NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Organization, going concern, and significant accounting policies
Business
Foothills
Exploration, Inc., (“Company”, “Foothills Exploration”, or “Foothills”) was incorporated in
the state of Delaware on May 13, 2010, under the name “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. See Note 2 – Share Exchange
Agreement.
Prior
to the Share Exchange, the Company had minimal assets and recognized no revenues from operations and was accordingly classified
as a shell company. In light of closing the Share Exchange transaction with the shareholders of FPI, the Company became actively
engaged in oil and gas operations and is no longer a shell company.
The
consolidated balance sheets include the accounts of the Company, and its wholly-owned direct and indirect subsidiaries, Foothills
Exploration, Inc. (“FTXP”), Foothills Petroleum, Inc. (“FPI”), Foothills Exploration, LLC (“FEL”),
Foothills Petroleum Operating, Inc. (“FPOI”), Foothills Exploration Operating, Inc. (“FEOI”), Tiger Energy
Partners International, LLC (“TEPI”), Tiger Energy Operating, LLC (“TEO”), and Tiger Energy Mineral Leasing,
LLC (“TEML”).
The
Company’s oil and gas operations are conducted by its wholly owned indirect subsidiaries. FEL is a qualified oil and gas
operator in the states of Wyoming and Colorado, and TEO is a qualified oil and gas operator in the state of Utah.
The
Company’s operating entities have historically employed, and will continue in the future to employ, on an as-needed basis,
the services of drilling contractors, other drilling related vendors, field service companies and professional petroleum engineers,
geologists, and landmen as required in connection with future drilling and production operations.
Going
Concern
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America, which contemplate continuation of the Company as a going concern. The Company has incurred recurring
losses from inception through December 31, 2017, has a working capital deficit at December 31, 2017, of $13,024,813, and has limited
sources of revenue. These conditions have raised substantial doubt as to the Company’s ability to continue as a going concern
for one year from the issuance of the financial statements. These financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
To
address these matters, the Company is actively meeting with investors for possible equity investments, including business combinations;
investigating other possible sources to refinance our existing debt; and in continuing discussions with various individuals and
groups that could be willing to provide capital to fund operations and growth of the Company.
Significant
Accounting Policies
Principles
of Consolidation
The
financial statements include the accounts of Foothills Exploration, Inc., and all of its direct and indirect wholly-owned subsidiaries
including Foothill Petroleum, Inc., 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 Estimates
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.
Reclassifications
Certain
reclassifications have been made to amounts in prior year to conform to the current year presentation. All reclassifications have
been applied consistently to the periods presented and had no effects on previously reported results of operations.
Cash
and Cash Equivalents
Cash
and cash equivalents include all highly liquid debt instruments with maturity of three months or less.
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. At each of the years ended December 31,
2017 and 2016, the Company had restricted cash of $240,000. This amount is being held in escrow for the benefit of the State of
Utah for certain properties located in Utah, covered under a certain Modification to Stipulated Order between the Utah Division
of Oil, Gas and Mining and TEPI dated August 1, 2014 (Case No. SI/TA-102). These funds held in escrow, will be released to the
Company once the Company finishes its reclamation of the various wells in question.
Accounts
receivable and allowance for doubtful accounts
Accounts
receivable are stated at the historical carrying amount net of an allowance for uncollectible accounts. The carrying amount of
the Company’s accounts receivable approximates fair value because of the short-term nature of the instruments.
The
Company routinely assesses the collectability of all material trade and other receivables.
Trade
accounts receivable comprise receivables from joint interest owners which are recorded when the Company incurs expenses on behalf
of the non-operator interest owners of the properties the Company operates.
The
Company’s oil and gas revenues receivable comprise receivables from purchasers of the Company’s production of oil
and gas and other hydrocarbons and from operators of properties in which the Company has a non-operated interest, as well as from
joint interest owners of properties the Company operates. During the year ended December 31, 2017, the company accrued $31,924
of net revenue receivable from EOG Resources, the operator of two wells in which the Company has a working interest, which the
Company has been informed that EOG will apply to unpaid invoices of the Company’s share of costs to drill two wells until
EOG has recovered those costs. During the year ended December 31, 2017, those costs were $1,501,377. See Note 4 – Property
and Equipment.
The
Company’s reported balance of accounts receivable, net of allowance for doubtful accounts, represents management’s
estimate of the amount that ultimately will be realized in cash or used in the future to offset an operator’s joint interest
billings.
The
Company reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical payment trends, the
age of the receivables and knowledge of the individual customers or joint interest owners. When the analysis indicates, management
increases or decreases the allowance accordingly. However, if the financial condition of our customers were to deteriorate, additional
allowances might be required.
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 unproved 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.
Support
Facilities and Equipment
Our
support facilities and equipment are generally located in proximity to certain of our principal fields. Depreciation of these
support facilities is calculated on a units-of-production basis.
Maintenance
and repair costs that do not extend the useful lives of property and equipment are charged to expense as incurred.
Proved
Reserves
Estimates
of the Company’s proved reserves included in this report are prepared in accordance with US GAAP and guidelines from the
United States Securities and Exchange Commission (“SEC”). The Company’s engineering estimates of proved oil
and natural gas reserves directly impact financial accounting estimates, including depreciation, depletion, and amortization expense
and impairment. Proved oil and natural gas reserves are the estimated quantities of oil and natural gas reserves that geological
and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under period-end
economic and operating conditions. The process of estimating quantities of proved reserves is very complex, requiring significant
subjective decisions in the evaluation of all geological, engineering and economic data for each reservoir. The accuracy of a
reserves estimate is a function of: (i) the quality and quantity of available data; (ii) the interpretation of that data; (iii)
the accuracy of various mandated economic assumptions, and (iv) the judgment of the persons preparing the estimate. The data for
a given reservoir may change substantially over time as a result of numerous factors, including additional development activity,
evolving production history and continual reassessment of the viability of production under varying economic conditions. Changes
in oil and natural gas prices, operating costs, and expected performance from a given reservoir also will result in revisions
to the amount of the Company’s estimated proved reserves. The Company engages independent reserve engineers to estimate
its proved reserves.
Fixed
Assets
The
Company capitalizes expenditures related to property and equipment not directly associated with our production of oil and gas,
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.
Depreciation
is calculated using the straight-line method over the estimated useful lives of the assets.
Office
equipment – 3 years
Vehicle(s)
– 5 years
Land
– not depreciated
Asset
Retirement Obligations
The
Company follows the provisions of the Accounting Standards Codification ASC 410 - Asset Retirement and Environmental Obligations.
The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount
of the long-lived asset. The Company’s asset retirement obligations relate to the abandonment of oil and gas producing facilities
and facilities that support the production of oil and gas. The amounts recognized are based upon numerous estimates and assumptions,
including future retirement costs, future inflation rates and the credit-adjusted risk-free interest rate. After recording these
amounts, the ARO will be accreted to its future estimated value using the same assumed cost of funds, and the capitalized costs
are depreciated on a unit-of-production basis. Both the accretion and the depreciation will be included in depreciation, depletion
and amortization expense on our consolidated statements of operations.
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:
|
●
|
Level
1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in
sufficient frequency and volume to provide pricing information on an ongoing basis
|
|
|
|
|
●
|
Level
2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially
the full term of the asset or liability. This category includes those derivative instruments that the Company values using
observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative
instruments, can be derived from observable data, or supported by observable levels at which transactions are executed in
the marketplace.
|
|
|
|
|
●
|
Level
3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement
and less observable from objective sources (i.e. supported by little or no market activity). Level 3 instruments include derivative
warrant instruments. The Company does not have sufficient corroborating evidence to support classifying these assets and liabilities
as Level 1 or Level 2.
|
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.
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. The estimated fair value of the derivative warrant instruments was
calculated using a Black Scholes valuation model.
The
following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for
at fair value on a recurring basis as of December 31, 2017 and 2016:
|
|
|
|
|
Fair
Value Measurement at
|
|
|
|
Carrying
Value
|
|
|
December
31, 2017
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets, debt and equity instruments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative
liabilities, debt and equity instruments
|
|
|
458,387
|
|
|
|
—
|
|
|
|
—
|
|
|
|
458,387
|
|
|
|
|
|
|
|
|
Fair
Value Measurement at
|
|
|
|
|
Carrying
Value
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Level
1
|
|
|
|
Level
2
|
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets, debt and equity instruments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative
liabilities, debt and equity instruments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
The
Company did not identify any other assets and liabilities that are required to be presented on the consolidated balance sheet
at fair value.
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). All of our revenue is attributable to sales of oil, gas, and other hydrocarbons which are sold daily, with sales aggregated
on a monthly basis. In the case of revenue received for a non-operated working interest, we are paid by the operator, which is
a joint interest partner and not the purchaser of the product. In the case of revenue received for an operated working interest,
we are paid by the marketer to whom we sell the commodities directly pursuant to contractual arrangements.
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.” The Company’s earnings (loss) per
share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted
earnings (loss) per share reflects the potential dilution of securities, if any, that could share in the earnings (loss) of the
Company and are calculated by dividing net income by the diluted weighted average number of common shares. The diluted weighted
average number of common shares is computed using the treasury stock method for common stock that may be issued for outstanding
stock options, warrants, and convertible debt.
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
Net income
(loss) available to stockholders
|
|
$
|
(6,493,871
|
)
|
|
$
|
(1,941,138
|
)
|
Basic
net income allocable to participating securities (1)
|
|
|
—
|
|
|
|
—
|
|
Income
(loss) available to Foothills Exploration, Inc.’s stockholders
|
|
$
|
(6,493,871
|
)
|
|
$
|
(1,941,138
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding-Basic
|
|
|
14,418,719
|
|
|
|
8,422,180
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
Options and warrants
(2)
|
|
|
—
|
|
|
|
—
|
|
Stock
payable (3)
|
|
|
205,000
|
|
|
|
200,000
|
|
Weighted average
number of common shares outstanding-Diluted
|
|
|
14,623,719
|
|
|
|
8,622,180
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.45
|
)
|
|
$
|
(0.23
|
)
|
Diluted
|
|
$
|
(0.44
|
)
|
|
$
|
(0.23
|
)
|
|
(1)
|
Restricted share
awards that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in computing
earnings using the two-class method. Participating securities, however, do not participate in undistributed net losses.
|
|
|
|
|
(2)
|
For the year ended
December 31, 2017, “out of the money” stock options representing 2,050,000 shares and warrants representing 2,683,515
shares were antidilutive and, therefore, excluded from the diluted share calculation. For the year ended December 31, 2016,
“out of the money” stock options representing 450,000 shares and warrants representing 1,025,000 shares were antidilutive
and, therefore, excluded from the diluted share calculation.
|
|
|
|
|
(3)
|
For
the year ended December 31, 2017, stock payable representing 205,000 shares were anti-dilutive. For the year ended December
31, 2016, stock payable representing 200,000 shares were 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 and may require the services of valuation experts. 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 – Share Exchange Agreement
During
the year ended December 31, 2016, (the “Company”):
(1)
|
acquired
over 14.1 million pre-split (56.4 million post-split) shares of Key Link’s common stock from five persons constituting
approximately 96% of our issued and outstanding shares (the “FPI Acquired Shares”). In conjunction with this purchase
we incurred a charge of $316,035 for the purchase of these shares.
|
|
|
(2)
|
effected
a 4:1 forward split of our shares of common stock.
|
|
|
(3)
|
entered
into a Share Exchange Agreement (“Share Exchange Agreement”) with the shareholders of FPI, whereby the Company
acquired all of the outstanding shares of FPI for an aggregate of 6,003,759 shares of common stock of which 4,500,000 shares
of common stock were issued to Wilshire Energy Partners, LLC, (“Wilshire”) and 1,503,759 of shares of common stock
were issuable to Alternus Capital Holdings Ltd., a British Virgin Islands company (“Alternus”) (the “Share
Exchange”) for automatic conversion of debt. As a result of the Share Exchange, FPI became the Company’s wholly
owned subsidiary and the FPI Acquired Shares were subsequently returned to treasury, deemed canceled and no longer outstanding.
|
|
|
(4)
|
exchanged
warrants to purchase 700,000 shares of FPI’s common stock that were issued to Wilshire for a like amount of warrants
to purchase shares of Key Link’s common stock (the “Wilshire Warrants”). The Wilshire Warrants which:
|
|
●
|
have
a term of five years;
|
|
|
|
|
●
|
are
exercisable at $1.25 per share as to 100,000 shares;
|
|
●
|
are
exercisable at $2.00 per share as to 200,000 shares;
|
|
|
|
|
●
|
are
exercisable at $3.00 per share as to 400,000 shares;
|
|
|
|
|
●
|
do
not have a cashless exercise feature; and
|
|
|
|
|
●
|
are
not exercisable for one year from the date of issuance.
|
Following
the closing of the Share Exchange transaction the Company had approximately 8,363,759 shares of common stock outstanding (excluding
the FPI Acquired Shares, which are deemed canceled following the Share Exchange), of which Wilshire and Alternus own in the aggregate
6,003,759 shares, or approximately 52% of the outstanding common stock.
Note
3 – Acquisition
On
December 30, 2016, the Company entered into a Purchase and Sale Agreement (“PSA”) with Total Belief Limited (“TBL”),
a British Virgin Islands limited liability company. Under the PSA, the Company purchased membership interests in the companies
listed below, constituting all of the ownership interest and claims that TBL has or may have in these companies, as defined below.
Based
on the closing of its agreement with TBL, the Company acquired:
●
|
Clear
Elite Holdings Limited (“CEH”), a British Virgin Islands limited liability company, which is the owner of 100%
of the membership interests of Golden Giants Limited, a British Virgin Islands limited liability company (“GGL”),
which owns:
|
|
○
|
100%
of the membership interests of NTE-Utah, LLC, a Delaware limited liability company (“NTE-Utah”), which in turn
owns 100% of the membership interests of Tiger Energy Operating, LLC (“TEO”), a Nevada limited liability company,
which in turn owns 100% of the membership interests of Tiger Energy Mineral Leasing, LLC (“TEML”), a Nevada limited
liability company, with owned oil and gas leases, wells, related oil and gas bonds, and oil and gas lease rights and options,
found in approximately 280 acres in Uintah County, Utah, and cash assets held by the entities; and
|
|
|
|
|
○
|
750
units of membership interests (representing 75% total equity ownership) of Tiger Energy Partners International, LLC (“TEPI”),
a Nevada limited liability company with owned assets including:
|
|
●
|
All
rights and interests pertaining to the Global Settlement Agreement (“GSA”) for the Uintah and Ouray Reservation
between Mountain Oil & Gas, Inc. and certain entities affiliated with it and the Ute Indian Tribe of the Uintah and Ouray
Reservation, dated December 22, 2014;
|
|
|
|
|
●
|
All
rights and interests acquired in the Purchase and Sale Agreements between TEPI and Mountain Oil & Gas, Inc. dated April
16, 2012, and December 18, 2012
|
|
|
|
|
●
|
All
cash held in an attorney trust account earmarked for payments to certain vendors and other creditors;
|
|
|
|
|
●
|
$240,000
cash held in escrow for State of Utah Department of Natural Resources Division of Oil, Gas and Mining (DOGM); and
|
|
|
|
|
●
|
Cash
balances in all company bank accounts
|
●
|
Prominent
Sino Holdings Limited (“PSH”) and Value Train Investments Limited (“VTI”), each a British Virgin Islands
limited liability company, and each a direct wholly-owned subsidiary of TBL, and that together own 55.63% of the shares of
Grey Hawk Exploration, Inc. (“Grey Hawk”), a British Columbia, Canada company, constituting ownership of 13,166,667
Grey Hawk common shares. Grey Hawk owns a non-operated working interest in two non-producing wells in the southern portion
of the Natural Buttes Field.
|
Pursuant
to the PSA the parties agreed to determine and pay the purchase price of $10.75 million for these assets and ownership interests
as follows:
●
|
A
cash payment of $75,000 in connection with closing;
|
|
|
●
|
Additional
cash payment of $675,000 payable within 10 business days following execution of the agreement;
|
|
|
●
|
2,083,334
shares of restricted common stock of the Company valued for accounting purposes at $3,812,500, or at price per share of $1.83
(valued by the parties at $4,000,000 at an agreed upon price per share of $1.92); and
|
|
|
●
|
A
promissory note delivered at closing in the principal amount of $6,000,000 that:
|
|
○
|
has
a term of 18 months from the Closing Date;
|
|
|
|
|
○
|
accrues
no interest during its term; and
|
|
|
|
|
○
|
requires
the entire principal amount to be due and payable upon maturity.
|
The
acquisition price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values. The following
table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.
Assets
|
|
|
|
Cash
|
|
$
|
358,130
|
|
Cash
in escrow
|
|
|
240,000
|
|
Oil
and gas properties
|
|
|
10,016,990
|
|
Drilling
equipment
|
|
|
265,578
|
|
Investment
|
|
|
100
|
|
Bond
deposits
|
|
|
295,000
|
|
Liabilities
|
|
|
|
|
Accounts
payable
|
|
|
(389,325
|
)
|
Contingent
liabilities
|
|
|
(213,372
|
)
|
Related
party payable
|
|
|
(10,600
|
)
|
Net
assets acquired
|
|
|
10,562,501
|
|
TBL
had no operating activities during the year ended December 31, 2016; hence no pro forma information is included for this acquisition.
Concurrently
with the foregoing, 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. Kevin Sylla, who beneficially owns approximately 53% of Wilshire Energy Partners, LLC, a principal
stockholder of the Company, and who has served as Managing Director of TEPI and of TEO introduced the Company to TBL. Subsequently,
Mr. Sylla was appointed director and Chief Executive Officer of FPI effective March 1, 2017.
Note
4 – Property and Equipment
Oil
and Gas Properties
The
Company’s oil and gas properties at December 31, 2017 and 2016 are located in the United States of America.
The
carrying values of the Company’s oil and gas properties, net of depletion, depreciation, amortization, and impairment at
December 31, 2017 and 2016 are set forth below in the following table:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Unproved
leasehold (1)
|
|
$
|
977,936
|
|
|
$
|
1,181,421
|
|
Proved leasehold
|
|
|
10,094,760
|
|
|
|
10,252,568
|
|
Properties subject
to depletion, net of depletion
|
|
|
580,158
|
|
|
|
—
|
|
Exploratory
wells – construction-in-progress (1) (2)
|
|
|
1,479,282
|
|
|
|
—
|
|
Total
|
|
$
|
13,132,136
|
|
|
$
|
11,433,989
|
|
(1)
|
Not
subject to depletion;
|
(2)
|
Expected
to be reclassified from exploratory to properties subject to amortization in the first quarter of 2018.
|
|
|
|
|
|
Exploration
and
|
|
|
|
|
|
Depreciation,
Depletion, Amortization,
|
|
|
|
|
Year
|
|
Acquisition
|
|
|
Development
|
|
|
Disposition
|
|
|
and
|
|
|
|
|
Incurred
|
|
Costs
|
|
|
Costs
|
|
|
of
Assets
|
|
|
Impairment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
and prior
|
|
$
|
10,252,568
|
|
|
$
|
1,181,421
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,433,989
|
|
2017
|
|
|
—
|
|
|
|
3,223,931
|
|
|
|
—
|
|
|
|
(1,525,784
|
)
|
|
|
1,698,147
|
|
Total
|
|
$
|
10,252,568
|
|
|
$
|
4,405,352
|
|
|
$
|
—
|
|
|
$
|
(1,525,784
|
)
|
|
$
|
13,132,136
|
|
During
the year ended December 31, 2017, the Company engaged in the following activities associated with its oil and gas properties:
●
|
Acquired
a 21.6% non-operated working interest in two exploratory horizontal gas wells in the
Uinta Basin from an undisclosed party
.
Both
wells are operated by EOG. We expect total cost of both wells will be $3.2 million.
These
wells align with the Company’s overall growth strategy for the Uinta Basin. The
well was drilled successfully and had a small amount of production, and completion will
be finalized in
2018. As of December 31, 2017, the Company incurred $1,501,377
in costs for our working interest share. The wells are classified on our consolidated
balance sheets as construction-in-progress and not subject to amortization until completion
has occurred which is expected to be late in the first quarter of 2018.
|
|
|
●
|
Drilled
a test well on the Labokay prospect to the total measured depth of 8,795 feet, where
hydrocarbons shows were not in commercial quantities to warrant completion. This well
was plugged and abandoned. Since the well was not commercially viable the Company’s
working interest in the underlying mineral lease terminated and we no longer have a right
to acquire title to said property. We incurred $1,507,768 in the drilling of this well
which was charged to impairment expense. Civil lawsuits were filed against FPOI arising
from unpaid accounts in connection with drilling of this well – see Note 11 –
Commitments and contingencies for additional information on the lawsuits.
|
|
|
●
|
Successfully
worked over two Duck Creek wells obtaining production from the Green River formation.
We incurred $70,937 in capitalized workover costs associated with these wells.
|
|
|
●
|
Incurred
costs of $22,691 for bonding, legal, title, engineering, geological and surveying in our Ladysmith project in Fremont County,
Wyoming.
|
During
the year ended December 31, 2016, the Company engaged in the following activities associated with its oil and gas properties:
●
|
Completed drilling
of the Federal #1 test well in the Paw Paw project in Big Horn County, Wyoming. The test well reached total depth in the Madison
Formation and the Company successfully logged and acquired valid data to further evaluate the project’s potential. Oil
shows were found in the Muddy, Phosphoria, and Madison formations. The Phosphoria is a regionally productive formation and
could end up being the secondary zone in sidetrack operations should that type of operation be deemed commercially economic.
We incurred costs of approximately $730,000 in this project.
|
|
|
●
|
Acquired various
proved 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 proved 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, the Company also obtained
six shut-in wells in the Natural Buttes Field, Utah. The transaction provided the Company 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 delivered 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 a pre-acquisition 35% up to 75%. We incurred $10,562,501 in acquiring these assets.
|
|
|
●
|
Incurred costs of
$55,848 for to acquire additional leases and working interest and for bonding, legal, title, engineering, geological
and surveying in our Ladysmith project in Fremont County, Wyoming.
|
Support
Facilities and Equipment
The
Company’s support facilities and equipment serve its oil and gas production activities. The following table summarizes these
properties and equipment, together with their estimated useful lives:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Tank
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
Vehicle
|
|
|
69,446
|
|
|
|
69,446
|
|
Accumulated depreciation
|
|
|
(31
|
)
|
|
|
—
|
|
Construction in progress (1)
|
|
|
22,087
|
|
|
|
—
|
|
Total support facilities and equipment, net
|
|
$
|
121,502
|
|
|
$
|
99,446
|
|
|
(1)
|
Facilities
constructed in conjunction with drilling for our two exploratory horizontal wells in Uintah County, Utah.
|
The
Company recognized depreciation expense of $31 and $0 during the years ended December 31, 2017 and 2016, respectively.
Office
Furniture, Equipment, and Other
As
of December 31, 2017, and 2016, office furniture, equipment, and other consisted of the following:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Computer
equipment and fixtures
|
|
$
|
22,453
|
|
|
$
|
22,453
|
|
Vehicle
|
|
|
—
|
|
|
|
—
|
|
Accumulated
depreciation
|
|
|
(8,632
|
)
|
|
|
(4,114
|
)
|
Office
furniture, equipment, and other, net
|
|
$
|
13,821
|
|
|
$
|
18,339
|
|
During
the year ended December 31, 2017, the vehicle was reclassified to Support Facilities and Equipment, as it is used in oil and gas
field operations of the Company.
During
the years ended December 31, 2017 and 2016, depreciation expense was $8,632 and $4,114, respectively.
Note
5 – Asset Retirement Obligation
The
following table provides a reconciliation of the changes in the estimated present value of asset retirement obligations for the
years ended December 31, 2017 and 2016.
|
|
For the Year Ended December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Beginning
asset retirement obligations
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities
established
|
|
|
291,659
|
|
|
|
—
|
|
Accretion
expense
|
|
|
11,668
|
|
|
|
—
|
|
Ending
asset retirement obligations
|
|
$
|
303,327
|
|
|
$
|
—
|
|
Accretion
expense for the year ended December 31, 2017 and 2016 was $11,668 and $0, respectively.
Note
6 – Notes Payable
A
summary of the outstanding amounts of our Notes payable as of December 31, 2017 and 2016 is as follows:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
9%
unsecured note payable due May 6, 2017 (1)
|
|
$
|
-
|
|
|
$
|
-
|
|
13.5%
unsecured note payable due September 8, 2017 (2)
|
|
|
1,050,000
|
|
|
|
-
|
|
0%
unsecured note payable due June 30, 2018 (3)
|
|
|
6,000,000
|
|
|
|
6,000,000
|
|
Less:
unamortized discount of imputed interest of 4% (3)
|
|
|
(114,268
|
)
|
|
|
-
|
|
0%
unsecured note payable due January 2, 2018 (4)
|
|
|
250,000
|
|
|
|
-
|
|
Less:
unamortized discount of imputed interest of 4% (4)
|
|
|
(2,264
|
)
|
|
|
-
|
|
12%
unsecured note payable June 30, 2018 (5)
|
|
|
120,629
|
|
|
|
-
|
|
Total
debt
|
|
|
7,304,097
|
|
|
|
6,000,000
|
|
Less:
current maturities
|
|
|
7,304,097
|
|
|
|
-
|
|
Long-term
debt, net of current maturities
|
|
|
-
|
|
|
|
6,000,000
|
|
At
December 31, 2017, the principal amounts due under our debt agreements were all classified as current on our Consolidated Balance
Sheets.
(1)
|
On
December 30, 2016, 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 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 reclassified the remaining accrued interest of $30,000 as a gain on extinguishment of debt.
|
|
|
(2)
|
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 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 the satisfaction of Profit Well. 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”).
|
(3)
|
On
December 30, 2016, in connection with the TBL acquisition (see Note 3 - Acquisitions), Foothills entered into a promissory
note in the amount of $6,000,000. This note bears no interest during its term. The Company calculated and recorded $342,804
of imputed interest as debt discount.
|
|
|
(4)
|
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.
(5)
|
A
promissory note was issued on November 1, 2017, for services rendered, bearing an interest rate of 12% per annum and
with a maturity date of June 30, 2018.
|
During
the years ended December 31, 2017 and 2016, respectively, we incurred $442,389 and $27,873 of interest expense, including
amortization of discount and recognized a gain on extinguishment of debt of $30,000 and $0, respectively.
Note
7 – Notes Payable - Related Party
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
13.25%
unsecured note payable due May 5, 2017 (1)
|
|
$
|
1,250,000
|
|
|
$
|
-
|
|
Total
debt
|
|
|
1,250,000
|
|
|
|
-
|
|
Less:
current maturities
|
|
|
1,250,000
|
|
|
|
-
|
|
Long-term
debt, net of current maturities
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
Effective
January 5, 2017, Foothills borrowed $1,250,000 from Berwin Trading Limited that, due
to its 20% beneficial ownership in the Company, is a related party. This note called
for interest at 9% per annum; but because it was not paid when due interest was to have
accrued at a default rate of 11% from the due date of the note. 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. See Note 3 – Acquisitions.
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. 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”).
|
During
the years ended December 31, 2017 and 2016, the Company recorded interest expense of $166,438 and $0, respectively on the related
party note.
Note
8 – Convertible Note Payable
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
10% convertible
note payable due May 10. 2018 (1)
|
|
$
|
50,000
|
|
|
$
|
-
|
|
8% convertible note
payable due August 16, 2018 (2)
|
|
|
267,500
|
|
|
|
-
|
|
Less:
unamortized debt discount on convertible notes (1)(2)
|
|
|
(224,228
|
)
|
|
|
-
|
|
Total
debt
|
|
|
93,272
|
|
|
|
-
|
|
Less:
current maturities
|
|
|
93,272
|
|
|
|
-
|
|
Long-term
debt, net of current maturities
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
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 thunder 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. 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”).
|
|
|
(2)
|
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 0.75 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 is being amortized to interest expense over the term of
the Note or in full upon the conversion of the Note. As of December 31, 2017, Company accounted for the conversion feature
as a derivative valued at $458,387 which was determined 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 0.6 year.
|
During
the years ended December 31, 2017 and 2016, the Company incurred $49,071 and $0, respectively, of interest expense on the convertible
notes and amortization of discount.
Note
9 – 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 3), 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.
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 if 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
10– Other 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. As
a result, Alternus became a 10% beneficial owner in the Company and a related party. All accrued interest was waived and recorded
as additional paid in capital.
Wilshire
Energy Partners, LLC
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, the Company, entered into a purchase and sale agreement with Total Belief Limited (see Note 3 - Acquisitions).
As a result of the acquisition the Company assumed a $10,600 related party payable due to Equipment Solutions, Inc., which is
owned by a director of the Company, Alex Hemb. During the year ended December 31, 2017, the balance was paid.
Note
11 – Commitments and Contingencies
Contractual
Obligations
Operating
Leases
Effective
May 1, 2017, the Company entered into a 39-month lease, expiring July 31, 2020, for its Denver, Colorado, corporate office at
a total rental of approximately $10,051 per month. During the year ended December 31, 2017, the Company paid $47,821 for its Denver
office space.
On
October 5, 2016, the Company launched its Exploration Division and opened a new office in Houston, Texas, to support the division’s
staff, at a monthly rental amount of $2,298. On March 27, 2018, the Company closed that office. During the year ended December
31, 2017, the Company paid $6,894 for its Houston office space.
The
Company leases a copier at monthly rental of $135 through September 23, 2020, for its Denver, Colorado, office. During the year
ended December 31, 2017, the Company paid $1,649 in rental for the copier.
During
2017, the Company’s rental expense was $1,649 for all operating leases.
During
2016, the Company’s rental expense was $0 for all operating leases.
Information
regarding all the Company’s contractual lease obligations, at December 31, 2017, is set forth in the following table.
|
|
Operating
Leases
|
|
|
|
|
|
2018
|
|
$
|
123,668
|
|
2019
|
|
|
125,816
|
|
2020
|
|
|
74,347
|
|
2021
and thereafter
|
|
|
—
|
|
Total
|
|
$
|
323,831
|
|
Legal
proceedings
The
Company has determined that judgments rendered in the first quarter of 2018 in connection with all but four of the following legal
proceedings against the Company are Type 1 subsequent events that provide additional evidence with respect to conditions that
existed at the date of the balance sheet. Therefore, the financial statements reflect the effects of prejudgment judgments awards
to plaintiffs as through the year ended December 31, 2017, noted below in accordance with Auditing Standard 2801.03.
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 workover 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 which TEO paid
to SCI Welding. We recorded $18,407 as gain on extinguishment of debt. 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
in this case sought collection of unpaid debt incurred by TEO for services rendered in connection with its workover of wells in
Duchesne County, Utah. On June 1, 2016, a default judgment of $159,965 was obtained against TEO by Plaintiff. 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 us. A Motion to Set Aside the sheriff’s sale of these properties was filed with the court based
on the fact that TEO was 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 issued to seize
the property subject of litigation on March 8, 2018.
Graco
had scheduled certain foreclosure sales of TEO’s interests in various oil and gas wells to take place on May 3, 2018 (the
“Sales”). On April 27, 2018, the parties reached a settlement and release agreement whereby TEO agreed to make five
(5) payments totaling $163,964.59 to Graco. The first payment due on May 9, 2018, has already been made to the judgment holder.
The second payment of $32,792.92 is due on July 9, 2018; the third payment of $32,792.92 is due on September 9, 2018; the fourth
payment of $32,792,92 is due on November 9, 2018; and fifth and final payment of $32,792.92 is due on January 9, 2019. If any
of the above payments are not made when due, Grace will have the right to immediately execute the Sales. Graco will maintain and
apply liens and notices of its judgment until the total payment has been paid in full by TEO. TEO shall be provided with a 10-day
period within which to cure any default under the settlement agreement, other than making the first payment described above. TEO
made its second payment of $32,793 on July 19, 2018, within the 10-day cure period provided in the settlement agreement.
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 in the amount of $49,689 in connection
with a workover 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 including $5,248.10 in pre-judgement
interest was filed on December 18, 2017. An order requesting company asset inquiry was issued on February 20, 2018. As of July
26, 2018, no further action has been taken.
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.
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 (the “Tribe”) 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 remained unchanged at December
31, 2017, 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 GSA. The Tribe and Tiger remain in discussion regarding approval of the Global
Settlement Agreement by the Regional Director.
Labokay
Well – Parish of Calcasieu, State of Louisiana
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
in the amount of $72,495 in connection with drilling the Labokay test well in Calcasieu Parish, Louisiana.
A
judgment was entered on January 22, 2018, in the County Court of Adams County, Mississippi in the principal amount of $72,495.00,
plus pre-judgement interest in the amount of $12,763, plus attorney’s fees in the amount of $18,124, plus costs in the amount
of $196, for a total amount of $103,578, plus post-judgment interest at the rate of 8% per annum. On May 9, 2018, District Court
for the City and County of Denver, Colorado, granted plaintiff with an order granting their petition to domesticate this foreign
judgment with the Denver District Court, which now has the same effect and is subject to the same procedures, defenses, and proceedings
for reopening, vacating, or staying as a judgment from the Denver District Court, and may be enforced or satisfied in like manner.
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, for payment of services performed by plaintiff in the amount of $205,251 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 of $2,500, and all costs of the court proceedings. As of December
31, 2017, we recorded $29,861 of prejudgment interest expense.
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.
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 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 inclusive of interest as of September 6,
2017; plus, finance charges to accrue after September 6, 2017, of one and one-half percent 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 December 31, 2017, we recorded $5,002 of prejudgment interest expense.
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 $30,244, plus interest in the
contractual amount of 18% per annum from the date the payment was originally due until the judgment date, plus legal interest
from the judgment date until amounts are paid, plus reasonable attorneys’ fees. As of December 31, 2017, we recorded $868
of prejudgment interest expense.
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 judgment in favor of plaintiff in the amount of $51,275, 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. As of December
31, 2017, we recorded $1,538 of prejudgment interest expense.
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 judgment in favor of plaintiff in the amount of $28,904, plus interest in the contractual
amount of 1.5% per month from the date the payment was originally due until the judgment 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.
As
of December 31, 2017, and 2016, the balance of contingent liabilities was $305,935 and $213,372, respectively. During the years
ended December 31, 2017 and 2016, we recorded $145,970 and $0 in contingent liabilities
Note
12 - Income Taxes
On
December 22, 2017, the Tax Cuts and Jobs Act (the TCJA), which significantly modified U.S. corporate income tax law, was signed
into law by President Trump. The TCJA contains significant changes to corporate income taxation, including but not limited to
the reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction
for interest expense to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses
to 80% of current year taxable income and generally eliminating net operating loss carrybacks, allowing net operating losses to
carryforward without expiration, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated,
elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments
instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including
changes to the orphan drug tax credit and changes to the deductibility of research and experimental expenditures that will be
effective in the future). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal
tax law is uncertain, including to what extent various states will conform to the newly enacted federal tax law.
The
Company has not recorded the necessary provisional adjustments in the financial statements in accordance with its current understanding
of the TCJA and guidance currently available as of this filing. But is reviewing the TCJA’s potential ramifications.
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 determined it is More likely than not that the Deferred Tax Assets will not be utilized, since
a loss Company to date and no evidence of income in the past.
No
federal tax provision has been provided for the years ended December 31, 2017, and 2016 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 &
estimated State tax rate and the effective tax rate for the years ended December 31, 2017, and 2016.
|
|
2017
|
|
|
2016
|
|
Net operating
loss carryforward
|
|
$
|
(2,029,437
|
)
|
|
$
|
(671,362
|
)
|
Stock based compensation
|
|
|
40,248
|
|
|
|
3,931
|
|
Fair value of
options
|
|
|
195,873
|
|
|
|
281
|
|
Total
deferred tax assets
|
|
|
(1,793,316
|
)
|
|
|
(667,150
|
)
|
Valuation
allowance
|
|
$
|
1,793,316
|
|
|
$
|
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 $21,793,316 and $667,150, respectively, which, if not utilized earlier, expire through 2037.
Utilization
of net operating loss carryforwards may be subject to substantial annual limitations due to the “change in ownership”
provisions of the Internal Revenue Code Sections 382 and 383. The annual limitation may result in the expiration of substantial
net operating loss carryforwards before utilization. The Company has not calculated its IRC Section 382 and 383 change of ownership
to date, within the meaning of Internal Revenue Code Section 382 and 383, which would limited the use of net operating losses
or render such worthless.
Note
13 – Subsequent Events
Completion
of two non-operated exploratory wells
In
Q2 2018, the two non-operated exploratory wells in which the Company has a 21.62% working interest and 17.1% net revenue
interest were completed, and the costs shown as “construction in progress” will be reclassified to oil and gas properties
subject to amortization in the second quarter of 2018. See Note 4 – Property and Equipment.
Extension
of Debt Maturity
13.5%
unsecured note payable due September 8, 2017
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. The Company and Profit Well are in ongoing discussions to extend
the term of this Note and the Company believes it will either extend, rework or repay the obligation to the satisfaction of Profit
Well. As partial consideration for the deferral, the Company will offer Profit Well 100,000 shares of its restricted common stock.
0%
unsecured note payable due January 2, 2018
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 Company
and this investor are in ongoing discussions to extend the term of this Note and the Company believes it will either extend, rework
or repay the obligation to the satisfaction of the investor.
8%
convertible note payable due August 16, 2018
In
June 2018, the Company made a principal payment in the amount of $100,000. Furthermore, the Company agreed to pay the remaining
balance of $229,025 on or before thirty-five (35) days from June 5
th
, 2018. The Note may be converted if the Note Balance
is not paid on or before thirty-five (35) days from June 5
th
2018. FirstFire agreed that the Note is not in default.
As consideration for agreeing to provide the Company with this extension of time to pay, the Company issued the investor 150,000
shares of restricted common stock, valued at $18,000.
Extension
of Debt Maturity – Related Party
13.25%
unsecured note payable due May 5, 2017
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. The Company and Berwin are in ongoing discussions to extend the term of this Note
and the Company believes it will either extend, rework or repay the obligation to the satisfaction of Berwin. As partial consideration
for the deferral, the Company will offer Berwin 100,000 shares of its restricted common stock.
Contingent
Liabilities – Legal Proceedings
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)
An
order requesting company asset inquiry was issued on February 20, 2018. As of July 26, 2018, no further action has been taken.
Note
14 - Supplemental Oil and Gas Reserve Information (Unaudited)
The
Company’s oil and gas properties and proved reserves are located in the United States.
Results
of operations from oil and gas producing activities
The
results of operations from the Company’s oil and gas producing activities for the years ended December 31, 2017 and 2016
are summarized below:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Net
revenues from production:
|
|
|
|
|
|
|
|
|
Sales
of oil and gas production to third parties
|
|
$
|
155,161
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Production
costs:
|
|
|
|
|
|
|
|
|
Oil
and gas lease operating expense
|
|
|
(252,753
|
)
|
|
|
—
|
|
Depletion,
depreciation, amortization, accretion, and impairment expense
|
|
|
(1,525,784
|
)
|
|
|
—
|
|
Income
tax expense
|
|
|
—
|
|
|
|
|
|
Results
of operations
|
|
$
|
(1,623,376
|
)
|
|
$
|
—
|
|
Results
of operations for producing activities comprise all activities associated with our exploration for and production of oil and gas.
Net revenues from production include only the revenues from the production and sale of oil, natural gas, natural gas liquids,
and residue gas. Production costs are those incurred to operate and maintain wells and related equipment and facilities used in
oil and gas operations. Income tax expense is calculated by applying the current statutory tax rates to the revenues after deducting
costs, which include depreciation, depletion, and amortization allowances, after giving effect to permanent differences. The results
of operations exclude general office overhead, and interest expense attributable to oil and gas activities.
Capitalized
costs
Capitalized
costs and accumulated depletion, depreciation, and amortization relating to the Company’s oil and gas producing activities
as of December 31, 2017 and 2016 are summarized below:
|
|
2017
|
|
|
2016
|
|
Unproved properties not being
amortized
|
|
$
|
2,509,274
|
|
|
$
|
1,181,421
|
|
|
|
|
|
|
|
|
|
|
Proved properties subject to amortization
|
|
$
|
10,762,380
|
|
|
|
10,352,014
|
|
Accumulated depreciation,
depletion, and amortization
|
|
$
|
(18,016
|
)
|
|
|
|
|
Net capitalized
costs
|
|
$
|
13,253,638
|
|
|
$
|
11,533,435
|
|
Costs
incurred in oil and gas 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:
|
|
2017
|
|
Proved
acreage
|
|
$
|
18,653
|
|
Producing
assets
|
|
|
580,158
|
|
Incomplete
construction
|
|
|
1,501,369
|
|
Exploration
costs
|
|
|
(148,533
|
)
|
Development
costs
|
|
|
—
|
|
Net
capitalized costs
|
|
$
|
1,951,647
|
|
Estimated
quantities of proved reserves
The
supplemental unaudited presentation of proved reserve quantities and related standardized measure of discounted future net cash
flows provides estimates only and does not purport to reflect realizable values or fair market values of the Company’s reserves.
The Company emphasizes that reserves estimates are inherently imprecise and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, significant changes to these estimates can be expected as future
information becomes available. All of the Company’s reserves are located in the United States.
Proved
reserves are those estimated reserves of crude oil (including condensate and natural gas liquids) and natural 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 expected to be recovered through existing wells, equipment,
and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well. Proved
undeveloped reserves are those reserves expected to be recovered from known accumulations where a significant expenditure is required
to rend them capable of production.
The
standardized measure of discounted future net cash flows is computed by applying the average first day of the month price of oil
and gas during the 12 month period before the end of the year (with consideration of price changes only to the extent provided
by contractual arrangements) to the estimated future production of proved oil and gas reserves, less the estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses
(based on year-end statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net
cash flows less tax basis of the properties and available credits, and assuming continuation of existing economic conditions.
The estimated future net cash flows are then discounted using a rate of 10 percent per year to reflect the estimated timing of
the future cash flows.
The
reserves estimates set forth below were prepared by a third party engineering firm using reserves definitions and pricing requirements
prescribed by the SEC. Chapman Petroleum Engineering Ltd. (“Chapman”) prepared our reserves report at January 1, 2018.
Chapman is an independent consultant, does not own any interest in the Company’s properties, and is not engaged contingent
upon the value of the Company’s properties. Chapman prepared reserves estimates under a discounted cash flow analysis of
estimated future net revenue, applying knowledge of concepts including uncertainty and risk, probability and statistics, and deterministic
and probabilistic estimation methods in properly using and applying reserves definitions. The data utilized were furnished to
Chapman by the Company or obtained from public data sources. Chapman is a professional engineering firm specializing in the technical
and financial evaluation of oil and gas assets.
Estimated
quantities of oil and natural gas reserves
The
following table sets forth certain data pertaining to changes in reserves quantities of the proved, proved developed, and proved
undeveloped reserves for the years ended December 31, 2017 and 2016.
|
|
December
31,
|
|
|
|
Crude
Oil
|
|
|
Natural
Gas
|
|
|
Crude
Oil
|
|
|
Natural
Gas
|
|
|
|
(MSTB)
|
|
|
(MCF)
|
|
|
(MSTB)
|
|
|
(MCF)
|
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
TOTAL PROVED RESERVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
1,622
|
|
|
|
811
|
|
|
|
—
|
|
|
|
—
|
|
Purchases of minerals in place
|
|
|
—
|
|
|
|
—
|
|
|
|
1,622
|
|
|
|
811
|
|
Sales of minerals in place
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Extensions and discoveries
|
|
|
4,174
|
|
|
|
8,353
|
|
|
|
—
|
|
|
|
—
|
|
Revisions of previous estimates
|
|
|
(1,620
|
)
|
|
|
(811
|
)
|
|
|
—
|
|
|
|
—
|
|
Production
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
End of period
|
|
|
4,174
|
|
|
|
8,353
|
|
|
|
1,622
|
|
|
|
811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVED DEVELOPED RESERVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved developed
producing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Proved
developed nonproducing
|
|
|
—
|
|
|
|
—
|
|
|
|
193
|
|
|
|
97
|
|
End of period
|
|
|
4,174
|
|
|
|
8,353
|
|
|
|
1,622
|
|
|
|
811
|
|
Total proved undeveloped
|
|
|
4,174
|
|
|
|
8,353
|
|
|
|
1,429
|
|
|
|
714
|
|
Standardized
measure of discounted future net cash flows
As
required by the Financial Accounting Standards Board, the standardized measure of discounted future net cash flows is computed
by applying first-day-of-the-month average prices, year-end costs and legislated tax rates and a discount factor of 10 percent
to net proved reserves. The standardized measure includes costs for future dismantlement, abandonment, and rehabilitation obligations.
The Company believes the standardized measure does not provide a reliable estimate of the Company’s expected future cash
flows to be obtained from the development and production of its oil and gas properties or of the value of its proved oil and gas
reserves. The standardized measure is prepared on the basis of certain prescribed assumptions, which represent discrete points
in time and may cause significant variability in cash flows from year to year as prices change.
Net cash flows
at December 31,
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Future cash inflows
|
|
$
|
268,949,000
|
|
|
$
|
74,093,600
|
|
Future production costs
|
|
|
(103,926,000
|
)
|
|
|
(17,313,400
|
)
|
Future development costs
|
|
|
(48,000,000
|
)
|
|
|
(19,750,000
|
)
|
Future income
tax expense
|
|
|
(23,275,919
|
)
|
|
|
(12,590,268
|
)
|
Future net cash flows
|
|
|
93,747,081
|
|
|
|
24,439,932
|
|
10% annual discount
for estimated timing of cash flow
|
|
|
(68,046,395
|
)
|
|
|
(14,908,800
|
)
|
Standard measure
of discounted future net cash flows related to proved reserves
|
|
$
|
25,700,686
|
|
|
$
|
9,531,132
|
|
Changes
in standardized measure of discounted future net cash flows
The
principal sources of changes in the standardized measure of the future net cash flows for the years ended December 31, 2017 and
2016 are:
|
|
2017
|
|
Balance,
beginning of period
|
|
$
|
9,531,132
|
|
Sales and transfers
of oil and gas produced during the period
|
|
|
97,592
|
|
Sales of minerals
in place
|
|
|
—
|
|
Purchases of minerals
in place
|
|
|
—
|
|
Net change in sales
price, net of production costs
|
|
|
(4,564,023
|
)
|
Net changes due
to extensions and discoveries
|
|
|
50,755,047
|
|
Changes in estimated
future development costs
|
|
|
(25,709,147
|
)
|
Previously estimated
development costs incurred during the period
|
|
|
—
|
|
Net change due to
revisions in quantity estimates
|
|
|
(16,007,121
|
)
|
Other
|
|
|
11,284,522
|
|
Accretion of discount
|
|
|
3,599,200
|
|
Net
change in income tax
|
|
|
(3,286,516
|
)
|
Balance,
end of period
|
|
$
|
25,700,686
|
|