Notes to Unaudited Financial Statements
September 30, 2017
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows as of September 30, 2017, and for all periods presented herein, have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted. It is suggested that these unaudited interim financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2016 audited financial statements. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the operating results for the full year.
Related party policy
In accordance with ASC 850, the Company discloses: the nature of the related party relationship(s) involved; a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Revenue recognition
The Company records revenues from the sales of natural gas and crude oil when the production is produced and sold, and also when collectability is ensured. The Company may in the future have an interest with other producers in certain properties, in which case the Company will use the sales method to account for gas imbalances. Under this method, revenue will be recorded on the basis of natural gas actually sold by the Company. The Company also reduces revenue for other owners’ natural gas sold by the Company that cannot be volumetrically balanced in the future due to insufficient remaining reserves. The Company’s remaining over- and under-produced gas balancing positions are considered in the Company’s proved oil and natural gas reserves. The Company had no gas imbalances at September 30, 2017 or December 31, 2016.
Impairment
The net book value of all capitalized oil and natural gas properties within a cost center, less related deferred income taxes, is subject to a full cost ceiling limitation which is calculated quarterly. Under the ceiling limitation, costs may not exceed an aggregate of the present value of future net revenues attributable to proved oil and natural gas reserves discounted at 10 percent using current prices, plus the lower of cost or market value of unproved properties included in the amortization base, plus the cost of unevaluated properties, less any associated tax effects. Any excess of the net book value, less related deferred tax benefits, over the ceiling is written off as expense. Impairment expense recorded in one period may not be reversed in a subsequent period even though higher oil and gas prices may have increased the ceiling applicable to the subsequent period. During the year ended December 31, 2016, the Company evaluated the future production of its leases through the termination of each lease. Through its analysis, the Company determined the present value of future production was less than the carrying value of the leases on the balance sheet. The Company recorded an impairment loss of $35,432 during the years ended December 31, 2016. The Company performed an additional analysis during the nine months ended September 30, 2017 and determined its proved and unproved properties were fully impaired and recorded an impairment loss of $11,250 during the nine months ended September 30, 2017.
Derivative Liabilities
The Company records a debt discount related to the issuance of convertible debts that have conversion features at adjustable rates. The debt discount for the convertible instruments is recognized and measured by allocating a portion of the proceeds as an increase in additional paid-in capital and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features. The debt discount will be accreted by recording additional non-cash gains and losses related to the change in fair market values of derivative liabilities over the life of the convertible notes.
8
NOTE 2 – GOING CONCERN
The Company’s interim unaudited financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date of issuance of this report. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan is to obtain such resources for the Company by obtaining capital from management and significant shareholders sufficient to meet its minimal operating expenses and seeking equity and/or debt financing. However management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 3 – COMMON STOCK WARRANTS
Through the year ended December 31, 2014, the Company issued warrants in connection with common stock issued for cash. The following table summarizes all stock warrant activity for the nine months ended September 30, 2017:
|
|
Shares
|
|
|
Weighted- Average
Exercise Price
Per Share
|
Outstanding, December 31, 2016
|
|
|
240,000
|
|
|
$
|
0.125
|
Granted
|
|
|
-
|
|
|
|
-
|
Exercised
|
|
|
-
|
|
|
|
-
|
Forfeited
|
|
|
-
|
|
|
|
-
|
Expired
|
|
|
(240,000)
|
|
|
|
0.125
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2017
|
|
|
-
|
|
|
$
|
-
|
The weighted average remaining contractual life of options outstanding as of September 30, 2017 and December 31, 2016, was approximately 0.00 and 0.20 years, respectively. The exercise price of these options was $0.125 and the intrinsic value of the options as of September 30, 2017 and December 31, 2016 is $0.00, respectively.
NOTE 4 – RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2017, the Company borrowed $8,031 and made repayments on short term related party loans payable of $18,736. During the nine months ended September 30, 2017, a significant shareholder made payment of $2,630 for expenses on behalf of the Company. The advances are non-interest bearing and due on demand. There was $9,780 and $17,855 due to related parties as of September 30, 2017 and December 31, 2016, respectively.
During the nine months ended September 30, 2017, the Company made advances to related parties of $445 which were repaid during the same period. The advances are non-interest bearing and due on demand. There was $0 due from related parties as of September 30, 2017 and December 31, 2016, respectively.
Fred Ziegler, who is the spouse of our President, Karen Ziegler, is an unpaid consultant for the Company. Although uncompensated and not having direct ownership of stock, he has the ability to exercise significant influence over the Company given the personal relationship with one of our officers.
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During the nine months ended September 30, 2017, the majority owners of the Company sold their stock in a private transaction to AEI Acquisition Company, LLC. Immediately after the close of the transaction, AEI Acquisition Company owned 85% of the issued and outstanding shares of the Company.
During the nine months ended September 30, 2017, the Company converted existing notes payable due to AEI Acquisition Company of $87,366 to a convertible credit line. See
Note 6 – Convertible Credit Line Payable – Related Party
.
NOTE 5 – NOTES PAYABLE
On February 1, 2017, the Company executed a promissory note for $56,216. The note bears simple interest at a rate of 3.75%, is not convertible to equity of the Company and is due on February 1, 2018. During the three months ended June 30, 2017, the Company received additional advances of $7,600. During the three months ended September 30, 2017, the Company made repayments of $2,000 and received additional advances of $23,550. On September 1, 2017, the outstanding balance of $87,366 on the note payable was converted to a convertible credit line payable as discussed in
Note 6 – Convertible Credit Line Payable – Related Party
.
NOTE 6 – CONVERTIBLE CREDIT LINE PAYABLE – RELATED PARTY
On September 1, 2017, the Company entered into a convertible credit line agreement to borrow up to $500,000. On the same date, the outstanding balance on a note payable of $87,366 was exchanged as a draw on the credit line. The loan modification is considered substantial under ASC 470-50. The outstanding balance accrues interest at a rate of 7% per annum and the outstanding balance is convertible to common stock of the Company at the lesser of the close price of the common stock as quoted on the OTCBB on the day interest is due and payable immediately preceding the conversion or $1.50. The Company analyzed the conversion options in the convertible line of credit for derivative accounting consideration under ASC 815, Derivative and Hedging, and determined that the transaction does qualify for derivative treatment. The Company measured the derivative liability and recorded a debt discount of $87,366 upon initial measurement. During the nine months ended September 30, 2017, the Company amortized $4,640 of the discount as interest expense leaving an unamortized discount of $82,726 as of September 30, 2017. See discussion of derivative liability in
Note 7 – Derivative Liability
The Company made payments of $2,000 on the credit line at September 30, 2017. There was $85,366 of principal and $1,686 of accrued interest outstanding as of September 30, 2017. As of September 30, 2017 there was an unamortized debt discount of $82,726 resulting in a net balance represented on the balance sheet of $2,640.
NOTE 7 – DERIVATIVE LIABILITY
As discussed in Note 1, on a recurring basis, we measure certain financial assets and liabilities based upon the fair value hierarchy. The following table presents information about the Company’s liabilities measured at fair value as of September 30, 2017 and December 31, 2016:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value at
September 30, 2017
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
$
|
-
|
|
$
|
-
|
|
$
|
156,504
|
|
$
|
156,504
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value at
December 31, 2016
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
As of September 30, 2017, the Company had a $156,504 derivative liability balance on the balance sheet and recorded a loss from derivative liability fair value adjustment of $66,226 during the three and nine months, respectively ended September 30, 2017. The Company assessed its outstanding convertible credit line payable as summarized in
Note 6 – Convertible Credit Line Payable- Related Party
and determined certain convertible credit lines payable with variable conversion features contain embedded derivatives and are therefore accounted for at fair value under
ASC 920, Fair Value Measurements and Disclosures
and
ASC 825, Financial Instruments.
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Utilizing Level 3 Inputs, the Company recorded fair market value adjustments related to convertible notes payable for the three months ended September 30, 2017 of $66,226 and fair value adjustments related to the convertible notes payable for the nine months ended September 30, 2017 of $66,226, respectively. The derivative liability was initially measured at $90,278, resulting in a loss on initial measurement of $2,912, on September 1, 2017 using the following assumptions: exercise price of $1.50, 58,244 common shares the balance can be converted into shares and a stock price at measurement date of $1.55. The fair market value adjustments as of September 30, 2017 were calculated utilizing a max valuation method using the following assumptions: exercise price of $1.50, 56,911 common shares the balance can be converted into and a stock price at measurement date of $2.75.
A summary of the activity of the derivative liability is shown below:
Balance at December 31, 2016
|
$
|
-
|
Derivative liabilities recorded
|
|
87,366
|
Day one loss
|
|
2,912
|
Change due to note conversion
|
|
-
|
Loss on change in derivative fair value adjustment
|
|
66,226
|
Balance at September 30, 2017
|
$
|
156,504
|
11