Notes
to the Condensed Consolidated Financial Statements
Three
and Six Months Ended June 30, 2017
(Unaudited)
Note
1.
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Nature
of Operations and Summary of Significant Accounting Policies
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Business
Foothills
Exploration, Inc., (“Company”, “Foothills Exploration” or “Foothills”) was incorporated in
the State of Delaware on May 13, 2010, under the name of “Key Link Assets Corp.” for the purpose of acquiring a portfolio
of heavily discounted real estate properties in the Chicago metropolitan area. The Company changed its focus and planned to acquire
small and medium sized grocery stores in non-urban locales that are not directly served by large national supermarket chains.
On
May 2, 2016, Foothills Petroleum Inc., a Nevada corporation (“FPI”), acquired over 14.1 million pre-split (56.4 million
post-split) shares of the Company’s common stock constituting approximately 96% of our then issued and outstanding shares
(“FPI Acquired Shares”). As of May 16, 2016, we effected a 4:1 forward split of our shares of common stock.
On
May 27, 2016, the Company entered into a Share Exchange Agreement with shareholders of FPI whereby we acquired all of the outstanding
shares of FPI in exchange for 4,500,000 shares of our common stock and also issued 1,503,759 shares of our common stock on automatic
conversion of debt (please see discussion below under Overview) for an aggregate of 6,003,759 shares of our common stock (the
“Share Exchange”). As a result of the Share Exchange, FPI became our wholly owned subsidiary and the FPI Acquired
Shares were returned to treasury and deemed cancelled. For accounting purposes, this transaction is being accounted for as a reverse
acquisition and has been treated as a recapitalization of the Company with FPI considered the accounting acquirer, and the financial
statements of the accounting acquirer became the financial statements of the registrant. The completion of the Share Exchange
resulted in a change of control. The FPI Shareholders obtained approximately 96% of voting control on the date of Share Exchange.
FPI was the acquirer for financial reporting purposes and the Company was the acquired company. The condensed consolidated financial
statements after the acquisition include the balance sheets of both companies at historical cost, the historical results of FPI
and the results of the Company from the acquisition date. All share and per share information in the accompanying condensed consolidated
financial statements and footnotes have been retroactively restated to reflect the recapitalization.
Prior
to the Share Exchange, the Company had minimal assets and recognized no revenues from operations, and were accordingly classified
as a shell company. On June 24, 2016, the Company filed an amendment to our Current Report on Form 8-K originally filed on June
10, 2016, indicating that we were no longer a shell company as defined by Rule 12b-2 of the Exchange Act. In light of closing
the Share Exchange transaction with the shareholders of FPI, the Company became actively engaged in oil and gas operations through
its wholly owned subsidiary.
On
December 12, 2016, the Company entered into a participation agreement with Magna Operating, LLC, a privately held Houston-based
independent exploration and production company (“Magna Operating”), in relation to the Labokay prospect, covering
approximately 240 acres in Calcasieu Parish, Louisiana.
As
consideration for an assignment of interest in and to the leases and the prospect, Foothills Petroleum Operating, Inc., a Nevada
corporation and indirect wholly-owned subsidiary of the Company (“FPOI”), tendered to Magna Operating the purchase
price in the amount of $144,000. This amount covered FPOI’s share of the land, lease, and administrative costs that Magna
Operating incurred in generating and assembling the Labokay prospect as of November 15, 2016. As further consideration for an
assignment of working interest in and to the leases, FPOI agreed to participate in the cost, risk, and expense of drilling the
Labokay test well. The well was plugged and abandoned in February 2017.
On
December 30, 2016, the Company acquired various oil and gas assets in Utah from Total Belief Limited, a wholly owned subsidiary
of New Times Energy Corporation Limited. These assets included certain oil and gas wells throughout the Uinta Basin in Utah on
acreage with over 30 proven undeveloped drilling locations, additional non-operating interest in other leases, and access to approximately
6,000 acres in the Uinta Basin with proven and probable reserves and existing infrastructure in place. Through the acquisition,
Foothills also obtained six shut-in wells in the Natural Buttes Field, Utah. The transaction provides Foothills with the rights
to an agreement to acquire up to 6,000+ acres and up to 16 shut-in oil and gas wells with proved and proved undeveloped reserves
on Tribal lands in the Uinta Basin. This acquisition delivers to the Company an additional 40% working interest in the Ladysmith
Prospect covering 3,060 acres in the Greater Green River Basin, Wyoming, bringing the Company’s total working interest in
the prospect from 35% (pre-acquisition) up to 75%.
By
this agreement, the Company acquired 13,166,667 shares, constituting 55.63% of the outstanding shares of Grey Hawk Exploration,
Inc. (“Grey Hawk”), a British Columbia, Canada company. Grey Hawk owns a non-operated working interest in two non-producing
wells in the southern portion of the Natural Buttes Field.
On
December 30, 2016, the Company also acquired the remaining 25% membership interest in Tiger Energy Partners International, LLC
(“TEPI”) from Green Stone Capital Partners Limited, a Cayman Islands limited liability company, in exchange for assumption
of Greenstone’s proportionate share of TEPI obligations and liabilities.
Nature
of Operations
FPI,
the Company’s main operating subsidiary, was incorporated in Nevada in December 2015. Foothills is an independent oil and
gas exploration company with a focus on the acquisition and development of oil and gas properties in the Rockies and Gulf Coast.
Foothills seeks to acquire dislocated and underdeveloped oil and gas assets and maximize those assets to create shareholder value
(the “Business”).
The
Company’s principal obligations include:
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A
debenture in the amount of $1,250,000, plus interest accruing at a rate of 9% per annum issued to Berwin Trading Limited (“Berwin”)
with principal and interest due upon maturity on May 6, 2017. On May 5, 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. The Company and Berwin have been in discussions to extend the term of this debenture and the
Company believes it will either extend or repay the obligation to the satisfaction of Berwin.
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A
second debenture in the amount of $1,000,000, plus interest accruing at a rate of 9% issued to Full Wealth Investment Hong
Kong Limited (“Full Wealth”) with principal and interest due upon maturity on or before May 5, 2017. On May 18,
2017, Full Wealth 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 acquired this note back from Gold Class and the Company issued a new debenture
with a 60-day term and 10% interest per annum to Full Wealth.
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Subsequent to the period ended June 30, 2017 on
August 9, 2017, a bridge note was issued to Profit Well Limited, a Hong Kong limited liability company, in the principal amount
of $1,050,000, bearing an annual interest rate of 13.5%, maturing September 8, 2017 (the “Bridge Note”). Proceeds
of this Bridge Note are intended to be used to retire the debenture issued to Full Wealth. Full Wealth has acknowledged that
the Company’s obligations under the Debenture dated June 1, 2017 will not be in default if paid in full by the proceeds
of the Bridge Note.
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A
promissory note in the amount of $6,000,000 to Total Belief Limited (“TBL”), a direct wholly-owned subsidiary
of New Times Energy Corporation Limited, in connection with the assets acquired on December 30, 2016, with a maturity date
of June 30, 2018. This promissory note accrues no interest during its term and is due and payable in full on or before its
maturity date.
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From
its inception in December 2015 through the period ended June 30, 2017, Foothills produced limited revenues from its business and
principal properties and is currently an exploration stage company. Prior to January 2017, Foothills had minimal operations that
were focused mainly on administrative activities connected to the identification and evaluation of potential oil and gas prospects
and other potential leasehold acquisitions in our geographical areas of interest. As of June 30, 2017, Foothills had rights to
45,648 acres of oil and gas property in the state of Wyoming, excluding 6,115 acres of the Ironwood prospect that are subject
to drilling a well in 2017.
Going
Concern
The
Company’s condensed consolidated financial statements included elsewhere in this Quarterly Report have been prepared assuming
that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation
of liabilities in the normal course of business. As reflected in the condensed consolidated financial statements, the Company
had an accumulated deficit of $5,391,871 at June 30, 2017, and incurred a net loss of $3,417,277, and utilized net cash of $1,614,695
in operating activities for the six-month period then ended. These factors raise substantial doubt about its ability to continue
as a going concern. The condensed consolidated financial statements included elsewhere herein do not include any adjustments related
to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
Use
of Estimate and Assumptions
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.
Restricted
Cash
Cash
and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded
in restricted cash in the non-current assets section of our condensed consolidated balance sheet. As of June 30, 2017 and December
31, 2016, the Company had restricted cash of $240,000 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.
Oil
and Gas Properties
The
Company follows the full cost method of accounting for its investments in oil and gas properties. Under the full cost method,
all costs associated with the exploration of properties are capitalized into appropriate cost centers within the full cost pool.
Internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration,
and development activities undertaken and do not include any costs related to production, general corporate overhead, or similar
activities. Cost centers are established on a country-by-country basis.
Capitalized
costs within the cost centers are amortized on the unit-of-production basis using proved oil and gas reserves. The cost of investments
in unevaluated properties and major development projects are excluded from capitalized costs to be amortized until it is determined
whether or not proved reserves can be assigned to the properties. Until such a determination is made, the properties are assessed
annually to ascertain whether impairment has occurred. The costs of drilling exploratory dry holes are included in the amortization
base immediately upon determination that the well is dry.
For
each cost center, capitalized costs are subject to an annual ceiling test, in which the costs shall not exceed the cost center
ceiling. The cost center ceiling is equal to: (i) the present value of estimated future net revenues computed by applying current
prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to
estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated
future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount
factor of ten percent and assuming continuation of existing economic conditions; plus (ii) the cost of properties not being amortized;
plus (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; and less (iv)
income tax effects related to differences between the book and tax basis of the properties. If unamortized costs capitalized within
a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense and separately
disclosed during the period in which the excess occurs.
As
of June 30, 2017, the Company determined that no impairment was required for the period then ended based on the guidance in Regulation
S-X, Rule 4-10; SAB Topic 12.D; and FRC Section 406.01.c.
Capitalization
of Fixed Assets
The
Company capitalizes expenditures related to property and equipment, subject to a minimum rule, that have a useful life greater
than one year for: (1) assets purchased; (2) existing assets that are replaced, improved or the useful lives have been extended;
or (3) all land, regardless of cost, acquisitions of new assets, additions, replacements and improvements (other than land) costing
less than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are
expensed as incurred.
Office
equipment – 3 years
Vehicle(s)
– 5 years
Drilling
and production equipment – 7 years
Oil
and gas properties – 20 years
Asset
Retirement Obligations
The
asset retirement obligation relates to the plug and abandonment costs when its wells are no longer useful. The Company determines
the value of the liability by obtaining quotes for this service and then estimating the increase it will face in the future. The
Company then discounts the future value based on an intrinsic interest rate that is appropriate. If costs rise more than what
was expected there could be additional future charges, however, Foothills monitors the costs of the abandoned wells and intends
to adjust this liability as required.
Fair
Value of Financial Instruments
For
certain of the Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, accounts
payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities.
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying
amounts reported in the condensed consolidated balance sheets for receivables and current liabilities each qualify as financial
instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of
such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy
are defined as follows:
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Level
1, defined as observable inputs to the valuation methodology are quoted prices for identical assets or liabilities in active
markets.
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Level
2, defined as inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets,
and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term
of the financial instrument.
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Level
3 defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable.
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The
Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities
from Equity,” and ASC 815.
As
of June 30, 2017, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet
at fair value.
Net
Earnings (Loss) Per Common Share
The
Company computes earnings per share under ASC 260-10, “Earnings Per Share.” Basic earnings (loss) per share is computed
by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares
of common stock outstanding (the denominator) during the reporting periods. Diluted loss per share is computed by increasing the
denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into
common stock (using the “treasury stock” method), unless their effect on net loss per share is anti-dilutive. There
were 225,000 potentially dilutive shares, which include outstanding warrants, for the period ended June 30, 2017. The potential
shares are excluded from the determination of basic and diluted net loss per share as their effect is anti-dilutive.
Stock-Based
Compensation
All
share-based payments, including grants of stock to employees, directors and consultants, are recognized in the condensed consolidated
financial statements based upon their estimated fair values.
The
Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services
follows ASC Topic 505. As such, the value of the applicable stock-based compensation is periodically re-measured and income or
expense is recognized during their vesting terms. The measurement date for the fair value of the equity instruments issued is
determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii)
the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants,
the fair value of the equity instrument is primarily recognized over the term of the consulting agreement. In accordance with
FASB guidance, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be
presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for
accounting purposes.
Recent
Accounting Pronouncements
In
November 2015, the FASB issued Accounting Standards Update No. 2015-17,
Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”). ASU 2015-17 requires companies to classify all deferred tax assets and liabilities as noncurrent
on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The guidance is effective for financial
statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early
adoption is permitted. The guidance may be adopted on either a prospective or retrospective basis. The Company does not expect
the adoption of this guidance to have a material effect on the Company’s condensed consolidated financial statements.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases
(Topic 842) (“ASU 2016-02”).
ASU 2016-02 addresses the financial reporting of leasing transactions. Under current guidance for lessees, leases are only included
on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This update will require the
recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that
extend beyond 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line
basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the
lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of operations and
the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component
will be included in the operating section of the statement of cash flows. This guidance is effective for annual and interim reporting
periods beginning after December 15, 2018. Early adoption is permitted. The Company has not yet completed the analysis of how
adopting this guidance will affect its condensed consolidated financial statements.
In
March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. Some of the areas of simplification apply only to nonpublic entities. For public business entities, the amendments
in ASU 2016-09 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.
The Company has not yet completed the analysis of how adopting this guidance will affect its condensed consolidated financial
statements.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-01,
Clarifying the Definition of a Business
(“ASU
2017-01”). The standard clarifies the definition of a business by adding guidance to assist entities in evaluating whether
transactions should be accounted for as acquisitions of assets or businesses. ASU 2017-01 is effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. Under ASU 2017-01, to be considered a business, the assets
in the transaction need to include an input and a substantive process that together significantly contribute to the ability to
create outputs. Prior to the adoption of the new guidance, an acquisition or disposition would be considered a business if there
were inputs, as well as processes that when applied to those inputs had the ability to create outputs. Early adoption is permitted
for certain transactions. Adoption of ASU 2017-01 may have a material impact on the Company’s condensed consolidated financial
statements if it enters into future business combinations.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-04,
Simplifying the Test for Goodwill Impairment
(“ASU
2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test,
which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests
in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not anticipate
the adoption of ASU 2017-04 will have a material impact on its condensed consolidated financial statements.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future condensed consolidated financial statements.
Note
2 – Fixed Assets
As
of June 30, 2017, and December 31, 2016, fixed assets consisted of the following:
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June 30, 2017
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December 31, 2016
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(unaudited)
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Computer equipment and fixtures
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$
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22,453
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$
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22,453
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Vehicle
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69,446
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69,446
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Drilling Equipment
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265,578
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265,578
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Accumulated depreciation
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(33,619
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)
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(4,114
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)
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Fixed assets, net
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$
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323,858
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$
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353,363
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Depreciation
and amortization expense for the three months ended June 30, 2017 and 2016 was $14,782 and $0, respectively. Depreciation and
amortization expense for the six months ended June 30, 2017 and 2016 was $29,505 and $0, respectively.
Note
3 – Oil and Gas Properties
Upon
organization of Foothills Petroleum Inc. (“FPI”), on December 24, 2015, Wilshire Energy Partners, LLC, contributed
its 100% membership interest in Foothills Exploration, LLC, a Wyoming limited liability company, to FPI in exchange for 4,500,000
shares of FPI’s common stock. At the time of contribution, Wilshire Energy Partners, LLC, had acquired and owned the rights
to 38,120 acres of oil and gas leases in the State of Wyoming. On completion of the Share Exchange, effective May 27, 2016, Wilshire
Energy Partners, LLC, exchanged its FPI shares for 4,500,000 shares of the Company’s common stock. As a result, the Company
owns 100% of FPI and Foothills Exploration, LLC, is now a wholly owned indirect subsidiary of the Company that retains title to
these oil and gas leases. This transaction is treated as the founding transaction by the Company. The asset was valued at $72,430
at the time of transfer based on costs associated with the payment of lease bonuses, fees and taxes paid during the formation
of the asset.
On
December 24, 2015, Foothills entered into a convertible promissory note in the amount of $600,000 with Alternus. The two-year
note matures on December 23, 2017, and accrues interest at 8% per year. By its terms the note was automatically required to convert
the outstanding principal and interest due under the terms of the note upon a merger or other combination occurring between Foothills
and an entity with shares listed for trading (“Pubco”). The conversion price in the note was established at $0.665
per share, (the “Conversion Price”). On April 5, 2016, and under substantially similar terms described herein, Foothills
received an additional $400,000 from Alternus. Under the agreements between Alternus and Foothills, Alternus had the right but
not the obligation to subscribe for an aggregate of up to $3,500,000 of convertible notes which, in the event of that full subscription
would convert into not less than 30% of the outstanding shares of Pubco. At May 27, 2016, the date of the Share Exchange, Alternus
had invested $1,000,000 and, based on the Conversion Price, 1,503,759 shares of Common Stock of Pubco (Key Link) were issued in
full satisfaction of its two notes.
Alternus
transferred to Berwin Trading Limited its right to purchase the remaining $2,500,000 in equity in the Company at substantially
the same terms as the conversion of the convertible note purchase agreement. Berwin agreed to purchase $2,000,000 or 3,007,519
common shares and completed the documents related to the purchase of equity on June 30, 2016, and funded its investment on July
6, 2016. The additional investment option has expired.
On
March 29, 2016, Foothills acquired a 35% working interest in the Ladysmith Anticline prospect that is located in Fremont County,
Wyoming. Total acreage position is 3,061 acres located between the Great Divide/Greater Green River Basin and the Wind River Basin,
in return for covering certain costs of operation in the amount of $20,000, and to a share of the working interest in the leases.
The primary target zones are the variable Phosphoria and Tensleep sandstone with secondary considerations in the Madison limestone
and Flathead sandstone. The prospect generation was based on licensed 2-D seismic comprised of two seismic lines covering the
Chevron/Echo – Greater Green River Basin. The asset is valued at $20,000 based on the agreement and consideration paid by
the Company. During the three and six months ended June 30, 2017, the Company capitalized an additional $651 and $12,169 in costs
related to this asset.
On
December 12, 2016, the Company entered into a participation agreement with Magna Operating, LLC, a privately held Houston-based
independent exploration and production company (“Magna Operating”), in relation to the Labokay prospect, covering
approximately 240 acres in Calcasieu Parish, Louisiana. As consideration for an assignment of interest in and to the leases and
the prospect, Foothills Petroleum Operating, Inc., a Nevada corporation and indirect wholly-owned subsidiary of the Company (“FPOI”),
tendered to Magna Operating the purchase price in the amount of $144,000. This amount covered FPOI’s share of the land,
lease, and administrative costs that Magna Operating incurred in generating and assembling the Labokay prospect as of November
15, 2016. As further consideration for an assignment of working interest in and to the leases, FPOI agreed to participate in the
cost, risk, and expense of drilling the Labokay test well.
During
the period ended June 30, 2017, the Company drilled a test well on Labokay to the total measured depth of 8,795 feet, where hydrocarbons
shows were present, but not in commercial quantities to warrant completion. The well was plugged and abandoned. The Company recognized
impairment of oil and gas property in amount of $1,283,218 during six months ended June 30, 2017.
On
December 30, 2016, the Company acquired various oil and gas assets in Utah from Total Belief Limited, a wholly owned subsidiary
of New Times Energy Corporation Limited. These assets included certain oil and gas wells throughout the Uinta Basin in Utah on
acreage with over 30 proven undeveloped drilling locations, additional non-operating interest in other leases, and access to approximately
6,000 acres in the Uinta Basin with proven and probable reserves and existing infrastructure in place. This purchase provides
us with an entry point into the Uinta Basin and a basis from which to seek other bolt-on acquisition opportunities in the Rockies.
The transaction delivers a licensed and bonded operator in Utah having bonds in place with the BLM, State of Utah and BIA. Through
the acquisition, Foothills also obtained six shut-in wells in the Natural Buttes Field, Utah. Three of these wells have already
been worked over and brought back online with production averaging around 547 barrels during Q2 2017. The remaining three
wells will be equipped and worked over in the coming months with the goal of bringing additional production back online.
The
transaction provides Foothills with the rights to an agreement to acquire up to 6,000+ acres and up to 16 shut-in oil and gas
wells with proved and proved undeveloped reserves on Tribal lands in the Uinta Basin. These properties provide in-field drilling
potential, the ability to bring online shut-in wells and behind pipe development. Five shut-in wells located on fee lands in the
Altamont-Bluebell Field that are undergoing title curative also have the potential to achieve near term production with stimulation
and the addition of surface equipment. Furthermore, this acquisition delivers to the Company an additional 40% working interest
in the Ladysmith Prospect covering 3,060 acres in the Greater Green River Basin, Wyoming, bringing the Company’s total working
interest in the prospect from 35% (pre-acquisition) up to 75%. Lastly through this transaction, the Company also acquired 13,166,667
shares of common stock, constituting 55.63% of the outstanding shares of Grey Hawk Exploration, Inc. (“Grey Hawk”),
a British Columbia, Canada company. Grey Hawk owns a non-operated working interest in two non-producing wells in the southern
portion of the Greater Natural Buttes Field in Utah.
On
December 30, 2016, concurrent with the TBL transaction, the Company also acquired the remaining 25% membership interests in TEPI
from Green Stone Capital Partners Limited, a Cayman Islands limited liability company, in exchange for assumption of Greenstone’s
proportionate share of TEPI obligations and liabilities.
On
December 30, 2016, in connection with the TBL acquisition (see Note 1), Foothills entered into a promissory note in the amount
of $6,000,000 with Total Belief Limited. This note matures on June 30, 2018, and accrues no interest during its term. $342,804
imputed interest was recorded as debt discount. $342,804 was determined using the imputed interest method based on the following
assumptions: (i) adjusted interest rate 4% (ii) expected life of 1.5 years. During the three and six months ended June 30, 2017,
we amortized $57,134 and $114,268 debt discount into interest expense.
During the six months ended June 30, 2017 and 2016, we capitalized an additional $1,696,045
and $33,243 of oil and gas properties, respectively.
Note
4 – Asset Retirement Obligation
The
Company’s asset retirement obligations relate to the abandonment of oil and gas wells. The amounts recognized are based
on numerous estimates and assumptions, including future retirement costs, inflation rates and credit adjusted risk-free interest
rates. The following shows the changes in asset retirement obligations:
Asset retirement obligations, January 1, 2017
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$
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-
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Liabilities incurred during the period
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291,659
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|
Release of liabilities associated with the sale of oil properties
|
|
|
-
|
|
Liabilities settled during the year
|
|
|
-
|
|
Accretion
|
|
|
5,834
|
|
Asset retirement obligations, June 30, 2017
|
|
$
|
297,493
|
|
Depletion
expense for the three and six months ended June 30, 2017 was $3,646 and $7,292, respectively.
Note 5 – Notes Payable
On
December 30, 2016, in connection with the TBL acquisition (see Note 1), Foothills entered into a promissory note in the amount
of $6,000,000 with Total Belief Limited. This note matures on June 30, 2018, and accrues no interest during its term. $342,804
imputed interest was recorded as debt discount. $342,804 was determined using the present value method based on the following
assumptions: (i) adjusted interest rate 4% (ii) expected life of 1.5 years. During the three months and six months ended June
30, 2017, we amortized $57,134 and $114,268 debt discount into interest expense. The Company has reduced the value of its oil
and gas properties in the proportion of the debt discount allocated to the note.
Effective January 5, 2017, Foothills borrowed
$1,000,000 from Full Wealth Investment Hong Kong Limited, a limited liability company organized under the laws of Hong Kong. The
Company executed a promissory note, titled as a Debenture, with the lender dated as of December 30, 2016, with proceeds being
received by the Company on January 5, 2017. This loan is unsecured, bears interest at 9% per year and is due and payable in 120
days from the receipt of fund. If any amount payable is not paid when due, any such overdue amount shall bear interest at the
default rate of 11% from the date of such non-payment until such amount is paid in full. The Company used net proceeds of this
loan to satisfy certain obligations under a Purchase and Sale Agreement with Total Belief Limited, dated December 30, 2016, for
general working capital and to support certain target drilling activities. 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. As of June 30, 2017, the balance of accrued interest was $47,945. During the three months
and six months ended June 30, 2017, we recorded interest expense in the amount of $25,507 and $47,945, respectively.
Subsequent
to the period ended June 30, 2017 and on August 9, 2017, Foothills borrowed $1,050,000 from Profit Well Limited, a Hong Kong limited
liability company and an unrelated party. 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 received by the Company on August 10, 2017, and were
primarily used to repay full wealth for the debenture dated June 1, 2017.
Note 6 – Notes Payable, Related Party
Effective
January 5, 2017, Foothills borrowed $1,250,000 from Berwin Trading Limited. The Company executed a promissory note, titled as
a Debenture, with the lender dated as of December 30, 2016, with proceeds being received by the Company on January 5, 2017. This
loan is unsecured, bears interest at 9% per year and is due and payable in 120 days from the receipt of funds. If any amount payable
is not paid when due, any such overdue amount shall bear interest at the default rate of 11% from the date of such non-payment
until such amount is paid in full. The Company used net proceeds of this loan to satisfy certain obligations under a Purchase
and Sale Agreement with Total Belief Limited, dated December 30, 2016, for general working capital and to support certain target
drilling activities. 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. The Company and Berwin
have been in discussions to extend the term of this debenture and the Company believes it will either extend or repay the obligation
to the satisfaction of Berwin. As of June 30, 2017, the balance of accrued interest was $81,370. During the three months and six
months ended June 30, 2017, the Company recorded interest expense in the amount of $53,322 and $81,370, respectively.
Note
7 – Convertible Note Payable
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. This note may, at the option of the lender, be converted at any time prior to September 7, 2017, 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 note.
Note
8 – Common Stock
Effective
April 1, 2016, Foothills appointed two directors to its board. Each director was granted 125,000 shares of its common stock (the
“Foothills Directors Shares”), vesting according to the following schedule: (i) 40% vesting ninety (90) days from
the appointment date; (ii) 20% vesting one hundred eighty (180) days from the appointment date; (iii) 20% vesting two hundred
seventy (270) days following the appointment date; (iv) 20% vesting three hundred sixty (360) days following the Effective Date.
As of June 30, 2017, 125,000 shares were issued to each director. As of June 30, 2017, 250,000 common shares were issued to directors
for a total value of $2,500 in aggregate.
On
May 2, 2016, FPI acquired 14,112,250 pre-split shares of the common stock of Key Link Assets Corp. (“Key Link” or
the “Company”) from five persons constituting approximately 96% of our issued and outstanding shares (the “FPI
Acquired Shares”). These shares were acquired for cash of $316,035, which was expensed in the period it was incurred.
As
of May 16, 2016, Foothills effected a 4:1 forward split of its shares of common stock. All references to the number of shares
issued and outstanding in these financial states have been retrospectively restated for the forward split.
The
14,112,250 pre-split shares were converted into 56,449,000 shares post-split, and were returned to treasury for cancellation.
A total of 2,360,000 shares remained outstanding held by the shareholders of the merged public company post the reverse merger
acquisition.
On
May 2, 2016, after obtaining the FPI Acquired Shares, FPI caused the Company to appoint its two non-executive directors to the
Board of the Company. These directors exchanged their rights to the FPI Directors Shares for Company shares having substantially
the same terms and provisions. On May 2, 2016, the Company also granted 150,000 restricted shares of its common stock to its CEO
as a part of his compensation package. The shares have the same vesting schedule as directors’ shares described above. As
of June 30, 2017, 150,000 common shares were issued to the Company’s CEO for a total value of $1,500 in aggregate.
On
May 27, 2016, we entered into a Share Exchange Agreement with the shareholders of FPI whereby we acquired all of the outstanding
shares of FPI for an aggregate of 6,003,759 shares of our common stock, of which 4,500,000 shares of our common stock were issued
to Wilshire Energy Partners, LLC, (“Wilshire”) and 1,503,759 of our shares of common stock were issuable to Alternus
(“Share Exchange”). As a result of the Share Exchange, FPI became our wholly owned subsidiary and the FPI Acquired
Shares were to be returned to treasury, deemed canceled and no longer outstanding. We also exchanged warrants to purchase 700,000
shares of Foothills’ common stock, that were issued to Wilshire on May 4, 2016, for a like amount of warrants to purchase
shares of the Company’s common stock (the “Wilshire Warrants”). The Wilshire Warrants:
|
●
|
have
a term of five years;
|
|
|
|
|
●
|
are
exercisable at $1.25 per share as to 100,000 shares;
|
|
|
|
|
●
|
are
exercisable at $2.00 per share as to 200,000 shares;
|
|
|
|
|
●
|
are
exercisable at $3.00 per share as to 400,000 shares;
|
|
|
|
|
●
|
do
not have a cashless exercise feature; and
|
|
|
|
|
●
|
are
not exercisable for one year.
|
On
June 30, 2016, we entered into a Securities Purchase Agreement with Berwin Trading Limited, a British Virgin Islands company (“Berwin”),
pursuant to which we sold and agreed to issue 3,007,519 shares of our common stock, $0.0001 par value, at a purchase price of
$0.665 per share for an aggregate amount of $2,000,000.
On
December 30, 2016, we issued 2,083,334 shares of common stock in connection with the TBL acquisition (see Note 6), at a purchase
price of $1.83 per share for an aggregate amount of $3,812,500.
On May 31, 2017, we entered into securities
purchase agreements with two investors whereby we sold 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, and
has been determined to be a Related Party.
In June 2017, we entered into securities purchase
agreements with two investors whereby we sold 45,000 units at a purchase price of $1.00 per unit for an aggregate amount of $45,000.
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.
As of June 30, 2017, we recorded $35,000 in stock subscriptions receivable and received the cash balance in July 2017.
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 six months ended June 30, 2017, the Company issued 275,000 shares of common stock to various third parties for services, valued
at $453,500.
As
of June 30, 2017, the Company had 14,459,612 shares of common stock issued and outstanding.
Restricted
Stock Units (RSUs)
Effective
August 11, 2016, and on August 15, 2016, Foothills granted Mr. Lanclos 100,000 restricted stock units (RSUs) of the Company of
which (i) 20,000 vested 180 days from August 15, 2016, (ii) another 20,000 shall vest 270 days from August 15, 2016, and (iii)
the remaining 60,000 shall vest 365 days from August 15, 2016. The Company has a right, but not an obligation to repurchase all
or any portion of RSUs granted to the executive at a purchase price of $0.665 per share if executive’s employment with the
Company is terminated for any reason within 30 months of start of employment on August 15, 2015. As of June 30, 2017, these RSU’s
were valued at $59,290. As of June 30, 2017, 40,000 shares were issued to Mr. Lanclos valued at $26,800.
On
August 15, 2016, Foothills also granted Mr. Ovalle 100,000 restricted stock units (RSUs) of the Company of which (i) 20,000 shall
vested 180 days from August 15, 2016, (ii) another 20,000 shall vest 270 days from August 15, 2016, and (iii) the remaining 60,000
shall vest 365 days from August 15, 2016. The Company has a right, but not an obligation to repurchase all or any portion of RSUs
granted to the executive at a purchase price of $0.665 per share if executive’s employment with the Company is terminated
for any reason within 30 months of start of employment on August 15, 2015. As of June 30, 2017, these RSU’s were valued
at $58,556. As of June 30, 2017, 40,000 shares were issued Mr. Ovalle valued at $26,800.
Warrants
On
May 27, 2016, the Company granted to Wilshire Energy Partners, LLC, warrants (“Wilshire Warrants”) to purchase (i)
100,000 common shares at a strike price of $1.25 per share, (ii) 200,000 common shares at a strike price of $2.00 per share and
(iii) 400,000 common shares at a strike price of $3.00 per share. The Wilshire Warrants commence to be exercisable on the earlier
of (i) 12-month anniversary of the closing of a going public transaction or (ii) June 30, 2017, and expire on June 1, 2021.
On
May 27, 2016, the Company granted to an unrelated party warrants to purchase (i) 125,000 common shares at a strike price of $1.25
per share, (ii) 100,000 common shares at a strike price of $2.00 per share and (iii) 100,000 common shares at a strike price of
$3.00 per share. The warrants commence to be exercisable on the earlier of (i) 12-month anniversary of the closing of a going
public transaction or (ii) June 30, 2017, and expire on June 1, 2021.
The
fair value of all warrants was determined to be $2,144 on May 27, 2016, using the Black-Scholes option-pricing model based on
the following assumptions: (i) volatility rate of 120%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv)
expected life of 5 years.
The
following table summarizes all stock warrant activity for the six months ended June 30, 2017:
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
Balance outstanding, December 31, 2016
|
|
|
1,025,000
|
|
|
$
|
2.32
|
|
|
|
4.42
|
|
Granted
|
|
|
245,000
|
|
|
|
1.50
|
|
|
|
2.93
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, June 30, 2017
|
|
|
1,270,000
|
|
|
$
|
2.07
|
|
|
|
3.62
|
|
Exercisable, June 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Options
On
May 19, 2016, the Company granted to each of its three directors options to purchase (i) 50,000 common shares at a strike price
of $2 per share, vesting when the Company achieves and maintains a total average daily production level of 100 barrels of oil
equivalent per day (“boe/d”) for at least 30 days, (ii) 50,000 common shares at a strike price of $3 per share, vesting
when the Company achieves and maintains a total average daily production level of 200 boe/d for at least 60 days, and (iii) 50,000
common shares at a strike price of $4 per share, vesting when the Company achieves and maintains a total average daily production
level of 500 boe/d for at least 90 days.
On
February 27, 2017, the Company granted to Mr. Christopher Jarvis options to purchase 400,000 common shares at a strike price of
$1.99 per share, vesting quarterly over two years commencing with the first quarter following the 90-day probationary period.
The
fair value of 400,000 options was determined to be $616,055 on February 27, 2017, using the Black-Scholes option-pricing model
based on the following assumptions: (i) volatility rate of 129%, (ii) discount rate of 0%, (iii) zero expected dividend yield,
and (iv) expected life of 5 years.
On
February 27, 2017, the Company granted to Mr. Kevin Sylla options to purchase 1,200,000 common shares at a strike price of $1.99
per share, vesting quarterly over the term of three years.
The
fair value of 1,200,000 options was determined to be $1,986,902 on February 27, 2017, using the Black-Scholes option-pricing model
based on the following assumptions: (i) volatility rate of 129%, (ii) discount rate of 0%, (iii) zero expected dividend yield,
and (iv) expected life of 7 years.
In
furtherance of the BDSA, Wilshire assigned FEL to Foothills on its organization in exchange for 4.5 million shares of Foothills,
and Foothills thereby acquired control of the Springs Prospect, owned by FEL, consisting of 38,120 contiguous acres. Foothills
regards the Springs Prospect as a valuable multiple objective oil resource play in the Greater Green River Basin of Wyoming. Through
Wilshire’s assistance, Foothills entered into two agreements with Alternus, whereby Foothills obtained a total of $1,000,000
of financing in the form of convertible notes that upon completion of the Share Exchange were converted, at $0.665 per share,
into 1,503,759 shares of the Company’s common stock.
In
connection with the hiring of Ritchie Lanclos as Executive Vice President of the Company and Vice President of Exploration of
FPI, and Eleazar Ovalle as Executive Vice President of the Company and Vice President of Geology and Geophysical of FPI, FPI agreed
to pay Wilshire, one of our principal shareholders, pursuant to a Services Agreement entered into by and between FPI and Wilshire,
a fee of 25% of the gross annual salary, including all cash and equity compensation, but excluding any bonuses to be received
by Mr. Lanclos and Mr. Ovalle. In the event either of Mr. Lanclos or Mr. Ovalle leaves FPI of his own volition or is terminated
for cause within 90 days from August 15, 2016 or August 11, 2016, respectively, the commencement day of their employment, Wilshire
shall refund FPI 100% of fees received, minus $2,500.
Alternus
Capital Holdings Limited
On
December 24, 2015, FPI entered into a convertible promissory note in the amount of $600,000 with Alternus. The two-year note originally
matured on December 23, 2017, and accrued interest at 8% per year. By its terms the note was automatically required to convert
the outstanding principal and interest due under the terms of the note upon a merger or other combination occurring between FPI
and an entity with shares listed for trading, which occurred on May 27, 2016. The conversion price of the note was established
at $0.665 per share (the “Conversion Price”), subject to adjustment as described below. On April 5, 2016, and under
substantially similar terms described herein, FPI received an additional $400,000 from Alternus. Under the agreements between
Alternus and Foothills, Alternus had the right but not the obligation to subscribe for an aggregate of up to $3,500,000 of convertible
notes, which, in the event of that full subscription, would convert into not less than 30% of the then outstanding shares of the
“public” company. Through May 27, 2016, the date the Share Exchange, Alternus had invested $1,000,000 and based on
the Conversion Price was issued 1,503,759 shares of the Company’s common stock in full satisfaction of its two notes. All
accrued interest was waived and recorded as additional paid in capital.
On
December 30, 2016, Foothills, through its indirect wholly owned subsidiary Foothills Exploration Operating, Inc. (“FEOI”),
entered into a purchase and sale agreement with Total Belief Limited (see Note 1). As a result of the purchase and sale agreement
the Company acquired a $10,600 related party payable due to Equipment Solutions, Inc., which is owned by a director of the Company,
Alex Hemb. As of June 30, 2017, the balance was paid off.
Berwin
Trading Limited
Effective
January 6, 2017, the Company borrowed $1,250,000 from Berwin Trading Limited, a British Virgin Islands limited liability company.
The Company executed a promissory note, titled as a Debenture, with the lender dated as of December 30, 2016, with proceeds being
received by the Company on January 6, 2017. This loan is unsecured, bears interest at 9% per year and is due and payable in 120
days from the receipt of funds. If any amount payable is not paid when due, any such overdue amount shall bear interest at the
default rate of 11% from the date of such non-payment until such amount is paid in full. The Company used net proceeds of this
loan to satisfy certain obligations under a Purchase and Sale Agreement with Total Belief Limited, dated December 30, 2016, for
general working capital and to support certain target drilling activities. As of June 30, 2017, the balance of accrued interest
was $81,370. During the three months and six months ended June 30, 2017, we recorded interest expense in the amount of $53,322
and $81,370, respectively.
On May 5, 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. The
Company and Berwin have been in discussions to extend the term of this debenture
and
the Company believes it will either extend or repay the obligation to the satisfaction of Berwin.
Note
9 – Commitments and Contingencies
Management
Additions and Changes
On
March 3, 2017, the Company announced the appointment of Christopher Jarvis and Kevin J. Sylla to its senior management team. Mr.
Jarvis is a current Director of Foothills Exploration and FPI and has taken on the full-time role of Executive Vice President
of Finance for the Company and Vice President of Risk Management for FPI. Mr. Sylla has been appointed Director and Chief Executive
Officer of FPI, which oversees the Company’s oil and gas operations. These appointments reinforce the Company’s team
of oil and gas industry professionals.
Legal
proceedings
SCI
Welding & Oilfield Service vs. Tiger Energy Operating LLC. (Case Number 169000023, Eighth District Court-Roosevelt Duchesne
County, State of Utah)
This
case concerns the collection of unpaid debt owed by Tiger Energy Operating, LLC (TEO), concerning the workover of wells in Duchesne
County, Utah. SCI Welding was granted a judgment in the amount of $67,470 on April 27, 2016. A garnishment was filed by SCI resulting
in their collection of $17,063 prior to our acquisition of TEO. Presently, writs of execution have been issued against TEO properties
in Duchesne and Uintah Counties, Utah. In addition, the writs seek execution upon various land parcels in Duchesne and Uintah
Counties, Utah. As of December 31, 2016, the Company recorded a contingent liability in the amount of $53,407. The Company and
SCI Welding recently reached an agreement to settle the matter for $35,000 and the parties are currently working out the settlement
agreement details.
Graco
Fishing & Rental Tools, Inc. vs. Tiger Energy Operating LLC., (Case No. 160800005 Eighth Judicial District Court in and for
Duchesne County, State of Utah)
This case concerns the collection of unpaid
debt owed by TEO for services performed by plaintiff. A default judgment in the amount of $159,965 was obtained on June 1, 2016,
against TEO, for unpaid accounts in connection with its workover of wells in Duchesne County, Utah. Graco has filed a writ of
execution against the A Rust 2, Dye-Hall 2-21 A1, Wilkins 1-24 A5 and Rust 3-22A-4 wells located in Duchesne County. A Motion
to Set Aside a sheriff’s sale concerning these properties was filed based on the fact that TEO is not the owner of these
properties. A hearing for this matter was held on May 1, 2017, in Duchesne County, Utah, at which a Company representative was
present to comply with the court’s order to produce documents. Prior to the hearing, TEO made an initial settlement offer,
which was eventually rejected by the Plaintiffs. The matter remains unresolved as of the filing of this report. As of June 30,
2017, the Company recorded a contingent liability in the amount of $159,965. The Company and Graco are in negotiations to settle
this matter but as of the date of this report no firm settlement agreement had yet been reached by the parties.
Note
10 – Subsequent Events
Subsequent to the period ended June 30, 2017
and 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.
Subsequent to the period ended June 30, 2017
and on August 9, 2017, Foothills borrowed $1,050,000 from Profit Well Limited, a Hong Kong limited liability company and an unrelated
party. 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 received by the Company on August 10, 2017, and were primarily utilized to repay Full
Wealth for the debt owed under the debenture dated June 1, 2017.