Notes
to Consolidated Unaudited Financial Statements
For
the years ended December 31, 2017 and 2016
Note
1 – Nature of the Business
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 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 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. The Company has
no immediate plans to engage in further exploration and development activities in the U.S. Gulf Coast region.
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.
On
May 10, 2017, the Company entered into a purchase and sale agreement (PSA), with an undisclosed seller, to acquire 67,330 gross
acres (49,600 net acres) held by production in Utah and Colorado. This acquisition was anticipated to close by or before June
30, 2017, such closing being subject to traditional representations, warranties, covenants and adjustments including, but not
limited to lien releases, cures of any defective title matters, satisfaction of leases and amendments thereto. In August 2017,
the parties by mutual agreement terminated the PSA.
On
October 19, 2017, the Company announced the acquisition of 21% working interest in two horizontal gas wells in the Uinta Basin
from an undisclosed party
.
Both wells are operated by EOG Resources,
Inc. (NYSE: EOG). We expect total cost for our 21% working interest in both wells will be $3.2 million.
These wells align
with the Company’s overall growth strategy for the Basin and provides us with the ability to gain insight from a world-class
operator. In February 2018, the Company announced the successful drilling, completion and flow testing of the
Stagecoach
111-20H and Stagecoach 117-20H horizontal wells, both of which are now producing natural gas in commercial quantities. Both wells
have been
online since late December 2017 and production
tubing is expected to be set in the near term. These two successful horizontal wells will generate production and net cash flow
for the Company and are expected to payout within 30 months. As of December 31, 2017, the Company incurred $1,501,377 cost for
our shares of interest.
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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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. On November 3, 2017, Berwin agreed to defer repayment of this note to a later date, and acknowledged
that the Company is not in default regarding this Debenture. Berwin also reaffirmed its belief that the Company will either
extend or repay the obligation to their satisfaction. As partial consideration for the deferment, the Company issued Berwin
100,000 shares of its restricted common stock, valued at $48,000. The issuance of the shares in exchange for the
maturity extension was treated as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt –
Modifications and Extinguishments” (“ASC 470-50”). On February 28, 2018, Berwin and the Company agreed
to extend the maturity date of the debenture to June 30, 2018, and as consideration for the extension, the Company agreed
to compensate Berwin with 250,000 shares of restricted common stock. In addition, the parties agreed that if payment of said
principal and interest due and payable is made late, then a penalty payment of $125,000 shall become due and payable to Berwin
by the Company.
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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. On August 14, 2017, we repaid $1,000,000 in principal and $20,000
in accrued interest and recorded remaining accrued interest in amount of $30,000 as gain on debt forgiveness.
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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, issued in connection with the assets acquired on December 30, 2016, with a maturity
date of June 30, 2018. This promissory note recites that it accrues no interest during its term and is due and payable in
full on or before its maturity date. Foothills recorded $342,804 imputed interest as debt discount. This amount of $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 year ended December 31, 2017, we amortized $228,536 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.
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convertible promissory note in amount of $50,000 was issued to an unrelated party on
May 10, 2017, bearing an annual percentage rate of 10% with a term of 12 months, which
is due on May 10, 2018. This note may, at the option of the lender, be converted at any
time prior to 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. On October 19, 2017, the Company agreed
to extend the allowable conversion period provided under this convertible note until
May 10, 2018. On November 7, 2017, the Company issued 50,000 warrants to purchase 50,000
shares of common stock of the Company at a strike price of $1.00 per share expiring on
May 7, 2019. If the Company fails to pay the principal and accrued unpaid interest due
and payable to Lender on or before the due date of the convertible note, then the Lender
shall be provided the right to convert at either $0.665 per share or upon the same terms
offered in FirstFire Opportunity Fund, LLC Note’s conversion options. The relative
fair value of warrant was determined to be $3,381 on November 7, 2017, using the Black-Scholes
option-pricing model based on the following assumptions: (i) volatility rate of 77%,
(ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life
of 1.5 years. At December 31, 2017, $50,000 of principal was outstanding under the Note. The issuance of the warrants in exchange for the maturity extension was treated as a modification of
existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”).
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promissory note to Profit Well Limited, a Hong Kong limited liability company, issued on August 9, 2017, in the amount of
$1,050,000. The promissory note bears an annual interest rate of 13.5% and was initially payable on September 8, 2017. The
Company received the funds under the foregoing note on August 10, 2017. The funds received pursuant to the Note principally
have been used to repay the Full Wealth debenture, dated June 1, 2017. On November 3, 2017, Profit Well Limited agreed to
defer repayment of this note to a later date, and acknowledged that the Company is not in default regarding this Debenture.
Profit Well Limited also reaffirmed its belief that the Company will either extend or repay the obligation to their satisfaction.
As partial consideration for the deferment, the Company agreed to issue Profit Well Limited 100,000 shares of its restricted
common stock, valued at $48,000. The issuance of the shares in exchange for the maturity extension was treated as
a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments”
(“ASC 470-50”). On February 28, 2018, Profit Well and the Company agreed to extend the maturity date of the
debenture to June 30, 2018, and as consideration for the extension, the Company agreed to compensate Profit Well with 200,000
shares of restricted common stock. In addition, the parties agreed that if payment of said principal and interest due and
payable is made late, then a penalty payment of $100,000 shall become due and payable to Profit Well by the Company.
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promissory note and three tranches of warrants issued on September 29, 2017, to an unaffiliated investor for an aggregate
consideration of $250,000. This promissory note recites that it accrues no interest if paid when due and is due and payable
on January 2, 2018. The obligations under the promissory note were personally guaranteed by Kevin J. Sylla, Executive Chairman
of the Company. If principal is not paid on or before January 2, 2018, interest will accrue at the rate of 15% per year until
paid. On November 6, 2017, the Company agreed to compensate the investor 75,000 shares of the Company’s restricted common
stock in connection with a more favorable term of a note entered with FirstFire Opportunity Fund, LLC. On December 30, 2017,
the Company and the investor agreed to extend the maturity date of this Note to January 23, 2018, in return for a payment
at maturity of the principal, accrued interest as provided in the Note, plus 30,000 shares of the Company’s restricted
common stock. Because the fair value of the shares was greater than 10% of the present value of the remaining cash flows
under the Note, the issuance of the shares in connection with a more favorable term of a note entered with FirstFire Opportunity
Fund, LLC. was treated as a debt extinguishment and reissuance of a new debt instrument pursuant to the guidance of ASC 470-50
“Debt – Modifications and Extinguishments” (“ASC 470-50”). Since January 23, 2018, the Company
and the investor have been in ongoing discussions to extend the term of this Note. On March 28, 2018, the investor acknowledged
that the Company is
not in default
regarding this Note and reaffirmed its belief that the Company will either extend
the Note’s due date or repay its obligation on terms that are mutually satisfactory. The warrants have the following
terms:
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375,000
warrants to purchase 375,000 shares of common stock of the Company at a strike price of $0.665 per share expiring on September
29, 2019,
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375,000
warrants to purchase 375,000 shares of common stock of the Company at a strike price of $1.25 per share expiring on September
29, 2020,
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185,000
warrants to purchase 185,000 shares of common stock of the Company at a strike price of $2.00 per share expiring on September
29, 2020.
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The
aggregate relative fair value of three tranches of warrants was determined to be $105,000 on September 29, 2017, using the Black-Scholes
option-pricing model based on the following assumptions: (i) volatility rate of 94%, (ii) discount rate of 0%, (iii) zero expected
dividend yield, and (iv) expected life of 2-3 years. $2,536 imputed interest was recorded as debt discount. $2,536 was determined
using the present value method based on the following assumptions: (i) adjusted interest rate 4% (ii) expected life of 0.26 year.
The aggregate value of the warrants and imputed interest of $107,536 was considered as debt discount upon issuance and will be
amortized as interest over the term of the Note or in full upon the conversion of the Note. During the year ended December 31,
2017, the Company amortized $105,272 of such discount to interest expense, and the unamortized discount as of December 31, 2017
was $2,264. At December 31, 2017, $250,000 of principal was outstanding under the Note.
Each
tranche of warrants is subject to down round adjustment provisions if the Company during the term of that tranche issues additional
securities for consideration per share, after giving effect to fees, commission and expenses, that is less, or which on conversion
or exercise of the underlying security is less, than $0.665 per share (as adjusted for any change resulting from forward or reverse
splits, stock dividends and similar events).
To
satisfy most favored nation provisions in previously entered securities purchase agreements that are triggered by the transaction
described above, Company issued 136,015 shares of common stock and warrants to purchase 136,015 shares of common stock,
in the aggregate, to certain investors who purchased units from the Company, at a $1.00 per unit, with each unit consisting of
one share and one warrant. See the Company’s Current Report on the Form 8-K filed with the SEC on June 5, 2017. Of this
amount, 100,752 shares and warrants to purchase 100,752 shares of common stock will be issued to Wilshire Energy Partners LLC,
an entity controlled by Kevin J. Sylla. The exercise price of these investor warrants was adjusted to $0.665 per share. We measured
the value of the effect of the down round feature as the difference between the fair value of the financial instrument at an original
exercise price of $1.50 and an adjusted exercise price of $0.665 and, as a result, $59,801 was recorded as down round feature
as interest expense under ASC 260-10-30-1. Foothills determined the amount of $59,801 using the Black-Scholes option-pricing model
based on the following assumptions: (i) volatility rate of 94%, (ii) discount rate of 0%, (iii) zero expected dividend yield,
and (iv) expected life of 3 years.
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convertible promissory note in the principal amount of $267,500, with net proceeds of $250,000 before giving effect to certain
transactional costs including legal fees, was issued to FirstFire Opportunity Fund, LLC, on November 17, 2017. As part of this
transaction the Company also issued:
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warrants
having an 18-month term, to purchase 267,500 shares of the Company’s common stock at an exercise price of $1.00 per
share and
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60,000
shares of the Company’s restricted common stock.
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The convertible note accrues interest of 8% per annum and is due and payable on August 17, 2018. The warrants are subject to adjustment in certain events such as forward or reverse stock splits or if subsequent financings are at terms that are more favorable to persons in subsequent issuances of securities. The convertible note agreements give the lender the right to convert the loan amounts due into common stock at a conversion price of $0.665 per share, subject to adjustment under certain events, and the Company has the option but not the obligation to repay the outstanding principal of the convertible note, in whole or in part, within six months from the closing date, by paying 115% of the principal amount then owing, plus any accrued and unpaid interest to avoid conversion under the convertible agreements. The convertible note may not be prepaid from 180 days after closing until maturity and is secured by a personal guaranty from the Company’s Executive Chairman, Kevin Sylla. The net proceeds of the convertible note will be used for general corporate and working capital purposes. No broker-dealer or placement agent was retained or involved in this transaction.
See 8-K report filed with the SEC on November 17, 2017 for more information.
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promissory note was issued on November 1, 2017, to the Law Offices of Aaron A. Grunfeld or its successors or assigns (the
“Holder”), the Company’s outside general counsel, for a principal amount of $120,628.95 in exchange of legal
services rendered, bearing an interest rate of 12% per annum and with a maturity date of June 30, 2018.
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From
its inception in December 2015 through the period ended December 31, 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 December 31, 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. Since the Company does not expect to drill a test well on the Ironwood prospect prior
to the end of 2017, this acreage will not be earned by the Company.
During
the period ended December 31, 2017, the Company continued to evaluate, consider and perform due diligence on several prospective
acquisitions of producing oil and gas properties located in the U.S. Rocky Mountain region. On May 10, 2017, the Company entered
into a purchase and sales agreement (PSA) with an undisclosed seller to acquire approximately 49,600 net acres held by production
in the Piceance Basin in Utah and Colorado. The acquisition was anticipated to close on or before June 30, 2017, however the Company
and seller agreed to terminate the PSA by mutual agreement and the Company did not consummate the acquisition. For the period
ended December 31, 2017, the Company also submitted several additional letters of intent and indications of interest to other
prospective sellers of producing assets, which unfortunately never progressed to the PSA stage of negotiations. Management continues
to seek out and evaluate potential joint ventures with industry partners and other prospective acquisitions of producing oil and
gas assets, which meet our criteria. We anticipate consummating one or more prospective acquisition of producing properties during
the current fiscal year, which will be accretive to earnings and provide a platform for future revenue growth.
Going
Concern
The
Company’s unaudited condensed consolidated financial statements included elsewhere in this Annual 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 consolidated financial statements, the Company had an accumulated
deficit of $8,382,238 at December 31, 2017, and incurred a net loss of $6,407,644, and utilized net cash of $502,078
in operating activities for the year ended. These factors raise substantial doubt about its ability to continue as a going
concern. The 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. Our financial statements reflect that our current liabilities exceed our current
assets and it is possible that the historical value of the assets that we record on our books may not be attained on a sale or
other disposition for cash. We require substantial additional operating capital to maintain current operations and to implement
even a portion of our identified acquisitions and workovers. Additional capital, if available at all, will likely be on onerous
terms that are also dilutive to our shareholders. No assurance can be given that we will obtain any additional capital. As a consequence,
an investment in our shares or other securities is extremely speculative and may result in a complete loss of your investment.
Principles
of Consolidation
The
financial statements include the accounts of Foothills Exploration, Inc., and all of its direct and indirect wholly-owned
subsidiaries including Foothills Petroleum Operating, Inc., Foothills Exploration Operating, Inc., Foothills Exploration LLC,
Tiger Energy Partners International, LLC, Tiger Energy Operating, LLC and Tiger Energy Mineral Leasing, LLC. Intercompany
balances and transactions have been eliminated in consolidation.
Basis
of Presentation and Functional Currency
These
consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted
in the United States of America, and are expressed in United States dollars (USD).
Use
of 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.
Cash
and Cash Equivalents
Cash
and cash equivalents include all highly liquid debt instruments with maturity of three months or less when purchased.
Restricted
Cash
Cash
and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded
in restricted cash in the non-current assets section of our consolidated balance sheet. As of December 31, 2017, and 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. These funds, currently being held in escrow, will be released to the Company
once the Company finishes its reclamation projects.
Accounts
receivable and allowance for doubtful accounts
Accounts
receivable represent customer accounts receivables. The Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts. The Company’s estimate is based on historical collection experience, general economic environment
trends, and a review of the current status of trade accounts receivable. Management reviews its accounts receivable each reporting
period to determine if the allowance for doubtful accounts is adequate. Such allowances, if any, would be recorded in the period
the impairment is identified. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts
will change. Uncollectible accounts receivables are charged against the allowance for doubtful accounts when all reasonable efforts
to collect the amounts due have been exhausted.
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 December 31, 2017, the Company recognized impairment of oil and gas property in amount of $1,479,230, during the year ended
December 31, 2017.
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 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. The carrying amounts of the Company’s financial assets and liabilities, including cash,
prepaid expenses, accounts payable, accrued expenses, and other current liabilities, approximate their fair values because of
the short maturity of these instruments. The fair value of notes payable and convertible notes approximates their fair values
since the current interest rates and terms on these obligations are the same as prevailing market rates.
As
of December 31, 2017, the Company did not identify any assets and liabilities that are required to be presented on the balance
sheet at fair value.
Derivative
Financial Instruments
Certain
of the Company’s debt and equity instruments include embedded derivatives that require bifurcation from the host contract
under the provisions of ASC 815-40, Derivatives and Hedging. Under the provisions of these statements, the Company records the
related derivative liabilities at fair value and records the accounting gain or loss resulting from the change in fair values
at the end of each reporting period.
Long-Lived
Assets
The
Company assesses the valuation of components of its property and equipment and other long-lived assets whenever events or circumstances
dictate that the carrying value might not be recoverable. The Company bases its evaluation on indicators such as the nature of
the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external
market conditions or factors that may be present. If such factors indicate that the carrying amount of an asset or asset group
may not be recoverable, the Company determines whether an impairment has occurred by analyzing an estimate of undiscounted future
cash flows at the lowest level for which identifiable cash flows exist. If the estimate of undiscounted cash flows during the
estimated useful life of the asset is less than the carrying value of the asset, the Company recognizes a loss for the difference
between the carrying value of the asset and its estimated fair value, generally measured by the present value of the estimated
cash flows.
Revenue
Recognition
The
Company recognizes revenue in accordance with the requirements of ASC 605-10-599, which directs that it should recognize revenue
when (1) persuasive evidence of an arrangement exists (contracts); (2) delivery has occurred; (3) the seller’s price is
fixed or determinable (per the customer’s contract); and (4) collectability is reasonably assured (based upon our credit
policy). For products sold to end-users revenue is recognized when title has passed to the customer and collectability is reasonably
assured; and no further efforts are required. Future revenue from anticipated new products will follow this same policy.
Debt
Issuance Costs, Debt Discount and Detachable Debt-Related Warrants
Costs
incurred to issue debt are deferred and recorded as a reduction to the debt balance in our consolidated balance sheets. We amortize
debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts relate to the
relative fair value of warrants issued in conjunction with the debt and are also recorded as a reduction to the debt balance and
accreted over the expected term of the debt to interest expense using the effective interest method.
Net
Earnings (Loss) Per Common Share
The
Company computes earnings per share under ASC 260-10, “Earnings Per Share.” 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. The
potential shares are excluded from the determination of basic and diluted net loss per share as their effect is anti-dilutive.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method whereby deferred tax assets are recognized for deductible
temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
Stock-Based
Compensation
All
share-based payments, including grants of stock to employees, directors and consultants, are recognized in the consolidated financial
statements based upon their estimated fair values.
The
Company accounts for stock, stock options and stock warrants issued for services and compensation by employees under the fair
value method. For non-employees, the fair market value of the Company’s stock is measured on the date of stock issuance
or the date an option/warrant is granted as appropriate under ASC 718 “Compensation – Stock Compensation”. The
Company determined the fair market value of the warrants/options issued under the Black-Scholes Pricing Model. Under the provisions
ASC 718, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized
as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).
The
Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services
follows ASC Topic 505. As such, the value of the applicable stock-based compensation is periodically re-measured and income or
expense is recognized during their vesting terms. The measurement date for the fair value of the equity instruments issued is
determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii)
the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants,
the fair value of the equity instrument is primarily recognized over the term of the consulting agreement. In accordance with
FASB guidance, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be
presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for
accounting purposes.
Recent
Accounting Pronouncements
In
November 2015, the FASB issued Accounting Standards Update No. 2015-17,
Balance Sheet Classification of Deferred Taxes
(“ASU
2015-17”). ASU 2015-17 requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance
sheet instead of separating deferred taxes into current and noncurrent amounts. The guidance is effective for financial statements
issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is
permitted. The guidance may be adopted on either a prospective or retrospective basis. The adoption of ASU 2015-17 did not have
a material impact on its consolidated financial statements.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases
(Topic 842) (“ASU 2016-02”).
ASU 2016-02 addresses the financial reporting of leasing transactions. Under current guidance for lessees, leases are only included
on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This update will require the
recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that
extend beyond 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line
basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the
lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of operations and
the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component
will be included in the operating section of the statement of cash flows. This guidance is effective for annual and interim reporting
periods beginning after December 15, 2018. Early adoption is permitted. The Company has not yet completed the analysis of how
adopting this guidance will affect its consolidated financial statements.
In
March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. Some of the areas of simplification apply only to nonpublic entities. For public business entities, the amendments
in ASU 2016-09 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.
The adoption of ASU 2016-09 did not have a material impact on its consolidated financial statements.
In
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 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 consolidated financial statements.
In
July 2017, the FASB issued Accounting Standards Update No. 2017-11,
Accounting for Certain Financial Instruments with Down
Round Features
(“ASU 2017-11”). When determining whether certain financial instruments should be classified as
liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument
is indexed to an entity’s own stock. ASU 2017-11 is effective for annual or interim periods within those fiscal years beginning
after December 15, 2018 and should be applied on a retrospective basis. Early adoption is permitted for all entities, including
adoption in an interim period. The Company adopted ASU 2017-11 on its consolidated financial statements.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
Note
2 – Fixed Assets
As
of December 31, 2017, and 2016, fixed assets consisted of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Computer equipment and fixtures
|
|
$
|
22,453
|
|
|
$
|
22,453
|
|
Vehicle
|
|
|
69,446
|
|
|
|
69,446
|
|
Drilling Equipment
|
|
|
265,578
|
|
|
|
265,578
|
|
Accumulated depreciation
|
|
|
(63,509
|
)
|
|
|
(4,114
|
)
|
Fixed assets, net
|
|
$
|
293,968
|
|
|
$
|
353,363
|
|
Depreciation
and amortization expense for the years ended December 31, 2017 and 2016 was $59,395 and $4,114, 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. During Q4 2017, the Company allowed the BLM leases for the Springs project to expire without paying additional delay
rental payments. As the result, the Company recognized impairment of oil and gas property in amount of $150,593, during the year
ended December 31, 2017.
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 year ended December 31, 2017, the Company capitalized an additional $15,919 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 December 31, 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 $1,479,230, during the year ended December 31, 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. All six (6) wells are currently
shut-in and not producing. The Company is working to bring all of these wells back into production during Q4.
The
transaction provided 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 (see Note 5). This note matures on June 30, 2018 and recites that no interest accrues
during its term. Foothills recorded $342,804 imputed interest as debt discount. This amount of $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 year ended December 31, 2017, we amortized $228,536 debt discount into interest expense.
On
May 10, 2017, the Company entered into a purchase and sale agreement (PSA), with an undisclosed seller, to acquire 67,330 gross
acres (49,600 net acres) held by production in Utah and Colorado. This acquisition was anticipated to close by or before June
30, 2017, such closing being subject to traditional representations, warranties, covenants and adjustments including, but not
limited to lien releases, cures of any defective title matters, satisfaction of leases and amendments thereto. In August 2017,
the parties by mutual agreement terminated the PSA.
On
October 19, 2017, the Company announced the acquisition of 21% working interest in two horizontal gas wells in the Uinta Basin
from an undisclosed party.
Both wells are operated by EOG Resources, Inc. (NYSE: EOG).
These
wells fit with the Company’s overall growth strategy for the Basin and provides us with the ability to gain insight from
a world-class operator. In February 2018, the Company announced the successful drilling, completion and flow testing of the
Stagecoach
111-20H and Stagecoach 117-20H horizontal wells, both of which are now producing natural gas in commercial quantities. Both wells
have been
online since late December 2017 and production tubing is expected to be set in the near term. These two successful
horizontal wells will generate production and net cash flow for the Company and are expected to payout within 30 months. As of
December 31, 2017, the Company incurred $1,501,377 cost for our shares of interest.
During
the years ended December 31, 2017 and 2016, the Company capitalized an additional $3,418,744 and $1,108,891 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
|
|
$
|
-
|
|
Liabilities incurred during the period
|
|
|
291,659
|
|
Release of liabilities associated with the sale of oil properties
|
|
|
-
|
|
Liabilities settled during the year
|
|
|
-
|
|
Accretion
|
|
|
11,667
|
|
Asset retirement obligations, December 31, 2017
|
|
$
|
303,326
|
|
Depletion
expense for the year ended December 31, 2017 and 2016 was $14,583 and $0, 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 recites that it accrues no interest during its
term. Foothills recorded $342,804 imputed interest as debt discount. This amount of $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 year
ended December 31, 2017, we amortized $228,536 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 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 18, 2017, Full Wealth
Investment Hong Kong Limited sold this note to Gold Class Limited, with accrued interest increased from 9% to 13.5% per annum
for the life of the debenture. On June 1, 2017, Full Wealth Investment Hong Kong Limited acquired this note from Gold Class with
a 60-day term and 10% interest per annum for the life of the debenture. On August 14, 2017, we repaid $1,000,000 in principal
and $20,000 in accrued interest and recorded remaining accrued interest in amount of $30,000 as gain on debt forgiveness.
Effective
August 9, 2017, Foothills borrowed $1,050,000 from Profit Well Limited, a Hong Kong limited liability company. The Company executed
a Bridge Note with an annual percentage interest rate of 13.5% and a maturity date of September 8, 2017. Proceeds of this Bridge
Note were received by the Company on August 10, 2017 and were primarily used to repay Full Wealth for the debenture dated June
1, 2017. On November 3, 2017, Profit Well Limited agreed to defer repayment of this note to a later date, and acknowledged that
the Company is not in default regarding this Debenture. Profit Well Limited also reaffirmed its belief that the Company will either
extend or repay the obligation to their satisfaction. As partial consideration for the deferment, the Company agreed to issue
Profit Well Limited 100,000 shares of its restricted common stock, valued at $48,000. The issuance of the shares in exchange
for the maturity extension was treated as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt –
Modifications and Extinguishments” (“ASC 470-50”). On February 28, 2018, Profit Well and the Company agreed
to extend the maturity date of the debenture to June 30, 2018, and as consideration for the extension, the Company agreed to compensate
Profit Well with 200,000 shares of restricted common stock. In addition, the parties agreed that if payment of said principal
and interest due and payable is made late, then a penalty payment of $100,000 shall become due and payable to Profit Well by the
Company.
On
September 29, 2017, the Company issued to an unaffiliated investor a promissory note and three tranches of warrants for an aggregate
consideration of $250,000. The Note recites that it accrues no interest if paid when due and is due and payable on January 2,
2018. If principal is not paid on or before maturity, interest will accrue at the rate of 15% per year until paid. On November
6, 2017, the Company agreed to compensate the investor 75,000 shares of the Company’s restricted common stock in connection
with a more favorable term of a note entered with FirstFire Opportunity Fund, LLC. On December 30, 2017, the Company and the investor
agreed to extend the maturity date of this Note to January 23, 2018, in return for a payment at maturity of the principal, accrued
interest as provided in the Note, plus 30,000 shares of the Company’s restricted common stock. Because the fair value
of the shares was greater than 10% of the present value of the remaining cash flows under the Note, the issuance of the shares
in connection with a more favorable term of a note entered with FirstFire Opportunity Fund, LLC. was treated as a debt extinguishment
and reissuance of a new debt instrument pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments”
(“ASC 470-50”). Since January 23, 2018, the Company and the investor have been in ongoing discussions to extend
the term of this Note. On March 28, 2018, the investor acknowledged that the Company is
not in default
regarding this Note
and reaffirmed its belief that the Company will either extend the Note’s due date or repay its obligation on terms that
are mutually satisfactory. The warrants have the following terms:
|
●
|
375,000
warrants to purchase 375,000 shares of common stock of the Company at a strike price of $0.665 per share expiring on September
29, 2019;
|
|
|
|
|
●
|
375,000
warrants to purchase 375,000 shares of common stock of the Company at a strike price of $1.25 per share expiring on September
29, 2020; and
|
|
|
|
|
●
|
185,000
warrants to purchase 185,000 shares of common stock of the Company at a strike price of $2.00 per share expiring on September
29, 2020.
|
The
aggregate relative fair value of three tranches of warrants was determined to be $105,000 on September 29, 2017, using the Black-Scholes
option-pricing model based on the following assumptions: (i) volatility rate of 94%, (ii) discount rate of 0%, (iii) zero expected
dividend yield, and (iv) expected life of 2-3 years. $2,536 imputed interest was recorded as debt discount. $2,536 was determined
using the present value method based on the following assumptions: (i) adjusted interest rate 4% (ii) expected life of 0.26 year.
The aggregate value of the warrants and imputed interest of $107,536 was considered as debt discount upon issuance and will be
amortized as interest over the term of the Note or in full upon the conversion of the Note. During the year ended December 31,
2017, the Company amortized $105,272 of such discount to interest expense, and the unamortized discount as of December 31, 2017
was $2,264. At December 31, 2017, $250,000 of principal was outstanding under the Note.
Each
tranche of warrants is subject to down round adjustment provisions if the Company during the term of that tranche issues additional
securities for consideration per share, after giving effect to fees, commission and expenses, that is less, or which on conversion
or exercise of the underlying security is less, than $0.665 per share (as adjusted for any change resulting from forward or reverse
splits, stock dividends and similar events).
To
satisfy most favored nation provisions in previously entered securities purchase agreements that are triggered by the transaction
described above, Company issued 136,015 shares of common stock and warrants to purchase 136,015 shares of common stock, in the
aggregate, to certain investors who purchased units from the Company, at a $1.00 per unit, with each unit consisting of one share
and one warrant. See the Company’s Current Report on the Form 8-K filed with the SEC on June 5, 2017. Of this amount, 100,752
shares and warrants to purchase 100,752 shares of common stock will be issued to Wilshire Energy Partners LLC, an entity controlled
by Kevin J. Sylla. The exercise price of these investor warrants was adjusted to $0.665 per share. We measured the value of the
effect of the down round feature as the difference between the fair value of the financial instrument at an original exercise
price of $1.50 and an adjusted exercise price of $0.665 and, as a result, $59,801 was recorded as down round feature as interest
expense under ASC 260-10-30-1. Foothills determined the amount of $59,801 using the Black-Scholes option-pricing model based on
the following assumptions: (i) volatility rate of 94%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv)
expected life of 3 years.
A
promissory note was issued on November 1, 2017, to the Law Offices of Aaron A. Grunfeld or its successors or assigns (the “Holder”),
the Company’s outside general counsel, for a principal amount of $120,628.95 in exchange of legal services rendered, bearing
an interest rate of 12% per annum and with a maturity date of June 30, 2018. As of December 31, 2017, $120,628.95 of principal
was outstanding under the Note and accrued interest was $2,413. During the year ended December 31, 2017, the Company recorded
interest expense in the amount of $2,413.
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. On November 3, 2017,
Berwin agreed to defer repayment of this note to a later date, and acknowledged that the Company is not in default regarding this
Debenture. Berwin also reaffirmed its belief that the Company will either extend or repay the obligation to their satisfaction.
As partial consideration for the deferment, the Company issued Berwin 100,000 shares of its restricted common stock, valued at
$48,000. The issuance of the shares in exchange for the maturity extension was treated as a modification of existing debt pursuant
to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”). On
February 28, 2018, Berwin and the Company agreed to extend the maturity date of the debenture to June 30, 2018, and as consideration
for the extension, the Company agreed to compensate Berwin with 250,000 shares of restricted common stock. In addition, the parties
agreed that if payment of said principal and interest due and payable is made late, then a penalty payment of $125,000 shall become
due and payable to Berwin by the Company. As of December 31, 2017, the balance of accrued interest was $166,438. During the year
ended December 31, 2017, the Company recorded interest expense in the amount of $166,438.
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, which is due on May 10, 2018. 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. On October 19, 2017, the Company agreed to extend
the allowable conversion period provided under this convertible note until May 10, 2018. On November 7, 2017, the Company issued
50,000 warrants to purchase 50,000 shares of common stock of the Company at a strike price of $1.00 per share expiring on May
7, 2019. If the Company fails to pay the principal and accrued unpaid interest due and payable to Lender on or before the due
date of the convertible note, then the Lender shall be provided the right to convert at either $0.665 per share or upon the same
terms offered in FirstFire Opportunity Fund, LLC Note’s conversion options. The relative fair value of warrant was determined
to be $3,381 on November 7, 2017, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility
rate of 77%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1.5 years. At December
31, 2017, $50,000 of principal was outstanding under the Note. The issuance of the warrants in exchange for the maturity extension was treated as a modification of
existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”).
On
November 17, 2017, the Company issued to FirstFire Opportunity Fund, LLC, an unaffiliated investor, a senior convertible promissory
note in the principal amount of $267,500 and received proceeds of $250,000 before giving effect to certain transactional costs
including legal fees. As part of this transaction the Company also issued (i) warrants having an 18-month term, to purchase 267,500
shares of the Company’s common stock at an exercise price of $1.00 per share and (ii) 60,000 shares of the Company’s
restricted common stock. This note accrues interest of 8% per annum and is due and payable on August 17, 2018. The Note agreements
give the lender the right to convert the loan amounts due into common stock at a conversion price of the lower of (i) $0.665 per
share or (ii) 50% of the lowest per share market values during the twenty (20) trading days immediately preceding a conversion
date. If the lowest traded price of the Common Stock is less than the Conversion Price on the date following the Conversion Date
on which the Holder actually receives from the Company, then the Conversion Price shall be deemed to have been retroactively adjusted,
as of the Conversion Date, to a price equal to 75% multiplied by the lowest closing price of the Common Stock on the Free Trading
Shares Receipt Date. This note is secured by a personal guaranty from the Company’s Executive Chairman, Kevin Sylla. The
net proceeds of this note will be used for general corporate and working capital purposes. The aggregate relative fair value of
warrant was determined to be $10,750 on November 17, 2017, using the Black-Scholes option-pricing model based on the following
assumptions: (i) volatility rate of 78%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life
of 1.5 year. Fair value of 60,000 shares of common stock was determined $18,250 using allocation of proceeds. The Company accounted
for the conversion feature as a derivative valued at $288,964, of which $67,964 was expensed immediately to interest expense.
$288,964 was determined using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of
78%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 0.6 year. The aggregate value of
the original debt discount, warrant, conversion feature and 60,000 shares of common stock of $267,500 was considered as debt discount
upon issuance and will be amortized as interest over the term of the Note or in full upon the conversion of the Note. During the
year ended December 31, 2017, the Company amortized $43,272 of such discount to interest expense, and the unamortized discount
as of December 31, 2017 was $224,228. At December 31, 2017, $267,500 of principal was outstanding under the Note.
Note
8 – Common Stock
Effective
April 1, 2016, Foothills appointed two directors to its board. Each director was granted 125,000 shares of 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 appointment date. During the year ended
December 31, 2017, we issued 25,000 shares of common stock to each director. As of December 31, 2017, the Company issued 125,000
shares to each director and the Company incurred compensation expense for each director of $1,250 for these share issuances. These
Foothills Director Shares issued in April 2016 all vested approximately one year later pursuant to the terms and conditions of
the grant.
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. These
shares granted in May 2016 all vested approximately one year later pursuant to the terms and conditions of the grant. During
the year ended December 31, 2017, we issued 30,000 shares of common stock. As of December 31, 2017, 150,000 shares were issued
and the Company incurred compensation expense of $1,500 for these share issuances.
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 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
|
|
|
|
|
●
|
were
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 a Securities Purchase Agreement with Wilshire Energy Partners, LLC, a principal shareholder, pursuant
to which we sold and agreed to issue 200,000 units at a purchase price of $1.00 per unit for an aggregate amount of $200,000.
Each unit consisted of one share of the Company’s common stock and one warrant to purchase a share of the Company’s
common stock, exercisable for a period of three years from the date of original issuance at an exercise price of $1.50 per share.
Wilshire Energy Partners, LLC, is controlled by Kevin J. Sylla, our Executive Chairman and Chief Executive Officer of FPI. See
Form 8-K filed by the Company on June 5, 2017 with the Commission and exhibit thereto. On September 29, 2017, we issued 100,752
additional shares of common stock and total warrants as amended to purchase 300,752 shares of common stock of the Company at a
strike price of $0.665 per share due to down round feature triggered by warrant issued at a strike price of $0.665 per share on
the day of trigger.
On
June 15, 2017, we entered into a Securities Purchase Agreement with an investor, pursuant to which we sold and agreed to
issue 20,000 units at a purchase price of $1.00 per unit for an aggregate amount of $20,000. Each unit consisted of one share
of the Company’s common stock and one warrant to purchase one additional share of the Company’s common stock, exercisable
for a period of three years from the date of original issuance at an exercise price of $1.50 per share. We received the initial
$10,000 on June 15, 2017, and the balance of the subscribed amount in July 2017. On September 29, 2017, we issued 10,075 additional
shares of common stock and total warrants as amended to purchase 30,075 shares of common stock of the Company at a strike price
of $0.665 per share due to a down round feature triggered by a warrant issued at a strike price of $0.665 per share on the day
of trigger.
On
June 30, 2017, we entered into a Securities Purchase Agreement with a third-party investor, pursuant to which we sold and agreed
to issue 25,000 units at a purchase price of $1.00 per unit for an aggregate amount of $25,000. Each unit consisted of one share
of the Company’s common stock and one warrant to purchase one additional share of the Company’s common stock, exercisable
for a period of three years from the date of original issuance at an exercise price of $1.50 per share. On September 29, 2017,
we issued 12,594 additional shares of common stock and total warrants as amended to purchase 37,594 shares of common stock of
the Company at a strike price of $0.665 per share due to a down round feature triggered by a warrant issued at a strike price
of $0.665 per share on the day of trigger.
On
July 10, 2017, we entered into a Securities Purchase Agreement pursuant to which we sold 25,000 units at a purchase price of $1.00
per unit for an aggregate amount of $25,000. Each unit consisted of one share of the Company’s common stock and one warrant
to purchase a share of the Company’s common stock, exercisable for a period of three years from the date of original issuance
at an exercise price of $1.50 per share.
On
September 29, 2017, we issued 12,594 additional shares of common stock and amended warrants to purchase 37,594 shares of common
stock of the Company at a strike price of $0.665 per share due to a down round feature triggered by the warrant issued at a strike
price of $0.665 per share on the day. We measured the value of the effect of the down round feature as the difference between
the fair value of the financial instrument at an original exercise price of $1.50 and an adjusted exercise price of $0.665 and,
as a result, $59,801 was recorded as down round feature as interest expense under ASC 260-10-30-1. Foothills determined the amount
of $59,801 using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 94%, (ii) discount
rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 3 years.
On
November 3, 2017, the Company issued 100,000 shares of common stock upon extension of the Berwin debenture, valued at $48,000.
On
November 3, 2017, the Company agreed to issue 100,000 shares of common stock upon extension of the Profit Well debenture. The
Company recorded $48,000 in stock payable.
On
November 6, 2017, the Company agreed to issue 75,000 shares of common stock upon extension of a debenture entered on September
29, 2017. The Company recorded $36,000 in stock payable.
On
November 17, 2017, the Company issued 60,000 shares of common stock in connection with a senior convertible promissory note. These
shares were valued at $18,250.
On
December 30, 2017, the Company agreed to issue 30,000 shares of common stock upon extension of a debenture entered on September
29, 2017. The Company recorded $9,900 in stock payable.
Each
of the purchasers is an accredited investor within the meaning of the federal securities laws. The Company paid no brokerage,
commission or finder’s fee in connection with these transactions. These transactions were exempt from registration under
Section 4(a)(2) of the Securities Act of 1933.
During
the year ended December 31, 2017, the Company issued 275,000 shares of common stock to various third parties for services, valued
at $453,500.
As
of December 31, 2017, the Company had 14,900,627 shares of common stock issued and outstanding.
Restricted
Stock Units (RSUs)
Effective
August 11, 2016, and on August 15, 2016, Foothills granted one of its executive officers, Mr. R. Lanclos, 100,000 restricted stock
units (RSUs) of the Company which vested as follows (i) 20,000 vested on February 15, 2017, (ii) 20,000 vested on May 15, 2017,
and (iii) 60,000 vested on August 15, 2017. The Company has the right, but not the obligation to repurchase all or any portion
of RSUs granted to the executive at a price of $0.665 per share if the executive’s employment with the Company is terminated
for any reason within 30 months of start of employment on August 15, 2015. These RSU’s were valued at $67,000 on the grant
day. As of December 31, 2017, 100,000 shares were vested and were issued to Mr. Lanclos.
On
August 15, 2016, Foothills also granted one of its executive officers, Mr. E. Ovalle, 100,000 restricted stock units (RSUs) of
the Company which vested as follows (i) 20,000 vested on February 15, 2017, (ii) 20,000 vested on May 15, 2017, and (iii) 60,000
vested on August 15, 2017. The Company has the right, but not the obligation to repurchase all or any portion of RSUs granted
to the executive at a price of $0.665 per share ifß executive’s employment with the Company is terminated for
any reason within 30 months of start of employment on August 15, 2015. These RSU’s were valued at $67,000 on the grant day.
As of December 31, 2017, 100,000 shares were vested and were issued to Mr. Ovalle.
Warrants
On
May 27, 2016, the Company granted to Wilshire Energy Partners, LLC, warrants (“Wilshire Warrants”) to purchase (i)
100,000 common shares at a strike price of $1.25 per share, (ii) 200,000 common shares at a strike price of $2.00 per share and
(iii) 400,000 common shares at a strike price of $3.00 per share. The Wilshire Warrants commence to be exercisable on the earlier
of (i) 12-month anniversary of the closing of a going public transaction or (ii) June 30, 2017 and expire on June 1, 2021.
On
May 27, 2016, the Company granted to an unrelated party warrants to purchase (i) 125,000 common shares at a strike price of $1.25
per share, (ii) 100,000 common shares at a strike price of $2.00 per share and (iii) 100,000 common shares at a strike price of
$3.00 per share. The warrants commence to be exercisable on the earlier of (i) 12-month anniversary of the closing of a going
public transaction or (ii) June 30, 2017 and expire on June 1, 2021.
The
fair value of above warrants was determined to be $2,144 on May 27, 2016, using the Black-Scholes option-pricing model based on
the following assumptions: (i) volatility rate of 120%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv)
expected life of 5 years.
On
November 7, 2017, the Company issued 50,000 warrants to purchase 50,000 shares of common stock of the Company at a strike price
of $1.00 per share expiring on May 7, 2019 in connection with a senior convertible promissory note in the principal amount of
$50,000. If the Company fails to pay the principal and accrued unpaid interest due and payable to Lender on or before the due
date of the convertible note, then the Lender shall be provided the right to convert at either $0.665 per share or upon the same
terms offered in FirstFire Opportunity Fund, LLC Note’s conversion options. The relative fair value of warrant was determined
to be $3,381 on November 7, 2017, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility
rate of 77%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1.5 years.
On
November 17, 2017, the Company issued an unaffiliated investor warrants to purchase 267,500 shares of the Company’s common
stock at an exercise price of $1.00 per share and expires in 18 months, in connection with a senior convertible promissory note
in the principal amount of $267,500. The aggregate relative fair value of warrant was determined to be $10,750 on November 17,
2017, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 78%, (ii) discount
rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1.5 year.
The
following table summarizes all stock warrant activity for the year ended December 31, 2017 and 2016:
|
|
Number of
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term
|
|
Balance outstanding, December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted
|
|
|
1,025,000
|
|
|
|
2.32
|
|
|
|
4.42
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, December 31, 2016
|
|
|
1,025,000
|
|
|
$
|
2.32
|
|
|
|
4.42
|
|
Granted
|
|
|
1,658,515
|
|
|
|
1.09
|
|
|
|
2.18
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, December 31, 2017
|
|
|
2,683,515
|
|
|
$
|
1.56
|
|
|
|
2.65
|
|
Exercisable, December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Options
On
May 19, 2016, the Company granted to each of its then three directors options to purchase (i) 50,000 common shares at a strike
price of $2 per share, vesting when the Company achieves and maintains a total average daily production level of 100 barrels of
oil equivalent per day (“boe/d”) for at least 30 days, (ii) 50,000 common shares at a strike price of $3 per share,
vesting when the Company achieves and maintains a total average daily production level of 200 boe/d for at least 60 days, and
(iii) 50,000 common shares at a strike price of $4 per share, vesting when the Company achieves and maintains a total average
daily production level of 500 boe/d for at least 90 days.
On
February 27, 2017, the Company granted to Mr. Christopher Jarvis, currently an officer and director, options to purchase 400,000
common shares at a strike price of $1.99 per share, vesting quarterly over two years commencing with the first quarter following
the 90-day probationary period.
The
fair value of 400,000 options was determined to be $616,055 on February 27, 2017, using the Black-Scholes option-pricing model
based on the following assumptions: (i) volatility rate of 129%, (ii) discount rate of 0%, (iii) zero expected dividend yield,
and (iv) expected life of 5 years.
On
February 27, 2017, the Company granted to Mr. Kevin Sylla, currently our Executive Chairman of the Board, options to purchase
1,200,000 common shares at a strike price of $1.99 per share, vesting quarterly over the term of three years.
The
fair value of 1,200,000 options was determined to be $1,986,902 on February 27, 2017, using the Black-Scholes option-pricing model
based on the following assumptions: (i) volatility rate of 129%, (ii) discount rate of 0%, (iii) zero expected dividend yield,
and (iv) expected life of 7 years.
During
December 31, 2017 and 2016, we recorded $816,139 and $0 option expense. As of December 31, 2017, the unamortized option expense
was $1,786,818.
The
following table summarizes all stock option activity for the year ended December 31, 2017 and 2016:
|
|
Number
of Option
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
Balance
outstanding, December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted
|
|
|
450,000
|
|
|
|
3.00
|
|
|
|
9.39
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
outstanding, December 31, 2016
|
|
|
450,000
|
|
|
$
|
3.00
|
|
|
|
9.39
|
|
Granted
|
|
|
1,600,000
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
outstanding, December 31, 2017
|
|
|
2,050,000
|
|
|
$
|
2.21
|
|
|
|
6.26
|
|
Exercisable,
December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Note
9 – Related Party Transactions
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.
Berwin
Trading Limited
Effective January
5, 2017, Foothills 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 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. On November 3, 2017, Berwin agreed to defer repayment of this note to a later date, and acknowledged that the
Company is not in default regarding this Debenture. Berwin also reaffirmed its belief that the Company will either extend or repay
the obligation to their satisfaction. As partial consideration for the deferment, the Company issued Berwin 100,000 shares of
its restricted common stock, valued at $48,000. The issuance of the shares in exchange for the maturity extension was treated
as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments”
(“ASC 470-50”). On February 28, 2018, Berwin and the Company agreed to extend the maturity date of the debenture to
June 30, 2018, and as consideration for the extension, the Company agreed to compensate Berwin with 250,000 shares of restricted
common stock. In addition, the parties agreed that if payment of said principal and interest due and payable is made late, then
a penalty payment of $125,000 shall become due and payable to Berwin by the Company. As of December 31, 2017, the balance of accrued
interest was $166,438. During the year ended December 31, 2017, the Company recorded interest expense in the amount of $166,438.
On
May 31, 2017, we entered into a Securities Purchase Agreement with Wilshire, pursuant to which we sold and agreed to issue 200,000
units at a purchase price of $1.00 per unit for an aggregate amount of $200,000. Each unit consisted of one share of the Company’s
common stock and one warrant to purchase a share of the Company’s common stock, exercisable for a period of three years
from the date of original issuance at an exercise price of $1.50 per share. Wilshire Energy Partners, LLC, is controlled by Kevin
J. Sylla, our Executive Chairman and Chief Executive Officer of FPI, and has been determined to be a Related Party. See the Company’s
8-K filed June 5, 2017 with the Commission and exhibit thereto. On September 29, 2017, we issued 100,752 additional shares of
common stock and amended warrants to purchase 300,752 shares of common stock of the Company at a strike price of $0.665 per share
due to a down round feature triggered by a warrant issued at a strike price of $0.665 per share on the day of trigger.
On
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 December 31, 2017, the balance was paid.
Note
10 – 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 was appointed Director and Chief Executive
Officer of FPI, which oversees the Company’s oil and gas operations.
On
June 1, 2017, the Company announced appointment of Kevin J. Sylla as Executive Chairman of the Company. Mr. Sylla continues to
serve as Director and Chief Executive Officer of FPI and manager of the Company’s indirect subsidiaries Tiger Energy Operating,
LLC, Tiger Energy Partners International, LLC, and Tiger Energy Mineral Leasing, LLC.
Legal
proceedings
Utah
Wells
SCI
Welding & Oilfield Service vs. Tiger Energy Operating LLC (Case No. 169000023, 8
th
District Court, Duchesne County,
State of Utah)
This
case concerns the collection of unpaid debt owed by TEO, relating to the work over of wells in Duchesne County, Utah, in the amount
of $53,407. On September 29, 2017, the TEO and SCI Welding reached an agreement to settle the matter for $35,000 and SCI Welding
is in receipt of these settlement funds. A Stipulated Motion to Dismiss (signed by all parties) and an Order by the Court Dismissing
Case was filed on October 11, 2017. This is a final settlement of this matter with no further judicial action required.
Graco
Fishing & Rental Tools, Inc. vs. Tiger Energy Operating LLC (Case No. 160800005 8
th
Judicial District Court, Duchesne
County, State of Utah)
Plaintiff
(Graco) in this case sought collection of unpaid debt incurred by TEO for services rendered. Pursuant to this action a default
judgment in the amount of $159,965 was obtained by Plaintiff on June 1, 2016, against TEO, for unpaid accounts in connection with
its workover of wells in Duchesne County, Utah. Graco filed a writ of execution against the A Rust 2, Dye-Hall 2-21 A1, Wilkins
1-24 A5 and Rust 3-22A-4 wells located in Duchesne County executing on properties not owned by our subsidiary company. A Motion
to Set Aside the sheriff’s sale concerning these properties was filed with the court 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 time a Company
representative was present to comply with the court’s order to produce documents. Prior to the hearing, TEO made an initial
settlement offer, which was eventually rejected by Graco. A writ of execution was again issued to seize the property of this subsidiary
on March 8, 2018. No return of asset seizure has been filed.
Conquest
Well Servicing, LLC vs. Foothills Exploration Operating, Inc. (Case No. 179800421 8
th
Judicial District Court in and
for Uintah County, State of Utah)
Plaintiff
filed this action on September 11, 2017 for collection of unpaid services and materials incurred by Foothills Exploration Operating,
Inc. (“FEOI”), a wholly-owned indirect subsidiary of the Company, in the amount of $49,689 in connection with a work
over of wells in Uintah County, Utah. A Settlement Agreement and Stipulation to Entry of Judgment was agreed to by the parties
and filed with the court on October 10, 2017. Judgment in the amount of $54,937.10 was filed on December 18, 2017. An order requesting
company asset inquiry was issued on February 20, 2018.
Peak
Well Service, LLC v. Tiger Energy Operating, LLC (Case No. 2:16-CV-00957-EJF United States District Court for the District of
Utah Court)
Peak
Well Service, LLC (“Peak”), filed mechanics and materialman’s liens against the Wilkins, Rust 2 Well, Dye Hall
2, Rust 3, and Josie 1 wells operated by TEO for unpaid accounts in connection with work on these wells. A settlement was reached
between TEO and Peak pursuant to a confidential settlement agreement. Pursuant to the settlement agreement, lien releases on each
of these well liens were filed on February 8, 2017. This settlement is a final resolution of this creditor claim. TEO was represented
in these matters by Holland & Hart, Salt Lake City, Utah.
BIA
Administrative Appeal – Tiger Energy Partners International, LLC
Notice
of Appeal,
|
Dated
May 8, 2013
|
Appellant:
|
Tiger
Energy Partners International, LLC
|
Appellee:
|
Superintendent
Uintah and Ouray Agency
|
Decision
|
April
12, 2013
|
Concerning:
|
Notice
of Expiration of Oil and Gas Leases
|
This
Administrative appeal concerns the ownership and validity of Northern Ute Tribal leases acquired by Tiger Energy Partners International,
LLC (TEPI) in a transaction with Mountain Oil and Gas and its affiliated companies. Pursuant to the Global Settlement Agreement
(GSA) negotiated between the Tribe and TEPI, the Company proposes to resolve any issues regarding the ownership of the subject
leases and other lands thus acquired. The status of the appeal by TEPI remains unchanged, awaiting decision by the Regional Director
of the BIA on the merits of the appeal. The decision of the Regional Director is stayed by the parties having entered into the
Global Settlement Agreement described in the above memorandum. The Tribe and Tiger remain in discussion regarding urging final
approval of the Global Settlement Agreement by the Regional Director.
Labokay
Well – Parish of Calcasieu, State of Louisiana
In
February 2017, FPOI drilled a test well on the Labokay prospect to the total measured depth of 8,795 feet, where hydrocarbons
shows were present, but not in commercial quantities to warrant completion. Consequently, the Labokay test well was plugged and
abandoned in February 2017. Since the well was not commercially viable, FPOI’s working interest in the underlying mineral
lease terminated and we no longer have a right to acquire title to said property. The Labokay-related civil suits described below
were filed against FPOI, a wholly-owned indirect subsidiary of the Company arising from unpaid accounts in connection with drilling
of the Labokay test well.
R.W.
Delaney Construction Company vs. Foothills Petroleum Operating, Inc. (Cause No. 2017-CV-0330 – County Court of Adams County,
Mississippi)
This
case was filed on September 18, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
(R. W. Delaney) in the amount of $72,495 in connection with drilling of the Labokay test well in Calcasieu Parish, Louisiana.
On January 22, 2018, Delaney obtained Judgment against FPOI in the amount of $103.577.87.
Performance
Drilling Company, LLC vs. Foothills Petroleum Operating, Inc. (Case No. 2017-3916 DIV G 14
th
Judicial District Court
in Parish of Calcasieu, State of Louisiana)
This
case was filed on September 25, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $205,251.24 for unpaid accounts in connection with its drilling of the Labokay test well. On January 16, 2018,
a default judgment was entered against FPOI, in the amount of $205,251.24; together with accrued interest of $29,861 from March
18, 2017, through December 31, 2017; plus additional interest from January 1, 2018, at the rate of one and one-half percent (1.5%)
per month until paid (a per diem rate of $103.69); plus an additional sum for reasonable attorney’s fees in the amount of
$2,500, and all costs of the court.
Monster
Rentals, LLC dba Deepwell Equipment Rentals vs. Foothills Petroleum Operating, Inc. (Case No. 2017-11013 DIV E – 15
th
Judicial District Court in Parish of Acadia, State of Louisiana)
This
case was filed on October 24, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $53,943.53 in connection with the Labokay test well in Calcasieu Parish, Louisiana. As of March 30, 2018, no
further judicial action has been issued by the court.
Canal
Petroleum Products, Inc. vs. Foothills Petroleum Operating, Inc. (Case No. 2017-6574; DIV. C – 15
TH
Judicial
District Court, Lafayette Parish, Louisiana)
This
case was filed on November 14, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $35,981.08 for unpaid accounts in connection with its drilling of the Labokay test well. On January 25, 2018,
a default judgment was entered against FPOI in the amount of $35,981 in inclusive of interest as of September 6, 2017; plus, finance
charges (interest) continuing to accrue after September 6, 2017, of one and one-half percent (1.5%) per month (18% per annum)
until paid on the unpaid principal amount of $32,956; plus, legal fees of $8,239 together with related court costs. As of March
30, 2018, no further judicial action has been issued by the court.
Smith
International, Inc. vs. Foothills Petroleum Operating, Inc. (Case No. 2017-004617; DIV. E – 14
th
Judicial District
Court, Calcasieu Parish, Louisiana)
This
case was filed on November 7, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $30,244 in connection with its drilling of the Labokay test well. On March 23, 2018, the court issued a preliminary
judgement in favor of plaintiff in the amount of $30,243.78, plus interest in the contractual amount of 18% per annum from the
date the payment was originally due until the judgement date, plus legal interest from the judgment date until amounts are paid,
plus reasonable attorney’s fees expended in the prosecution and collection of debt.
M-I,
L.L.C. d/b/a MI-SWACO vs. Foothills Petroleum Operating, Inc. (Case No. 2017-004616; DIV. G – 14
th
Judicial District
Court, Calcasieu Parish, Louisiana)
This
case was filed on November 7, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $51,275 in connection with the Labokay test well. On March 23, 2018, the court issued a preliminary judgement
in favor of plaintiff in the amount of $51,274.93, plus interest in the contractual amount of 1.5% per month from the date the
payment was originally due until the judgement date, plus legal interest from the judgment date until amounts are paid, plus reasonable
attorney’s fees expended in the prosecution and collection of debt.
Schlumberger
Technology Corporation vs. Foothills Petroleum Operating, Inc. (Case No. 2017-004618; DIV. E – 14
th
Judicial
District Court, Calcasieu Parish, Louisiana)
This
case was filed on November 7, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $28,904 for unpaid accounts in connection with its drilling of the Labokay test well in Calcasieu Parish, Louisiana.
On March 23, 2018, the court issued a preliminary judgement in favor of plaintiff in the amount of $28,904.01, plus interest in
the contractual amount of 1.5% per month from the date the payment was originally due until the judgement date, plus legal interest
from the judgment date until amounts are paid, plus reasonable attorney’s fees expended in the prosecution and collection
of debt.
We
currently are not a party to any other material legal proceedings. However, legal claims are inherently uncertain, and we cannot
assure you that we will not be adversely affected in the future by legal proceedings.
As
of December 31, 2017 and 2016, the balance of contingent liabilities were $305,935 and $213,372, respectively. During the years
ended December 31, 2017 and 2016, we recorded $145,970 and $0 in contingent liabilities, paid $35,000 and $0 cash for debt settlement
and realized $18,407 and $0 as gain on settlement of debt, respectively.
Note
11 - Income Taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets
as of December 31, 2017, and 2016 are summarized below.
In
assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon
the Company attaining future taxable income during the periods in which those temporary differences become deductible. As of December
31, 2017, and 2016, management was unable to determine if it is more likely than not that the Company’s deferred tax assets
will be realized and has therefore recorded an appropriate valuation allowance against deferred tax assets at such dates.
No
federal tax provision has been provided for the years ended December 31, 2017, and 2015 due to the losses incurred during such
periods. Reconciled below is the difference between the income tax rate computed by applying the U.S. federal statutory rate and
the effective tax rate for the years ended December 31, 2017, and 2015.
|
|
2017
|
|
|
2016
|
|
Net
operating loss carryforward
|
|
$
|
(2,845,750
|
)
|
|
$
|
(671,362
|
)
|
Stock
based compensation
|
|
|
57,019
|
|
|
|
3,931
|
|
Fair
value of options
|
|
|
277,487
|
|
|
|
281
|
|
Total
deferred tax assets
|
|
|
(2511,244
|
)
|
|
|
(667,150
|
)
|
Valuation
allowance
|
|
$
|
2,511,244
|
|
|
$
|
667,150
|
|
Net
deferred tax asset
|
|
|
-
|
|
|
|
-
|
|
|
|
2017
|
|
|
2016
|
|
U.S federal statutory income tax
|
|
|
-34.00
|
%
|
|
|
-34.00
|
%
|
State tax, net of federal tax benefit
|
|
|
-5.80
|
%
|
|
|
-5.80
|
%
|
Stock based compensation
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Change in valuation allowance
|
|
|
39.80
|
%
|
|
|
39.80
|
%
|
Effective tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
At
December 31, 2017 and 2016, the Company has available net operating loss carryforwards for federal and state income tax purposes
of approximately $2,511,244 and $667,150, respectively, which, if not utilized earlier, expire through 2037.
Note
12 – Subsequent Events
On
February 25, 2018, Berwin agreed to defer repayment of the $1,250,000 note which was entered on May 5, 2017 to June 30, 2018.
As partial consideration for the deferment, the Company agreed to issue Berwin 250,000 shares of its restricted common stock.
In addition, the parties agreed that if payment of said principal and interest due and payable is made late, then a penalty payment
of $125,000 shall become due and payable to Berwin by the Company.
On
February 25, 2018, Profit Well Limited agreed to defer repayment of the $1,050,000 note which was entered on August 9, 2017 to
June 30, 2018. As partial consideration for the deferment, the Company agreed to issue Profit Well Limited 200,000 shares of its
restricted common stock. In addition, the parties agreed that if payment of said principal and interest due and payable is made
late, then a penalty payment of $100,000 shall become due and payable to Profit Well by the Company.
Note
13 - Supplemental Oil and Gas Reserve Information (Unaudited)
Results
of operations from oil and gas producing activities
The
following table shows the results of operations from the Company’s oil and gas producing activities. For the year ended
December 31, 2017, the Company had no revenue from oil and gas producing activities.
|
|
Year Ended
|
|
|
|
December 31, 2017
|
|
Production revenues
|
|
$
|
101,998
|
|
Production costs
|
|
|
—
|
|
Depletion and depreciation
|
|
|
14,584
|
|
Income tax
|
|
|
—
|
|
Results of operations for producing activities
|
|
$
|
87,414
|
|
Capitalized
costs
The
following table summarizes the Company’s capitalized costs of oil and gas properties:
|
|
Year Ended
|
|
|
|
December 31, 2017
|
|
Properties subject to depletion
|
|
$
|
13,086,780
|
|
Accumulated depletion
|
|
|
14,584
|
|
Net capitalized costs
|
|
$
|
13,072,196
|
|
Costs
incurred in property acquisition, exploration and development activities
The
following table summarizes the Company’s costs incurred in property acquisition, exploration and development activities
for the year ended December 31, 2017:
|
|
Year Ended
|
|
|
|
December 31, 2017
|
|
Acquisition of properties
|
|
$
|
10,462,220
|
|
Exploration costs
|
|
|
2,609,976
|
|
Development costs
|
|
|
—
|
|
Net capitalized costs
|
|
$
|
13,072,196
|
|
Estimated
quantities of proved reserves
Our
ownership interests in estimated quantities of proved oil and gas reserves all of which are located in the United States are summarized
below. Proved reserves are estimated quantities of oil and gas that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed
reserves are those that are expected to be recovered through existing wells with existing equipment and operating methods.
Oil
reserves are stated in thousands of standard barrels [“MSTB”], natural gas reserves are stated in thousands of cubic
feet [“MCF”] and combined oil and gas reserves are stated in thousands of barrels of oil equivalent [“MBOE”].
Geological and engineering estimates of proved oil and gas reserves developed at one point in time by an independent third-party
petroleum reserves engineering firm are highly interpretive, inherently imprecise and subject to ongoing revisions that may be
substantial in amount. Although every reasonable effort is made to ensure that the reserve estimates are accurate, by their nature
reserve estimates are generally less precise than other estimates presented in connection with financial statement disclosures.
|
|
|
|
|
December 31, 2017
|
|
|
|
|
Proved Reserves
|
|
Total Proved
Non-Producing
|
|
|
Proved
Undeveloped
|
|
|
Total
Proved
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil MSTB’s
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Natural Gas Liquids MSTB’s
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Natural Gas MCF’s
|
|
|
97
|
|
|
|
714
|
|
|
|
811
|
|
Oil Equivalents MBOE’s
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revisions of previous estimates
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil MSTB’s
|
|
|
33
|
|
|
|
5,478
|
|
|
|
5,511
|
|
Natural Gas Liquids MSTB’s
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Natural Gas MCF’s
|
|
|
2
|
|
|
|
4,757
|
|
|
|
4,759
|
|
Oil Equivalents MBOE’s
|
|
|
33
|
|
|
|
6,298
|
|
|
|
6,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of minerals in place
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil MSTB’s
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil MSTB’s
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Natural Gas Liquids MSTB’s
|
|
|
—
|
|
|
|
-
|
|
|
|
—
|
|
Natural Gas MCF’s
|
|
|
—
|
|
|
|
-
|
|
|
|
—
|
|
Oil Equivalents MBOE’s
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil MSTB’s
|
|
|
31
|
|
|
|
5,478
|
|
|
|
5,509
|
|
Natural Gas Liquids MSTB’s
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Natural Gas MMCF’s
|
|
|
2
|
|
|
|
4,757
|
|
|
|
4,759
|
|
Oil Equivalents MBOE’s
|
|
|
31
|
|
|
|
6,298
|
|
|
|
6,329
|
|
Proved
non-producing and proved undeveloped reserves at December 31, 2017 totaled 31 MBOE’s and 6,298 MBOE’s, respectively.
Total proved reserves at December 31, 2017 totaled 6,329 MBOE’s and consisted of approximately 91% oil and 9% gas.
Reserves
estimates are revised as of June 2017 from an independent third-party petroleum reserves engineering firm. The Company intends
to review annually its proved undeveloped reserves to ensure an appropriate plan for development exists. The Company considers
proved undeveloped reserves only if it plans to convert these reserves to proved developed producing reserves within five years
from the date they were first acquired. The Company plans to develop all the remaining locations that comprise the 6,329 MBOE
of proved reserves within five years. However, the decision to deploy capital and the timing of those expenditures is contingent
on many different factors. The Company estimates capital expenditures of approximately $40 million will be sufficient to begin
developing these reserves. The development plan assumes a continued gradual improvement in commodity pricing and general market
conditions within the oil and gas industry.
The
calculation of proved undeveloped reserves requires the Company to make predictions regarding future acquisitions and discoveries
and the impact they may have on the Company’s overall development plan of properties it currently owns. Management anticipates
that the development plan will be revised to reflect changes in the oil and gas industry, including changing markets and prices,
new investment opportunities, and other key factors and such revisions will result in changes to its proved undeveloped reserves.
Consequently, the timing of capital expenditures will be heavily dependent upon the Company’s interpretation of market opportunities,
which are influenced by projections of future commodity prices and other key industry factors. Each year management expects to
review our five-year development plan to maximize the value of our investment in oil and gas assets and in turn also to enhance
shareholder value.
At
December 31, 2017, the Company expects its development plan to generally perform as follows:
|
|
Estimated Conversion of
Proved Undeveloped Reserves
|
|
|
|
CAPEX (000’s)
|
|
|
MBOE
|
|
2018
|
|
$
|
9,220
|
|
|
|
2,658
|
|
2019
|
|
$
|
9,500.0
|
|
|
|
3,498
|
|
2020
|
|
|
9,500
|
|
|
|
4,220
|
|
2021
|
|
|
—
|
|
|
|
—
|
|
2022
|
|
|
—
|
|
|
|
—
|
|
For
the year ended December 31, 2017, the Company had three wells in production and earned $101,999 in net revenues from the sale
of oil or natural gas. All properties were either proved non-producing or proved undeveloped.
In
2017, the Company invested approximately $3,418,744 in its oil and gas properties. The Company has approximately $265,578 of net
fixed assets on hand and existing infrastructure on the ground in Utah, which will be utilized to facilitate the exploitation
and development of proved non-producing and proved undeveloped reserves over the next five years. At year end the Company’s
review of proved undeveloped reserves revealed challenges but the Company maintains its belief that reserves will be developed
within five years of their acquisition. In addition, the Company anticipates raising additional funds through the sale of common
stock, debt and cash generated from the Company’s financing activities, including public, private and institutional offerings
in capital market transactions and future reserve-based lending activities to develop all of its proved non-producing and proved
undeveloped reserves within the next five-years. Additionally, the Company also believes that it has the ability to joint venture
to develop any of its assets.
Standardized
measure of discounted future net cash flows
The
standardized measure of discounted future net cash flows from our proved non-producing and proved undeveloped reserves for the
periods presented in the financial statements is summarized below.
|
|
Year Ended
|
|
|
|
December 31, 2017
|
|
Future net production revenue
|
|
$
|
256,032,802
|
|
Future operating costs
|
|
|
(35,896,000
|
)
|
Future capex costs
|
|
|
(42,900,260
|
)
|
Future net cash flows before tax
|
|
|
177,236,542
|
|
Future income taxes (
assuming 34% corporate tax rate
)
|
|
|
(60,260,424
|
)
|
Future net cash flows after tax
|
|
|
116,976,118
|
|
10% annual discount for estimating of future cash flows
|
|
|
(60,019,390
|
)
|
Standardized measure of discounted net future cash flows
|
|
$
|
56,956,728
|
|
Changes
in standardized measure of discounted future net cash flows
For
the year ending December 31, 2017, the Company sold a total of approximately 2,137 barrels of oil, which were produced from three
of its Duck Creek wells.