NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 and 2016
General:
On July 20, 2001, Americomm Resources Corporation merged with its wholly-owned subsidiary, Empire Petroleum Corporation, and simultaneously changed the name of the corporation to Empire Petroleum Corporation (the "Company"). Both the merger and name change were effective as of August 15, 2001. Americomm Resources Corporation was originally incorporated in the State of Utah on the 22nd day of August 1983, as Chambers Energy Corporation. On the 7th day of March 1985, the state of incorporation was changed to Delaware by means of a merger with Americomm Corporation, a Delaware corporation formed for the purpose of effecting the said change. In July 1995, the Company changed its name to Americomm Resources Corporation.
1. Continuing operations:
The ultimate recoverability of the Company's investment in its oil and gas interests is dependent upon the existence, discovery, and development of economically recoverable oil and gas reserves, the ability of the Company to obtain necessary financing to further develop the interests, and upon the ability to attain future profitable production. The Company has been incurring significant losses in recent years and future financing is uncertain. These factors indicate that there is a substantial doubt about the Company's ability to continue as a going concern.
The continuation of the Company is dependent upon the ability of the Company to raise capital and attain future profitable operations. These financial statements have been prepared on the basis of United States generally accepted accounting principles applicable to a company with continuing operations, which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its obligations in the normal course of operations. These financial statements do not include any adjustments that might be necessary to the carrying value of assets and liabilities, reported expenses and the balance sheet classifications used should the Company be unable to continue as a going concern.
2. Significant accounting policies:
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
(a) Capital assets:
The Company uses the successful efforts method of accounting for its oil and gas activities. Costs incurred are deferred until exploration and completion results are evaluated. At such time, costs of activities with economically recoverable reserves are capitalized as proven properties, and costs of unsuccessful or uneconomical activities are expensed.
Capitalized drilling costs are reviewed periodically for impairment. Costs related to impaired prospects or unsuccessful exploratory drilling is charged to expense. Management's assessment of the results of exploration activities, commodity price outlooks, planned future sales or expiration of all or a portion of such leaseholds impact the amount and timing of impairment provisions. An impairment expense could result if oil and gas prices decline in the future as it may not be economical to develop some of these unproved properties.
Lease options are capitalized as unproved property acquisition costs and are reviewed for impairment if indicators exist that the carrying value of the lease option may not be recoverable. If the lease options become impaired, expire or are abandoned, the options will be expensed. If proved reserves are discovered after the options are exercised, these costs will be reclassified as proved property.
(b) Equity Method Investments:
Companies in which Empire owns a 20% to 50% interest, but does not have a controlling interest, are accounted for by the equity method. The Company owns a 50% non-controlling interest in Masterson West II. Masterson West II is accounted for under the equity method and is not required to be consolidated in the financial statements. The carrying value of the Company's investment in Masterson West II is reflected in the Balance Sheets as Investment in Masterson West II. For more information about the investment in Masterson West II and the summarized Masterson West II balance sheet, refer to Note 4.
(c) Per share amounts:
The Company calculates and discloses basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). The computation of basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period.
Diluted Earnings per Share ("EPS") gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on losses. As a result, if there is a loss from continuing operations, Diluted EPS is computed in the same manner as Basic EPS. At December 31, 2016 and 2017, the Company had 3,287,500 and 8,775,167 options and warrants outstanding, respectively, that were not included in the calculation of earnings per share for the periods then ended. Such financial instruments may become dilutive and would then need to be included in future calculations of Diluted EPS. At December 31, 2017 and 2016, the outstanding options were considered anti-dilutive since the strike prices were above the market price and since the Company has incurred losses year to date.
(d) Income taxes:
The Company accounts for income taxes in accordance with the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established if management determines it is more likely than not that some portion of a deferred tax asset will not be realized.
(e) Financial instruments:
The carrying value of current assets and current liabilities approximate their fair value due to the relatively short period to maturity of the instruments. The carrying value of the convertible debt and investments in Masterson West II also approximate their fair value as of December 31, 2017. Management's estimates are based on an assessment of qualitative factors that are considered level 3 measurements in the fair value valuation hierarchy required by FASB ASC 820.
(f) Stock option plan:
The Company expenses options granted over the vesting period based on the grant date fair value of the award.
(g) Obligations associated with the retirement of assets:
The Company follows Financial Accounting Standards Board (FASB) guidance on accounting for asset retirement obligations, which among other matters, addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This guidance requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred, with the associated asset retirement cost capitalized as part of the related asset and allocated to expense over the asset's useful life. The Company applies its analysis to producing wells.
(h) Recent Accounting Pronouncements:
FASB periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The Company has reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable:
In February 2016, the FASB issued ASU No. 2016-02: "Leases (Topic 842)" which is intended to improve financial reporting about leasing transactions. This ASU will require organizations ("lessees") that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Organizations that own the assets leased by lessees ("lessors") will remain largely unchanged from current GAAP. In addition, this ASU will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted. Based on management's initial assessment, ASU No. 2016-02 will not have a material impact on the Company's financial statements. The Company is a lessee on an office lease; however since the lease is on a month to month basis it would not record a right of use asset or liability.
In May 2017, the FASB issued ASU 2017-09 which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Entities should apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted and prospective application is required. The Company does not expect the adoption of ASU 2017-09 to have a material impact on its financial position, results of operations or cash flows.
3. Property and Lease Options:
In 2015, the Company acquired exclusive options to enter into two separate oil and gas leases with respect to 160,000 gross acres of mineral interests primarily in South Dakota. The Company conducted geological and geophysical studies of the prospective acreage to identify potential areas for seismic surveys, geochemical imaging surveys and satellite and gravity studies to identify certain areas within the acreage for prospect development. The options expired in April 2017.
4. Investment in Masterson West II, LLC
On December 22, 2016, the Company entered into a subscription and contribution agreement with Masterson West, LLC ("Masterson West") (the "Contribution Agreement") relating to the newly formed Masterson West II, LLC, a Texas limited liability company ("Masterson West II"). Pursuant to the Contribution Agreement, among other things, (a) at the initial closing, the Company agreed to contribute 2,000,000 shares of its common stock, par value $0.001 per share (the "Common Stock"), to Masterson West II, along with an additional 38,000,000 shares of Common Stock and (b) at the final closing, Masterson West has an obligation to contribute certain oil and gas properties (the "Contributed Properties") to Masterson West II in exchange for the Company contributing cash of not less than $9,000,000 and up to $18,000,000 to Masterson West II. There is no assurance that the Company will be able to secure the funds necessary for the final closing. The final closing is scheduled to occur no later than April 1, 2017. If the final closing occurs, the Company will own 50% of Masterson West II if it delivers $18,000,000 of cash at the final closing and 25% of Masterson West II if it delivers $9,000,000 of cash at the final closing.
Also on December 22, 2016, the Company entered into a limited liability agreement of Masterson West II with Masterson West (the "LLC Agreement"). Pursuant to the Contribution Agreement and the LLC Agreement, Masterson West is immediately entitled to a distribution of the 2,000,000 shares of Common Stock, but is only entitled to a distribution of all or a portion of the 38,000,000 shares of Common Stock if and when the final closing occurs.
In connection with the contribution of the Contributed Properties by Masterson West, at the final closing, Masterson West II will assume a credit facility affiliated with the Contributed Properties that has approximately $20,000,000 outstanding as of the date hereof. Masterson West and the Company intends to use the cash consideration paid by the Company at the final closing to pay down such credit facility and/or as working capital to continue to develop the Contributed Properties. If the proceeds are used to pay down part or all of such credit facility, the credit facility will be used to continue to develop the Contributed Properties.
All of Contributed Properties are located in Moore and Potter Counties in Texas and the wells to be included in such Contributed Properties primarily target the red cave formation at a depth of 2,100 to 2,300 feet. Masterson West and affiliate of Masterson West, Adams Affiliates Inc., have owned and operated the Contributed Properties for over 20 years. The Company has targeted this transaction for a number of reasons. First, the Contributed Properties are currently producing approximately 1,000 barrels of oil per day equivalent and include approximately 8,000 net acres of leasehold that are held by such production. Second, the Company believes this transaction is a lower risk oil-weighted infill drilling opportunity as Masterson West has identified approximately 380 locations to develop on five to ten acre spacing units, with approximately 200 proved undeveloped drilling locations. The Company estimates the total cost to complete each well will be approximately $250,000.
As stated above, if the final closing does not occur, the Contributed Properties will not be transferred to Masterson West II and the additional 38,000,000 shares of the Common Stock will not be issued by the Company. Also as stated above, under the Contribution Agreement, the final closing was scheduled to occur no later than April 1, 2017. However, on February 18, 2017, the majority owner of Masterson West, Gary C. Adams, unexpectedly passed away. As a result of this development, the final closing did not occur on April 1, 2017, the final close date per the Contribution Agreement. Though the transaction did not close before the stated final closing date, the Agreement remains in effect until one or both parties serve a notice of termination. As of the date of this filing, neither party has elected to terminate the Contribution Agreement. The Company is continuing its discussions with representatives of Masterson West regarding a potential acquisition.
Masterson West II had no operations during the year. The following table reflects the balance sheet of Masterson West II as of December 31, 2017:
Masterson West II Summarized Balance Sheet
|
|
2017
|
|
|
|
|
|
|
Total Assets (option and partial consideration to purchase certain oil and gas assets)
|
|
$
|
300,000
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
300,000
|
|
5. Senior Unsecured Convertible Promissory Notes
In December 2016, the Company entered into securities purchase agreements (each, a "Securities Purchase Agreement" and, collectively, the "Securities Purchase Agreements") with four accredited investors, pursuant to which it issued senior unsecured convertible promissory notes due December 31, 2018 (each, a "Convertible Note" and, collectively, the "Convertible Notes") in the aggregate amount of $132,500 in cash. Each Convertible Note accrues interest at 6%, is due December 31, 2018 and is convertible at the option of the holder at $0.15 per share. Each investor was also issued a warrant certificate (each, a "Warrant Certificate" and, collectively, the "Warrant Certificates"), pursuant to which such investor could acquire one share of Common Stock at $0.25 per share for each $0.25 invested in the applicable Convertible Note until December 31, 2018. The full amount interest under each Convertible Note is accrued and paid upon the maturity date or earlier conversion.
The value allocated to the Warrant Certificates was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 112%, risk free interest rate of 0.91% and an expected useful life of two years, The fair value of the Warrant Certificates was allocated $38,115 to Paid in Capital and $38,115 as Debt Issue Costs. The Notes' conversion features were valued at their intrinsic value in excess of the debt's allocated value of $38,115 and resulted in additional Paid in Capital and Debt Issue Costs. The Debt Issue Costs represent a direct deduction of the face amount the Convertible Notes is amortized as interest expense over the life of the Notes.
In January 2017, the Company entered into securities purchase agreements (each, a "Securities Purchase Agreement" and, collectively, the "Securities Purchase Agreements") with two accredited investors, pursuant to which it issued senior unsecured convertible promissory notes due December 31, 2018 (each, a "Convertible Note" and, collectively, the "Convertible Notes") in the aggregate amount of $62,500 in cash. Each Convertible Note accrues interest at 6%, is due December 31, 2018 and is convertible at the option of the holder at $0.15 per share. Each investor was also issued a warrant certificate (each, a "Warrant Certificate" and, collectively, the "Warrant Certificates"), pursuant to which such investor could acquire one share of Common Stock at $0.25 per share for each $0.25 invested in the applicable Convertible Note until December 31, 2018. The full amount of interest under each Convertible Note is accrued and paid upon the maturity date or earlier conversion.
The value allocated to the Warrant Certificates was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 110%, risk free interest rate of 1.23% and an expected useful life of two years. The fair value of the Warrant Certificates was allocated $16,975 to Paid in Capital. The Notes' conversion features were valued at their intrinsic value in excess of the debt's allocated value of $16,975 and resulted in additional Paid in Capital. The Debt Issue Costs represent a direct deduction of the face amount the Convertible Notes and is amortized as interest expense over the life of the Notes.
In September and October 2017, the Company entered into securities purchase agreements (each, a "Securities Purchase Agreement" and, collectively, the "Securities Purchase Agreements") with two accredited investors, pursuant to which it issued senior unsecured convertible promissory notes due December 31, 2019 (each, a "Convertible Note" and, collectively, the "Convertible Notes") in the aggregate amount of $65,000 in cash. Each Convertible Note accrues interest at 6%, is due December 31, 2019 and is convertible at the option of the holder at $0.15 per share. Each investor was also issued a warrant certificate (each, a "Warrant Certificate" and, collectively, the "Warrant Certificates"), pursuant to which such investor could acquire one share of Common Stock at $0.25 per share for each $0.25 invested in the applicable Convertible Note until December 31, 2019. The full amount of interest under each Convertible Note is accrued and paid upon the maturity date or earlier conversion. The value allocated to the September Warrant Certificates was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 154%, risk free interest rate of 1.35% and an expected useful life of 28 months. The value allocated to the October Warrant Certificates was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 180%, risk free interest rate of 1.51% and an expected useful life of 27 months The fair value of the Warrant Certificates of $13,918 was allocated to Paid in Capital. The Notes' conversion features were valued at their intrinsic value in excess of the debt's allocated value of $13,918 and resulted in additional Paid in Capital. The Debt Issue Costs represent a direct deduction of the face amount the Convertible Notes and is amortized as interest expense over the life of the Notes.
The following table reflects the changes in long term debt during the years ended December 31, 2017 and 2016, respectively:
|
|
2017
|
|
|
2016
|
|
|
|
Current
|
|
|
Long Term
|
|
|
Total
|
|
|
|
|
Convertible Notes Outstanding
|
|
$
|
208,950
|
|
|
$
|
51,050
|
|
|
$
|
260,000
|
|
|
$
|
132,500
|
|
Debt Issue Costs – Warrants and Conversion Feature
|
|
|
(71,694
|
)
|
|
|
(3,684
|
)
|
|
|
(75,378
|
)
|
|
|
(73,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes Outstanding, Net
|
|
$
|
137,256
|
|
|
$
|
47,366
|
|
|
$
|
184,622
|
|
|
$
|
58,844
|
|
6. Capital Stock:
During December 2016, the Company issued $132,500 of senior unsecured convertible promissory notes ("Convertible Notes") due December 31, 2018 to several accredited investors, See Note 5. The Convertible Notes are convertible at the option of the holder into Common Stock at $0.15 per share. Each investor was also issued a warrant certificate, pursuant to which such investor could acquire one share of Common Stock at $0.25 per share for each $0.25 invested in the applicable Convertible Note until December 31, 2018.
During January 2017 the Company issued $62,500 of senior unsecured convertible promissory notes ("Convertible Notes") due December 31, 2018 to several accredited investors, See Note 5. The Convertible Notes are convertible at the option of the holder into Common Stock at $0.15 per share. Each investor was also issued a warrant certificate, pursuant to which such investor could acquire one share of Common Stock at $0.25 per share for each $0.25 invested in the applicable Convertible Note until December 31, 2018.
On July 25, 2017 the Company issued 93,333 shares of its common stock and warrants to purchase 56,000 shares of its common stock for $.25 per share which expires on December 31, 2018 to an investment banking service firm in return for past and future services. The Common Stock was valued at $4,200 which represents the market price of 4.5 cents per share on the date of issuance. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 145%, risk free interest rate of 1.32% and an expected useful life of 17 months. The fair value of the warrants of $694 was allocated to Paid in Capital.
During September and October 2017 the Company issued $65,000 of senior unsecured convertible promissory notes ("Convertible Notes") due December 31, 2019 to two accredited investors, See Note 5. The Convertible Notes are convertible at the option of the holder into Common Stock at $0.15 per share. Each investor was also issued a warrant certificate, pursuant to which such investor could acquire one share of Common Stock at $0.25 per share for each $0.25 invested in the applicable Convertible Note until December 31, 2019.
During November 2017 the Company issued warrants to purchase 4,000,000 shares of its common stock for $.25 per share and $.15 per share which expires on December 31, 2021 to several Board members and management. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 179%, risk free interest rate of 1.98% and an expected useful life of 49 months. The fair value of the warrants of $472,700 was recorded as compensation expense and allocated to Paid in Capital.
During December 2017 the Company issued 1,225,000 shares of its common stock and warrants to purchase 1,225,000 shares of its common stock for $.10 per share which expires on December 31, 2019 to several accredited investors. The value allocated to the warrants was the fair value determined using the Black-Scholes option valuation with the following assumptions: no dividend yield, expected annual volatility of 179%, risk free interest rate of 1.78% and an expected useful life of 25 months. The fair value of the warrants of $121,275 was allocated to Paid in Capital.
7. Stock options:
At the Company's 2006 Annual Meeting of Stockholders, the stockholders approved the 2006 Stock Incentive Plan (the "Plan"). The Plan permits the issuance of stock options, restricted stock awards, and performance shares to employees, officers, directors, and consultants of the Company. Initially, and until such time as the Board creates a Compensation Committee, the Board of Directors will administer the Plan. The total number of shares of common stock that may be issued pursuant to awards under the Plan is 5,000,000. Under the Plan, no participant may receive awards of stock options that cover, in the aggregate, more than 500,000 shares of common stock in any fiscal year. The plan terminated on June 5, 2016.
The Company expenses the cost of options granted over the vesting period of the option based on the grant-date fair value of the award. Option fair values are estimated at the grant date using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. For purposes of determining the expected life of the options, the Company utilizes the Simplified Method as defined in Staff Accounting Bulletin No. 107 issued by the Securities and Exchange Commission. In addition, the Black-Scholes option valuation model requires the input of other highly subjective assumptions including stock price volatility.
On June 1, 2016 the Company issued options to purchase a total of 1,150,000 shares of the Company's common stock under the 2006 Stock Incentive Plan for services rendered to the Company, including capital formation, prospective deal origination, evaluation, due diligence, and administrative support. The options immediately vested and expire after 2 years. Options totaling 600,000 have a strike price of $0.15, with the remainder 550,000 having a strike price of $.25. The Company recorded an expense of $65,660 for the options; $27,500 related to options with a strike price of $0.25 and $38,160 related to options with a strike price of $0.15.
A summary of the Company's Incentive Plan as of December 31, 2017 and changes during the year is presented below:
|
|
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at End of Year 2015
|
|
|
6,250
|
|
|
$
|
2.56
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
600,000
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
550,000
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
Cancelled or Exercised
|
|
|
2,083
|
|
|
$
|
1.44
|
|
|
|
|
|
|
|
|
|
|
Outstanding at End of Year 2016
|
|
|
1,154,167
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or Exercised
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at End of Year 2017
|
|
|
1,154,167
|
|
|
|
0.21
|
|
The following table summarizes information about stock options outstanding at December 31, 2017:
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
Weighted
|
Range of
|
Number
|
Remaining
|
|
Average
|
Number
|
Average
|
Exercise
|
Outstanding
|
Contractual
|
|
Exercise
|
Exercisable
|
Exercise
|
Prices
|
at 12/31/17
|
Life
|
|
Price
|
at 12/31/16
|
Price
|
|
|
|
|
|
|
|
$0.15 - $3.12
|
1,154,167
|
0.42 years
|
|
$0.21
|
1,154,167
|
$0.21
|
8. Income taxes:
The provision for income taxes differs from the amount obtained by applying the Federal income tax rate of 34% to income before income taxes. The difference relates to the following items:
|
|
2017
|
|
|
2016
|
|
Statutory tax rate
|
|
34%
|
|
|
34%
|
|
|
|
|
|
|
|
|
|
|
Expected tax benefit
|
|
$
|
(280,000
|
)
|
|
$
|
(129,000
|
)
|
Nondeductible expenses
|
|
|
0
|
|
|
|
101,000
|
|
Benefit of losses not recognized
|
|
|
280,000
|
|
|
|
28,000
|
|
|
|
|
|
|
|
|
|
|
Tax provision (benefit) as reported
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
The components of deferred income taxes at December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Loss carry-forwards
|
|
$
|
2,065,000
|
|
|
$
|
2,960,000
|
|
Valuation allowance
|
|
|
(2,065,000
|
)
|
|
|
(2,960,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017, the Company has accumulated net operating loss carryforwards totaling approximately $9,800,000 which begin to expire if not utilized starting in 2018.
On December 22, 2017 H.R. 1, originally known as the Tax Cuts and Jobs Act, (the "Tax Act") was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate ("Federal Tax Rate") from 35% to 21% effective January 1, 2018. The Company must re-measure its net deferred tax assets and liabilities using the Federal Tax Rate that will apply when these amounts are expected to reverse. Accordingly, the Company utilized a 21% tax rate to evaluate its net deferred taxes for the period ended December 31, 2017.
Utilization of the Company's loss carryforwards is dependent on realizing taxable income. Deferred tax assets for these carryforwards have been reduced by a valuation allowance up to an amount equal to estimated deferred tax liability.
The Company is no longer subject to income tax examinations by tax authorities for years before 2013. The Company is not currently the subject of any income tax examinations by any tax authorities.
Based upon a review of its income tax filing positions, the Company believes that its positions would be sustained upon an audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded. The Company recognizes interest related to income taxes as interest expense and penalties as operating expenses.
9. Oil Sale Revenue:
The Company records revenue from petroleum sales when received from the operator of the well. Petroleum sales are reported net of working interest and overriding royalty amounts due.
10. Operating lease:
Rent expense for the year ended December 31, 2017 was $4,650. The Company incurred no rent expense in 2016.
11. Related Party Transactions:
On November 28, 2017, the Company named Thomas Pritchard as Chief Executive Officer of the Company. Mr. Pritchard is the co-founder/ partner for Pritchard Griffin Advisors and the Managing Director of Pritchard Energy Advisors. Both of the companies have provided services to the Company, primarily related to raising capital and locating oil & gas investments. In 2017, the Company paid Pritchard Griffin Advisors $56,764 for consulting services.
12. Subsequent Events:
Subsequent to December 31, 2017, the Company received subscriptions for 1,200,000 shares of its Common Stock and warrants to purchase an additional 1,200,000 shares of common stock at an exercise price of $0.25 per share which expire December 31, 2019 to a group of accredited investors. The Company received $120,000 as consideration for the transactions.