideration the entity expects to receive
in exchange for those goods or services. All of our revenue is attributable to sales of oil, gas, and other hydrocarbons which
are sold daily, with sales aggregated on a monthly basis. In the case of revenue received for a non-operated working interest,
we are paid by the operator, which is a joint interest partner and not the purchaser of the product. In the case of revenue received
for an operated working interest, we are paid by the marketer to whom we sell the commodities directly pursuant to contractual
arrangements.
Debt
Issuance Costs, Debt Discount and Detachable Debt-Related Warrants
Costs
incurred to issue debt are deferred and recorded as a reduction to the debt balance in our consolidated balance sheets. We amortize
debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts relate to the
relative fair value of warrants issued in conjunction with the debt and are also recorded as a reduction to the debt balance and
accreted over the expected term of the debt to interest expense using the effective interest method.
Net
Earnings (Loss) Per Common Share
The
Company computes earnings per share under ASC 260-10, “Earnings Per Share.” The Company’s earnings (loss) per
share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted
earnings (loss) per share reflects the potential dilution of securities, if any, that could share in the earnings (loss) of the
Company and are calculated by dividing net income by the diluted weighted average number of common shares. The diluted weighted
average number of common shares is computed using the treasury stock method for common stock that may be issued for outstanding
stock options, warrants, and convertible debt.
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) available to stockholders
|
|
$
|
(6,585,506
|
)
|
|
$
|
(6,493,871
|
)
|
Basic net income allocable to participating securities (1)
|
|
|
—
|
|
|
|
—
|
|
Income (loss) available to Foothills Exploration, Inc.’s stockholders
|
|
$
|
(6,585,506
|
)
|
|
$
|
(6,493,871
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding-Basic
|
|
|
16,992,461
|
|
|
|
14,418,719
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Options and warrants (2)
|
|
|
—
|
|
|
|
—
|
|
Stock payable (3)
|
|
|
—
|
|
|
|
205,000
|
|
Convertible notes (4)
|
|
|
19,504,517
|
|
|
|
1,800,532
|
|
Weighted average number of common shares outstanding-Diluted
|
|
|
36,496,978
|
|
|
|
16,424,251
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.39
|
)
|
|
$
|
(0.45
|
)
|
Diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.40
|
)
|
|
(1)
|
Restricted
share awards that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in
computing earnings using the two-class method. Participating securities, however, do not participate in undistributed net
losses.
|
|
|
|
|
(2)
|
For
the year ended December 31, 2018, “out of the money” stock options representing 2,050,000 shares and warrants
representing 5,761,015 shares were antidilutive and, therefore, excluded from the diluted share calculation. For the year
ended December 31, 2017, “out of the money” stock options representing 2,050,000 shares and warrants representing
2,783,515 shares were antidilutive and, therefore, excluded from the diluted share calculation.
|
|
|
|
|
(3)
|
For
the year ended December 31, 2017, stock payable representing 205,000 shares were anti-dilutive.
|
|
|
|
|
(4)
|
For
the year ended December 31, 2018 and 2017, convertible notes representing 19,504,517 and 1,800,532 shares were 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 accounts for stock, stock options, and stock warrants issued for services and compensation by employees under the fair
value method. For non-employees, the fair market value of the Company’s stock is measured on the date of stock issuance
or the date an option/warrant is granted as appropriate under ASC 718 “Compensation – Stock Compensation”. The
Company determined the fair market value of the warrants/options issued under the Black-Scholes Pricing Model. Under the provisions
ASC 718, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized
as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).
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 adoption of ASU 2015-17 did not have
a material impact on its 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 adoption of ASU 2016-09 did not have a material impact on its consolidated financial statements.
In
November 2016, the FASB issued ASC Update No. 2016-18 (Topic 230) Statement of Cash Flows – Restricted Cash (a consensus
of the FASB Emerging Issues Task Force). The amendments in this update require that restricted cash and restricted cash equivalents
be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. Current GAAP does not include specific guidance on the cash flow classification and presentation of changes
in restricted cash. The updated guidance is effective for interim and annual periods beginning after December 15, 2017 and is
required to be applied using a retrospective transition method to each period presented. The Company implemented this guidance
effective January 1, 2018. Implementing this guidance did not have a material impact on the Company’s statement of cash
flows.
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 will not have a material impact on the Company’s consolidated financial
statements.
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 and may require the services of valuation experts. 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 carry any Goodwill on its Consolidated Balance Sheets and does not anticipate the adoption of ASU 2017-04
will have a material impact on its consolidated financial statements.
In
July 2017, the FASB issued Accounting Standards Update No. 2017-11,
Accounting for Certain Financial Instruments with Down
Round Features
(“ASU 2017-11”). When determining whether certain financial instruments should be classified as
liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument
is indexed to an entity’s own stock. ASU 2017-11 is effective for annual or interim periods within those fiscal years beginning
after December 15, 2018 and should be applied on a retrospective basis. Early adoption is permitted for all entities, including
adoption in an interim period. The Company adopted ASU 2017-11 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.
In
June 2018, the FASB issued “ASU 2018-07 - Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting”. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions
for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards
except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over
which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic
718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a
grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply
to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling
goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The
updated standard is effective for the Company beginning after December 15, 2018, including interim periods within that fiscal
year. Early adoption of the new guidance is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company
does not expect that the adoption of this standard will have a material effect on its consolidated financial statements.
Note
4 – Property and Equipment
Oil
and Gas Properties
The
Company’s oil and gas properties at December 31, 2018 and 2017 are located in the United States of America.
The
carrying values of the Company’s oil and gas properties, net of depletion, depreciation, amortization, and impairment at
December 31, 2018 and December 31, 2017 are set forth below in the following table:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Unproved leasehold (1)
|
|
$
|
106,299
|
|
|
$
|
977,936
|
|
Proved leasehold
|
|
|
11,915,695
|
|
|
|
10,094,760
|
|
Properties subject to depletion, net of depletion
|
|
|
121,110
|
|
|
|
580,158
|
|
Exploratory wells – construction-in-progress (1) (2)
|
|
|
-
|
|
|
|
1,479,282
|
|
Total
|
|
$
|
12,143,103
|
|
|
$
|
13,132,136
|
|
(1)
|
Not
subject to depletion;
|
(2)
|
Reclassified
from exploratory to properties subject to amortization at December 31, 2018.
|
|
|
|
|
|
Exploration and
|
|
|
|
|
|
Depreciation, Depletion, Amortization,
|
|
|
|
|
Year
|
|
Acquisition
|
|
|
Development
|
|
|
Disposition
|
|
|
and
|
|
|
|
|
Incurred
|
|
Costs
|
|
|
Costs
|
|
|
of Assets
|
|
|
Impairment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 and prior
|
|
$
|
10,252,568
|
|
|
$
|
1,181,421
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,433,989
|
|
2017
|
|
|
—
|
|
|
|
3,223,931
|
|
|
|
—
|
|
|
|
(1,525,784
|
)
|
|
|
1,698,147
|
|
2018
|
|
|
—
|
|
|
|
1,897,502
|
|
|
|
|
|
|
|
(2,886,535
|
)
|
|
|
989,033
|
|
Total
|
|
$
|
10,252,568
|
|
|
$
|
6,302,854
|
|
|
$
|
—
|
|
|
$
|
(4,412,319
|
)
|
|
$
|
12,143,103
|
|
|
●
|
In 2017, the Company acquired a 21.62% non-operated working interest with a 17.1% net revenue interest in two exploratory horizontal gas wells in the Uinta Basin from an undisclosed party, and the Company incurred $1,479,282 in well costs. During the year ended December 31, 2018, the company incurred an additional $1,868,370 of well costs. At December 31, 2018, the Company’s share total costs for drilling and completing the two wells was $3,347,776. Although these wells produced economic quantities of natural gas liquids and residue gas through December 31, 2017, well completion activities were completed during the year ended December 31, 2018, so costs were reclassed from construction-in-progress and to proved properties subject to depletion through December 31, 2018. As of December 31, 2018, we recorded impairment expense of $1,521,776 for the amount exceed ceiling test limitation.
|
|
|
|
|
●
|
In 2017, the Company drilled a test well on the Labokay prospect to the total measured depth of 8,795 feet, where hydrocarbons shows were not in commercial quantities to warrant completion. This well was plugged and abandoned. Since the well was not commercially viable the Company’s working interest in the underlying mineral lease terminated and we no longer have a right to acquire title to said property. During the year ended December 31, 2017, we incurred costs of $1,209,675 in the drilling of this well and $1,352,982 was charged to impairment expense. Civil lawsuits were filed against FPOI arising from unpaid accounts in connection with drilling of this well – see Note 11 – Commitments and Contingencies for additional information on the lawsuits.
|
|
|
|
|
●
|
In 2017, the Company worked over two Duck Creek wells obtaining production from the Green River formation. We incurred $79,989 in capitalized workover costs associated with these wells. The wells require additional workover and were shut-in in July 2017. The Company recorded asset retirement costs of $291,659 related to Duck Creek wells. During the year ended December 31, 2018, we incurred $8,821 in capitalized workover costs associated with these wells. As of December 31, 2018, due to the Duck Creek wells subsequently becoming subject to a Sherriff’s sale stemming from a legal matter with our indirect subsidiary, the Duck Creek wells should be impaired to the extent of total intangible costs, which were capitalized for these properties during 2017 and 2018. Accordingly, the impairment expense for the period ending December 31, 2018 is $88,810.
|
|
|
|
|
●
|
In 2017, the Company incurred costs of $22,691 for bonding, legal, title, engineering, geological and surveying in our Ladysmith project in Fremont County, Wyoming.
|
|
●
|
In 2017, the Company incurred costs of $3,750 related to Springs Project. The Company allowed the BLM leases for the Springs project to expire without paying additional delay rental payments. The primary terms on these leases were due to expire in Q4 2018 and in the view of management it was not in the best interest of the Company to continue exploratory efforts on this speculative play. Management concluded that Company resources would be better redirected to continue seeking lower-risk acquisitions of producing oil and gas properties rather than take additional wildcat drilling risk on this prospect. The Company currently no longer owns the mineral rights for this project. As the result, the Company recognized impairment of oil and gas property in amount of $154,787, during the year ended December 31, 2017. During the year ended 31, 2018, the Company has decided to allow Ladysmith leases to expire without making further delay rental payments to the BLM, as the result we recorded impairment expense of $78,469.
|
|
|
|
|
●
|
In 2017, the Company incurred costs of $100,191 for exploration and development efforts associated with the proved oil and gas assets in Utah, which were acquired on December 30, 2016, from Total Belief Limited, a wholly owned subsidiary of New Times Energy Corporation Limited. These assets include certain oil and gas wells throughout the Uinta Basin in Utah on acreage with over 30 proved 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. In connection with the TBL acquisition, Foothills entered into a promissory note in the amount of $6,000,000. This note bears no interest during its term. The Company recorded ($342,804) of imputed interest as debt discount. Starting from July 1, 2018 the note bears 10% annual interest. During the year ended December 31, 2018, we incurred cost of $20,000 exploration and development efforts associated with these properties.
|
|
|
|
|
●
|
In 2017, the Company incurred costs of $379,498 for exploration and development efforts associated with numerous unproved oil and gas properties in the Company’s geographic areas of interest, including farmout properties (Paw Paw and Ironwood) and numerous others that were being evaluated and considered for a prospective acquisition and/or farmout by the Company. During the year ended December 31, 2018, we incurred cost of $312 exploration and development efforts associated with these properties. As of December 31, 2018, the Company determined it is unlikely that it will be able to obtain enough production from this test well at the present time to warrant continued development. As the result we recorded $778,034 impairment expense of Pawpaw during the year ended December 31, 2018.
|
|
|
|
|
●
|
In 2017, we recorded depreciation, depletion and amortization cost related to oil and gas properties of $18,017. During the year ended December 31, 2018, we recorded depreciation, depletion, amortization costs related to oil and gas properties of $411,821.
|
Support
Facilities and Equipment
The
Company’s support facilities and equipment serve its oil and gas production activities. The following table summarizes these
properties and equipment, together with their estimated useful lives:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Tank
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
Vehicle
|
|
|
69,446
|
|
|
|
69,446
|
|
Uinta Basin facilities
|
|
|
186,428
|
|
|
|
-
|
|
Accumulated depreciation
|
|
|
(1,717
|
)
|
|
|
(31
|
)
|
Construction in progress (1)
|
|
|
-
|
|
|
|
22,087
|
|
Total support facilities and equipment, net
|
|
$
|
284,157
|
|
|
$
|
121,502
|
|
|
(1)
|
Facilities
constructed in conjunction with drilling for our two exploratory horizontal wells in Uintah County, Utah, not subject to depreciation.
During the months ended December 31, 2018, construction-in-progress was reclassified to Uinta Basin facilities and became
eligible for depreciation upon the completion of the construction.
|
The
Company recognized depreciation expense of $1,686 and $31 during the years ended December 31, 2018 and 2017, respectively.
Office
Furniture, Equipment, and Other
As
of December 31, 2018 and 2017, office furniture, equipment, and other consisted of the following:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Computer equipment and fixtures
|
|
$
|
22,453
|
|
|
$
|
22,453
|
|
Accumulated depreciation
|
|
|
(16,116
|
)
|
|
|
(8,632
|
)
|
Office furniture, equipment, and other, net
|
|
$
|
6,337
|
|
|
$
|
13,821
|
|
During
the years ended December 31, 2018 and 2017, we recorded depreciation expense of $7,484 and $8,632, respectively.
Note
5 – Asset Retirement Obligation
The
following table provides a reconciliation of the changes in the estimated present value of asset retirement obligations for the
years ended December 31, 2018 and December 31, 2017.
|
|
For
the period ended
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Beginning
asset retirement obligations
|
|
$
|
303,327
|
|
|
$
|
291,659
|
|
Liabilities
established
|
|
|
23,709
|
|
|
|
-
|
|
Accretion
expense
|
|
|
13,081
|
|
|
|
11,668
|
|
Ending
asset retirement obligations
|
|
$
|
340,117
|
|
|
$
|
303,327
|
|
Accretion
expense for the years ended December 31, 2018 and 2017 was $13,081 and $11,668, respectively.
Note
6 – Notes Payable
A
summary of the outstanding amounts of our notes payable as of December 31, 2018 and 2017 is as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
9% unsecured note payable due May 6, 2017 (1)
|
|
$
|
-
|
|
|
$
|
-
|
|
13.5% unsecured note payable due September 8, 2017 (2)
|
|
|
1,050,000
|
|
|
|
1,050,000
|
|
0% unsecured note payable due January 2, 2018 (3)
|
|
|
250,000
|
|
|
|
250,000
|
|
12% unsecured note payable December 31, 2018 (4)
|
|
|
120,629
|
|
|
|
120,629
|
|
0% unsecured note payable due August 6, 2018 (5)
|
|
|
38,000
|
|
|
|
-
|
|
9% unsecured note payable due December 15, 2018(6)
|
|
|
100,000
|
|
|
|
-
|
|
8% unsecured note payable due October 22, 2018(7)
|
|
|
50,000
|
|
|
|
-
|
|
Less: unamortized discount
|
|
|
(12,932
|
)
|
|
|
(2,264
|
)
|
Total debt
|
|
$
|
1,595,697
|
|
|
$
|
1,418,365
|
|
Less: current maturities
|
|
|
1,595,697
|
|
|
|
1,418,365
|
|
Long-term debt, net of current maturities
|
|
$
|
-
|
|
|
$
|
-
|
|
At
December 31, 2018, the principal amounts due under our debt agreements were all classified as current on our Consolidated Balance
Sheets.
(1)
|
On
December 30, 2016, 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 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. On May 18, 2017, Full Wealth Investment Hong Kong Limited sold this note
to Gold Class Limited, with accrued interest increased from 9% to 13.5% per annum for the life of the debenture. On June 1,
2017, Full Wealth Investment Hong Kong Limited acquired this note from Gold Class with a 60-day term and 10% interest per
annum for the life of the debenture. On August 14, 2017, we repaid $1,000,000 in principal and $20,000 in accrued interest
and reclassified the remaining accrued interest of $30,000 as a gain on extinguishment of debt.
|
|
|
(2)
|
Effective
August 9, 2017, Foothills borrowed $1,050,000 from Profit Well Limited, a Hong Kong limited liability company. The Company
executed a Bridge Note with an annual percentage interest rate of 13.5% and a maturity date of September 8, 2017. Proceeds
of this Bridge Note were primarily used to repay Full Wealth for the debenture dated June 1, 2017. On November 3, 2017, Profit
Well Limited agreed to defer repayment of this note to a later date and acknowledged that the Company is not in default regarding
this Debenture. Profit Well Limited also reaffirmed its belief that the Company will either extend or repay the obligation
to the satisfaction of Profit Well. As partial consideration for the deferment, the Company agreed to issue Profit Well Limited
100,000 shares of its restricted common stock, valued at $48,000. The issuance of the shares in exchange for the maturity
extension was treated as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications
and Extinguishments” (“ASC 470-50”). On February 28, 2018, Profit Well and the Company agreed to extend
the maturity date of the debenture to June 30, 2018, and as consideration for the extension, the Company agreed to compensate
Profit Well with 200,000 shares of restricted common stock valued at $46,700. The issuance of the shares in exchange for the
maturity extension was treated as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt –
Modifications and Extinguishments” (“ASC 470-50”). In addition, the parties agreed that if payment of said
principal and interest due and payable is made late, then a penalty payment of $100,000 shall become due and payable to Profit
Well by the Company. On June 30, 2018, we recorded $100,000 penalty as additional interest payable. The penalty payment was
treated as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments”
(“ASC 470-50”). On July 29, 2018, Profit Well Limited agreed to defer repayment of this note to a later date and
acknowledged that the Company is not in default regarding this Debenture, and as consideration for the extension, the Company
agreed to compensate Profit Well with 100,000 shares of restricted common stock valued at $12,000. The issuance of the shares
in exchange for the maturity extension was treated as a modification of existing debt pursuant to the guidance of ASC 470-50
“Debt – Modifications and Extinguishments” (“ASC 470-50”).
|
(3)
|
On
September 29, 2017, the Company issued to an unaffiliated investor a promissory note and three tranches of warrants for an
aggregate consideration of $250,000. The Note recites that it accrues no interest if paid when due and is due and payable
on January 2, 2018. If principal is not paid on or before maturity, interest will accrue at the rate of 15% per year until
paid. On November 6, 2017, the Company agreed to compensate the investor with 75,000 shares of the Company’s restricted
common stock in connection with a more favorable term of a note entered into with FirstFire Global Opportunities Fund, LLC
(“FirstFire”). On December 30, 2017, the Company and the investor agreed to extend the maturity date of this Note
to January 23, 2018, in return for a payment at maturity of the principal, accrued interest as provided in the Note, plus
30,000 shares of the Company’s restricted common stock. Because the fair value of the shares was greater than 10% of
the present value of the remaining cash flows under the Note, the issuance of the shares in connection with a more favorable
term of a note entered with FirstFire was treated as a debt extinguishment and reissuance of a new debt instrument pursuant
to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”).
|
Since
January 23, 2018, the Company and the investor have been in ongoing discussions to extend the term of this Note. On March 28,
2018, the investor acknowledged that the Company is not in default regarding this Note and reaffirmed its belief that the Company
will either extend the Note’s due date or repay its obligation on terms that are mutually satisfactory. The warrants have
the following terms:
●
|
375,000
warrants to purchase 375,000 shares of common stock of the Company at a strike price of $0.665 per share expiring on September
29, 2019;
|
|
|
●
|
375,000
warrants to purchase 375,000 shares of common stock of the Company at a strike price of $1.25 per share expiring on September
29, 2020; and
|
|
|
●
|
185,000
warrants to purchase 185,000 shares of common stock of the Company at a strike price of $2.00 per share expiring on September
29, 2020.
|
The
aggregate relative fair value of three tranches of warrants was determined to be $105,000 on September 29, 2017, using the Black-Scholes
option-pricing model based on the following assumptions: (i) volatility rate of 94%, (ii) discount rate of 0%, (iii) zero expected
dividend yield, and (iv) expected life of 2-3 years. $2,536 imputed interest was recorded as debt discount. $2,536 was determined
using the present value method based on the following assumptions: (i) adjusted interest rate 4% (ii) expected life of 0.26 year.
The aggregate value of the warrants and imputed interest of $107,536 was considered as debt discount upon issuance and will be
amortized as interest over the term of the Note or in full upon the conversion of the Note. During the year ended December 31,
2018, the Company amortized the remaining $2,264 of such discount to interest expense. At December 31, 2018, $250,000 of principal
was outstanding under the Note.
Each
tranche of warrants is subject to down round adjustment provisions if the Company during the term of that tranche issues additional
securities for consideration per share, after giving effect to fees, commission and expenses, that is less, or which on conversion
or exercise of the underlying security is less, than $0.665 per share (as adjusted for any change resulting from forward or reverse
splits, stock dividends and similar events).
To
satisfy most favored nation provisions in previously entered securities purchase agreements that are triggered by the transaction
described above, the Company issued 136,015 shares of common stock and warrants to purchase 136,015 shares of common stock, in
the aggregate, to certain investors who purchased units from the Company, at a $1.00 per unit, with each unit consisting of one
share and one warrant. See the Company’s Current Report on the Form 8-K filed with the SEC on June 5, 2017. Of this amount,
100,752 shares and warrants to purchase 100,752 shares of common stock will be issued to Wilshire Energy Partners LLC, an entity
controlled by Kevin J. Sylla, our Executive Chairman and Chief Executive Officer of FPI. The exercise price of these investor
warrants was adjusted to $0.665 per share. We measured the value of the effect of the down round feature as the difference between
the fair value of the financial instrument at an original exercise price of $1.50 and an adjusted exercise price of $0.665 and,
as a result, $59,801 was recorded as down round feature as interest expense under ASC 260-10-30-1. Foothills determined the amount
of $59,801 using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 94%, (ii) discount
rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 3 years.
(4)
|
A
promissory note was issued on November 1, 2017, for services rendered, bearing an interest rate of 12% per annum and with
a maturity date of June 30, 2018. On August 22, 2018, the Note Holder agreed to defer repayment of this note to a later date
and acknowledged that the Company is not in default regarding this Debenture. As partial consideration for the deferment,
the Company agreed to issue the Note Holder 60,000 shares of its restricted common stock. The issuance of the shares in exchange
for the maturity extension was treated as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt
– Modifications and Extinguishments” (“ASC 470-50”).
|
|
|
(5)
|
On
July 19, 2018, the Company borrowed $38,000 from an unaffiliated investor with an original discount of $3,207. The Note recites
that it accrues no interest if paid when due and is due and payable on August 6, 2018. If principal is not paid on or before
maturity, interest will accrue at the rate of 10% per year until paid. In connection with the issuance of this note, the Company
issued 300,000 shares for late SEC filing, valued at $36,000. $74 imputed interest was recorded as debt discount. $74 was
determined using the present value method based on the following assumptions: (i) adjusted interest rate 4% (ii) expected
life of 0.05 year. The relative aggregate value of the shares and imputed interest was determined to be $32,793 using the
allocation of proceed, $32,793 was considered as debt discount upon issuance and will be amortized as interest over the term
of the Note or in full upon the conversion of the Note. Pursuant to this Note, the investor shall be assigned an undivided
two percent (2%) overriding royalty of all oil, gas, and other minerals and hydrocarbons produced, saved, and sold from each
well now or hereinafter located on certain leases and wells owned by the Company. On August 23, 2018, the lender agreed to
defer repayment of this note to a later date and acknowledged that the Company is not in default regarding this Debenture,
and as consideration for the extension, the Company agreed to compensate the lender with 15,000 shares of restricted common
stock valued at $1,950. The issuance of the shares in exchange for the maturity extension was treated as a modification of
existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC
470-50”). During the year ended December 31, 2018, the Company amortized the remaining $38,000 of such discount to interest
expense. At December 31, 2018, $38,000 of principal was outstanding under the Note.
|
|
|
(6)
|
On
September 14, 2018, the Company borrowed $100,000 from an unaffiliated investor, bearing an interest rate of 9% per annum
and with a maturity date of December 15, 2018. In connection with the issuance of this note, the Company issued 250,000 shares
of its common stock, valued at $22,500, which was considered as debt discount upon issuance and will be amortized as interest
over the term of the Note or in full upon the conversion of the Note. During the year ended December 31, 2018, the Company
amortized $22,500 of such discount to interest expense. At December 31, 2018, unamortized debt discount was $0 and $100,000
of principal was outstanding under the Note.
|
|
|
(7)
|
On
October 22, 2018, the Company issued a term sheet to an unaffiliated investor for a promissory note in the principal amount
of $50,000 with a Volumetric Production Payment (“VPP”) equal to 1,250 barrels of oil equivalent (“BOE”).
The Note has a maturity date of October 22, 2019, with the Principal and accrued unpaid interest due in full at Maturity.
VPP will be made after deduction of 20% royalties due to mineral owners, paid within the term on the Note and at the discretion
of the Company as to amount and volume;
provided, however,
that the VPP for any month shall not be less than 5%
of the month’s total crude oil sales. Payment may be made “in-kind” at the election of the Investor.
If election is made by Investor to be paid “in-kind,” then Investor shall bear responsibility for paying mineral
owner royalties due on said “in-kind” payments. All VPP’s to be made from the production of the Company’s
operating subsidiaries, Foothills Exploration Operating, Inc. and Tiger Energy Operating, LLC, from the well bores of
the Company’s Duck Creek wells, subject to the terms of the Leases covering such wells. Such VPP will continue until
paid in full, regardless of payment in full of the Note and shall be secured by the assets. In the event that the West
Texas Intermediate (WTI) crude oil market price closes below USD $40.00 per barrel for 10 consecutive trading days, the
Investor shall be allocated a revised VPP equal to 2 times the remaining VPP barrels left over at that time.
Pursuant
to this Note, the investor shall be assigned an un undivided one-half percent (0.5%) overriding royalty interest (“ORRI”)
in all oil, gas and other minerals produced, saved, and marketed from each well now or hereinafter located on wells owned
by the Company, subject to the terms of the Leases covering such wells. Upon any default in payment of principal hereunder,
the Company shall pay interest on the principal balance of this Note then outstanding and on the accrued but unpaid interest
from the date of such default until such default is cured and the Note paid in full at the rate of Fifteen Percent (15%).
The Company agreed to issue the investor 200,000 shares of the Company’s restricted common stock as additional consideration
for entering into the Note with the Company, valued at $16,000, which was considered as debt discount upon issuance and
will be amortized as interest over the term of the Note or in full upon the conversion of the Note.
Pursuant
to this Note, Investor has the right to participate in any future offering by the Company for a period of twelve (12)
months for an amount equal to the principal amount detailed in this Term Sheet. So long as the Note is outstanding, if
the Company enters into a subsequent financing with another individual or entity (a third party) on terms that are more
favorable to that third party, the agreements between the Company and the investor shall be amended to include such better
terms. During the year ended December 31, 2018, the Company amortized $3,069 of such discount to interest expense. At
December 31, 2018, unamortized debt discount was $12,932 and $50,000 of principal was outstanding under the Note.
|
During
the years ended December 31, 2018 and 2017, respectively, we incurred $433,350 and $213,852 of interest expense, including amortization
of discount of $67,113 and $105,272 and shares issued for extension of $68,376 and $0 and penalty of $100,000 and $0, respectively.
Note
7 – Notes Payable - Related Party
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
13.25% unsecured note payable due May 5, 2017 (1)
|
|
$
|
1,250,000
|
|
|
$
|
1,250,000
|
|
10% unsecured note payable due December 31, 2018 (2)
|
|
|
6,000,000
|
|
|
|
6,000,000
|
|
Less: unamortized discount of imputed interest of 4% (2)
|
|
|
-
|
|
|
|
(114,268
|
)
|
Total debt
|
|
|
7,250,000
|
|
|
|
7,135,732
|
|
Less: current maturities
|
|
|
7,250,000
|
|
|
|
7,135,732
|
|
Long-term debt, net of current maturities
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
Effective
January 5, 2017, Foothills borrowed $1,250,000 from Berwin Trading Limited that, due to its 20% beneficial ownership in the
Company, is a related party. This note called for interest at 9% per annum; but because it was not paid when due interest
was to have accrued at a default rate of 11% from the due date of the note. 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.
|
|
|
|
On
May 4, 2017, the Company and Berwin 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. On November 3, 2017, Berwin agreed
to defer repayment of this note to a later date and acknowledged that the Company is not in default regarding this Debenture.
As partial consideration for the deferment, the Company issued Berwin 100,000 shares of its restricted common stock, valued
at $48,000. The issuance of the shares in exchange for the maturity extension was treated as a modification of existing debt
pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”).
On February 28, 2018, Berwin and the Company agreed to extend the maturity date of the debenture to June 30, 2018, and as
consideration for the extension, the Company agreed to compensate Berwin with 250,000 shares of restricted common stock valued
at $58,375. The issuance of the shares in exchange for the maturity extension was treated as a modification of existing debt
pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”).
In addition, the parties agreed that if payment of said principal and interest due and payable is made late, then a penalty
payment of $125,000 shall become due and payable to Berwin by the Company. On June 30, 2018, we recorded $125,000 penalty
as additional interest payable. The penalty payment was treated as a modification of existing debt pursuant to the guidance
of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”). The Company and Berwin
are in ongoing discussions to extend the term of this Note and the Company believes it will either extend, rework or repay
the obligation to the satisfaction of Berwin. On July 29, 2018, Berwin agreed to defer repayment of this note to a later date
and acknowledged that the Company is not in default regarding this Debenture, and as consideration for the extension, the
Company agreed to compensate Berwin with 100,000 shares of restricted common stock valued at $12,000. The issuance of the
shares in exchange for the maturity extension was treated as a modification of existing debt pursuant to the guidance of ASC
470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”).
|
|
|
(2)
|
On
December 30, 2016, in connection with the TBL acquisition, Foothills entered into a promissory note in the amount of $6,000,000.
This note bears no interest during its term. The Company calculated and recorded $342,804 of imputed interest as debt discount.
Starting from July 1, 2018, the note bears 10% annual interest. During the year ended December 31, 2018, we accrued 300,000
interest payable.
|
During
the years ended December 31, 2018 and 2017, respectively, we incurred $778,393 and $394,974 of interest expense, including amortization
of discount of $114,268 and $228,536 and shares issued for extension of $70,375 and $0, and penalty of $125,000 and $0, respectively.
Note
8 – Convertible Note Payable
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
10% convertible
note payable due May 10, 2018 (1)
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
8% convertible note
payable due August 16, 2018 (2)
|
|
|
-
|
|
|
|
267,500
|
|
13.5% convertible note
payable due February 11, 2020 (3)
|
|
|
44,000
|
|
|
|
-
|
|
12% convertible note
payable due May 1, 2019 (4)
|
|
|
380,000
|
|
|
|
-
|
|
12% convertible note
payable due December 6, 2019 (5)
|
|
|
45,000
|
|
|
|
-
|
|
10% convertible note
payable due September 19, 19 (6)
|
|
|
58,300
|
|
|
|
-
|
|
Less:
unamortized debt discount on convertible notes
|
|
|
(363,265
|
)
|
|
|
(224,228
|
)
|
Total
debt
|
|
|
214,535
|
|
|
|
93,272
|
|
Less:
current maturities
|
|
|
181,637
|
|
|
|
93,272
|
|
Long-term
debt, net of current maturities
|
|
$
|
32,898
|
|
|
$
|
-
|
|
(1)
|
On
May 10, 2017, we entered into a convertible note agreement with an unrelated party, pursuant to which we borrowed $50,000
at an annual percentage rate of 10% with a term of 12 months, which is due on May 10, 2018. This note may, at the option of
the lender, be converted at any time prior to May 10, 2018, into fully-paid, restricted and non-assessable shares of common
stock of the Company at a price equal to 100% of the selling price of such common stock in a private placement to institutional
and/or accredited investors initiated by the Company during the term of this convertible note until May 10, 2018. On November
7, 2017, the Company issued 50,000 warrants to purchase 50,000 shares of common stock of the Company at a strike price of
$1.00 per share expiring on May 7, 2019. If the Company fails to pay the principal and accrued unpaid interest due and payable
to Lender on or before the due date of the convertible note, then the Lender shall be provided the right to convert at either
$0.665 per share or upon the same terms offered in FirstFire Global Opportunities Fund, LLC Note’s conversion options.
The relative fair value of warrant was determined to be $3,381 on November 7, 2017, using the Black-Scholes option-pricing
model based on the following assumptions: (i) volatility rate of 77%, (ii) discount rate of 0%, (iii) zero expected dividend
yield, and (iv) expected life of 1.5 years. The issuance of the warrants in exchange for the maturity extension was treated
as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments”
(“ASC 470-50”). On September 17, 2018, the note holder agreed to defer repayment of this note to December 15,
2018, the Company agreed to compensate the note holder with 50,000 shares of restricted common stock valued at
$4,500. On April 4, 2019, note holder confirmed that the Company is not in default with respect to this note.
The issuance of the shares in exchange for the maturity extension was treated as a modification of existing debt pursuant
to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”).
|
|
|
(2)
|
On
November 17, 2017, the Company issued to FirstFire Global Opportunities Fund, LLC, (“FirstFire”) an unaffiliated
investor, a senior convertible promissory note in the principal amount of $267,500 and received proceeds of $250,000 before
giving effect to certain transactional costs including legal fees. As part of this transaction the Company also issued (i)
warrants having an 18-month term, to purchase 267,500 shares of the Company’s common stock at an exercise price of $1.00
per share and (ii) 60,000 shares of the Company’s restricted common stock. This note accrues interest of 8% per annum
and is due and payable on August 17, 2018. The Note agreements give the lender the right to convert the loan amounts due into
common stock at a conversion price of the lower of (i) $0.665 per share or (ii) 50% of the lowest per share market values
during the twenty (20) trading days immediately preceding a conversion date. If the lowest traded price of the Common Stock
is less than the Conversion Price on the date following the Conversion Date on which the Holder actually receives from the
Company, then the Conversion Price shall be deemed to have been retroactively adjusted, as of the Conversion Date, to a price
equal to 75% multiplied by the lowest closing price of the Common Stock on the Free Trading Shares Receipt Date. This note
is secured by a personal guaranty from the Company’s Executive Chairman, Kevin Sylla. The net proceeds of this note
will be used for general corporate and working capital purposes. The aggregate relative fair value of the warrant was determined
to be $10,750 on November 17, 2017, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility
rate of 78%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1.5 year. Fair value
of 60,000 shares of common stock was determined to be $18,250 using allocation of proceeds. The Company accounted for the
conversion feature as a derivative valued at $288,964, of which $67,964 was expensed immediately to interest expense. $288,964
was determined using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 78%,
(ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 0.75 year. The aggregate value of
the original debt discount, warrant, conversion feature and 60,000 shares of common stock of $267,500 was considered as debt
discount upon issuance and is being amortized to interest expense over the term of the Note or in full upon the conversion
of the Note. As of December 31, 2017, Company accounted for the conversion feature as a derivative valued at $458,387 which
was determined using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 77%,
(ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 0.6 year. As of December 31, 2018,
the Company accounted for the conversion feature as a derivative valued at $454,444 which was determined using the Black-Scholes
option-pricing model based on the following assumptions: (i) volatility rate of 225%, (ii) discount rate of 0%, (iii) zero
expected dividend yield, and (iv) expected life of 0.07 year. On June 6, 2018, the Company made a principal payment in the
amount of $100,000. Furthermore, the Company agreed to pay the remaining balance of $229,025 on or before thirty-five (35)
days from June 5
th
, 2018. The Note may be converted if the Note Balance is not paid on or before thirty-five (35)
days from June 5
th
2018. FirstFire agreed that the Note is not in default. As consideration for agreeing to provide
the Company with this extension of time to pay, the Company issued the investor 150,000 shares of restricted common stock,
valued at $30,000. Because the fair value of the shares was greater than 10% of the present value of the remaining cash flows
under the Note, the issuance of the shares in connection with a more favorable term of a note entered with FirstFire, was
treated as a debt extinguishment and reissuance of a new debt instrument pursuant to the guidance of ASC 470-50 “Debt
– Modifications and Extinguishments” (“ASC 470-50”). On September 6, 2018, the Company agreed to make
a principal payment in the amount of $50,000. Furthermore, the Company agreed to settle the debt for $210,000 on or before
October 26, 2018, as consideration of extension, the Company issued 100,000 shares of common stock, at $9,000. The issuance
of the shares in exchange for the maturity extension was treated as a modification of existing debt pursuant to the guidance
of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”). On September 13, 2018,
the Company agreed to issue an additional 250,000 shares of common stock for an extension, valued at $11,250. The issuance
of the shares in exchange for the maturity extension was treated as a modification of existing debt pursuant to the guidance
of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”). On November 6, 2018,
the Company made a payment of $220,000 to FirstFire Global Opportunities Fund, LLC, representing a final and completed settlement
of the Company’s outstanding obligations pursuant to the convertible promissory note dated November 17, 2017. As of
On November 6, 2018, Company accounted for the conversion feature as a derivative valued at $283,580 which was determined
using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 226%, (ii) discount
rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 0.25 year. As the result, the Company recorded $283,580
as gain on extinguishment of debt.
|
(3)
|
On
August 11, 2018, the Company borrowed $44,000 from an unaffiliated investor, bearing an interest rate of 12.5% per annum and
with a maturity date of February 11, 2020. As part of this transaction the Company also issued (i) warrants having a 24-month
term, to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.665 per share and (ii) 44,000
shares of the Company’s restricted common stock. The Note agreements give the lender the right to convert the loan amounts
due into common stock at a fixed conversion price of $0.20. The aggregate relative fair value of the warrant was determined
to be $9,035 on August 11, 2018, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility
rate of 221%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 2 year. Fair value of
44,000 shares of common stock was determined to be $5,280 using market price. The aggregate value of the warrant and 44,000
shares of common stock of $14,315 was considered as debt discount upon issuance and is being amortized to interest expense
over the term of the Note or in full upon the conversion of the Note. During the year ended December 31, 2018, the Company
amortized the $815 of such discount to interest expense. At December 31, 2018, unamortized debt discount was $11,101 and $44,000
of principal was outstanding under the Note.
|
|
|
(4)
|
On
November 1, 2018, the Company entered into a loan transaction with an unaffiliated investor
(“Holder”), which funded and closed on November 5, 2018. The Company issued
the lender a convertible promissory note (“Note”) dated November 1, 2018,
in the principal amount of $380,000 with an original issue discount of 10% and received
proceeds of $342,000, before giving effect to certain transactional costs including legal
fees on November 5, 2018. As part of this transaction the Company also issued (i) 650,000
shares of the Company’s restricted common stock and two tranches of warrants :
(ii) tranche 1 are warrants having a 5-year term to purchase 687,500 shares of the Company’s
restricted common stock at an exercise price of $0.20 per share with cashless exercise
option and (ii) tranche 2 are warrants having a 5-year term to purchase 2,062,500 shares
of the Company’s restricted common stock at an exercise price of $0.20 per share
with cashless exercise option. Tranche 2 warrants may be redeemed by the Company for
$20,000 (“Call Payment”) beginning on the date of issuance, November 1, 2018,
and ending on the date which is 180 calendar days following the issuance date (the “Call”).
If Company exercises the Call, then the Company shall make the Call Payment to the Holder
within five business days of the date that the Company exercises the Call. If the Call
Payment is not made within the required time frame, then the Company will lose its right
to exercise the Call for the tranche 2 warrants.
The
Note accrues interest at 12% per year, and is due and payable on May 1, 2019 (“Maturity Date”). The Company
may prepay the Note without prepayment penalty if prepaid during the first 180 days following issuance date. No prepayment
is permitted after the initial 180 days from issuance. The Note agreements give the lender the right to convert the loan
amounts due into common stock at a conversion price equal to the lesser of (i) 50% multiplied by the lowest trading price
during the previous twenty (20) trading day period ending on the latest complete trading day prior to the date of this
Note and (ii) 50% multiplied by the during the twenty (20) trading day period ending on the latest complete trading day
prior to the conversion date.
The
aggregate relative fair value of the warrant was determined to be $89,908 on November 1, 2018, using the Black-Scholes
option-pricing model based on the following assumptions: (i) volatility rate of 226%, (ii) discount rate of 0%, (iii)
zero expected dividend yield, and (iv) expected life of 5.0 year. Fair value of 650,000 shares of common stock was determined
to be $53,300 using allocation of proceeds. The Company accounted for the conversion feature as a derivative valued at
$558,923, of which $364,131 was expensed immediately to interest expense. $194,792 was determined using the Black-Scholes
option-pricing model based on the following assumptions: (i) volatility rate of 226%, (ii) discount rate of 0%, (iii)
zero expected dividend yield, and (iv) expected life of 0.50 year. The aggregate value of the original debt discount,
warrant, conversion feature and 650,000 shares of common stock of $380,000 was considered as debt discount upon issuance
and is being amortized to interest expense over the term of the Note or in full upon the conversion of the Note.
|
(5)
|
On
December 6, 2018, Foothills Exploration, Inc. (the “Company”), entered into
a convertible loan transaction with an unaffiliated investor (“Holder”) in
the principal amount of $136,500 (the “Note”). The Note is divided into three
tranches, the first tranche of which, in the face amount of $45,500, funded and closed
on December 7, 2018, before giving effect to certain transactional costs including legal
fees yielding a net of $41,500. The Note carries an original issue discount of $12,000
(the “OID”) prorated to each tranche, to cover the Holder’s accounting
fees, due diligence fees, monitoring, and/or other transactional costs incurred in connection
with the negotiation, purchase and sale of the Note, which is included in the principal
balance of this Note.
For
each tranche funded under the Note, the Company agreed to issue warrants having a 5-year term to purchase up to 227,500
shares of the Company’s restricted common stock at an exercise price of $0.20 per share with a cashless exercise
option. The warrants are subject to adjustment in certain events such as forward or reverse stock splits or if subsequent
financings are at terms that are more favorable to persons in subsequent issuances of securities.
The
Note agreements give the Holder, after the 180
th
calendar day after the issue date, the right to convert all
or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of this Note due into fully
paid and non-assessable shares of Common Stock at 50% multiplied by the lowest trading Price for the Common Stock during
the twenty (20) Trading Day period prior to the Conversion Date.
Each
tranche of the Note funded accrues interest at 12% per year. The maturity date for each tranche funded shall be twelve
(12) months from the effective date of each payment (each a “Maturity Date”), and is the date upon which the
principal sum of each respective tranche, as well as any accrued and unpaid interest and other fees relating to that respective
tranche, shall be due and payable. This Company may prepay any amount outstanding under each tranche of this Note, during
the initial 60 calendar day period after the issuance of the respective tranche of this Note, by making a payment to the
Holder of an amount in cash equal to 125% multiplied the amount that the Company is prepaying Notwithstanding anything
to the contrary contained in this Note, the Company may prepay any amount outstanding under each tranche of this Note,
during the 61
st
through 120 calendar day period after the issuance of the respective tranche of this Note,
by making a payment to the Holder of an amount in cash equal to 135% multiplied the amount that the Company is prepaying.
Notwithstanding anything to the contrary contained in this Note, the Company may prepay any amount outstanding under each
tranche of this Note, during the 121
st
through 180 calendar day period after the issuance of the respective
tranche of this Note, by making a payment to the Holder of an amount in cash equal to 145% multiplied the amount that
the Company is prepaying.
The
Company may not prepay any amount outstanding under each tranche of this Note after the 180
th
calendar day
after the issuance of the respective tranche of this Note. Any amount of principal or interest due pursuant to this Note,
which is not paid by the Maturity Date, shall bear interest at the rate of the lesser of (i) fifteen percent (15%) per
annum or (ii) the maximum amount permitted by law from the due date thereof until the same is paid (“Default Interest”).
Interest shall commence accruing on the date that each tranche of the Note is fully paid and shall be computed on the
basis of a 365-day year and the actual number of days elapsed. Net proceeds obtained in this transaction will be used
for general corporate and working capital purposes. No assurance can be given that any other tranche of the Note will
be funded or that any amount due there under will be prepaid. No broker-dealer or placement agent was retained or involved
in this transaction.
The
aggregate relative fair value of the warrant was determined to be $7,880 on November 1, 2018, using the Black-Scholes
option-pricing model based on the following assumptions: (i) volatility rate of 225%, (ii) discount rate of 0%, (iii)
zero expected dividend yield, and (iv) expected life of 5.0 year. The Company accounted for the conversion feature as
a derivative valued at $74,970, of which $42,850 was expensed immediately to interest expense. $74,970 was determined
using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 225%, (ii) discount
rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1.00 year. The aggregate value of the original
debt discount, warrant and conversion feature of $45,500 was considered as debt discount upon issuance and is being amortized
to interest expense over the term of the Note or in full upon the conversion of the Note.
|
(6)
|
On
December 19, 2018, Foothills Exploration, Inc. (the “Company”), entered into
a convertible loan transaction with an unaffiliated investor (“Holder”) in
the principal amount of $58,300 (the “Note”), which funded and closed on
December 21, 2018, before giving effect to certain transactional costs including legal
fees yielding a net of $53,000. The Note carries an original issue discount of $5,300
(the “OID”), to cover the Holder’s accounting fees, due diligence fees,
monitoring, and/or other transactional costs incurred in connection with the negotiation,
purchase and sale of the Note, which is included in the principal balance of this Note.
The
Note agreements give the Holder, after the 180
th
calendar day after the issue date, the right to convert all
or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of this Note due into fully
paid and non-assessable shares of Common Stock at the Conversion Price which equal the lesser of (i) 60% multiplied by
the lowest Trading Price during the previous twenty-five (25) Trading Day before the Issue Date of this Note or (ii) 60%
multiplied by the lowest Trading Price for the Common Stock during the twenty-five (25) Trading Day period ending on the
latest complete Trading Day prior to the Conversion Date.
The
Note accrues interest at 10% per year. The maturity date for the Note is September 19, 2019 (“Maturity Date”),
and is the date upon which the principal sum, as well as any accrued and unpaid interest, shall be due and payable. This
Company may prepay any amount outstanding under this Note, during the initial 60 calendar day period after the issuance
of this Note, by making a payment to the Holder of an amount in cash equal to 125% multiplied the amount that the Company
is prepaying Notwithstanding anything to the contrary contained in this Note, the Company may prepay any amount outstanding
under each tranche of this Note, during the 61
st
through 120 calendar day period after the issuance of the
respective tranche of this Note, by making a payment to the Holder of an amount in cash equal to 135% multiplied the amount
that the Company is prepaying. Notwithstanding anything to the contrary contained in this Note, the Company may prepay
any amount outstanding under each tranche of this Note, during the 121
st
through 180 calendar day period after
the issuance of the respective tranche of this Note, by making a payment to the Holder of an amount in cash equal to 140%
multiplied the amount that the Company is prepaying.
The
Company may not prepay any amount outstanding under each tranche of this Note after the 180th calendar day after the issuance
of the respective tranche of this Note. Any amount of principal or interest due pursuant to this Note, which is not paid
by the Maturity Date, shall bear interest at the rate of the lesser of (i) eighteen percent (18%) per annum or (ii) the
maximum amount permitted by law from the due date thereof until the same is paid (“Default Interest”). Interest
shall commence accruing on the date that each tranche of the Note is fully paid and shall be computed on the basis of
a 360-day year and the actual number of days elapsed. Net proceeds obtained in this transaction will be used for general
corporate and working capital purposes. No broker-dealer or placement agent was retained or involved in this transaction.
The
Company accounted for the conversion feature as a derivative valued at $102,942, of which $52,942 was expensed immediately
to interest expense. $102,942 was determined using the Black-Scholes option-pricing model based on the following assumptions:
(i) volatility rate of 228%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 0.75
year. The fair value of the conversion feature of $50,000 was considered as debt discount upon issuance and is being amortized
to interest expense over the term of the Note or in full upon the conversion of the Note.
|
During
the years ended December 31, 2018 and 2017, respectively, the Company incurred $529,121 and $49,071 of interest expense, including
amortization of discount of $389,078 and $0 and shares issued for note extension of $24,750 and $0, respectively. At the year
ended December 31, 2018 and 2017, the unamortized discount was $363,265 and $224,228, respectively .
The
following table reconciles, for the period ended December 31, 2018, the beginning and ending balances for financial instruments
that are recognized at fair value in the consolidated financial statements:
Balance of embedded derivative
as of December 31, 2017
|
|
$
|
458,387
|
|
Additions related to
embedded conversion features of convertible debt issued
|
|
|
736,835
|
|
Change in fair value
of conversion features
|
|
|
(50,619
|
)
|
Reductions
in fair value due to principal repayments and conversion
|
|
|
(483,283
|
)
|
Balance of embedded
derivatives at December 31, 2018
|
|
$
|
661,320
|
|
Derivative liabilities were determined using
the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 144 - 230 %, (ii) discount rate
of 0%, (iii) zero expected dividend yield, and (iv) expected life of 0.33 – 0.93 year.
Note
9 – Common Stock
On
May 31, 2017, we entered into a Securities Purchase Agreement with Wilshire Energy Partners, LLC, a principal shareholder, pursuant
to which we sold and agreed to issue 200,000 units at a purchase price of $1.00 per unit for an aggregate amount of $200,000.
Each unit consisted of one share of the Company’s common stock and one warrant to purchase a share of the Company’s
common stock, exercisable for a period of three years from the date of original issuance at an exercise price of $1.50 per share.
Wilshire Energy Partners, LLC, is controlled by Kevin J. Sylla, our Executive Chairman and Chief Executive Officer of FPI. See
Form 8-K filed by the Company on June 5, 2017 with the Commission and exhibit thereto. On September 29, 2017, we issued 100,752
additional shares of common stock and total warrants as amended to purchase 300,752 shares of common stock of the Company at a
strike price of $0.665 per share due to down round feature triggered by warrant issued at a strike price of $0.665 per share on
the day of trigger.
On
June 15, 2017, we entered into a Securities Purchase Agreement with an investor, pursuant to which we sold and agreed to issue
20,000 units at a purchase price of $1.00 per unit for an aggregate amount of $20,000. Each unit consisted of one share of the
Company’s common stock and one warrant to purchase one additional share of the Company’s common stock, exercisable
for a period of three years from the date of original issuance at an exercise price of $1.50 per share. We received the initial
$10,000 on June 15, 2017, and the balance of the subscribed amount in July 2017. On September 29, 2017, we issued 10,075 additional
shares of common stock and total warrants as amended to purchase 30,075 shares of common stock of the Company at a strike price
of $0.665 per share due to a down round feature triggered by a warrant issued at a strike price of $0.665 per share on the day
of trigger.
On
June 30, 2017, we entered into a Securities Purchase Agreement with a third party investor, pursuant to which we sold and agreed
to issue 25,000 units at a purchase price of $1.00 per unit for an aggregate amount of $25,000. Each unit consisted of one share
of the Company’s common stock and one warrant to purchase one additional share of the Company’s common stock, exercisable
for a period of three years from the date of original issuance at an exercise price of $1.50 per share. On September 29, 2017,
we issued 12,594 additional shares of common stock and total warrants as amended to purchase 37,594 shares of common stock of
the Company at a strike price of $0.665 per share due to a down round feature triggered by a warrant issued at a strike price
of $0.665 per share on the day of trigger.
On
July 10, 2017, we entered into a Securities Purchase Agreement pursuant to which we sold 25,000 units at a purchase price of $1.00
per unit for an aggregate amount of $25,000. Each unit consisted of one share of the Company’s common stock and one warrant
to purchase a share of the Company’s common stock, exercisable for a period of three years from the date of original issuance
at an exercise price of $1.50 per share.
We
measured the value of the effect of the down round feature as the difference between the fair value of the financial instrument
at an original exercise price of $1.50 and an adjusted exercise price of $0.665 and, as a result, $59,801 was recorded as down
round feature as interest expense under ASC 260--10--30--1. Foothills determined the amount of $59,801 using the Black-Scholes
option pricing model based on the following assumptions: (i) volatility rate of 94%, (ii) discount rate of 0%, (iii) zero expected
dividend yield, and (iv) expected life of 3 years.
On
November 3, 2017, the Company issued 100,000 shares of common stock upon extension of the Berwin debenture, valued at $48,000.
On
November 3, 2017, the Company agreed to issue 100,000 shares of common stock upon extension of the Profit Well debenture. The
Company recorded $48,000 in stock payable.
On
November 6, 2017, the Company agreed to issue 75,000 shares of common stock upon extension of a debenture entered on September
29, 2017. The Company recorded $36,000 in stock payable.
On
November 17, 2017, the Company issued 60,000 shares of common stock in connection with a senior convertible promissory note. These
shares were valued at $18,250.
On
December 30, 2017, the Company agreed to issue 30,000 shares of common stock upon extension of a debenture entered on September
29, 2017. The Company recorded $9,900 in stock payable.
Each
of the purchasers is an accredited investor within the meaning of the federal securities laws. The Company paid no brokerage,
commission or finder’s fee in connection with these transactions. These transactions were exempt from registration under
Section 4(a)(2) of the Securities Act of 1933.
During
the year ended December 31, 2017, the Company issued 275,000 shares of common stock to various third parties for services, valued
at $453,500.
As
of December 31, 2017, the Company had 14,900,627 shares of common stock issued and outstanding.
On
June 5, 2018, the Company issued to FirstFire 150,000 shares of restricted common stock for an extension of their note originally
issued November 17, 2017 in the amount of $267,500 (see Note 8). These shares were valued at $30,000.
From
June 21, 2018 to June 23, 2018 four (4) officers and directors of the Company agreed to convert $566,300 of accrued wages and
fees into 3,836,111 shares of restricted common stock, valued at $774,737. We recorded $208,437 as loss on extinguishment of debt.
During
the year ended December 31, 2018, the Company agreed to issue Berwin an aggregate 350,000 shares of restricted common stock for
an extension of their note originally issued January 5, 2017 in the amount of $1,250,000 (see Note 7). These shares were valued
at $70,375.
During
the year ended December 31, 2018, the Company issued Profit Well 400,000 shares of restricted common stock for an extension of
their note originally issued August 10, 2017 in the amount of $1,050,000 (see Note 6). These shares were valued at $106,700. 100,000
of these shares were authorized during 2017.
During
the year ended December 31, 2018, the Company agreed to issue a third party an aggregate of 659,000 shares of restricted common
stock in connect with new notes and extensions of their notes (see Note 6 and 8). These shares were valued at $70,230. 105,000
shares of common stock were authorized but not issued as of December 31, 2017. All 964,000 shares of common stock, valued at $132,130,
were issued during year ended December 31, 2018. 0 and 105,000 shares of common stock, valued at $0 and $45,900 were authorized
but not issued as of December 31, 2018 and 2017, respectively.
On
August 22, 2018, the Company agreed to issue a third party 60,000 shares of restricted common stock to extend maturity date of
a promissory note issued on November 1, 2017, valued at $7,800.
On
September 13, 2018, the Company agreed to issue 125,000 shares of restricted common stock to FirstFire to defer the expiration
date of their notes, valued at $11,250. These shares were issued on November 28, 2018.
On
October 9, 2018, the Board of Directors of the Company approved and authorized an aggregate of 540,000 shares of common stock
to various service providers for their continued service and additional attention rendered to the Company. These shares were valued
at $54,000.
On
November 1, 2018, in connection with a convertible note, the Company issued 650,000 shares of the Company’s restricted common
stock, valued at $53,300.
As
of December 31, 2018, the Company had 22,075,738 shares of common stock issued and outstanding.
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 above 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.
On
November 7, 2017, the Company issued 50,000 warrants to purchase 50,000 shares of common stock of the Company at a strike price
of $1.00 per share expiring on May 7, 2019 in connection with a senior convertible promissory note in the principal amount of
$50,000. If the Company fails to pay the principal and accrued unpaid interest due and payable to Lender on or before the due
date of the convertible note, then the Lender shall be provided the right to convert at either $0.665 per share or upon the same
terms offered in FirstFire Global Opportunities Fund, LLC Note’s conversion options. The relative fair value of warrant
was determined to be $3,381 on November 7, 2017, using the Black-Scholes option-pricing model based on the following assumptions:
(i) volatility rate of 77%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1.5 years.
On
November 17, 2017, the Company issued an unaffiliated investor warrants to purchase 267,500 shares of the Company’s common
stock at an exercise price of $1.00 per share and expires in 18 months, in connection with a senior convertible promissory note
in the principal amount of $267,500. The aggregate relative fair value of warrant was determined to be $10,750 on November 17,
2017, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 78%, (ii) discount
rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1.5 year.
On
August 11, 2018, the Company issued an unaffiliated investor warrants to purchase 100,000 shares of common stock at a strike price
of $0.665 per share expiring in 24 months, in connection with a convertible promissory note in the principal amount of $44,000.
The aggregate relative fair value of the warrant was determined to be $9,035 on August 11, 2018, using the Black-Scholes option-pricing
model based on the following assumptions: (i) volatility rate of 221%, (ii) discount rate of 0%, (iii) zero expected dividend
yield, and (iv) expected life of 2 year.
On
November 1, 2018, the Company issued an unaffiliated investor two tranches of warrants in connection with a convertible promissory
note in the principal amount of $380,000. (i) tranche 1 are warrants having a 5-year term to purchase 687,500 shares of the Company’s
restricted common stock at an exercise price of $0.20 per share with cashless exercise option and (ii) tranche 2 are warrants
having a 5-year term to purchase 2,062,500 shares of the Company’s restricted common stock at an exercise price of $0.20
per share with cashless exercise option. Tranche 2 warrants may be redeemed by the Company for $20,000 (“Call Payment”)
beginning on the date of issuance, November 1, 2018, and ending on the date which is 180 calendar days following the issuance
date (the “Call”). The aggregate relative fair value of the warrant was determined to be $89,908 on November 1, 2018,
using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 226%, (ii) discount rate
of 0%, (iii) zero expected dividend yield, and (iv) expected life of 5.0 year.
On
December 31, 2018, the Company issued an unaffiliated investor warrants to purchase 227,500 shares of common stock at a strike
price of $0.20 per share expiring in 5 years, in connection with a convertible promissory note in the principal amount of $45,500.
The relative fair value of the warrant was determined to be $7,880 on November 17, 2017, using the Black-Scholes option-pricing
model based on the following assumptions: (i) volatility rate of 225%, (ii) discount rate of 0%, (iii) zero expected dividend
yield, and (iv) expected life of 5.0 year.
The
following table summarizes all stock warrant activity for the year ended December 31, 2018:
|
|
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
|
|
|
1,658,515
|
|
|
|
1.09
|
|
|
|
2.18
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, December 31, 2017
|
|
|
2,683,515
|
|
|
|
1.56
|
|
|
|
2.65
|
|
Granted
|
|
|
3,077,500
|
|
|
|
0.22
|
|
|
|
4.74
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding,
December 31, 2018
|
|
|
5,761,015
|
|
|
$
|
0.82
|
|
|
|
3.30
|
|
Exercisable, December
31, 2018
|
|
|
5,761,015
|
|
|
$
|
0.82
|
|
|
|
3.30
|
|
Options
On
May 19, 2016, the Company granted to each of its then 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, currently an officer and director, 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 J. Sylla, currently our Executive Chairman of the Board, 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.
During
the years ended December 31, 2018 and 2017, we recorded $970,329 and $816,140 option expense. As of December 31,
2018, the unamortized option expense was $816,490.
The
following table summarizes all stock option activity for the year ended December 31, 2018:
|
|
Number
of Option
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
Balance outstanding, December
31, 2016
|
|
|
450,000
|
|
|
$
|
3.00
|
|
|
|
9.39
|
|
Granted
|
|
|
1,600,000
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, December 31, 2017
|
|
|
2,050,000
|
|
|
|
2.21
|
|
|
|
6.26
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding,
December 31, 2018
|
|
|
2,050,000
|
|
|
$
|
2.21
|
|
|
|
5.26
|
|
Exercisable, December
31, 2018
|
|
|
1,500,000
|
|
|
$
|
2.29
|
|
|
|
5.36
|
|
Note
10– Other Related Party Transactions
Wilshire
Energy Partners, LLC
Wilshire
Energy Partners, LLC, is controlled by Kevin J. Sylla, our Executive Chairman and Chief Executive Officer of FPI, and has been
determined to be a Related Party. During the years ended December 31, 2018 and 2017, Wilshire advanced the Company $181,083 and
$0 for operating purposes and the Company repaid $74,324 and $0, respectively .
As
of December 31, 2018, and 2017, total amount due to officers and directors were $687,770 and $362,714.
From
June 21, 2018 to June 23, 2018 four (4) officers and directors of the Company agreed to convert $566,300 of accrued wages and
fees into 3,836,111 shares of restricted common stock.
Note
11 – Commitments and Contingencies
During the audit
process, a vendor for whom the Company has recorded $50,000 in accounts payable, confirmed an open invoice due to them that was
greater than what was reported on the Company’s financial statements. The Company believes that this invoice is legally
disputable, as follows:
|
1.
|
The
invoice was only prepared and submitted after the request for a confirmation letter. No demand has ever been made to the Company
for payment either orally, invoice or letter.
|
|
2.
|
The
invoice fails to reflect any payments made to the account, although Company records show that certain amounts were paid to
this account.
|
|
3.
|
The
invoice includes a bonus fee for services rendered in connection with a lease transfer. This fee was not earned in that the
milestone for the bonus was a lease transfer which remains in litigation and the terms of the oral modification of the written
contract between the parties required the successful completion of the transfer as the milestone.
|
|
4.
|
The
contract between the parties was terminated in May, 2018.
|
The
Company believes that the invoice is completely irregular and does not represent any legitimate debt of the Company to this vendor.
Contractual
Obligations
Operating
Leases
Effective
May 1, 2017, the Company entered into a 39-month lease, expiring July 31, 2020, for its Denver, Colorado, corporate office at
a total rental of approximately $10,051 per month. During the years ended December 31, 2018 and 2017, the Company paid $25,801
and $47,821 for its Denver office space, redeemed unused allowance for tenant improvements which was contractually allowed
to offset monthly rental payments of $22,907 and $0, respectively and recorded $22,907 and $0 as other income, respectively. The
lease was terminated on September 1, 2018.
On
October 5, 2016, the Company launched its Exploration Division and opened a new office in Houston, Texas, to support the division’s
staff, at a monthly rental amount of $2,298. On March 27, 2018, the Company closed that office. During the years ended December
31, 2018 and 2017, the Company paid $0 and $6,894 for its Houston office space.
Legal
proceedings
The
Company has determined that judgments rendered in the second quarter of 2018 in connection with all but four of the following
legal proceedings against the Company are Type 1 subsequent events that provide additional evidence with respect to conditions
that existed at the date of the balance sheet. Therefore, the financial statements reflect the effects of prejudgment judgments
awards to plaintiffs through December 31, 2018, noted below in accordance with Auditing Standard 2801.03.
Utah
Wells
Graco
Fishing & Rental Tools, Inc. vs. Tiger Energy Operating LLC (Case No. 160800005 8
th
Judicial District Court, Duchesne
County, State of Utah)
Plaintiff
in this case sought collection of unpaid debt incurred by TEO for services rendered in connection with its workover of wells in
Duchesne County, Utah. On June 1, 2016, a default judgment of $159,965 was obtained against TEO by Plaintiff. Graco 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 executing
on properties not owned by us. A Motion to Set Aside the sheriff’s sale of these properties was filed with the court based
on the fact that TEO was not the owner of these properties. A hearing for this matter was held on May 1, 2017, in Duchesne County,
Utah, at which time 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 Graco. A writ of execution was issued to seize
the property subject of litigation on March 8, 2018.
Graco
had scheduled certain foreclosure sales of TEO’s interests in various oil and gas wells to take place on May 3, 2018 (the
“Sales”). On April 27, 2018, the parties reached a settlement and release agreement whereby TEO agreed to make five
(5) payments totaling $163,964.59 to Graco. The first payment due on May 9, 2018, has already been made to the judgment holder.
The second payment of $32,792.92 is due on July 9, 2018; the third payment of $32,792.92 is due on September 9, 2018; the fourth
payment of $32,792.92 is due on November 9, 2018; and fifth and final payment of $32,792.92 is due on January 9, 2019. If any
of the above payments are not made when due, Grace will have the right to immediately execute the Sales. Graco will maintain and
apply liens and notices of its judgment until the total payment has been paid in full by TEO. TEO shall be provided with a 10-day
period within which to cure any default under the settlement agreement, other than making the first payment described above. TEO
made its second payment of $32,793 on July 19, 2018, within the 10-day cure period provided in the settlement agreement. TEO made
its third payment of $32,793 on September 11, 2018, within the 10-day cure period provided in the settlement agreement. TEO also
made its fourth payment of $32,793 on November 15, 2018. On January 25, 2019, the Plaintiff issued a Writ of Execution Notice.
A Notice of Sheriff Sale was filed on February 1, 2019.
Conquest
Well Servicing, LLC vs. Foothills Exploration Operating, Inc. (Case No. 179800421 8
th
Judicial District Court in and
for Uintah County, State of Utah)
Plaintiff
filed this action on September 11, 2017, for collection of unpaid services and materials in the amount of $49,689 in connection
with a workover of wells in Uintah County, Utah. A Settlement Agreement and Stipulation to Entry of Judgment was agreed to by
the parties and filed with the court on October 10, 2017. Judgment in the amount of $54,937.10 including $5,248.10 in pre-judgement
interest was filed on December 18, 2017. An order requesting company asset inquiry was issued on February 20, 2018. As of December
31, 2018, we recorded $12,115.31 of prejudgment interest expense. A hearing on contempt by FEOI for failure to appear and an answer
as to assets was set for September 13, 2018. A stipulation was filed with the court to continue the hearing to October 22, 2018.
FEOI inadvertently failed to appear at this hearing, resulting in a contempt of court citation being issued. Currently, FEOI is
seeking to reschedule this hearing and intends to purge any contempt by compliance with the court’s order.
Peak
Well Service, LLC v. Tiger Energy Operating, LLC (Case No. 2:16-CV-00957-EJF United States District Court for the District of
Utah Court)
Peak
Well Service, LLC (“Peak”), filed mechanics and materialman’s liens against the Wilkins, Rust 2 Well, Dye Hall
2, Rust 3, and Josie 1 wells operated by TEO for unpaid accounts in connection with work on these wells. A settlement was reached
between TEO and Peak pursuant to a confidential settlement agreement. Pursuant to the settlement agreement, lien releases on each
of these well liens were filed on February 8, 2017. This settlement is a final resolution of this creditor claim.
BIA
Administrative Appeal – Tiger Energy Partners International, LLC
Notice
of Appeal:
|
Dated
May 8, 2013
|
Appellant:
|
Tiger
Energy Partners International, LLC
|
Appellee:
|
Superintendent
Uintah and Ouray Agency
|
Decision
|
April
12, 2013
|
Concerning:
|
Notice
of Expiration of Oil and Gas Leases
|
This
Administrative appeal concerns the ownership and validity of Northern Ute (the “Tribe”) Tribal leases acquired by
Tiger Energy Partners International, LLC (TEPI) in a transaction with Mountain Oil and Gas and its affiliated companies. Pursuant
to the Global Settlement Agreement (GSA) negotiated between the Tribe and TEPI, the Company proposes to resolve any issues regarding
the ownership of the subject leases and other lands thus acquired. The status of the appeal by TEPI remained unchanged at December
31, 2018, awaiting decision by the Regional Director of the BIA on the merits of the appeal. The decision of the Regional Director
is stayed by the parties having entered into the GSA. The Tribe and Tiger remain in discussion regarding approval of the Global
Settlement Agreement by the Regional Director. There has been no change in the status of this matter since the Company’s
last quarterly report filed with the SEC.
Labokay
Well – Parish of Calcasieu, State of Louisiana
R.W.
Delaney Construction Company vs. Foothills Petroleum Operating, Inc. (Cause No. 2017-CV-0330 – County Court of Adams County,
Mississippi)
This
case was filed on September 18, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $72,495 in connection with drilling the Labokay test well in Calcasieu Parish, Louisiana.
A
judgment was entered on January 22, 2018, in the County Court of Adams County, Mississippi in the principal amount of $72,495,
plus pre-judgement interest in the amount of $12,763, plus attorney’s fees in the amount of $18,124, plus costs in the amount
of $196, for a total amount of $103,578, plus post-judgment interest at the rate of 8% per annum. On May 9, 2018, District Court
for the City and County of Denver, Colorado, granted plaintiff with an order granting their petition to domesticate this foreign
judgment with the Denver District Court, which now has the same effect and is subject to the same procedures, defenses, and proceedings
for reopening, vacating, or staying as a judgment from the Denver District Court, and may be enforced or satisfied in like manner.
No further action filed in this matter as of the date of this current annual report.
Performance
Drilling Company, LLC vs. Foothills Petroleum Operating, Inc. (Case No. 2017-3916 DIV G 14
th
Judicial District Court
in Parish of Calcasieu, State of Louisiana)
This
case was filed on September 25, 2017, for payment of services performed by plaintiff in the amount of $205,251 for unpaid accounts
in connection with its drilling of the Labokay test well. On January 16, 2018, a default judgment was entered against FPOI, in
the amount of $205,251.24; together with accrued interest of $29,861 from March 18, 2017, through December 31, 2017; plus, additional
interest from January 1, 2018, at the rate of one and one-half percent (1.5%) per month until paid (a per diem rate of $103.69);
plus, an additional sum for reasonable attorney’s fees of $2,500, and all costs of the court proceedings. FPOI was cited
to appear through its authorized representative, B.P. Allaire, in Open Court, on 27
th
of July at 9:00 a.m. to be examined
as a Judgment Debtor. FPOI was ordered to produce at the above time and place all the books, papers and other documents so requested
in the petition. FPOI inadvertently failed to appear at this hearing and is currently seeking to reschedule this hearing.
Monster
Rentals, LLC dba Deepwell Equipment Rentals vs. Foothills Petroleum Operating, Inc. (Case No. 2017-11013 DIV E – 15
th
Judicial District Court in Parish of Acadia, State of Louisiana)
This
case was filed on October 24, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $53,943.53 in connection with the Labokay test well in Calcasieu Parish, Louisiana. On December 5, 2017, a default
judgement was entered against FPOI in favor of Plaintiff in the amount of $53,943.53, plus attorneys’ fees of $3,483 and
court costs and expenses in the amount of $476.84, plus judicial interest from the date of the judicial demand, until paid, and
for all costs of these proceedings. No further action filed in this matter as of the date of this current annual report.
Canal
Petroleum Products, Inc. vs. Foothills Petroleum Operating, Inc. (Case No. 2017-6574; DIV. C – 15
th
Judicial
District Court, Lafayette Parish, Louisiana)
This
case was filed on November 14, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $35,981 for unpaid accounts in connection with its drilling of the Labokay test well.
On
January 25, 2018, a default judgment was entered against FPOI in the amount of $35,981 inclusive of interest as of September 6,
2017; plus, finance charges to accrue after September 6, 2017, of one and one-half percent per month (18% per annum) until paid
on the unpaid principal amount of $32,956; plus, legal fees of $8,239 together with related court costs.
Smith
International, Inc. vs. Foothills Petroleum Operating, Inc. (Case No. 2017-004617; DIV. E – 14
th
Judicial District
Court, Calcasieu Parish, Louisiana)
This
case was filed on November 7, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $30,244 in connection with its drilling of the Labokay test well.
On
March 23, 2018, the court issued a preliminary judgement in favor of plaintiff in the amount of $30,244, plus interest in the
contractual amount of 18% per annum from the date the payment was originally due until the judgment date, plus legal interest
from the judgment date until amounts are paid, plus reasonable attorneys’ fees. On April 3, 2018, a final judgment was entered
in favor of plaintiff. No further action filed in this matter as of the date of this current annual report.
M-I,
L.L.C. d/b/a MI-SWACO vs. Foothills Petroleum Operating, Inc. (Case No. 2017-004616; DIV. G – 14
th
Judicial District
Court, Calcasieu Parish, Louisiana)
This
case was filed on November 7, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $51,275 in connection with the Labokay test well.
On
March 23, 2018, the court issued a preliminary judgment in favor of plaintiff in the amount of $51,275, plus interest in the contractual
amount of 1.5% per month from the date the payment was originally due until the judgement date, plus legal interest from the judgment
date until amounts are paid, plus reasonable attorney’s fees expended in the prosecution and collection of debt. On April
3, 2018, a final judgment was entered in favor of plaintiff. No further action filed in this matter as of the date of this current
annual report.
Schlumberger
Technology Corporation vs. Foothills Petroleum Operating, Inc. (Case No. 2017-004618; DIV. E – 14
th
Judicial
District Court, Calcasieu Parish, Louisiana)
This
case was filed on November 7, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $28,904 for unpaid accounts in connection with its drilling of the Labokay test well in Calcasieu Parish, Louisiana.
On
March 23, 2018, the court issued a preliminary judgment in favor of plaintiff in the amount of $28,904, plus interest in the contractual
amount of 1.5% per month from the date the payment was originally due until the judgment date, plus legal interest from the judgment
date until amounts are paid, plus reasonable attorney’s fees expended in the prosecution and collection of debt. On April
3, 2018, a final judgment was entered in favor of plaintiff. No further action filed in this matter as of the date of this current
annual report.
Zealous
Energy Services, LLC vs. Foothills Petroleum Operating, Inc. (Docket No. 086708 Div. C 16
th
Judicial District Court,
Parish of St. Martin, Louisiana)
On
September 28, 2018, the Court after reviewing the record of these proceedings, found the law and evidence supported Plaintiff’s
demands and, without holding a hearing, ruled as follows: the Court ordered, adjudged and decreed that a money judgement be rendered
in favor of Zealous Energy Services, LLC and against Foothills Petroleum Operating, Inc. in the full and true amount of $53,026.58,
plus interest at the judicial interest rate of 5% per annum from January 24, 2018, the date of judicial demand, until finally
paid, plus attorney’s fees of $1,260.00 and all cost. On March 1, 2019, a Motion to Examine Judgment Debtor was filed with
the court.
633
17
th
Street Operating Company LLC v. Foothills Exploration, Inc. (Case No. 2019CV30189, District Court, City and County
of Denver, Colorado)
This
case was filed on January 16, 2019, seeking unpaid leasehold obligations in the amount of $75,107 from the Defendant. No service
has been affected. The Company is seeking to resolve this claim without further litigation.
As
of December 31, 2018, and December 31, 2017, the balance of other liabilities was $282,676 and $305,935, respectively.
Note
12 - Income Taxes
On December 22, 2017, the Tax Cuts and
Jobs Act (the TCJA), which significantly modified U.S. corporate income tax law, was signed into law by President Trump. The TCJA
contains significant changes to corporate income taxation, including but not limited to the reduction of the corporate income
tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of
earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable
income and generally eliminating net operating loss carrybacks, allowing net operating losses to carryforward without expiration,
one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on
foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions
for depreciation expense over time, and modifying or repealing many business deductions and credits (including changes to the
orphan drug tax credit and changes to the deductibility of research and experimental expenditures that will be effective in the
future). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain,
including to what extent various states will conform to the newly enacted federal tax law.
The
Company has not recorded the necessary provisional adjustments in the financial statements in accordance with its current understanding
of the TCJA and guidance currently available as of this filing. But is reviewing the TCJA’s potential ramifications.
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, 2018 and 2017 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, 2018, and 2017, management determined it is More likely than not that the Deferred Tax Assets will not be utilized, since
a loss Company to date and no evidence of income in the past.
No
federal tax provision has been provided for the years ended December 31, 2018 and 2017 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 &
estimated State tax rate and the effective tax rate for the years ended December 31, 2018 and 2017.
|
|
2018
|
|
|
2017
|
|
Net
operating loss carryforward
|
|
$
|
(3,373,837
|
)
|
|
$
|
(2,029,437
|
)
|
Stock
based compensation
|
|
|
25,638
|
|
|
|
40,248
|
|
Fair
value of options
|
|
|
223,879
|
|
|
|
195,873
|
|
Total
deferred tax assets
|
|
|
(3,115,321
|
)
|
|
|
(1,793,316
|
)
|
Valuation
allowance
|
|
$
|
3,115,321
|
|
|
$
|
1,793,316
|
|
Net
deferred tax asset
|
|
|
-
|
|
|
|
-
|
|
|
|
2018
|
|
|
2017
|
|
U.S
federal statutory income tax
|
|
|
-21
|
%
|
|
|
-34
|
%
|
State
tax, net of federal tax benefit
|
|
|
-3
|
%
|
|
|
-6
|
%
|
Stock
based compensation
|
|
|
-
|
%
|
|
|
-
|
%
|
Change
in valuation allowance
|
|
|
24
|
%
|
|
|
50
|
%
|
Effective
tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
At
December 31, 2018 and 2017, the Company has available net operating loss carryforwards for federal and state income tax purposes
of approximately $12,464,311 and $6,844,052, respectively, which, if not utilized earlier, expire through 2037.
Utilization
of net operating loss carryforwards may be subject to substantial annual limitations due to the “change in ownership”
provisions of the Internal Revenue Code Sections 382 and 383. The annual limitation may result in the expiration of substantial
net operating loss carryforwards before utilization. The Company has not calculated its IRC Section 382 and 383 change of ownership
to date, within the meaning of Internal Revenue Code Section 382 and 383, which would limit the use of net operating losses or
render such worthless.
Federal,
State & Local Income tax remain open by statute. The Company has not filed certain state income tax returns for the last few
years, but does not believe any income tax is due, if any, it would not be material
Note
13 – Subsequent Events
Acquisition
of 22 producing natural gas wells situated on 18,214 acres in Greater Green River Basin, Wyoming
Subsequent
to the period ended December 31, 2018 and on March 6, 2019, the Company, through its indirect wholly-owned subsidiary, Foothills
Exploration, LLC, closed on the acquisition of 22 natural gas wells and approximately 18,214 gross acres (14,584 core), 78% held
by production, located in the Greater Green River Basin in Wyoming (the “GRB Assets”). Some of the underlying leases
come with certain depth restrictions and roughly 80% of the acreage remains undeveloped. The GRB assets were purchased for approximately
$700,000, in an all-cash transaction, which was financed through Company borrowings. The 22 natural gas wells are currently producing
approximately 900 Mcf/d and the Company plans to implement a field-wide optimization program over the next 60-90 days designed
to increase current production rates.
For
additional details, please refer to the Company’s current report filed on Form 8-K with the SEC on March 12, 2019.
Extension
of Debt – 10% senior secured convertible promissory note due September 1, 2019
Subsequent
to the period ended December 31, 2018 and on March 6, 2019, the Company closed on a loan transaction with FirstFire Global Opportunities
Fund, LLC, (“FirstFire”) pursuant to which the Company issued FirstFire a senior secured convertible promissory note
(“FirstFire Note”) in the principal amount of $705,882, and received proceeds of $600,000, before giving effect to
certain transactional costs. As part of this transaction the Company issued (i) warrants having an 18-month term, to purchase
1,125,000 shares of the Company’s common stock at an exercise price of $0.50 per share, with a cashless exercise feature.
The warrants are subject to adjustment in certain events such as forward or reverse stock splits or if subsequent financings during
the exercise period of the warrants are at terms that are more favorable to persons in subsequent issuances of securities.
The
FirstFire Note accrues interest of 10% per annum, and matures on September 1, 2019, which is the date upon which the principal
sum, the original issue discount, as well as any accrued and unpaid interest and other fees, shall be due and payable. The Company
has agreed to make payments of $20,000 per month pursuant to a cash management agreement as described in the note agreements.
The FirstFire Note is collateralized by the GRB Assets described above, which principally are being acquired by the Company with
the net proceeds of this Note.
For
additional details, please refer to the Company’s current report filed on Form 8-K with the SEC on March 12, 2019.
Entry
into a Material Definitive Agreement
Subsequent
to the period ended December 31, 2018 and on March 22, 2019, the Company, through its indirect wholly owned subsidiary, Foothills
Exploration, LLC, entered into a letter agreement with an affiliate of American Shale Energy, LLC, to acquire approximately 16,387
net acres located in Wyoming’s Wind River Basin (the “WRB Assets”), which was announced in the Company’s
press release issued on March 25, 2019. On March 28, 2019, the Company closed on the acquisition of the WRB Assets for an undisclosed
sum and a reservation of overriding royalty interest in the leases, netting the Company with an 82.5% net revenue interest and
100% of the working interest.
Final
assignment of the leases covered under this letter agreement will be assigned to Foothills Exploration, LLC, the Company’s
operating subsidiary in Wyoming. Federal Bureau of Land Management leases, totaling 16,066 net acres, will require the Company
to pay annual delay rental payments during the remaining primary term of the leases, if no commercial quantities of hydrocarbons
are produced or minimum royalties are not met, totaling approximately $128,584 over the next four years.
The
fee leases covering approximately 320 net acres will need to be renegotiated with the respective mineral rights owners and if
said leases, amounting to less than 2% of the total acquired acreage cannot be renegotiated, then the Company will lose said acreage.
Geopinion, Inc., a geological services firm based in Salt Lake City, advised the Company in managing the negotiated sale process
and will be paid a finder’s fee consisting of 125,00 shares of the Company’s restricted common stock.
For
additional details, please refer to the Company’s current report filed on Form 8-K with the SEC on March 29, 2019.
Debt
– 12% convertible note payable due September 6, 2019
Subsequent
to the period ended December 31, 2018 and on March 8, 2019, the Company closed on a loan transaction with Labrys Fund, L.P., a
Delaware limited partnership, (“Labrys”), pursuant to which, the Company issued a convertible promissory note dated
March 6, 2019, in the principal amount of $380,000, with an original issue discount of 10% and received proceeds of $342,000,
before giving effect to certain transactional costs including legal fees (the “Labrys Note”). The Company utilized
proceeds in part to pay (i) $110,000 to Labrys as partial repayment of a convertible promissory note issued on November 1, 2018
and (ii) $40,000 to the Company’s auditor. As part of this transaction the Company also issued Labrys warrants having a
five-year term to purchase 608,000 shares of the Company’s restricted common stock, at an exercise price of $0.50 per share,
with a cashless exercise feature. The Labrys Note accrues interest at 12% per year and is due and payable on September 6, 2019.
The Company may prepay the Labrys Note without prepayment penalty if prepaid during the first 180 days following issuance date.
No prepayment is permitted after the initial 180 days from issuance. The warrants are subject to adjustment in certain events
such as forward or reverse stock splits or if subsequent financings are at terms that are more favorable to persons in subsequent
issuances of securities.
For
additional details, please refer to the Company’s current report filed on Form 8-K with the SEC on March 14, 2019.
Debt
– 10% convertible note payable due December 19, 2019
Subsequent
to the period ended December 31, 2018 and on March 19, 2019, the Company entered into a securities purchase agreement (the “JSC
SPA”) with Jefferson Street Capital, LLC, an unaffiliated investor (“JSC”), pursuant to which the Company issued
and sold to JSC a convertible promissory note (the “JSC Note”) in the principal amount of $52,250 (the “JSC
Principal”). The foregoing transaction closed on March 28, 2019 and the Company received $47,500 before giving effect to
certain transactional costs including legal fees.
The
JSC Note accrues interest at 10% per year and carries an original issue discount of $4,750. The maturity date for the JSC Note
is December 19, 2019, at which time the JSC Principal, and any accrued but unpaid interest, is due and payable. The holder may
convert after the 180
th
calendar day after the issue date of the JSC Note, all or any part of the outstanding and unpaid
principal amount and accrued and unpaid interest of the JSC Note due into shares of common stock of the Company at the conversion
price that is equal to the lesser of (i) 60% multiplied by the lowest Trading Price (as defined in the note) during the previous
twenty-five (25) Trading Days (as defined below) before the Issue Date of this Note (representing a discount rate of 40%) or (ii)
60% multiplied by the Market Price (as defined in the note) (representing a discount rate of 40%).
For
additional details, please refer to the Company’s current report filed on Form 8-K with the SEC on February 4, 2019.
Debt
– 12% convertible note payable due March 28, 2020
Subsequent
to the period ended December 31, 2018 and on March 20, 2019, the Company, entered into Amendment #1 to the Securities Purchase
Agreement dated December 6, 2018, with Crown Bridge Partners, LLC, an unaffiliated investor (“Holder”) pursuant to
which the Company closed on March 28, 2019 a second tranche under the note, dated December 6, 2017, with a face value of $40,018
(the “Second Tranche”). The Company received $36,500 after giving effect to prorated OID, as defined below, but before
certain transaction costs and legal fees. The note carries an original issue discount of $12,000 (the “OID”) to face
value prorated to each tranche, to cover the Holder’s transaction related costs incurred in connection with the negotiation,
purchase and sale of the note. Each tranche of the note funded accrues interest at a rate of 12% per year. The principal amount
of each respective tranche, as well as any accrued and unpaid interest and other fees relating to that respective tranche, is
due and payable twelve (12) months from the date on which each respective tranche is delivered to the Company. The Company may
not prepay any amount outstanding under each tranche of this Note after the 180
th
calendar day after the issuance of
the respective tranche received pursuant to the Note.
For
additional details, please refer to the Company’s current report filed on Form 8-K with the SEC on February 4, 2019.
Common
Stock Issuance
|
●
|
During
February 2019, we issued 200,000 shares of common stock to various consultants for services rendered.
|
|
|
|
|
●
|
During
February 2019, a third party debt holder cashless exercised 875,000 shares of warrant
to purchase common stocks.
|
|
|
|
|
●
|
During
March 2019, 650,000 shares were returned in connection with partial repayment made to debt holder and the same holder cashless
exercised 1,110,000 shares of warrant to purchase common stocks.
|
Contingent
Liabilities – Legal Proceedings
633
17
th
Street Operating Company LLC v. Foothills Exploration, Inc. (Case No. 2019CV30189, District Court, City and County
of Denver, Colorado)
This
case was filed on January 16, 2019, seeking unpaid leasehold obligations in the amount of $75,107 from the Company. The Company
is seeking to resolve this claim without further litigation.
Graco
Fishing & Rental Tools, Inc. vs. Tiger Energy Operating LLC (Case No. 160800005 8
th
Judicial District Court, Duchesne
County, State of Utah)
Regarding
the Company’s Utah properties, there was a settlement agreement between Graco Fishing & Rental Tools, Inc. (“Graco”)
and Tiger Energy Operating, LLC (“TEO”), an indirect subsidiary of the Company and the Operator of the Duck Creek
wells. Graco obtained a default judgment of $159,965 against TEO, subsequent to which they were also issued Writs of Execution
against the certain TEO wells, located in Uintah and Duchesne County, Utah.
Graco
had scheduled foreclosure sales of TEO’s interests in four wells (A Rust 2, Dye-Hall 2-21-A1, Wilkins 1-24A5, and Rust 3-22A4),
which was to take place on May 3, 2018 (the “Sales”). On April 27, 2018, the parties reached a settlement and release
agreement whereby TEO agreed to make five (5) payments totaling $163,965 to Graco. If any of the above payments were not made
when due, Graco had the right to immediately execute the Sales. Graco also had the right to maintain and apply liens and notices
of its judgment until the total payment has been paid in full by TEO. On June 27, 2018, Finley Resources, Inc. (“Finley”),
acquired all of Graco’s right, title and interest in the settlement agreement.
The
first four settlement payments to the judgment holder were made timely but the last and final payment was made late, and the judgment
holder (i.e. Finley) rejected TEO’s final payment. The Company disputes this because the final date of the 10-day cure period
was on a Saturday, which is not considered a business day and therefore, the payment was made on the following business day. On
January 25, 2019, Finley issued a Writ of Execution Notice and a Notice of Sheriff Sale was filed on February 1, 2019, for the
four wells: A Rust 2, Dye-Hall 2-21-A1, Wilkins 1-24A5, and Rust 3-22A4. While it believes it could prevail should it protest
Finley’s actions, the Company believes that the production value of the affected properties is limited. For additional details,
please review the Legal Proceedings section of this 10-K report.
Note
14 - Supplemental Oil and Gas Reserve Information (Unaudited)
The
Company’s oil and gas properties and proved reserves are located in the United States.
Results
of operations from oil and gas producing activities
The
results of operations from the Company’s oil and gas producing activities for the years ended December 31, 2018 and 2017
are summarized below:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Net revenues from production:
|
|
|
|
|
|
|
|
|
Sales of
oil and gas production to third parties
|
|
$
|
2,567,438
|
|
|
$
|
155,161
|
|
|
|
|
|
|
|
|
|
|
Production costs:
|
|
|
|
|
|
|
|
|
Oil and gas lease operating
expense
|
|
|
(1,648,155
|
)
|
|
|
(252,753
|
)
|
Depletion, depreciation,
amortization, accretion, and impairment expense
|
|
|
(2,908,787
|
)
|
|
|
(1,525,784
|
)
|
Income
tax expense
|
|
|
—
|
|
|
|
—
|
|
Results of operations
|
|
$
|
(1,989,504
|
)
|
|
$
|
(1,623,376
|
)
|
Results
of operations for producing activities comprise all activities associated with our exploration for and production of oil and gas.
Net revenues from production include only the revenues from the production and sale of oil, natural gas, natural gas liquids,
and residue gas. Production costs are those incurred to operate and maintain wells and related equipment and facilities used in
oil and gas operations. Income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting
costs, which include depreciation, depletion, and amortization allowances, after giving effect to permanent differences. The results
of operations exclude general office overhead, and interest expense attributable to oil and gas activities.
Capitalized
costs
Capitalized
costs and accumulated depletion, depreciation, and amortization relating to the Company’s oil and gas producing activities
as of December 31, 2018 and 2017 are summarized below:
|
|
2018
|
|
|
2017
|
|
Unproved
properties not being amortized
|
|
$
|
106,299
|
|
|
$
|
2,509,274
|
|
|
|
|
|
|
|
|
|
|
Proved properties subject
to amortization
|
|
|
12,752,515
|
|
|
|
10,762,380
|
|
Accumulated
depreciation, depletion, and amortization
|
|
|
(431,554
|
)
|
|
|
(18,016
|
)
|
Net
capitalized costs
|
|
$
|
12,427,260
|
|
|
$
|
13,253,638
|
|
Costs
incurred in oil and gas 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, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Proved acreage
|
|
$
|
(871,637
|
)
|
|
$
|
18,653
|
|
Producing assets
|
|
|
184,742
|
|
|
|
580,158
|
|
Incomplete construction
|
|
|
(1,501,369
|
)
|
|
|
1,501,369
|
|
Exploration costs
|
|
|
1,361,886
|
|
|
|
(148,533
|
|
Development costs
|
|
|
—
|
|
|
|
—
|
|
Net capitalized costs
|
|
$
|
(826,378
|
)
|
|
$
|
1,951,647
|
|
Estimated
quantities of proved reserves
The
supplemental unaudited presentation of proved reserve quantities and related standardized measure of discounted future net cash
flows provides estimates only and does not purport to reflect realizable values or fair market values of the Company’s reserves.
The Company emphasizes that reserves estimates are inherently imprecise and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, significant changes to these estimates can be expected as future
information becomes available. All of the Company’s reserves are located in the United States.
Proved
reserves are those estimated reserves of crude oil (including condensate and natural gas liquids) and natural 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 expected to be recovered through existing wells, equipment,
and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well. Proved
undeveloped reserves are those reserves expected to be recovered from known accumulations where a significant expenditure is required
to rend them capable of production.
The
standardized measure of discounted future net cash flows is computed by applying the average first day of the month price of oil
and gas during the 12 month period before the end of the year (with consideration of price changes only to the extent provided
by contractual arrangements) to the estimated future production of proved oil and gas reserves, less the estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses
(based on year-end statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net
cash flows less tax basis of the properties and available credits, and assuming continuation of existing economic conditions.
The estimated future net cash flows are then discounted using a rate of 10 percent per year to reflect the estimated timing of
the future cash flows.
The
reserves estimates set forth below were prepared by a third party engineering firm using reserves definitions and pricing requirements
prescribed by the SEC. Chapman Petroleum Engineering Ltd. (“Chapman”) prepared our reserves report at January 1, 2019
and 2018. Chapman is an independent consultant, does not own any interest in the Company’s properties, and is not engaged
contingent upon the value of the Company’s properties. Chapman prepared reserves estimates under a discounted cash flow
analysis of estimated future net revenue, applying knowledge of concepts including uncertainty and risk, probability and statistics,
and deterministic and probabilistic estimation methods in properly using and applying reserves definitions. The data utilized
were furnished to Chapman by the Company or obtained from public data sources. Chapman is a professional engineering firm specializing
in the technical and financial evaluation of oil and gas assets.
Estimated
quantities of oil and natural gas reserves
The
following table sets forth certain data pertaining to changes in reserves quantities of the proved, proved developed, and proved
undeveloped reserves for the years ended December 31, 2018 and 2017.
|
|
December 31,
|
|
|
|
Crude Oil
|
|
|
Natural Gas
|
|
|
Crude Oil
|
|
|
Natural Gas
|
|
|
|
(MSTB)
|
|
|
(MCF)
|
|
|
(MSTB)
|
|
|
(MCF)
|
|
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
TOTAL PROVED RESERVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
4,174
|
|
|
|
8,353
|
|
|
|
—
|
|
|
|
—
|
|
Purchases of minerals in place
|
|
|
—
|
|
|
|
—
|
|
|
|
1,622
|
|
|
|
811
|
|
Sales of minerals in place
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Extensions and discoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
4,174
|
|
|
|
8,353
|
|
Revisions of previous estimates
|
|
|
161
|
|
|
|
2,099
|
|
|
|
(1,620
|
)
|
|
|
(811
|
)
|
Production
|
|
|
(764
|
)
|
|
|
(870
|
)
|
|
|
—
|
|
|
|
—
|
|
End of period
|
|
|
4,334
|
|
|
|
9,582
|
|
|
|
4,174
|
|
|
|
8,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVED DEVELOPED RESERVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved developed producing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Proved developed nonproducing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
End of period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total proved undeveloped
|
|
|
4,334
|
|
|
|
9,582
|
|
|
|
4,174
|
|
|
|
8,353
|
|
Standardized
measure of discounted future net cash flows
As
required by the Financial Accounting Standards Board, the standardized measure of discounted future net cash flows is computed
by applying first-day-of-the-month average prices, year-end costs and legislated tax rates and a discount factor of 10 percent
to net proved reserves. The standardized measure includes costs for future dismantlement, abandonment, and rehabilitation obligations.
The Company believes the standardized measure does not provide a reliable estimate of the Company’s expected future cash
flows to be obtained from the development and production of its oil and gas properties or of the value of its proved oil and gas
reserves. The standardized measure is prepared on the basis of certain prescribed assumptions, which represent discrete points
in time and may cause significant variability in cash flows from year to year as prices change.
Net
cash flows at December 31,
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Future
cash inflows
|
|
$
|
360,258,000
|
|
|
$
|
268,949,000
|
|
Future production costs
|
|
|
(126,192,000
|
)
|
|
|
(103,926,000
|
)
|
Future development
costs
|
|
|
(53,250,000
|
)
|
|
|
(48,000,000
|
)
|
Future
income tax expense
|
|
|
(54,833,123
|
)
|
|
|
(23,275,919
|
)
|
Future net cash flows
|
|
|
125,982,877
|
|
|
|
93,747,081
|
|
10%
annual discount for estimated timing of cash flow
|
|
|
(77,591,818
|
)
|
|
|
(68,046,395
|
)
|
Standard
measure of discounted future net cash flows related to proved reserves
|
|
$
|
48,391,059
|
|
|
$
|
25,700,686
|
|
Changes
in standardized measure of discounted future net cash flows
The
principal sources of changes in the standardized measure of the future net cash flows for the years ended December 31, 2018 and
2017 are:
|
|
2018
|
|
|
2017
|
|
Balance,
beginning of period
|
|
$
|
25,700,686
|
|
|
$
|
9,531,132
|
|
Sales and transfers
of oil and gas produced during the period
|
|
|
(1,133,957
|
)
|
|
|
97,592
|
|
Sales of minerals
in place
|
|
|
—
|
|
|
|
—
|
|
Purchases of minerals
in place
|
|
|
—
|
|
|
|
—
|
|
Net change in sales
price, net of production costs
|
|
|
18,083,915
|
|
|
|
(4,564,023
|
)
|
Net changes due
to extensions and discoveries
|
|
|
—
|
|
|
|
50,755,047
|
|
Changes in estimated
future development costs
|
|
|
(1,848,661
|
)
|
|
|
(25,709,147
|
)
|
Previously estimated
development costs incurred during the period
|
|
|
—
|
|
|
|
—
|
|
Net change due to
revisions in quantity estimates
|
|
|
6,749,925
|
|
|
|
(16,007,121
|
)
|
Other
|
|
|
2,227,581
|
|
|
|
11,284,522
|
|
Accretion of discount
|
|
|
3,599,200
|
|
|
|
3,599,200
|
|
Net
change in income tax
|
|
|
(4,987,627
|
)
|
|
|
(3,286,516
|
)
|
Balance,
end of period
|
|
$
|
48,391,059
|
|
|
$
|
25,700,686
|
|