Notes
to the Consolidated Financial Statements
(unaudited)
1.
|
Summary
of Significant Accounting Policies
|
|
(a)
|
Basis
of Presentation
|
These consolidated financial statements
are unaudited and have been prepared from the books and records of Park Place Energy Inc. and its consolidated subsidiaries (“Park
Place”, the “Company”, “we”, or “our”). In our opinion, all normal and recurring adjustments
necessary for a fair presentation of the financial position of the Company as of June 30, 2017, and the results of operations
for the three months ended June 30, 2017 and 2016, and cash flows for the six months ended June 30, 2017 and 2016, have been made
in conformity with generally accepted accounting principles (“GAAP”). All significant intercompany accounts
and transactions have been eliminated. These interim financial statements and notes are condensed as permitted by the instructions
to Form 10-Q and should be read in conjunction with the audited consolidated financial statements of the Company included in its
Form 10-K for the year ended December 31, 2016.
As
of June 30, 2017, we had cash and cash equivalents of $314,900, down from $1,550,937 as of December 31, 2016. We generated a net
loss of $1,431,458 for the six months ended June 30, 2017. On January 18, 2017, the Company completed the acquisition of three
oil and gas producing fields in Turkey. The purchase price for the acquisition of the PPE Turkey Companies from Tiway Oil B.V.
was $2.1 million. Based on projections of revenue and net income for the PPE Turkey Companies and expected fund raising activities,
we believe that we will not have sufficient cash resources to finance our operations and expected capital expenditures through
June 30, 2018. We expect to fund our operations through anticipated Company profits and additional investments of private equity
and debt, which, if we are able to obtain, may have the effect of diluting our existing common stockholders. Any equity or debt
financings, if available at all, may be on terms which are not favorable to us. If our operations do not generate positive cash
flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on terms and conditions acceptable
to us, if at all, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.
The
Company computes loss per share of Company stock in accordance with ASC 260 (“Earnings per Share”), which requires
presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is
computed by dividing the loss available to common shareholders (numerator) by the weighted average number of shares outstanding
(denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period
using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average
stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options
or warrants. Diluted EPS excludes dilutive potential shares if their effect is anti-dilutive. For the three and six months ended
June 30, 2017 and 2016, the Company had 20,834,375 and 15,268,001 potentially dilutive shares outstanding that were excluded for
the diluted EPS calculation, respectively, related to options, warrants, and restricted stock.
The
preparation of the accompanying consolidated 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 of the consolidated and combined financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant
estimates include, but are not limited to, oil and natural gas reserves; depreciation, depletion, and amortization of proved oil
and natural gas properties; future cash flows from oil and natural gas properties; impairment of long-lived assets; fair value
of derivatives; fair value of equity compensation; fair values of assets acquired and liabilities assumed in business combinations
and asset retirement obligations.
Certain
prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had
no effect on the reported results of operations.
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Unproven
properties:
|
|
|
|
|
|
|
|
|
Bulgaria
|
|
$
|
3,042,040
|
|
|
$
|
2,939,829
|
|
Proven
properties:
|
|
|
|
|
|
|
|
|
PPE
Turkey
|
|
|
3,085,959
|
|
|
|
-
|
|
|
|
$
|
6,127,999
|
|
|
$
|
2,939,829
|
|
The
Company holds a 98,205 acre oil and gas exploration claim in the Dobrudja Basin located in northeast Bulgaria. The Company intends
to conduct exploration for natural gas and test production activities over a five year period in accordance with or exceeding
its minimum work program obligation. The Company intends to commence its work program efforts once it receives all regular regulatory
approvals of its work programs.
On
January 18, 2017, Park Place completed the acquisition of three oil and gas exploration and production companies operating in
Turkey from Tiway Oil B.V. in exchange for cash consideration of $2,100,000. On the date of acquisition, the fair value of the
identifiable net assets exceeded the purchase consideration by $270,565, which is included in the other income line of the accompanying
consolidated statement of operations for the six months ended June 30, 2017. We incurred acquisition related expenses of approximately
$39,000 which include legal and corporate matters.
The
following table presents recognized fair value of the identifiable assets acquired and liabilities assumed at acquisition:
Assets:
|
|
|
|
|
Cash
|
|
$
|
850,051
|
|
Accounts receivable
|
|
|
641,584
|
|
Prepaid and other
current assets
|
|
|
311,895
|
|
Restricted cash
|
|
|
129,913
|
|
Oil and natural
gas properties – proved
|
|
|
3,414,110
|
|
Total assets
|
|
|
5,347,553
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable
and accrued liabilities
|
|
|
674,488
|
|
Asset retirement
obligation
|
|
|
2,302,500
|
|
Total liabilities
|
|
|
2,976,988
|
|
|
|
|
|
|
Total identifiable net assets
|
|
|
2,370,565
|
|
Cash consideration
|
|
|
2,100,000
|
|
Bargain purchase gain
|
|
$
|
270,565
|
|
During
the three and six month periods ended June 30, 2017, revenues of approximately $1,046,423 and $1,672,639 were recorded in the
statement of operations related to the Tiway acquisition after the closing date and we generated losses of approximately $573,458
during the period ended June 30, 2017.
In
April 2015, the Company loaned $38,570 to a Bulgarian company pursuant to a revolving credit facility, enabling such Bulgarian
company to buy and manage land in Bulgaria to be leased by the Company for future well sites. The credit facility has a maximum
loan obligation of BGN 1,000,000 ($583,910 USD at June 30, 2017), bears interest at 6.32%, has a five-year term and is secured
by the land the Bulgarian company buys. Payment on the facility is due the earlier of the end of the five-year term (April 6,
2020) or demand by the Company. As of June 30, 2017, the outstanding balance on the loan obligation was $41,089.
5.
|
Stockholder
Loans Payable
|
At June 30, 2017, the Company had
a principal of $799,000 of stockholder loans outstanding. All loans bear interest at 10% per annum, of which $42,142 is due
and payable.
6.
|
Asset
Retirement Obligations
|
Asset
retirement obligations (“AROs”) associated with the retirement of tangible long-lived assets are recognized as liabilities
with an increase to the carrying amounts of the related long-lived assets in the period incurred. The fair value of AROs is recognized
as of the acquisition date for business combination (see footnote 3). The cost of the tangible asset, including the asset retirement
cost, is depreciated over the useful life of the asset. AROs are recorded at estimated fair value, measured by reference to the
expected future cash outflows required to satisfy the retirement obligations discounted at the Company’s credit-adjusted
risk-free interest rate. Accretion expense is recognized over time as the discounted liabilities are accreted to their expected
settlement value. If estimated future costs of AROs change, an adjustment is recorded to both the ARO and the long-lived asset.
Revisions to estimated AROs can result from changes in retirement cost estimates, revisions to estimated inflation rates and changes
in the estimated timing of abandonment. The following is a description of the Company’s asset retirement obligations for
the periods ended June 30, 2017 and December 31, 2016:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Asset retirement obligations at beginning
of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Additions
|
|
|
2,302,500
|
|
|
|
—
|
|
Accretion expense
|
|
|
102,982
|
|
|
|
—
|
|
Asset retirement
obligations at end of period
|
|
$
|
2,405,482
|
|
|
$
|
—
|
|
In
January 2017, the Company received subscriptions for 550,000 shares of common stock at $0.20 per share for total proceeds of $106,000.
On January 17, 2017, the Company issued 5,075,000 shares of common stock for stock subscriptions received during 2017 and 2016.
The
following table summarizes the continuity of the Company’s stock options:
|
|
Number
of
options
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average
fair value
|
|
|
Aggregate
intrinsic
value
|
|
Outstanding, December 31, 2016
|
|
|
1,265,000
|
|
|
$
|
0.14
|
|
|
$
|
0.11
|
|
|
$
|
–
|
|
Granted
|
|
|
1,600,000
|
|
|
|
0.18
|
|
|
|
0.18
|
|
|
|
–
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
–
|
|
Expired
|
|
|
(250,000
|
)
|
|
|
0.22
|
|
|
|
0.19
|
|
|
|
–
|
|
Outstanding, June 30, 2017
|
|
|
2,615,000
|
|
|
$
|
0.16
|
|
|
$
|
0.15
|
|
|
$
|
91,350
|
|
Additional
information regarding stock options as of June 30, 2017, is as follows:
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Range
of
exercise
prices
|
|
|
Number
of
shares
|
|
|
Weighted
average
remaining
contractual life
(years)
|
|
|
Weighted
average
exercise price
|
|
|
Number
of
shares
|
|
|
Weighted
average
exercise price
|
|
$
|
0.10
|
|
|
|
765,000
|
|
|
|
1.1
|
|
|
$
|
0.10
|
|
|
|
765,000
|
|
|
$
|
0.10
|
|
$
|
0.14
|
|
|
|
150,000
|
|
|
|
0.8
|
|
|
$
|
0.14
|
|
|
|
150,000
|
|
|
$
|
0.14
|
|
$
|
0.18
|
|
|
|
1,500,000
|
|
|
|
3.7
|
|
|
$
|
0.18
|
|
|
|
1,500,000
|
|
|
$
|
0.18
|
|
$
|
0.19
|
|
|
|
100,000
|
|
|
|
2.7
|
|
|
$
|
0.19
|
|
|
|
100,000
|
|
|
$
|
0.19
|
|
$
|
0.28
|
|
|
|
100,000
|
|
|
|
1
|
|
|
$
|
0.28
|
|
|
|
50,000
|
|
|
$
|
0.28
|
|
|
|
|
|
|
2,615,000
|
|
|
|
1.7
|
|
|
$
|
0.16
|
|
|
|
2,565,000
|
|
|
$
|
0.16
|
|
The
fair values for stock options granted during the period have been estimated using the Black-Scholes option pricing model assuming
no expected dividends and the following weighted average assumptions:
|
|
2017
|
|
Risk-free interest rate
|
|
|
1.7
|
%
|
Expected life (in years)
|
|
|
3.9
|
|
Expected volatility
|
|
|
298
|
%
|
Dividend yield
|
|
|
0
|
%
|
The
fair value of stock options vested during the three months ended June 30, 2017 and 2016 was $23,787 and $0, respectively, that
was recorded as stock-based compensation and included in general and administrative expenses. The weighted average fair value
of stock options granted during the six months ended June 30, 2017 was $0.18. There were no options granted during the six months
ended June 30, 2016. At June 30, 2017, the Company had $277,874 in unrecognized compensation expense related to stock options
that will be expensed through March 2021.
On
January 17, 2017, the Company issued 5,395,000 stock purchase warrants with an exercise price of $0.40 per share with an expiration
date of January 17, 2018.
On
March 27, 2017, the Company amended the expiration date on 5,500,000 of the 11,000,000 stock purchase warrants from August 27,
2017 to August 27, 2018. No other conditions of the warrants were amended. The Company recognized expense of approximately $279,000
related to the amendment of the warrants.
The
following table summarizes the share purchase warrants:
|
|
Number
of
warrants
|
|
|
Weighted
average
exercise
price
|
|
|
Expire
|
|
Outstanding, December 31, 2016
|
|
|
11,000,000
|
|
|
$
|
0.20
|
|
|
|
2017/2018
|
|
Issued
|
|
|
5,395,000
|
|
|
$
|
0.40
|
|
|
|
2018
|
|
Outstanding, June 30, 2017
|
|
|
16,395,000
|
|
|
$
|
0.27
|
|
|
|
|
|
10.
|
Restricted
Stock Units
|
For
the three months ended June 30, 2017 and 2016, restricted stock expense recorded as stock-based compensation was $3,294 and $18,200,
respectively, and capitalized stock based compensation was $8,214 and $12,339, respectively.
|
|
Number
of
restricted
stock units
|
|
|
Weighted
average
fair value per
award
|
|
Balance, December 31, 2016
|
|
|
2,711,297
|
|
|
$
|
0.17
|
|
Granted
|
|
|
–
|
|
|
$
|
-
|
|
Vested
|
|
|
(887,422
|
)
|
|
|
0.25
|
|
Balance, June 30, 2017
|
|
|
1,824,375
|
|
|
$
|
0.13
|
|
At
June 30, 2017, unrecognized compensation expense related to RSUs totaled $54,066 that will be recognized over a weighted average
period of approximately eight months.
The
Company’s operations are in two geographic segments: Bulgaria and Turkey. Summarized financial information for our geographic
segments for the current period is shown in the following table:
Six
months ended June 30, 2017
|
|
Bulgaria
|
|
|
Turkey
|
|
|
Corporate
Office
|
|
|
Total
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
1,672,639
|
|
|
$
|
-
|
|
|
$
|
1,672,639
|
|
Loss before other income
(expenses)
|
|
|
(664
|
)
|
|
|
(835,772
|
)
|
|
|
(783,423
|
)
|
|
|
(1,643,555
|
)
|
Net loss
|
|
|
(664
|
)
|
|
|
(573,458
|
)
|
|
|
(833,639
|
)(1)
|
|
|
(1,431,458
|
)
|
(1)
Includes approximately $279,000 of expense related to the amendment of warrants. See note 9.
The
Company is subject to United States federal and state income taxes at a rate of 34%. The reconciliation of the provision for income
taxes at the United States federal statutory rate compared to the Company’s income tax expense as reported is as follows:
|
|
Six
Months Ended
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
Benefit at statutory rate
|
|
$
|
(486,696
|
)
|
|
$
|
(58,666
|
)
|
Permanent differences and other:
|
|
|
154
|
|
|
|
134
|
|
Valuation allowance
change
|
|
|
486,542
|
|
|
|
58,532
|
|
Income tax provision
|
|
$
|
–
|
|
|
$
|
–
|
|