NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
1
|
ORGANIZATION AND DESCRIPTION
OF BUSINESS
|
Pledge Petroleum Corp.
(formerly Propell Technologies Group, Inc. and Propell Corporation) (the “Company”), is a Delaware corporation originally
formed on January 29, 2008 as CA Photo Acquisition Corp. On April 10, 2008 Crystal Magic, Inc. (“CMI”), a Florida
Corporation, merged with an acquisition subsidiary of Propell’s, and the Company issued an aggregate of 180,000 shares to
the former shareholders of CMI. On May 6, 2008, the Company acquired both Mountain Capital, LLC (doing business as Arrow Media
Solutions) (“AMS”) and Auleron 2005, LLC (doing business as Auleron Technologies) (“AUL”) and made each
a wholly owned subsidiary and issued a total of 41,897 shares of the Company’s common stock to the members of Mountain Capital,
LLC and a total of 2,722 shares of the Company’s common stock to the members of AUL. In 2010 AUL and AMS were dissolved
and the operations of CMI were discontinued. On February 4, 2013, the Company entered into a Share Exchange Agreement with Novas
Energy (USA), Inc. (“Novas”) whereby the Company exchanged 100,000,000 shares of its common stock for 100,000,000
shares of common stock in Novas. After the consummation of the share exchange, Novas became a wholly owned subsidiary of the Company.
As a result of the share exchange the shareholders of Novas obtained the majority of the outstanding shares of the Company. As
such, the exchange is accounted for as a reverse merger or recapitalization of the Company and Novas was considered the acquirer
for accounting purposes.
|
b)
|
Description of the business
|
During the past year,
the Company’s management, at the direction of the Board of Directors, had evaluated, considered, and brought forward various
opportunities to acquire producing oil fields; however, to date, an oil field meeting the criteria acceptable to the Board of
Directors (which criteria include among other things, low general and administrative costs, ability to generate cash flow and
ability to fully utilize the PPT) had not been found.
On March 23, 2018, after obtaining
approval of the majority shareholder and the majority of the minority of the shareholders we sold substantially all of our assets
for $650,000 and simultaneously therewith the entire shareholding of the majority shareholder, Ervington was purchased by us for
gross proceeds of $8,500,000. We are currently exploring the acquisition of assets or businesses in the oil and water treatment
segments.
On October 4, 2016, Novas Energy
USA, Inc. (“Novas USA”), a wholly owned subsidiary of the Company, delivered a notice to Technovita Technologies USA,
Inc. (“Technovita”) electing to dissolve its joint venture with Technovita (the “Joint Venture”), effective
November 1, 2016, pursuant to Section 11.1(b) of the Operating Agreement of Novas Energy North America, LLC (“NENA”),
dated October 22, 2015 (the “Operating Agreement”), by and among Novas USA and Technovita.
Section 11.1(b) of the Operating
Agreement provided that the Joint Venture may be dissolved upon the election of Novas USA in the event the Joint Venture fails
to satisfy any Year 1 Key Performance Indicator by an amount greater than five percent (5%) of the applicable metric (the “Year
1 Milestone”). The Joint Venture has not achieved the Year 1 Milestone. For the purposes of the Operating Agreement, the
Year 1 Key Performance Indicators are defined as: during a continuous twelve (12) month period commencing upon September 1, 2015
each of: (1) sales from activities in the United States of greater than or equal to $2,829,000; (2) sales from activities in Canada
of greater than or equal to $2,829,000; (3) EBITDA from activities in the United States of greater than or equal to $524,000; and
(4) EBITDA from activities in Canada of greater than or equal to $524,000. Upon a dissolution, all intellectual property assets
of the Joint Venture, including any improvements to Technology (as defined in the Operating Agreement) is to be distributed to
Technovita solely for use in Canada, its territories and its possessions and Novas USA solely for use in the United States and
its territories.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND
ESTIMATES
|
The accompanying financial statements
have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).
All amounts referred to in the
notes to the financial statements are in United States Dollars ($) unless stated otherwise.
|
b)
|
Principles of Consolidation
|
The consolidated financial statements
include the financial statements of the Company and its subsidiary in which it has a majority voting interest. All significant
inter-company accounts and transactions have been eliminated in the consolidated financial statements. The entities included in
these consolidated financial statements are as follows:
Pledge Petroleum Corp (formerly
Propell Technologies Group, Inc.) – Parent Company
Novas Energy USA Inc. (wholly
owned)
The preparation of consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions, which are evaluated on
an ongoing basis, that affect the amounts reported in the consolidated financial statements and accompanying notes. Management
bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of
revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and judgments.
In particular, significant estimates and judgments include those related to: the estimated useful lives for plant and equipment,
the fair value of warrants and stock options granted for services or compensation, estimates of the probability and potential magnitude
of contingent liabilities, derivative liabilities, the valuation allowance for deferred tax assets due to continuing operating
losses, those related to revenue recognition and the allowance for doubtful accounts.
Making estimates requires management
to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation
or set of circumstances that existed at the date of the consolidated financial statements, which management considered in formulating
its estimate could change in the near-term due to one or more future confirming events. Accordingly, the actual results could differ
significantly from our estimates.
Certain conditions may exist
as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved
when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and
such assessment inherently involves an exercise of judgment.
If the assessment of a contingency
indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential
material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of
the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case
the guarantee would be disclosed.
|
e)
|
Fair Value of Financial Instruments
|
The Company adopted the guidance
of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair
value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring
fair value as follows:
Level 1-Inputs are unadjusted
quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted
quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities
in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by
observable market data.
Level 3-Inputs are unobservable
inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing
the asset or liability based on the best available information.
The carrying amounts reported
in the balance sheets for cash, accounts receivable, prepaid expenses, deposits, accounts payable, accrued liabilities, notes payable,
and convertible notes payable approximate fair value due to the relatively short period to maturity for these instruments. The
Company did not identify any other assets or liabilities that are required to be presented on the balance sheets at fair value
in accordance with the accounting guidance.
ASC 825-10 “
Financial
Instruments
” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value
(fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new
election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should
be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding
instruments.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND
ESTIMATES (continued)
|
|
f)
|
Risks and Uncertainties
|
The Company's operations will
be subject to significant risk and uncertainties including financial, operational, regulatory and other risks associated, including
the potential risk of business failure. The recent global economic crisis has caused a general tightening in the credit markets,
lower levels of liquidity, increases in the rates of default and bankruptcy, and extreme volatility in credit, equity and fixed
income markets. These conditions not only limit the Company’s access to capital, but also make it difficult for its customers,
vendors and the Company to accurately forecast and plan future business activities.
The Company’s operations
were carried out in the USA and Mexico. Accordingly, the Company’s business, financial condition and results of operations
may be influenced by the political, economic and legal environment in the USA and Mexico and by the general state of those economies.
The Company’s results could have been adversely affected by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, and rates and methods of taxation, among other things.
|
g)
|
Recent Accounting Pronouncements
|
In January 2017, the FASB issued
Accounting Standards Update No. (
“
ASU
”
)
2017-02, an amendment to Topic 805, Business Combinations. The amendments in this Update clarify the definition of a business with
the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions
(or disposals) of assets or businesses. The amendments in this Update affect all reporting entities that must determine whether
they have acquired or sold a business. The amendments in this Update provide a more robust framework to use in determining when
a set of assets and activities is a business. The amendments in this Update apply to annual periods beginning after December 15,
2017. The amendments in this Update should be applied prospectively on or after the effective date. No disclosures are required
at transition. The Company does not expect this guidance to have a material impact on its financial statements.
In January 2017, the FASB issued
ASU 2017-04, an amendment to Topic 350, Intangibles – Goodwill and Other, an entity no longer will determine goodwill impairment
by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities
as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 3 from the goodwill
impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. An entity should apply the amendments
in this Update on a prospective basis. The amendments in this Update are effective for Goodwill impairment tests in fiscal years
beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017. We are currently evaluating the effect ASU 2017-04 will have on our consolidated financial statements.
In February 2017, the FASB issued
ASU 2017-05, an amendment to Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets.
The amendments in this Update are required for public business entities and other entities that have goodwill reported in their
financial statements, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment
test by comparing the fair value of a reporting unit with its carrying amount. The amendments in this Update modify the concept
of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition
that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment
by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities
as if that reporting unit had been acquired in a business combination. An entity should apply the amendments in this Update on
a prospective basis. The amendments in this Update are effective for fiscal years beginning after December 15, 2019. Early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently
evaluating the effect ASU 2017-05 will have on our consolidated financial statements.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND
ESTIMATES (continued)
|
|
g)
|
Recent Accounting Pronouncements (continued)
|
In March 2017, the FASB issued
ASU 2017-07, Compensation-Retirement Benefits (Topic 715). This Update is being issued primarily to improve the presentation of
net periodic pension cost and net periodic postretirement benefit cost. This Update also includes amendments to the Overview and
Background Sections of the FASB Accounting Standards Codification. Under generally accepted accounting principles (GAAP), defined
benefit pension cost and postretirement benefit cost (net benefit cost) comprise several components that reflect different aspects
of an employer
’
s financial arrangements as well as the cost
of benefits provided to employees. Those components are aggregated for reporting in the financial statements. The amendments in
this Update apply to all employers, including not-for-profit entities, that offer to their employees defined benefit pension plans,
other postretirement benefit plans, or other types of benefits accounted for under Topic 715. The amendments in this Update require
that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide
explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement
and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendments in this Update
are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within
those 3 annual periods. For other entities, the amendments in this Update are effective for annual periods beginning after December
15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted as of the beginning
of an annual period for which financial statements have not been issued or made available for issuance. The amendments in this
Update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic
pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective
date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit
in assets. We are currently evaluating the effect ASU 2017-07 will have on our consolidated financial statements.
In March 2017, the FASB issued
ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization of Purchased Callable
Debt Securities. The amendments in this Update affect all entities that hold investments in callable debt securities that have
an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium).
The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically,
the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change
for securities held at a discount; the discount continues to be amortized to maturity. Under current GAAP, premiums and discounts
on callable debt securities generally are amortized to the maturity date. The amendments in this Update more closely align the
amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. As a
result, the amendments more closely align interest income recorded on bonds held at a premium or a discount with the economics
of the underlying instrument. For public business entities, the amendments in this Update are effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for
fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early
adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period,
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should
apply the amendments in this Update on a modified retrospective basis through a cumulative effect adjustment directly to retained
earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures
about a change in accounting principle. We are currently evaluating the effect ASU 2017-08 will have on our consolidated financial
statements.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND
ESTIMATES (continued)
|
|
g)
|
Recent Accounting Pronouncements (continued)
|
In May 2017, the FASB issued
Accounting Standards Update No. (“ASU’’) 2017-09, Compensation – Stock Compensation, an amendment to Topic
718. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting in Topic 718. 2. An entity should account for the effects of a modification
unless all the following are met:
|
1.
|
The fair value (or calculated
value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value
(or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately
before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the
entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification.
|
|
2.
|
The vesting conditions of
the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.
|
|
3.
|
The classification of the
modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately
before the original award is modified.
|
The current disclosure requirements
in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this Update.
The amendments in this Update are effective for all entities for annual periods beginning after December 15, 2017. Early adoption
is permitted and should be applied prospectively to an award modified on or after the adoption date. The amendments proposed in
this ASU are not expected to have a material impact on our consolidated financial statements.
In May 2017, the FASB issued
ASU 2017-10, service concession arrangements, an amendment to Topic 853. Topic 853 provides guidance for operating entities when
they enter into a service concession arrangement with a public-sector grantor who both:
|
1.
|
Controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price
|
|
2.
|
Controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement.
|
In a service concession arrangement
within the scope of Topic 853, the operating entity should not account for the infrastructure as a lease or as property, plant,
and equipment. An operating entity should refer to other Topics to account for various aspects of a service concession arrangement.
For example, an operating entity should account for revenue relating to construction, upgrade, or operation services in accordance
with Topic 605, Revenue Recognition, or Topic 606, Revenue from Contracts with Customers.
The amendments in this Update
apply to the accounting by operating entities for service concession arrangements within the scope of Topic 853. These updates
are effective when the Company adopts the updates to Topic 606. The amendments proposed in this ASU are not expected to have an
impact on our consolidated financial statements.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND
ESTIMATES (continued)
|
|
g)
|
Recent Accounting Pronouncements (continued)
|
In July 2017, the FASB issued
Accounting Standards Update No. (“ASU’’) 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities
from Equity (Topic 480) and Derivatives and Hedging (Topic 815). The amendments in this Update provide guidance about:
|
1.
|
Accounting for certain financial instruments with down round features
|
|
2.
|
Replacement of the indefinite deferral for mandatorily redeemable financial instruments of certain non-public entities and certain non-controlling interests
|
The amendments in Part I of
this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down
round features. 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. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding
equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at
fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the
amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down
round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders
in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized
guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options),
including related EPS guidance (in Topic 260).
The amendments in Part II of
this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content
in the Codification, to a scope exception. Those amendments do not have an accounting effect.
The amendments in Part I of
this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early
adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an
interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The
amendments in Part 1 of this Update should be applied in either of the following ways: 1. Retrospectively to outstanding financial
instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the
beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective
2. Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in
accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10.
The amendments in Part II of
this Update do not require any transition guidance because those amendments do not have an accounting effect.
The Company is currently evaluating
the impact this ASU will have on its consolidated financial statements.
In August 2017, the FASB issued
ASU 2017-12, Derivatives and Hedging, (Topic 815), Targeted Improvements to accounting for Hedging Activities.
The amendments in this Update
better align an entity’s risk management activities and financial reporting for hedging relationships through changes to
both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet
that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align
the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.
For public business entities,
the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those
fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim
periods within fiscal years beginning after December 15, 2020. Early application is permitted in any interim period after issuance
of the Update. Transition Requirements For cash flow and net investment hedges existing at the date of adoption, an entity should
apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive
income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that
an entity adopts the amendments in this Update. The amended presentation and disclosure guidance is required only prospectively.
The impact this ASU will have
on the Company’s consolidated financial statements is expected to be immaterial.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND
ESTIMATES (continued)
|
|
g)
|
Recent Accounting Pronouncements (continued)
|
In September 2017, the FASB
issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840 and Leases
(Topic 842). The amendments in this update provide guidance about:
The transition provisions in
ASC Topic 606 require that a public business entity and certain other specified entities adopt ASC Topic 606 for annual reporting
periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities
are required to adopt ASC Topic 606 for annual reporting periods beginning after December 15, 2018, and interim reporting periods
within annual reporting periods beginning after December 15, 2019.
The transition provisions in
ASC Topic 842 require that a public business entity and certain other specified entities adopt ASC Topic 842 for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. FN3 All other entities are required to adopt ASC Topic
842 for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
The impact this ASU will have
on the Company’s consolidated financial statements is expected to be immaterial.
In November 2017, the FASB issued
ASU 2017-14, Income Statement – Reporting Comprehensive Income (Topic220), Revenue Recognition (Topic 605) and Revenue from
Contracts with Customers (Topic 606).
Certain amendments made to SEC
materials and staff guidance relating to Operating-Differential subsidiaries, and amendments to the wording and disclosure requirements
of Topic 605, Revenue Recognition.
The impact of this ASU on the
Company’s consolidated financial statements are limited until such time as the Company generates revenue from operations.
In January 2018, the FASB
issued ASU 2018-1, Leases (Topic 842), Land Easement practical expedient for Top 842. The amendments in this update provide guidance
about:
The amendments in this Update
permit an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist
or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840.
An entity that elects this practical expedient should apply the practical expedient consistently to all of its existing or expired
land easements that were not previously accounted for as leases under Topic 840. Once an entity adopts Topic 842, it should apply
that Topic prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as
a lease. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection
with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The amendment
in this Update clarifies that an entity should determine whether land easements are leases in accordance with Topic 842 before
applying the guidance.
The impact this ASU will have
on the Company’s consolidated financial statements is expected to be immaterial.
In February 2018, the FASB issued
ASU 2018-2, Income Statement- Reporting Comprehensive Income (Topic 220), Reclassification of certain tax effects from accumulated
other comprehensive income.
The amendments in this Update
allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from
the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs
Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only
relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that
the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in
this Update also require certain disclosures about stranded tax effects.
The amendments in this Update
are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business
entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting
periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied
either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Cuts and Jobs Act is recognized.
The impact this ASU will have
on the Company’s consolidated financial statements will be a reduction in the tax effect of net operating losses carried
forward.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND
ESTIMATES (continued)
|
|
g)
|
Recent Accounting Pronouncements (continued)
|
In February 2018, the FASB issued
ASU 2018-3 Technical Corrections and Improvements to Financial Instruments – Overall (Sub topic 825-10), Recognition and
Measurement of Financial Assets and Financial Liabilities. The amendments in this update provide guidance about:
The amendment clarifies that
an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method
in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all
identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases
of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820.
The amendment clarifies that
the adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that
the observable transaction for a similar security took place.
The amendment clarifies that
remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying
equity securities.
The amendment clarifies that
when the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless
of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives,
or 825- 10, Financial Instruments— Overall.
The amendments clarify that
for financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument
specific credit risk should first be measured in the currency of denomination when presented separately from the total change in
fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured
into the functional currency of the reporting entity using end-of-period spot rates.
The amendment clarifies that
the prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update
2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance
in Topic 944, Financial Services— Insurance, should apply a prospective transition method Area for Correction or Improvement
Summary of Amendments when applying the amendments related to equity securities without readily determinable fair values. An insurance
entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities
for which the measurement alternative is elected.
The amendments in this Update
are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after
June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required
to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years
beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments
in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities
may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal
years, as long as they have adopted Update 2016-01.
The amendments in this update
are not expected to have a material impact on the Company’s consolidated financial statements.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND
ESTIMATES (continued)
|
|
g)
|
Recent Accounting Pronouncements (continued)
|
In March 2018, the FASB issued
ASU 2018-4 Investments – Debt Securities (Topic 320) and Regulated Operations (Topic 980), Amendments to SEC Paragraphs pursuant
to SEC Staff Accounting Bulletin no. 117 and SEC Release No. 33-9273. The amendments in this update provide guidance about:
Certain amendments made to SEC
materials and staff guidance relating to Investments – Debt Securities (Topic 320) and Regulated Operations (Topic 980).
The amendments in this update
are not expected to have a material impact on the Company’s consolidated financial statements.
In March 2018, the FASB issued
ASU 2018-5, Income Taxes (Topic 740) Amendments to SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 118
These amendments affect the
wording of SEC paragraphs in the accounting standard codification dealing with Income Taxes (Topic 740).
The amendments in this update
are not expected to have a material impact on the Company’s consolidated financial statements.
Any new accounting standards,
not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the financial statements upon adoption.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND
ESTIMATES (continued)
|
No segmental information is
required as the Company currently only has one segment of business, the Plasma Pulse Technology for the petroleum industry.
Revenues to date are insignificant.
|
i)
|
Cash and Cash Equivalents
|
The Company considers all highly
liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. At December
31, 2017 and December 31, 2016, respectively, the Company had no cash equivalents.
The Company assesses credit
risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times
may exceed federally insured limits. At December 31, 2017, the Company had cash balances of $8,599,620, which exceeded the federally
insured limits by $8,320,495.
|
j)
|
Accounts Receivable and Allowance for Doubtful Accounts
|
Accounts receivable are reported
at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period the related revenue
is recorded. The Company has a standardized approach to estimate and review the collectability of its receivables based on a number
of factors, including the period they have been outstanding. Historical collection and payer reimbursement experience is an integral
part of the estimation process related to allowances for doubtful accounts. In addition, the Company regularly assesses the state
of its billing operations in order to identify issues, which may impact the collectability of these receivables or reserve estimates.
Revisions to the allowance for doubtful accounts estimates are recorded as an adjustment to bad debt expense. Receivables deemed
uncollectible are charged against the allowance for doubtful accounts at the time such receivables are written-off. Recoveries
of receivables previously written-off are recorded as credits to the allowance for doubtful accounts. There were no recoveries
during the period ended December 31, 2017.
The Company had no inventory
as of December 31, 2017 or December 31, 2016.
Plant and equipment is stated
at cost, less accumulated depreciation. Plant and equipment with costs greater than $1,000 are capitalized and depreciated. Depreciation
is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets
are as follows:
Description
|
Estimated Useful Life
|
Office equipment and furniture
|
2 to 5 years
|
Leasehold improvements and fixtures
|
Lesser of estimated useful life or life of lease
|
Plant and equipment
|
2 to 3 years
|
Plasma pulse tools
|
5 years
|
The cost of repairs and maintenance
is expensed as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts,
and any resulting gains or losses are included in income in the year of disposition.
Where fixed assets are deemed
to be impaired we recognize an impairment loss measured as the difference between the estimated fair value of the fixed asset and
its book value.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND ESTIMATES (continued)
|
All of the Company’s intangible
assets are subject to amortization. The Company evaluates the recoverability of intangible assets periodically by taking into account
events or circumstances that may warrant revised estimates of useful lives that indicates the asset may be impaired. Where intangibles
are deemed to be impaired we recognize an impairment loss measured as the difference between the estimated fair value of the intangible
and its book value.
License agreements acquired
by the Company are reported at acquisition value less accumulated amortization and impairments.
Amortization is reported in
the income statement on a straight-line basis over the estimated useful life of the intangible assets, unless the useful life is
indefinite. Amortizable intangible assets are amortized from the date that they are available for use. The estimated useful life
of the license agreement is five years which is the expected period for which we expect to derive a benefit from the underlying
license agreements.
Assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the assets.
The Company records revenue
when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the service is completed without
further obligation, (3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND
ESTIMATES (continued)
|
|
p)
|
Share-Based Payment Arrangements
|
Generally, all forms of share-based
payments, including stock option grants, restricted stock grants and stock appreciation rights are measured at their fair value
on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation
awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair
value of the share-based payment, whichever is more readily determinable. The expense resulting from share- based payments is recorded
in operating expenses inhe consolidated statement of operations.
Income taxes are computed using
the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently
enacted tax rates and laws. A full valuation allowance is provided for the amount of deferred tax assets that, based on available
evidence, are not expected to be realized. It is the Company’s policy to classify interest and penalties on income taxes
as interest expense or penalties expense. As of December 31, 2017, there have been no interest or penalties incurred on income
taxes.
Basic net loss per share is
computed on the basis of the weighted average number of common shares outstanding during the period.
Diluted net loss per share is
computed on the basis of the weighted average number of common shares and common share equivalents outstanding. Dilutive securities
having an anti-dilutive effect on diluted net loss per share are excluded from the calculation (See Note 14, below).
Dilution is computed by applying
the treasury stock method for options and warrants. Under this method, options and warrants are assumed to be exercised at the
beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common shares
at the average market price during the period.
Dilution is computed by applying
the if-converted method for convertible preferred shares. Under this method, convertible preferred stock is assumed to be converted
at the beginning of the period (or at the time of issuance, if later), and preferred dividends (if any) will be added back to determine
income applicable to common stock. The shares issuable upon conversion will be added to weighted average number of common shares
outstanding. Conversion will be assumed only if it reduces earnings per share (or increases loss per share).
Any common shares issued as
a result of the issue of stock options and warrants would come from newly issued common shares from our remaining authorized shares.
Comprehensive income is defined
as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions
resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented
includes net loss.
Parties are considered to be
related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled
by, or are under common control with the Company, or own in aggregate, on a fully diluted basis 5% or more of the Company’s
stock. Related parties also include principal owners of the Company, its management, members of the immediate families of principal
owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented
from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions are recorded
at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related
party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to related party.
Certain reclassifications have
been made to the prior year financial statement numbers to conform to the current presentation of the financial statements.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company has cash balances
of $8,599,620, of which only $749,620 is not restricted as of December 31, 2017.
On March 23, 2018, after obtaining approval of the majority shareholder and the majority of the minority of the shareholders the
Company sold substantially all of its assets for $650,000 and simultaneously therewith the entire shareholding of the majority
shareholder, Ervington was purchased by the Company for gross proceeds of $8,500,000. The Company has $489,236 of cash available on
May 8, 2018 and is considering the acquisition of an oil services treatment business in which two of the Company’s directors
have an interest. The ability of the Company to conclude an acquisition based on current cash balances and continue as a going
concern is uncertain.
|
4
|
DISCONTINUED OPERATIONS
|
On October 4, 2016, Novas Energy
USA, Inc. (“Novas USA”), a wholly owned subsidiary of the Company, delivered a notice to Technovita Technologies USA,
Inc. (“Technovita”) electing to dissolve its joint venture with Technovita (the “Joint Venture”), effective
November 1, 2016, pursuant to Section 11.1(b) of the Operating Agreement of Novas Energy North America, LLC (“NENA”),
dated October 22, 2015 (the “Operating Agreement”), by and among Novas USA and Technovita.
Section 11.1(b) of the Operating
Agreement provides that the Joint Venture may be dissolved upon the election of Novas USA in the event the Joint Venture fails
to satisfy any Year 1 Key Performance Indicator by an amount greater than five percent (5%) of the applicable metric (the “Year
1 Milestone”). The Joint Venture has not achieved the Year 1 Milestone. For the purposes of the Operating Agreement, the
Year 1 Key Performance Indicators are defined as: during a continuous twelve (12) month period commencing upon September 1, 2015
each of: (1) sales from activities in the United States of greater than or equal to $2,829,000; (2) sales from activities in Canada
of greater than or equal to $2,829,000; (3) EBITDA from activities in the United States of greater than or equal to $524,000; and
(4) EBITDA from activities in Canada of greater than or equal to $524,000. Upon a dissolution, all intellectual property assets
of the Joint Venture, including any improvements to Technology (as defined in the Operating Agreement) is to be distributed to
Technovita solely for use in Canada, its territories and its possessions and Novas USA solely for use in the United States and
its territories.
Pursuant to the Operating Agreement,
Novas USA had entered into a sublicense agreement (the “Novas Sublicense Agreement”) with NENA and Novas Energy Group
Limited for NENA to be the exclusive provider of Plasma Pulse Technology for treatment of vertical wells to third parties in the
United States. The Sublicense Agreement was terminated upon termination of the Joint Venture. The Operating Agreement also provided,
among other things, that Novas USA would contribute an aggregate of $1,200,000 to the capital of the Joint Venture for its 60%
interest in the Joint Venture. Novas USA has contributed $900,000 to the Joint Venture to date and believes that it has valid defenses
to any claim that may be made that it contribute additional funds.
The assets and liabilities of
discontinued operations as of December 31, 2017 and 2016, respectively is as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
19,480
|
|
Accounts receivable, net
|
|
|
-
|
|
|
|
61,661
|
|
Prepaid expenses and other current assets
|
|
|
-
|
|
|
|
29,896
|
|
Total current assets
|
|
|
-
|
|
|
|
111,037
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
Plant and equipment, net
|
|
|
-
|
|
|
|
6,480
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
117,517
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
94,784
|
|
Related party payables
|
|
|
-
|
|
|
|
932,478
|
|
Accrued liabilities and other payables
|
|
|
-
|
|
|
|
115,971
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
1,143,233
|
|
Discontinued operations
|
|
$
|
-
|
|
|
$
|
1,025,716
|
|
Income (Loss) from discontinued
operations is as follows:
|
|
Year ended
December 31,
2017
|
|
|
Year ended
December 31,
2016
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
-
|
|
|
$
|
196,328
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
148,475
|
|
Gross Profit
|
|
|
-
|
|
|
|
47,853
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
|
-
|
|
|
|
11,932
|
|
Professional fees
|
|
|
-
|
|
|
|
62,331
|
|
Business development
|
|
|
-
|
|
|
|
179,980
|
|
Consulting fees
|
|
|
-
|
|
|
|
898,640
|
|
General and administrative expenses
|
|
|
-
|
|
|
|
543,558
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
1,478
|
|
Total expense
|
|
|
-
|
|
|
|
1,697,919
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
-
|
|
|
|
(1,650,066
|
)
|
|
|
|
|
|
|
|
|
|
Gain on discontinuance of subsidiary
|
|
|
-
|
|
|
|
-
|
|
Other income
|
|
|
-
|
|
|
|
10
|
|
Foreign currency gains
|
|
|
-
|
|
|
|
992
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
-
|
|
|
$
|
(1,649,064
|
)
|
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Prepaid expenses consisted of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
22,483
|
|
|
$
|
22,607
|
|
Prepaid professional fees
|
|
|
3,333
|
|
|
|
3,333
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,816
|
|
|
$
|
25,940
|
|
Plant and Equipment consisted of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
Cost
|
|
|
Amortization
and Impairment
|
|
|
Net book value
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plasma pulse tool
|
|
|
945,423
|
|
|
|
(945,423
|
)
|
|
|
-
|
|
|
|
-
|
|
Furniture and equipment
|
|
|
6,700
|
|
|
|
(2,457
|
)
|
|
|
4,243
|
|
|
|
5,583
|
|
Field equipment
|
|
|
19,627
|
|
|
|
(19,627
|
)
|
|
|
-
|
|
|
|
341
|
|
Computer equipment
|
|
|
11,130
|
|
|
|
(6,438
|
)
|
|
|
4,692
|
|
|
|
8,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
982,880
|
|
|
|
(973,945
|
)
|
|
$
|
8,935
|
|
|
$
|
14,326
|
|
Depreciation expense was $5,391
and $130,933 for the years ended December 31, 2017 and 2016, respectively. An impairment charge of $741,754 was made in 2016 against
the Plasma Pulse tool.
Licenses
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
7
|
INTANGIBLES (continued)
|
Intangibles consisted of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
Cost
|
|
|
Amortization
and Impairment
|
|
|
Net book value
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License agreements
|
|
$
|
350,000
|
|
|
$
|
(350,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Website development
|
|
|
8,000
|
|
|
|
(8,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
358,000
|
|
|
$
|
(358,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Amortization expense was $0 and
$70,000 for the years ended December 31, 2017 and 2016, respectively. Due to the lack of revenue generated under this license agreement,
the remaining unamortized balance at December 31, 2016 of $157,500 was impaired.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
8
|
ACCRUED LIABILITIES AND
OTHER PAYABLES
|
Accrued liabilities consisted of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Royalties payable
|
|
|
14,653
|
|
|
|
14,653
|
|
Other
|
|
|
13,199
|
|
|
|
-
|
|
Severance accrual
|
|
|
-
|
|
|
|
19,814
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,852
|
|
|
$
|
34,467
|
|
The severance accrual relates
to accrued severance costs due to the COO, whose employment with the Company was terminated on December 15, 2016 as part of a cost
reduction exercise.
The note payable advanced by
Owl Holdings to the Company has no interest rate and is repayable on demand.
The Company has authorized 500,000,000
common shares with a par value of $0.001 each, and issued and has outstanding 268,558,931 shares of common stock as of December
31, 2017.
No shares were issued during the current year.
The Company has 10,000,000 authorized
preferred shares with a par value of $0.001 each with 5,000,000 preferred shares designated as Series A-1 Convertible Preferred
Stock (“Series A-1 Shares”), 500,000 preferred shares designated as Series B Preferred Stock and 4,500,000 preferred
shares designated as Series C Preferred Stock.
|
i)
|
Series A-1 Convertible Preferred Stock
|
The Company has designated 5,000,000 preferred shares
as Series A-1 Convertible Preferred Stock (“Series A-1 Shares”), with 3,137,500 Series A-1 Shares issued and outstanding
which are convertible into 31,375,000 shares of common stock.
The rights, privileges and preferences of the Series
A-1 Shares are summarized as follows;
Conversion
Each Series A-1 Share has the following conversion rights:
|
(a)
|
Each share of the Series A-1Shares is convertible into ten shares of Common Stock.
|
|
(b)
|
There shall be no adjustment made to the conversion ratio of the Series A-1 Shares for any stock split, stock dividend, combination, reclassification or other similar event.
|
Company Redemption
The Series A-1 Shares are non-redeemable by the Company.
Voting Rights
Each holder of Series A-1 Shares
is entitled to vote on all matters submitted to a vote of the stockholders of the Company and be entitled to that number of votes
equal to the number of shares of Common Stock into which such holder’s shares of Series A-1 Shares could then be converted.
Dividends
Until such time that any dividend
is paid to the holders of Common Stock, the holders of Series A-1 Shares will be entitled to a dividend in an amount per share
equal to that which such holders would have been entitled to receive had they converted all of the shares of Series A-1 Shares
into Common Stock immediately prior to the payment of such dividend
Liquidation Preference
Each share of Series A-1 Shares
is entitled to a liquidation preference of $0.08 per share
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
10
|
STOCKHOLDERS’ EQUITY
(continued)
|
|
b)
|
Preferred Stock (continued)
|
|
i)
|
Series A-1 Convertible Preferred Stock (continued)
|
No Circumvention
The approval of the holders of
at least 2/3 (66.6%) of the outstanding shares of the Series A-1 Shares, voting together separately as a class, is required for:
|
(a)
|
the merger, sale of all, or substantially all of the assets or intellectual property, recapitalization, or reorganization of the Company;
|
|
(b)
|
the authorization or issuance of any equity security having any right, preference or priority superior to or on a parity with the Series A-1 Shares;
|
|
(c)
|
the redemption, repurchase or acquisition of any of the Company’s equity securities or the payment of any dividends or distributions thereon;
|
|
(d)
|
any amendment or repeal of the Company’s Articles of Incorporation or Bylaws that would have an adverse effect on the rights, preferences or privileges of the Series A-1 Shares; and
|
|
(e)
|
the making of any loan or advance to any person except in the ordinary course of business.
|
|
ii)
|
Series B Convertible Preferred Stock
|
The Company has designated 500,000
preferred shares as Series B Convertible Preferred Stock (“Series B Shares”), with 40,000 Series B Shares issued and
outstanding which are convertible into 4,000,000 shares of common stock.
The rights, privileges and preferences
of the Series B Shares are summarized as follows:
Conversion
The holders of the Series B Preferred
Shares shall have conversion rights as follows:
|
(a)
|
Each share of the Series B Shares is convertible at any time prior to the issuance of a redemption notice by the Company into such number of shares of Common Stock by dividing the Stated value ($10) of the Series B Shares by $0.10 and is subject to adjustment for dividends or distributions made in common stock, the issue of securities convertible into common stock, stock splits, reverse stock splits, or reclassifications of common stock. No adjustments will be made to the conversion rights or conversion price for any reorganization other than to be entitled to receive the same benefits as if the shares were converted immediately prior to such reorganization. No conversion will take place if the holder of the Series B Shares will beneficially own in excess of 4.99% of the shares of Common Stock outstanding immediately after conversion. As of the date hereof, each Series B Share converts into 100 shares of common stock.
|
|
(b)
|
The conversion right of the holders of Series B Shares are exercised by the surrender of the certificates representing shares to be converted to the Company, accompanied by written notice electing conversion.
|
|
(c)
|
No fractional shares of Common Stock or script will be issued upon conversion of Series B Shares. The Company will pay a cash adjustment in respect to such fractional interest based upon the fair value of a share of Common Stock, as determined in good faith by the Company’s Board of Directors.
|
|
(d)
|
All shares of Common Stock issued upon conversion of Series B Shares will upon issuance be validly issued, fully paid and non-assessable. All certificates representing Series B Shares surrendered for conversion shall be appropriately canceled on the books of the Company and the shares so converted represented by such certificates shall be restored to the status of authorized but unissued shares of preferred stock of the Company.
|
Company Redemption
The Company has the right, at any
time after the date the Series B Shares have been issued, to redeem all or a portion of any Holder's Series B Shares at a price
per Series B Share equal to the issue price per Series B Share multiplied by 120%
Voting Rights
Each holder of Series B Shares
is entitled to vote on all matters submitted to a vote of the stockholders of the Company and is entitled to votes equal to the
number of shares of Common Stock into which Series B Shares could be converted, and the holders of shares of Series B Shares and
Common Stock shall vote together as a single class on all matters submitted to the stockholders of the Company.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
10
|
STOCKHOLDERS’ EQUITY
(continued)
|
|
b)
|
Preferred Stock (continued)
|
|
ii)
|
Series B Convertible Preferred Stock (continued)
|
Dividends
|
(a)
|
The holders of the Series B Shares are entitled to receive cumulative dividends at the rate of eight percent per annum of the issue price per share, accrued daily and payable annually in arrears on December 31st of each year (“Dividend Date”). Such dividends accrue on any given share from the day of original issuance of such share. Such dividends are cumulative, whether or not declared by the Board of Directors, but are non-compounding.
|
|
(b)
|
Any dividend payable on a dividend payment date may be paid, at the option of the Company, either (i) in cash or (ii) in shares of common stock at an issue price of $0.10 per common share.
|
|
(c)
|
Nothing contained herein is deemed to establish or require any payment or other charges in excess of the maximum permitted by applicable law.
|
|
(d)
|
In the event that pursuant to applicable law or contract the Company is prohibited or restricted from paying in cash the full dividends to which the holders of the Series B Shares are entitled, the cash amount available pursuant to applicable law or contract will be distributed among the holders of the Series B Shares ratably in proportion to the full amounts to which they would otherwise be entitled and any remaining amount due to holders of the Series B Shares will be payable in cash.
|
Liquidation Preference
In the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary, the holders of the Series B Shares are entitled to receive,
prior and in preference to any distribution of any assets of the Company to the holders of any other preferred stock of the Company
and subordinate to any distribution to the Series A-1 Shares, and prior and in preference to any distribution of any assets of
the Company to the holders of the Common Stock, the amount of 120% of the issue price per share. In addition, the Series B holder
has agreed to vote to subordinate the series B Preferred stock liquidation preferences to the Series C Preferred stock preferences.
No Circumvention
The Company may not amend its certificate
of incorporation, or participate in any reorganization, sale or transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action for the purpose of avoiding or seeking to avoid the observance or performance
of any of the terms to be observed or performed by the Company.
The Company has undeclared dividends
on the Series B Preferred stock amounting to $626,000 as of December 31, 2017. If the dividends are paid in stock, the beneficial
conversion feature of these undeclared dividends will be recorded upon the declaration of these dividends. The computation of loss
per common share for the year ended December 31, 2017 takes into account these undeclared dividends.
|
iii)
|
Series C Convertible Preferred Stock
|
The Company has designated 4,500,000
preferred shares as Series C Convertible Preferred Stock (“Series C Shares”), with 4,500,000 Series C Shares issued
and outstanding which are convertible into 120,000,000 shares of common stock (a conversion price of $0.12291665 per share).
The terms attached to the Series
C Preferred Stock (“Series C Share”) are summarized below:
Conversion
Subject to adjustment for stock
splits, stock dividends, reorganizations and recapitalizations and similar transactions, each Series C Share is currently convertible
at the option of the holder into 26.67 shares of common stock.
Company Redemption
The Series C Shares are not subject
to redemption by the Company.
Voting Rights
Generally, holders of Series C
Shares will, on an as-converted basis, vote together with the common stock as a single class.
Upon the issuance of at least 1,500,000
shares of Series C Preferred Stock the holders of the Series C Preferred Stock, as a class, are entitled to elect either two directors
holding one vote or one director holding two votes. Upon the issuance of an aggregate of 4,500,000 shares of Series C Preferred
Stock, the holders of the Series C Preferred Stock are entitled to elect either three directors holding one vote each, one director
holding three votes or two directors with one director holding two votes and another director holding one vote.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
10
|
STOCKHOLDERS’ EQUITY
(continued)
|
|
b)
|
Preferred Stock (continued)
|
|
iii)
|
Series C Convertible Preferred Stock (continued)
|
Dividends
The Series C Shares accrue dividends
at the rate per annum equal to 4% of the stated price (which initially is $3.277777778) payable annually in arrears on December
31 of each year in preference and priority to any payment of any dividend on our common stock, or any other class of preferred
stock.
Liquidation Preference
In the event of our liquidation,
dissolution or winding up and other liquidation events (as defined in the Series C Certificate of Designations), holders of Series
C Shares are entitled to receive from proceeds remaining after distribution to our creditors and prior to the distribution to holders
of common stock or any other class of preferred stock the (x) stated value (as adjusted for stock splits, stock dividends, reorganizations,
recapitalizations and the like) held by such holder and (y) all accrued but unpaid dividends on such shares.
Anti-Dilution
The Series C Shares are entitled
to certain weighted average anti-dilution protection as specified in the Series C Certificate of Designations.
No Circumvention
The approval by holders of a majority
of the Series C Shares, voting separately as a class, will be required for the following:
|
(i)
|
merger, sale of substantially all of our assets or our recapitalization, reorganization, liquidation, dissolution or winding up;
|
|
(ii)
|
redemption or acquisition of shares of our common stock other than in limited circumstances;
|
|
(iii)
|
declaration or payment of a dividend or distribution with respect to our capital stock;
|
|
(iv)
|
making any loan or advance;
|
|
(v)
|
amending the Company’s Certificate of Incorporation or Bylaws;
|
|
(vi)
|
authorizing or creating any new class or series of equity security;
|
|
(vii)
|
increasing the number of authorized shares for issuance under any existing stock or option plan;
|
|
(viii)
|
materially changing the nature of the business
|
|
(ix)
|
incurring any indebtedness;
|
|
(x)
|
engaging in or making investments not authorized by our board of directors;
|
|
(xi)
|
acquiring or divesting a material amount of assets;
|
|
(xii)
|
selling, assigning, licensing, pledging or encumbering our material technology or intellectual property;
|
|
(xiii)
|
entering into any corporate strategic relationship involving payment, contribution or assignment by the Company or to the Company of any assets.
|
The Company has undeclared dividends
on the Series C Preferred stock amounting to $1,550,822 as of December 31, 2017. The computation of loss per common share for the
year ended December 31, 2017 takes into account these undeclared dividends.
The Company’s Board of Directors
approved the Company’s 2008 Stock Option Plan (the “Stock Plan”) for the issuance of up to 5,000,000 shares of
common stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent
rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors and consultants
of the Company and its subsidiaries. After the reverse stock split in August 2012, a total of 100,000 shares were available for
grant. Subsequent to the reverse split the Board of Directors approved an increase in the number of awards available for grant
to 2,100,000 shares. The exercise price of stock options under the Stock Plan is determined by the Board of Directors, and may
be equal to or greater than the fair market value of the Company’s common stock on the date the option is granted. Options
become exercisable over various periods from the date of grant, and generally expire ten years after the grant date.
At December 31, 2017 and 2016,
there were 380,950 Plan options issued and outstanding, respectively, under the Stock Option Plan.
The vesting provisions for these
stock options are determined by the board of directors at the time of grant, there are no unvested options outstanding as of December
31, 2017.
No options were issued during the
year ended December 31, 2017.
In the event of the employees’
termination, the Company will cease to recognize compensation expense.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
10
|
STOCKHOLDERS’ EQUITY
(continued)
|
|
c)
|
Stock Options (continued)
|
|
b.
|
Non-Plan Stock Options
|
On January 1, 2016, the Company granted, to its
then Chief Executive Officer, non - plan options for 3,000,000 shares of common stock (that are not covered by the Company’s
Stock Option Plan), with an exercise price of $0.08 per share and which options will expire thirty days after resignation. These
options vested as to 1,000,000 on January 1, 2017, the first anniversary of the grant date; 1,000,000 was due to vest on the second
anniversary of the grant date and a further 1,000,000 was due to vest on the third anniversary of the grant date.
On March 31, 2017, the Chief Executive
Officer, Mr. Brian Boutte tendered his resignation and the remaining unvested options for 2,000,000 shares of common stock were
cancelled. The 1,000,000 options which vested on January 1, 2017, were not exercised within 30 days of resignation by Mr. Boutte
and have been forfeited.
In the event of the employees’
termination, the Company will cease to recognize compensation expense.
The Company has applied fair value
accounting for all share based payment awards since inception. The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model. There is no deferred compensation recorded upon initial grant date, instead,
for employees, the fair value of the share-based payment is recognized ratably over the stated vesting period. For consultants,
the fair value is recognized as expense immediately.
A summary of all of our option
activity during the period January 1, 2016 to December 31, 2017 is as follows:
|
|
No. of shares
|
|
|
Exercise price
per share
|
|
|
Weighted
average exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2016
|
|
|
380,950
|
|
|
|
$0.51 to $13.50
|
|
|
$
|
0.90
|
|
Granted – non plan options
|
|
|
4,000,000
|
|
|
|
$0.08 to $0.09
|
|
|
|
0.90
|
|
Forfeited/cancelled
|
|
|
(1,000,000
|
)
|
|
$
|
0.08
|
|
|
|
0.08
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2016
|
|
|
3,380,950
|
|
|
|
$0.08 to $13.50
|
|
|
|
0.18
|
|
Granted - non plan options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/cancelled
|
|
|
(3,000,000
|
)
|
|
$
|
0.08
|
|
|
|
0.08
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2017
|
|
|
380,950
|
|
|
|
$0.08 to $13.50
|
|
|
$
|
0.90
|
|
Stock options outstanding as of
December 31, 2017 and 2016 as disclosed in the above table, have an intrinsic value of $0 and $0, respectively.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10
|
STOCKHOLDERS’ EQUITY (continued)
|
|
c)
|
Stock Options (continued)
|
The options outstanding and exercisable at December
31, 2017 are as follows:
|
|
|
Options outstanding
|
|
|
Options exercisable
|
|
Exercise price
|
|
|
No. of shares
|
|
|
Weighted
average
remaining years
|
|
|
Weighted
average exercise
price
|
|
|
No. of shares
|
|
|
Weighted
average exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13.50
|
|
|
|
3,480
|
|
|
|
1.45
|
|
|
|
|
|
|
|
3,480
|
|
|
|
|
|
$
|
12.50
|
|
|
|
2,000
|
|
|
|
2.78
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
$
|
8.50
|
|
|
|
500
|
|
|
|
3.50
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
$
|
5.00
|
|
|
|
14,800
|
|
|
|
3.79
|
|
|
|
|
|
|
|
14,800
|
|
|
|
|
|
$
|
0.65
|
|
|
|
36,924
|
|
|
|
5.25
|
|
|
|
|
|
|
|
36,924
|
|
|
|
|
|
$
|
0.63
|
|
|
|
38,096
|
|
|
|
0.50
|
|
|
|
|
|
|
|
38,096
|
|
|
|
|
|
$
|
0.51
|
|
|
|
285,150
|
|
|
|
2.28
|
|
|
|
|
|
|
|
285,150
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
380,950
|
|
|
|
2.45
|
|
|
|
0.90
|
|
|
|
380,950
|
|
|
|
0.90
|
|
The Company has recorded an
expense of $18,066 and $88,330 for the year ended December 31, 2017 and 2016 relating to options issued.
A summary of all of our warrant
activity during the period January 1, 2016 to December 31, 2017 is as follows:
|
|
No. of shares
|
|
|
Exercise price
per share
|
|
|
Weighted
average
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2016
|
|
|
6,339,498
|
|
|
|
$0.15 to $0.30
|
|
|
$
|
0.24
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2016
|
|
|
6,339,498
|
|
|
|
$0.15 to $0.30
|
|
|
|
0.24
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2017
|
|
|
6,339,498
|
|
|
|
$0.15 to $0.30
|
|
|
$
|
0.24
|
|
The warrants outstanding and exercisable at December
31, 2017 are as follows:
|
|
|
Warrants outstanding
|
|
|
Warrants exercisable
|
|
Exercise price
|
|
|
No. of shares
|
|
|
Weighted
average
remaining years
|
|
|
Weighted
average exercise
price
|
|
|
No. of shares
|
|
|
Weighted
average
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.30
|
|
|
|
375,000
|
|
|
|
0.83
|
|
|
|
|
|
|
|
375,000
|
|
|
|
|
|
$
|
0.25
|
|
|
|
1,751,667
|
|
|
|
1.49
|
|
|
|
|
|
|
|
1,751,667
|
|
|
|
|
|
$
|
0.15
|
|
|
|
525,500
|
|
|
|
1.49
|
|
|
|
|
|
|
|
525,500
|
|
|
|
|
|
$
|
0.25
|
|
|
|
1,508,333
|
|
|
|
1.58
|
|
|
|
|
|
|
|
1,508,333
|
|
|
|
|
|
$
|
0.15
|
|
|
|
577,499
|
|
|
|
1.60
|
|
|
|
|
|
|
|
577,499
|
|
|
|
|
|
$
|
0.25
|
|
|
|
968,166
|
|
|
|
1.60
|
|
|
|
|
|
|
|
968,166
|
|
|
|
|
|
$
|
0.25
|
|
|
|
633,333
|
|
|
|
1.65
|
|
|
|
|
|
|
|
633,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,339,498
|
|
|
|
1.52
|
|
|
|
0.24
|
|
|
|
6,339,498
|
|
|
|
0.24
|
|
The warrants outstanding have an intrinsic value
of $0 and $0 as of December 31, 2017 and 2016, respectively.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
11
|
EQUITY BASED COMPENSATION
|
Equity based compensation is made up as follows:
|
|
Year ended
December 31,
2017
|
|
|
Year ended
December 31,
2016
|
|
|
|
|
|
|
|
|
Stock option compensation charge
|
|
$
|
18,066
|
|
|
$
|
88,330
|
|
|
|
$
|
18,066
|
|
|
$
|
88,330
|
|
|
12
|
OTHER INCOME (EXPENSE)
|
|
|
Year ended
December 31,
2017
|
|
|
Year ended
December 31,
2016
|
|
|
|
|
|
|
|
|
License fee forgiven
|
|
$
|
-
|
|
|
$
|
200,000
|
|
Other
|
|
|
-
|
|
|
|
(6,333)
|
|
|
|
$
|
-
|
|
|
$
|
193,667
|
|
Other income in the prior period includes the forgiveness
of the $200,000 license fee due to Novas BVI during the prior period.
A reconciliation of the U.S. Federal statutory income
tax rate to the effective income tax rate is as follows:
|
|
Year ended
December 31,
2017
|
|
|
Year ended
December 31,
2016
|
|
|
|
%
|
|
|
%
|
|
Tax expense at the federal statutory rate
|
|
|
(34
|
)
|
|
|
(34
|
)
|
State tax expense, net of the federal effect
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Permanent timing differences
|
|
|
1
|
|
|
|
5
|
|
Deferred taxation rate change
|
|
|
243
|
|
|
|
-
|
|
Deferred income tax valuation allowance
|
|
|
(205
|
)
|
|
|
34
|
|
|
|
|
-
|
|
|
|
-
|
|
Significant components of the Company’s deferred
income tax assets are as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
2,867,000
|
|
|
$
|
4,703,000
|
|
Valuation allowance
|
|
|
(2,867,000
|
)
|
|
|
(4,703,000
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The valuation allowance for deferred
income tax assets as of December 31, 2017 and December 31, 2016 was $2,867,000 and $4,703,000, respectively. The net change in
the deferred income tax assets valuation allowance was $1,836,000 for the year ended December 31, 2017, including a decrease in
the valuation allowance of $1,464,000 due to the federal tax rate change from 35% to 21% in terms of the Tax Cuts and Jobs Act,
discussed below. In the prior year the valuation allowance increased by $1,507,000. The increase includes a true up of the previous
year’s estimate of net operating losses.
As of December 31, 2017, the
prior three years remain open for examination by the federal or state regulatory agencies for purposes of an audit for tax purposes.
Our net operating loss carry-forwards
of $11,026,000 begin to expire in 2032 and continue to expire through 2037. In assessing the realizability of deferred income tax
assets, management considers whether or not it is more likely than not that some portion or all deferred income tax assets will
be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible. Management considers the projected future taxable income and
tax planning strategies in making this assessment.
The Tax Cuts and Jobs Act (the
“Act”) was signed into law on December 22, 2017 and significantly changes tax law in the United States by, among
other items, reducing the federal corporate income tax rate from a maximum of 35% to 21% (effective January 1, 2018). The
Act embraces a territorial system for the taxation of future foreign earnings and modifies certain business deductions by, among
other changes, repealing the domestic production activities deduction, further limiting the deductibility of certain executive
compensation and increasing the limitation on the deductibility of certain meals and entertainment expenses. On the other hand,
the Act permits 100% bonus depreciation on assets placed in service through 2022 (with a phase-out period through 2026). The full
effects of these changes will be reflected for the first time in the determination of income tax expense for the year ending December 31,
2018. The Company determined that it had no liability as of December 31, 2018 for the one-time transition tax on deemed repatriated
earnings of foreign subsidiaries imposed by the Act.
The Company will evaluate the
impact of the Global Intangible Low-Taxed Income (“GILTI”) provision of the Act, beginning with the year ending December 31,
2018, the year for which it will first apply. The FASB has issued guidance stating that a company may elect to treat the additional
taxes due in the United States as a result of GILTI inclusions as current period expenses when incurred or to include such amounts
in the company’s determination of deferred taxes. The Company has not yet elected a method and will do so once the impact
of GILTI has been evaluated.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Basic loss per share is based
on the weighted-average number of common shares outstanding during each period. Diluted loss per share is based on basic shares
as determined above plus common stock equivalents, including convertible preferred shares and convertible notes as well as the
incremental shares that would be issued upon the assumed exercise of in-the-money stock options using the treasury stock method.
The computation of diluted net loss per share does not assume the issuance of common shares that have an anti-dilutive effect on
net loss per share. For the year ended December 31, 2017 and 2016, all stock options, unvested restricted stock awards, warrants,
convertible preferred stock and convertible notes were excluded from the computation of diluted net loss per share. Dilutive shares
which could exist pursuant to the exercise of outstanding stock instruments and which were not included in the calculation because
their affect would have been anti-dilutive are as follows:
|
|
Year ended
December 31,
2017
|
|
|
Year ended
December 31,
2016
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
380,950
|
|
|
|
3,380,950
|
|
Warrants to purchase shares of common stock
|
|
|
6,339,498
|
|
|
|
6,339,498
|
|
Series A-1 convertible preferred shares
|
|
|
31,375,000
|
|
|
|
31,375,000
|
|
Series B convertible preferred shares
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
Series C convertible preferred shares
|
|
|
120,000,000
|
|
|
|
120,000,000
|
|
|
|
|
162,095,448
|
|
|
|
165,095,448
|
|
|
15
|
RELATED PARTY TRANSACTIONS
|
On January 1, 2016, the “Company
entered into a three-year Employment Agreement with C. Brian Boutte (the “Boutte Employment Agreement”) to serve as
the Company’s Chief Executive Officer. Mr. Boutte was to also serve as the Company’s interim Chief Financial Officer.
Under the Boutte Employment Agreement, for his service as the Chief Executive Officer of the Company, Mr. Boutte was to receive
an annual base salary of $265,000, a sign on bonus of $60,000 and an annual performance bonus of up to 55% of his base salary,
such bonus payable in cash or equity upon attainment of certain performance indicators established by the Company’s Board
of Directors and Mr. Boutte. In connection with the entry into the Boutte Employment Agreement, Mr. Boutte was granted an option
award exercisable for 3,000,000 shares of the Company’s common stock, which will vest as to 1,000,000 shares on each of the
one, two and three-year anniversary of the commencement of his employment with the Company. The Boutte Employment Agreement was
amended on December 31, 2016 to provide for a term of six months ending June 30, 2017, a reduced annual base salary of $165,000
and a provision for immediate vesting of the options upon a Change of Control (as defined in the amendment).
Mr. Boutte tendered his resignation
to the Board of Directors on March 31, 2017.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
16
|
COMMITMENTS AND CONTINGENCIES
|
The Company disposed of its Crystal
Magic, Inc. subsidiary effective December 31, 2013. In terms of the sale agreement entered into by the Company, the purchaser has
been indemnified against all liabilities whether contingent or otherwise, claimed by third parties, this includes claims by creditors
of the Company amounting to $372,090 and claims against long-term liabilities of $848,916. Management does not consider it likely
that these claims will materialize and accordingly no provision has been made for these contingent liabilities.
The Company entered into a lease
agreement for approximately 3,733 square feet of office and warehouse space in Houston, the term of the lease was for 39 months
commencing on March 1, 2016 and terminating on May 31, 2019. The lease provided for the first month to be rent free, the fourteenth
month to be rent free and the twenty-seventh month to be rent free. Monthly rentals, including estimated operating costs, for the
first 12 months, excluding the free rental month amounted to approximately $3,410 per month, escalating at a rate of 1.7% per annum,
after excluding the free rental months. This lease agreement was amended, and the lease terminated with effect from May 31, 2017
with a final payment of $2,000 and the forfeiture of the security deposit of $6,968.
The Company entered into an Office
Service Agreement on May 16, 2017 whereby it has a lease to use an office in a business center, together with all telecommunication
services and access to conference rooms, kitchens and all utilities, the agreement is for a period of six months commencing on
June 1, 2017 and terminated on November 30, 2017. The Company paid a monthly amount of $530 in terms of the Office Service Agreement.
PLEDGE PETROLEUM CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On October 4, 2016, Novas Energy
USA, Inc. (“Novas USA”), a wholly owned subsidiary of the Company, delivered a notice to Technovita Technologies USA,
Inc. (“Technovita”) electing to dissolve its joint venture with Technovita (the “Joint Venture”), effective
November 1, 2016, pursuant to Section 11.1(b) of the Operating Agreement of Novas Energy North America, LLC (“NENA”),
dated October 22, 2015 (the “Operating Agreement”), by and among Novas USA and Technovita.
Pursuant to the Operating Agreement,
Novas USA had entered into a sublicense agreement (the “Novas Sublicense Agreement”) with NENA and Novas Energy Group
Limited for NENA to be the exclusive provider of Plasma Pulse Technology for treatment of vertical wells to third parties in the
United States. The Sublicense Agreement was terminated upon termination of the Joint Venture.
The Company entered into an Asset
Purchase Agreement (the “Asset Purchase Agreement”) with an affiliate (the “Purchaser”) of Ervington Investment
Limited (“Ervington”), the current holder of a majority of the Company’s outstanding voting securities, pursuant
to which the Company has agreed to sell to the Purchaser substantially all of its assets, including all pertinent intellectual
property rights, comprising its business of implementing its plasma pulse technology, for $650,000 (the “Asset Sale”).
The Asset Purchase Agreement provided, among other things, that the Asset Sale is conditioned on its approval by holders of a majority
of the Company’s voting securities, exclusive of the securities held by Ervington (a “majority of the minority”).
The Company had also
entered into an agreement with Ervington (the “Share Repurchase Agreement”) to repurchase all of its outstanding
securities held by Ervington for $8,500,000 (the “Share Repurchase”), which repurchase will occur at the same
time as the Asset Sale. The repurchase will constitute a change of control and upon consummation of the repurchase,
Ivan Persiyanov, will resign from all positions he holds as an officer and director of the Company and its subsidiaries.
After the completion of the Asset Sale, the Company expects to cease all activities related to its existing business while
evaluating other business opportunities, which include potentially acquiring a technology and oilfield services business, of
which two of the Company’s current directors (Messrs. Huemoeller and Zotos) own a minority equity interest. The Company
has not entered into an agreement with any potential acquisition candidate and has only been in the early stages of
discussion.
On March 23, 2018, after
receipt of the approval of the majority shareholder, the majority of the minority shareholders, the Company sold
substantially all of the Company’s assets for $650,000 and repurchased the outstanding securities held by Ervington for
$8,500,000. On March 23, 2018, Mr. Persiyanov resigned as an officer and director and Mr. Zotos was appointed the interim
Chief Executive Officer. On May 31, 2018, Mr. Zotos was also appointed as the Interim Chief Financial Officer.
On May 2, 2018, Christopher Headrick
was appointed as a director.
On May 2, 2018, we issued to
each of our three directors, 10,000,000 shares of restricted common stock, vesting as to 1/3 of the grant immediately, 1/3 of the
grant on the one year anniversary of the grant date and 1/3 of the grant on the two year anniversary of the grant date.
Other than disclosed above, in
accordance with ASC 855-10, the Company has analyzed its operations subsequent to December 31, 2017 to the date these financial
statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial
statements.