NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2019
(Unaudited)
NOTE 1 – ORGANIZATION AND DESCRIPTION
OF BUSINESS
On
December 19, 2018, Pledge Petroleum Corp. (the “Company”) entered into a Share Exchange agreement with Renewable Technology
Solutions, Inc. (“RTS”). Pursuant to the terms of the agreement, in exchange for 100% of the RTS shares, the Company
will issue a stock certificate registered in the name of the RTS stockholder for 250,000,000 shares of its common stock. The transaction
will be accounted for as a “reverse acquisition” and recapitalization, with RTS being the accounting acquirer. A reverse
merger transaction with a public company is considered and accounted for as a capital transaction in substance; it is equivalent
to the issuance of Pledge’s common stock for the net monetary assets of RTS, accompanied by a recapitalization. Accordingly,
the accounting does not contemplate the recognition of unrecorded assets of the accounting acquiree, such as goodwill. Consolidated
financial statements presented herein reflect the consolidated financial assets and liabilities of the Company at their historical
costs, giving effect to the recapitalization, as if it had been RTS during the periods presented.
RTS was incorporated in the State of Tennessee
on August 22, 2018. The Company was formed in order to conduct business in the sourcing and implementation of renewable energy
technology.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of presentation
The accompanying unaudited interim condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”). These unaudited condensed consolidated financial statements should be read in conjunction
with the audited financial statements and footnotes for the year ended December 31, 2018 included on the Company’s Form 10-K.
The results of the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full
year ending December 31, 2019.
In the opinion of management, all adjustments
necessary to present fairly the financial position as of March 31, 2019 and the results of operations and cash flows presented
herein have been included in the financial statements. All such adjustments are of a normal and recurring nature. Interim results
are not necessarily indicative of results of operations for the full year.
Use of estimates
The preparation of financial statements
in conformity with U.S. 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 of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of the Company and
its wholly-owned subsidiary RTS
. All significant
intercompany transactions and balances have been eliminated.
Fair Value of Financial Instruments
The Company follows paragraph 825-10-50-10
of the
Financial Accounting Standards Board (“FASB”)
Accounting Standards
Codification (“ASC”) for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the
FASB ASC (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37
establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. To increase
consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value
hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair
value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by Paragraph 820-10-35-37 are
described below:
Level 1:
|
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
Level 2:
|
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
|
Level 3:
|
Pricing inputs that are generally unobservable inputs and not corroborated by market data.
|
The carrying amount of the Company’s
financial assets and liabilities, such as cash, prepaid expenses and accrued expenses approximate their fair value because of the
short maturity of those instruments. The Company’s notes payable approximates the fair value of such instruments as
the notes bear interest rates that are consistent with current market rates.
The following table classifies the Company’s liabilities
measured at fair value on a recurring basis into the fair value hierarchy as of:
March 31, 2019:
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Gains and
(Losses)
|
|
Derivative
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
181,967
|
|
|
$
|
197,153
|
|
Net Loss per Share
Net
loss per common share is computed pursuant to section 260-10-45 of the ASC. Basic net loss per common share is computed by
dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss
per common share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding
shares of common stock during the period. The weighted average number of common shares outstanding and potentially outstanding
common shares assumes that the Company incorporated as of the beginning of the first period presented. The computation of diluted
net loss per share does not assume the issuance of common shares that have an anti-dilutive effect on net loss per share. For the
three months ended March 31, 2019, all stock options, unvested restricted stock awards, warrants, convertible preferred stock were
excluded from the computation of diluted net loss per share. Dilutive shares which could exist pursuant to the exercise of outstanding
stock instruments and which were not included in the calculation because their affect would have been anti-dilutive.
Recently issued accounting pronouncements
On June 20, 2018, the FASB issued ASU 2018-07,
Compensation—Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
. ASU 2018-07 is intended to reduce cost
and complexity and to improve financial reporting for share-based payments to nonemployees (for example, service providers, external
legal counsel, suppliers, etc.). Under the new standard, companies will no longer be required to value non-employee awards differently
from employee awards. Meaning that companies will value all equity classified awards at their grant-date under ASC718 and forgo
revaluing the award after this date. The guidance is effective for interim and annual periods beginning after December 15,
2018. The adoption of this standard has had no material impact.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The ASU requires that a lessee recognize the assets and liabilities that arise from operating leases.
A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a
right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or
less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and
lease liabilities. This new guidance will be effective for annual reporting periods beginning after December 15, 2018, including
interim periods within those annual reporting periods, and early adoption is permitted. In transition, lessees and lessors are
required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.
The adoption of this standard has had no material impact.
The Company has implemented all new accounting
pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless
otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued
that might have a material impact on its financial position or results of operations.
NOTE 3 – GOING CONCERN
The Company’s consolidated financial
statements have been prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge
its liabilities and commitments in the normal course of business for the foreseeable future. The Company has just begun its operations
and does not yet have operations or revenue to cover its operating expenses. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. The ability to continue as a going concern is dependent upon generating profitable operations
in the future and/or to obtain the necessary financing to meet the Company’s obligations and repay its liabilities arising
from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with
debt and equity financing. While the Company believes that it will be successful in obtaining the necessary financing and generating
revenue to fund its operations, meet regulatory requirements and achieve commercial goals, there are no assurances that such additional
funding will be achieved and that it will succeed in its future operations. The financial statements of the Company do not include
any adjustments that may result from the outcome of these uncertainties.
NOTE 4 – CONVERTIBLE NOTE PAYABLE
On January 22, 2019, the Company executed
a converted promissory note with Redstart Holdings Corp. (“Redstart”) for $103,000. The note is unsecured, bears interest
at 10% per annum and matures on January 22, 2020. The note is convertible, after 180 days, into shares of common stock at the rate
of 61% (39% discount) of the average of the lowest three trading prices in the twenty trading days preceding the conversion. The
Company bifurcated the conversion feature and accounted for it as a derivative liability. The Company recorded the derivative liability
at its fair value of $379,120 based on the Black Scholes Merton pricing model and a corresponding debt discount of $103,000 to
be amortized utilizing the interest method of accretion over the term of the note. As of March 31, 2019, the Company fair valued
the derivative at $181,967. In addition, $19,471 of the debt discount has been amortized to interest expense.
A summary of the activity of the derivative
liability for the notes above is as follows:
Balance at December 31, 2018
|
|
$
|
-
|
|
Increase to derivative due to new issuances
|
|
|
379,120
|
|
Derivative gain due to mark to market adjustment
|
|
|
(197,153
|
)
|
Balance at March 31, 2019
|
|
$
|
181,967
|
|
A summary of quantitative information about
significant unobservable inputs (Level 3 inputs) used in measuring the Company’s derivative liability that are categorized
within Level 3 of the fair value hierarchy for the three months ended March 31, 2019 is as follows:
Inputs
|
|
March 31, 2019
|
|
|
Initial Valuation
|
|
Stock price
|
|
$
|
0.0400
|
|
|
$
|
0.0406
|
|
Conversion price
|
|
$
|
0.0203
|
|
|
$
|
0.0105
|
|
Volatility (annual)
|
|
|
316.98
|
%
|
|
|
318.13
|
%
|
Risk-free rate
|
|
|
2.60
|
%
|
|
|
2.59
|
%
|
Years to maturity
|
|
|
.81
|
|
|
|
1
|
|
The development and determination of the
unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s
management
NOTE 5 – RELATED PARTY TRANSACTIONS
On May 2, 2018, the Company issued to each
of its three directors, 10,000,000 shares of restricted common stock, vesting as to 1/3 of the grant immediately, 1/3 of the grant
on the one-year anniversary of the grant date and 1/3 of the grant on the two-year anniversary of the grant date. The value of
the stock has been debited to prepaid stock compensation and will be amortized over the vesting period. As of March 31, 2019 and
December 31, 2018, there is $108,333 and $133,333 of prepaid stock compensation, respectively.
The restricted stock granted and exercisable at March 31, 2019
is as follows:
|
|
|
Restricted Stock Granted
|
|
|
Restricted Stock Vested
|
|
Grant date price
|
|
|
Number
granted
|
|
|
Weighted
average exercise
price
|
|
|
Number
vested
|
|
|
Weighted
average exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
30,000,000
|
|
|
$
|
0.01
|
|
|
|
10,000,000
|
|
|
$
|
0.01
|
|
The Company recorded an expense of $25,000
for the three months ended March 31, 2019, related to the restricted stock granted to the directors.
As of March 31, 2019 and December 31, 2018,
$62,704 and $5,890, respectively, is owed to the three directors of the Company for director fees and various advances for services
provided in the normal course of business. All amounts due are unsecured, non-interest bearing and due on demand.
On December 31, 2018, the Company executed
a promissory note with John Huemoeller, Chairman, for $5,000. The promissory note is unsecured, bears interest at 5% and is due
on or before December 31, 2019.
NOTE 6 – PREFERRED STOCK
Series A-1 Preferred
The Company has designated 5,000,000 preferred
shares as Series A-1 Convertible Preferred Stock (“Series A-1 Shares”). Each share of Series A-1
is
convertible into ten shares of common stock and has voting rights equal to the number of shares of common stock that holders can
convert into. The Series A-1 Shares are non-redeemable by the Company and are entitled to a liquidation preference of $0.08 per
share.
As of March 31, 2019, there are no shares of Series A-1 Preferred outstanding.
Series B Preferred
The Company has designated 500,000 preferred
shares as Series B Convertible Preferred Stock (“Series B Shares”), with 40,000 Series B Shares issued and outstanding
as of March 31, 2019, which are convertible into 4,000,000 shares of common stock.
The rights, privileges and preferences
of the Series B Shares are summarized as follows:
Conversion
Each share of the Series B Shares is convertible
at any time prior to the issuance of a redemption notice by the Company into such number of shares of Common Stock by dividing
the Stated value ($10) of the Series B Shares by $0.10 and is subject to adjustment for dividends or distributions made in common
stock, the issue of securities convertible into common stock, stock splits, reverse stock splits, or reclassifications of common
stock.
Company Redemption
The Company has the right, at any time
after the date the Series B Shares have been issued, to redeem all or a portion of any Holder's Series B Shares at a price per
Series B Share equal to the issue price per Series B Share multiplied by 120%.
Voting Rights
Each holder of Series B Shares is entitled
to vote on all matters submitted to a vote of the stockholders of the Company and is entitled to votes equal to the number of shares
of Common Stock into which Series B Shares could be converted, and the holders of shares of Series B Shares and Common Stock will
vote together as a single class on all matters submitted to the stockholders of the Company.
Dividends
The holders of the Series B Shares are
entitled to receive cumulative dividends at the rate of eight percent per annum of the issue price per share, accrued daily and
payable annually in arrears on December 31st of each year. Such dividends accrue on any given share from the day of original issuance
of such share. Such dividends are cumulative, whether or not declared by the Board of Directors, but are non-compounding. Any dividend
payable on a dividend payment date may be paid, at the option of the Company, either (i) in cash or (ii) in shares of common stock
at an issue price of $0.10 per common share. In the event that pursuant to applicable law or contract the Company is prohibited
or restricted from paying in cash the full dividends to which the holders of the Series B Shares are entitled, the cash amount
available pursuant to applicable law or contract will be distributed among the holders of the Series B Shares ratably in proportion
to the full amounts to which they would otherwise be entitled and any remaining amount due to holders of the Series B Shares will
be payable in cash.
Liquidation Preference
In the event of any liquidation, dissolution
or winding up of the Company, either voluntary or involuntary, the holders of the Series B Shares are entitled to receive, prior
and in preference to any distribution of any assets of the Company to the holders of any other preferred stock of the Company and
subordinate to any distribution to the Series A-1 Shares, and prior and in preference to any distribution of any assets of the
Company to the holders of the Common Stock, the amount of 120% of the issue price per share. In addition, the Series B holder has
agreed to vote to subordinate the series B Preferred stock liquidation preferences to the Series C Preferred stock preferences.
The Company has undeclared dividends on
the Series B Preferred stock amounting to $193,118 as of March 31, 2019. If the dividends are paid in stock, the beneficial conversion
feature of these undeclared dividends will be recorded upon the declaration of these dividends. The computation of loss per common
share takes into account these undeclared dividends.
Series C Preferred
The Company has designated 4,500,000 preferred
shares as Series C Convertible Preferred Stock (“Series C Shares”). Each share of Series C
is
convertible into 120,000,000 shares of common stock and has voting rights equal to the number of shares of common stock that holders
can convert into. The Series C Shares are non-redeemable by the Company and are entitled to a liquidation preference.
As
of March 31, 2019, there are no shares of Series C Preferred outstanding.
NOTE 7 – STOCK OPTIONS
The Company’s Board of Directors
approved the Company’s 2008 Stock Option Plan (the “Stock Plan”) for the issuance of up to 5,000,000 shares of
common stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent
rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors and consultants
of the Company and its subsidiaries. After the reverse stock split in August 2012, a total of 100,000 shares were available for
grant. Subsequent to the reverse split the Board of Directors approved an increase in the number of awards available for grant
to 2,100,000 shares. The exercise price of stock options under the Stock Plan is determined by the Board of Directors, and may
be equal to or greater than the fair market value of the Company’s common stock on the date the option is granted. Options
become exercisable over various periods from the date of grant, and generally expire ten years after the grant date.
At March 31, 2019, there were 57,704 plan
options outstanding, under the Stock Option Plan.
The vesting provisions for these stock
options are determined by the board of directors at the time of grant, there are no unvested options outstanding as of March 31,
2019.
In the event of the employees’ termination,
the Company will cease to recognize compensation expense.
A summary of all of our option activity
during the period ended March 31, 2019 is as follows:
|
|
No. of shares
|
|
|
Exercise price
per share
|
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
From August 22, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted - non-plan options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Effects of recapitalization from reverse acquisition
|
|
|
57,704
|
|
|
$
|
0.65 to $13.50
|
|
|
|
3.02
|
|
Outstanding December 31, 2018
|
|
|
57,704
|
|
|
$
|
0.65 to $13.50
|
|
|
$
|
3.02
|
|
Granted - non-plan options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding March 31, 2019
|
|
|
57,704
|
|
|
$
|
0.65 to $13.50
|
|
|
$
|
3.02
|
|
The options outstanding and exercisable at March 31, 2019 are
as follows:
|
|
|
Options outstanding
|
|
|
Options exercisable
|
|
Exercise price
|
|
|
No. of shares
|
|
|
Weighted
average remaining
years
|
|
|
Weighted
average exercise
price
|
|
|
No. of shares
|
|
|
Weighted
average exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13.50
|
|
|
|
3,480
|
|
|
|
0.21
|
|
|
|
|
|
|
|
3,480
|
|
|
|
|
|
$
|
12.50
|
|
|
|
2,000
|
|
|
|
1.53
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
$
|
8.50
|
|
|
|
500
|
|
|
|
2.25
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
$
|
5.00
|
|
|
|
14,800
|
|
|
|
2.54
|
|
|
|
|
|
|
|
14,800
|
|
|
|
|
|
$
|
0.65
|
|
|
|
36,924
|
|
|
|
4.00
|
|
|
|
|
|
|
|
36,924
|
|
|
|
|
|
|
|
|
|
|
57,704
|
|
|
|
3.29
|
|
|
|
3.02
|
|
|
|
57,704
|
|
|
$
|
3.02
|
|
NOTE 8 – WARRANTS
The warrants outstanding and exercisable at March 31, 2019 are
as follows:
|
|
|
Warrants outstanding
|
|
|
Warrants exercisable
|
|
Exercise price
|
|
|
No. of shares
|
|
|
Weighted
average remaining
years
|
|
|
Weighted
average exercise
price
|
|
|
No. of shares
|
|
|
Weighted
average exercise
price
|
|
$
|
0.25
|
|
|
|
1,751,667
|
|
|
|
0.24
|
|
|
|
|
|
|
|
1,751,667
|
|
|
|
|
|
$
|
0.15
|
|
|
|
525,500
|
|
|
|
0.24
|
|
|
|
|
|
|
|
525,500
|
|
|
|
|
|
$
|
0.25
|
|
|
|
1,508,333
|
|
|
|
0.34
|
|
|
|
|
|
|
|
1,508,333
|
|
|
|
|
|
$
|
0.15
|
|
|
|
577,499
|
|
|
|
0.35
|
|
|
|
|
|
|
|
577,499
|
|
|
|
|
|
$
|
0.25
|
|
|
|
968,166
|
|
|
|
0.35
|
|
|
|
|
|
|
|
968,166
|
|
|
|
|
|
$
|
0.25
|
|
|
|
633,333
|
|
|
|
0.40
|
|
|
|
|
|
|
|
633,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,964,498
|
|
|
|
0.29
|
|
|
$
|
0.22
|
|
|
|
5,964,498
|
|
|
$
|
0.22
|
|
No warrants were issued, forfeited, cancelled or exercised
From
August 22, 2018 through March 31, 2019.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
During the normal course of business, the
Company may be exposed to litigation. When the Company becomes aware of potential litigation, it evaluates the merits of the case
in accordance with FASB ASC 450-20-50, Contingencies. The Company evaluates its exposure to the matter, possible legal or settlement
strategies and the likelihood of an unfavorable outcome. If the Company determines that an unfavorable outcome is probable and
can be reasonably estimated, it establishes the necessary accruals. As of March 31, 2019, the Company is not aware of any contingent
liabilities that should be reflected in the unaudited condensed consolidated financial statements.
NOTE 10 – SUBSEQUENT EVENTS
Management has evaluated subsequent events
pursuant to the requirements of ASC Topic 855, from the balance sheet date through the date the consolidated financial statements
were available to be issued and has determined that there are no material subsequent events that require disclosure in the unaudited
condensed consolidated financial statements other than as disclosed below.