NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 – Organization
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.
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.
Note
2 – 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 March 31, 2018, has a working capital deficit at March 31, 2018, of $14,798,342, 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.
Note
3 – Summary of 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
Pursuant
to the rules and regulations of the Securities and Exchange Commission for Form 10-Q, the unaudited condensed consolidated financial
statements, footnote disclosures and other information normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. The condensed consolidated financial statements
contained in this report are unaudited but, in the opinion of management, reflect all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the consolidated financial statements. All significant inter-company accounts
and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative
of results for the full year. The condensed consolidated balance sheet at December 31, 2017 has been derived from the audited
consolidated financial statements at that date but does not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements.
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 March 31, 2018 and December 31, 2017,
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. As of March 31, 2018, the Company accrued $396,384 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 three months ended March 31, 2018, those costs were $1,706,625. 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 March 31, 2018 and December 31, 2017:
|
|
|
|
|
Fair
Value Measurement at
|
|
|
|
Carrying
Value
|
|
|
March
31, 2018
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets, debt and equity instruments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative
liabilities, debt and equity instruments
|
|
|
413,362
|
|
|
|
—
|
|
|
|
—
|
|
|
|
413,362
|
|
|
|
|
|
|
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
|
|
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 606, which directs that it should recognize revenue when
a customer obtains control of promised goods or services for an amount that reflects the consideration the entity expects to receive
in exchange for those goods or services. 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.
|
|
For
the Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
income (loss) available to stockholders
|
|
$
|
(861,845
|
)
|
|
$
|
(2,159,499
|
)
|
Basic
net income allocable to participating securities (1)
|
|
|
—
|
|
|
|
—
|
|
Income
(loss) available to Foothills Exploration, Inc.’s stockholders
|
|
$
|
(861,845
|
)
|
|
$
|
(2,159,499
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding-Basic
|
|
|
14,900,627
|
|
|
|
13,970,001
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Options
and warrants (2)
|
|
|
—
|
|
|
|
—
|
|
Stock
payable (3)
|
|
|
655,000
|
|
|
|
240,000
|
|
Weighted
average number of common shares outstanding-Diluted
|
|
|
15,555,627
|
|
|
|
14,210,001
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06
|
)
|
|
$
|
(0.15
|
)
|
Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.15
|
)
|
|
(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 three months ended March 31, 2018, “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 three
months ended March 31, 2017, “out of the money” stock options representing 2,050,000 shares and warrants representing
1,025,000 shares were antidilutive and, therefore, excluded from the diluted share calculation.
|
|
|
|
|
(3)
|
For
the three months ended March 31, 2018, stock payable representing 655,000 shares were anti-dilutive. For the three months
ended March 31, 2017, stock payable representing 240,000 shares were anti-dilutive.
|
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
November 2016, the FASB issued ASC Update No. 2016-18 (Topic 230) Statement of Cash Flows – Restricted Cash (a consensus
of the FASB Emerging Issues Task Force). The amendments in this update require that restricted cash and restricted cash equivalents
be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. Current GAAP does not include specific guidance on the cash flow classification and presentation of changes
in restricted cash. The updated guidance is effective for interim and annual periods beginning after December 15, 2017 and is
required to be applied using a retrospective transition method to each period presented. The Company implemented this guidance
effective January 1, 2018. Implementing this guidance did not have a material impact on the Company’s statement of cash
flows, as the restricted cash balance did not change during three month ended March 31, 2018.
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 will not have a material impact on the Company’s consolidated financial
statements.
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 carry any Goodwill on its Consolidated Balance Sheets and 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
4 – Property and Equipment
Oil
and Gas Properties
The
Company’s oil and gas properties at March 31, 2018 and December 31, 2017 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
March 31, 2018 and December 31, 2017 are set forth below in the following table:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
Unproved
leasehold (1)
|
|
$
|
977,936
|
|
|
$
|
977,936
|
|
Proved
leasehold
|
|
|
10,094,760
|
|
|
|
10,094,760
|
|
Properties
subject to depletion, net of depletion
|
|
|
470,731
|
|
|
|
580,158
|
|
Exploratory
wells – construction-in-progress (1) (2)
|
|
|
2,973,729
|
|
|
|
1,479,282
|
|
Total
|
|
$
|
14,517,156
|
|
|
$
|
13,132,136
|
|
(1)
|
Not
subject to depletion;
|
(2)
|
Expected
to be reclassified from exploratory to properties subject to amortization in the second 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
|
|
2018
|
|
|
—
|
|
|
|
1,494,448
|
|
|
|
|
|
|
|
(109,428
|
)
|
|
|
1,385,020
|
|
Total
|
|
$
|
10,252,568
|
|
|
$
|
5,899,900
|
|
|
$
|
—
|
|
|
$
|
(1,635,212
|
)
|
|
$
|
14,517,156
|
|
●
|
In
2017, the Company acquired a 21.62% non-operated working interest with a 17.1% net revenue
interest in two exploratory horizontal gas wells in the Uinta Basin from an undisclosed
party, and the Company incurred $1,479,282 in well costs. During the three months ended
March 31, 2018, the company incurred an additional $1,494,448 of well costs. At March
31, 2018, the Company’s share total costs for drilling and completing the two wells
was $3,205,724, and we anticipate incurring additional well costs in the second quarter
of 2018. Although these wells produced economic quantities of natural gas liquids and
residue gas through March 31, 2018, well completion activities were not completed during
the three months ended March 31, 2018, so costs remain classified as construction-in-progress
and not subject to depletion through March 31, 2018.
|
|
|
●
|
In
2017, the Company 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. During the year ended
December 31, 2017, we incurred costs of $1,209,675 in the drilling of this well and $1,352,982
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.
|
|
|
●
|
In
2017, the Company worked over two Duck Creek wells obtaining production from the Green
River formation. We incurred $79,989 in capitalized workover costs associated
with these wells. The wells require additional workover and were shut-in in July 2017.
The Company recorded assets retirement cost of $291,659 related to Duck Creek wells.
|
|
|
●
|
In
2017, the Company incurred costs of $22,691 for bonding, legal, title, engineering, geological and surveying in our Ladysmith
project in Fremont County, Wyoming.
|
|
|
●
|
In
2017, the Company incurred costs of $3,750 related to Springs Project. The Company allowed
the BLM leases for the Springs project to expire without paying additional delay rental
payments. The primary terms on these leases were due to expire in Q4 2018 and in the
view of management it was not in the best interest of the Company to continue exploratory
efforts on this speculative play. Management concluded that Company resources would be
better redirected to continue seeking lower-risk acquisitions of producing oil and gas
properties rather than take additional wildcat drilling risk on this prospect. The Company
currently no longer owns the mineral rights for this project. As the result, the Company
recognized impairment of oil and gas property in amount of $154,787, during the year
ended December 31, 2017.
|
|
|
●
|
In
2017, the Company incurred costs of $100,191 for exploration and development efforts
associated with the proved oil and gas assets in Utah, which were acquired on December
30, 2016, from Total Belief Limited, a wholly owned subsidiary of New Times Energy Corporation
Limited. These assets include 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. In connection
with the TBL acquisition, 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.
|
|
|
●
|
In
2017, the Company incurred costs of $379,498 for exploration and development efforts
associated with numerous unproved oil and gas properties in the Company’s geographic
areas of interest, including farmout properties (Paw Paw and Ironwood) and numerous others
being evaluated and considered for a prospective acquisition and/or farmout by the Company.
|
|
|
●
|
In
2017, we recorded depreciation, depletion and amortization cost related to oil and gas
properties of $18,017
. During the three months ended March
31, 2018, we recorded depreciation, depletion, amortization costs related to oil and
gas properties $109,428.
|
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:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Tank
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
Vehicle
|
|
|
69,446
|
|
|
|
69,446
|
|
Accumulated
depreciation
|
|
|
(216
|
)
|
|
|
(31
|
)
|
Construction
in progress (1)
|
|
|
138,032
|
|
|
|
22,087
|
|
Total
support facilities and equipment, net
|
|
$
|
237,262
|
|
|
$
|
121,502
|
|
|
(1)
|
Facilities
constructed in conjunction with drilling for our two exploratory horizontal wells in Uintah County, Utah, not subject to depreciation.
The Company anticipates construction will be competed in the second quarter of 2018, at which time construction-in-progress
will be reclassified to Uinta Basin facilities and become eligible for depreciation.
|
The
Company recognized depreciation expense of $185 and $0 during the three months ended March 31, 2018 and 2017, respectively.
Office
Furniture, Equipment, and Other
As
of March 31, 2018 and December 31, 2017, office furniture, equipment, and other consisted of the following:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
Computer
equipment and fixtures
|
|
$
|
22,453
|
|
|
$
|
22,453
|
|
Accumulated
depreciation
|
|
|
(10,477
|
)
|
|
|
(8,632
|
)
|
Office
furniture, equipment, and other, net
|
|
$
|
11,976
|
|
|
$
|
13,821
|
|
During
the three months ended March 31, 2018 and 2017, we recorded depreciation expense of $1,846 and $18,369, 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
three months ended March 31, 2018 and December 31, 2017.
|
|
For
the period ended
|
|
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Beginning asset retirement
obligations
|
|
$
|
303,327
|
|
|
$
|
291,659
|
|
Liabilities established
|
|
|
—
|
|
|
|
—
|
|
Accretion expense
|
|
|
2,917
|
|
|
|
11,668
|
|
Ending asset
retirement obligations
|
|
$
|
306,244
|
|
|
$
|
303,327
|
|
Accretion
expense for the three months ended March 31, 2018 and 2017 was $2,917 and $2,917, respectively.
Note
6 – Notes Payable
A
summary of the outstanding amounts of our Notes payable as of March 31, 2018 and December 31, 2017 is as follows:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
9% unsecured note payable
due May 6, 2017 (1)
|
|
$
|
-
|
|
|
$
|
-
|
|
13.5% unsecured
note payable due September 8, 2017 (2)
|
|
|
1,050,000
|
|
|
|
1,050,000
|
|
0% unsecured note payable
due January 2, 2018 (3)
|
|
|
250,000
|
|
|
|
250,000
|
|
Less: unamortized discount
of imputed interest of 4% (3)
|
|
|
—
|
|
|
|
(2,264
|
)
|
12% unsecured
note payable June 30, 2018 (4)
|
|
|
120,629
|
|
|
|
120,629
|
|
Total
debt
|
|
|
1,420,629
|
|
|
|
1,418,365
|
|
Less:
current maturities
|
|
|
1,420,629
|
|
|
|
1,418,365
|
|
Long-term
debt, net of current maturities
|
|
|
-
|
|
|
|
-
|
|
At
March 31, 2018, 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”). 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 valued at $46,700. 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”). 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.
|
(3)
|
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 with 75,000 shares of the Company’s
restricted common stock in connection with a more favorable term of a note entered into with FirstFire Global
Opportunities 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 Global Opportunities 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 three months ended March 31, 2018, the Company amortized remaining $2,264 of such discount to interest expense. 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, the 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.
|
(4)
|
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 three months ended March 31, 2018 and 2017, respectively, we incurred $87,485 and $22,438 of interest expense, including
amortization of discount of $2,264 and $0 and shares issued for extension of $46,700 and $0, respectively.
Note
7 – Notes Payable - Related Party
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
13.25%
unsecured note payable due May 5, 2017 (1)
|
|
$
|
1,250,000
|
|
|
$
|
1,250,000
|
|
0% unsecured note
payable due June 30, 2018 (2)
|
|
|
6,000,000
|
|
|
|
6,000,000
|
|
Less:
unamortized discount of imputed interest of 4% (2)
|
|
|
(57,134
|
)
|
|
|
(114,268
|
)
|
Total
debt
|
|
|
7,192,866
|
|
|
|
7,135,732
|
|
Less:
current maturities
|
|
|
7,192,866
|
|
|
|
7,135,732
|
|
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.
|
|
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”).
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 valued
at $58,375. (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”).
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.
|
|
|
(2)
|
On
December 30, 2016, in connection with the TBL acquisition, 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.
|
During the three months ended
March 31, 2018 and 2017, respectively, we incurred $157,119 and $85,182
of interest
expense, including amortization of discount of $57,134 and $57,134 and shares issued for extension of $58,375 and $0, respectively.
Note
8 – Convertible Note Payable
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
10%
convertible note payable due May 10, 2018 (1)
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
8%
convertible note payable due August 16, 2018 (2)
|
|
|
267,500
|
|
|
|
267,500
|
|
Less:
unamortized debt discount on convertible notes (1)(2)
|
|
|
(135,717
|
)
|
|
|
(224,228
|
)
|
Total
debt
|
|
|
181,783
|
|
|
|
93,272
|
|
Less:
current maturities
|
|
|
181,783
|
|
|
|
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 Global Opportunities 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 Global Opportunities 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.
As of March 31, 2018, Company accounted for the conversion feature as a derivative valued at $413,362 which was determined
using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 144%, (ii) discount
rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 0.4 year.
|
During
the three months ended March 31, 2018 and 2017, respectively, we incurred $95,021 and $0 of interest expense, including amortization
of discount of $88,511 and $0, respectively.
Note
9 – Common Stock
During
the three months ended March 31, 2018, the Company did not issue common stock.
As
of March 31, 2018, the Company had 14,900,627 shares of common stock issued and outstanding.
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 Global Opportunities 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 three months ended March 31, 2018:
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Term
|
|
Balance
outstanding, December 31, 2017
|
|
|
2,683,515
|
|
|
$
|
1.56
|
|
|
|
2.65
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
outstanding, March 31, 2018
|
|
|
2,683,515
|
|
|
$
|
1.56
|
|
|
|
2.65
|
|
Exercisable,
March 31, 2018
|
|
|
2,683,515
|
|
|
$
|
1.56
|
|
|
|
2.65
|
|
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
the three months ended March 31, 2018 and 2017, we recorded $239,259 and $68,861 option expense. As of March 31, 2018, the unamortized
option expense was $1,547,559.
The
following table summarizes all stock option activity for the three months ended March 31, 2018:
|
|
Number
of Option
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
Balance
outstanding, December 31, 2017
|
|
|
2,050,000
|
|
|
$
|
2.21
|
|
|
|
6.26
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
outstanding, March 31, 2018
|
|
|
2,050,000
|
|
|
$
|
2.21
|
|
|
|
6.26
|
|
Exercisable,
March 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Note
10– Other Related Party Transactions
Wilshire
Energy Partners, LLC
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. During the three months ended March 31, 2018 and 2017, Wilshire advanced the Company $55,210
and $0 for operating purposes, respectively.
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 three months ended March 31, 2018, the Company paid $0 for its Denver
office space, redeemed unused allowance for tenant improvements which was contractually allowed to offset monthly rental payments
of $17,180 and recorded $17,180 as other income.
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 three months ended
March 31, 2018 and 2017, the Company accrued $6,366 and $3,600 in rent expense and paid $0 and $2,400 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 three
months ended March 31, 2018, the Company accrued $405 and paid $0 in rental for the copier.
Information
regarding all the Company’s contractual lease obligations, at March 31, 2018, is set forth in the following table.
|
|
Operating
Leases
|
|
|
|
|
|
2018
(9 Months)
|
|
$
|
93,109
|
|
2019
|
|
|
125,816
|
|
2020
|
|
|
74,347
|
|
2021
and thereafter
|
|
|
—
|
|
Total
|
|
$
|
293,272
|
|
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 March 31, 2018, noted below in accordance with Auditing Standard 2801.03.
Utah
Wells
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. As of March 31, 2018, we recorded $6,621.59 of prejudgment interest expense.
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 March 31,
2018, we recorded $39,097.74 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 March 31, 2018, we recorded $6,485 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 March 31, 2018, we recorded $3,474.28
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 March
31, 2017, we recorded $3,845 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 March 31, 2018, and December 31, 2017, the balance of contingent liabilities was $327,891 and $305,935, respectively. During
the three months ended March 31, 2018 and 2017, we recorded $21,956 and $0 in contingent liabilities.
Note
12 – 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
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. On July 29, 2018, as partial consideration for the deferral,
the Company agreed to issue Profit Well 100,000 shares of its restricted common stock.
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
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. On July 29, 2018, as partial consideration for the deferral,
the Company agreed to issue Berwin 100,000 shares of its restricted common stock.