NOTES TO FINANCIAL STATEMENTS
January 31, 2014
(Unaudited)
NOTE 1 – GENERAL ORGANIZATION AND BUSINESS
Freedom Petroleum, Inc. (“the Company”) was incorporated under the laws of the State of Nevada, U.S. on June 13, 2012. The Company is in the exploration stage as defined under Accounting Standards Codification (“ASC 915”) and it intends to engage in the exploration and development of oil and gas properties.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
Basis of Presentation
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in U.S. dollars. The Company’s fiscal year end is July 31.
Basis of Accounting
The accompanying financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America and are presented in U.S. dollars. The Company is currently an exploration stage enterprise. An exploration stage enterprise is one in which planned principal operations have not commenced or if its operations have commenced, there has been no significant revenues there from. All losses accumulated since the inception of the business have been considered as part of its exploration stage activities.
Development Stage Company
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles related to development-stage companies. A development-stage company is one in which planned principal operations have not commenced or if its operations have commenced, there has been no significant revenues there from.
Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. The Company had $200 and $1,674 of cash at January 31, 2014 and July 31, 2013, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles of the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. The more significant areas requiring the use of estimates include asset impairment, stock-based compensation, and future income tax amounts. Management bases its estimates on historical experience and on other assumptions considered to be reasonable under the circumstances. However, actual results may differ from the estimates.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts payable and accrued expenses, and amounts due to a related party. The carrying amounts of these financial instruments approximate fair value due either to length of maturity or interest rates that approximate prevailing rates unless otherwise disclosed in these financial statements.
Revenue Recognition
The Company has yet to realize revenues from operations and is still in the exploration stage. The Company will recognize revenue when delivery of goods or completion of services has occurred provided there is persuasive evidence of an agreement, acceptance has been approved by its customers, the fee is fixed or determinable based on the completion of stated terms and conditions, and collection of any related receivable is reasonably assured.
Oil and Gas Properties
The Company uses the full cost method of accounting for oil and natural gas properties. Under this method, all acquisition, exploration and development costs, including certain payroll, asset retirement costs, other internal costs, and interest incurred for the purpose of finding oil and natural gas reserves, are capitalized. Internal costs that are capitalized are directly attributable to acquisition, exploration and development activities and do not include costs related to production, general corporate overhead or similar activities. Costs associated with production and general corporate activities are expensed in the period incurred. Proceeds from the sale of oil and natural gas properties are applied to reduce the capitalized costs of oil and natural gas properties unless the sale would significantly alter the relationship between capitalized costs and proved reserves, in which case a gain or loss is recognized.
Capitalized costs associated with impaired properties and capitalized costs related to properties having proved reserves, plus the estimated future development costs, and asset retirement costs under ASC 410 “Asset Retirement and Environmental Obligations”, are amortized using the unit-of-production method based on proved reserves. Capitalized costs of oil and natural gas properties, net of accumulated amortization and deferred income taxes, are limited to the total of estimated future net cash flows from proved oil and natural gas reserves, discounted at ten percent, plus the cost of unevaluated properties.
There are many factors, including global events that may influence the production, processing, marketing and price of oil and natural gas. A reduction in the valuation of oil and natural gas properties resulting from declining prices or production could adversely impact depletion rates and capitalized cost limitations. Capitalized costs associated with properties that have not been evaluated through drilling or seismic analysis are excluded from the unit-of-production amortization. Exclusions are adjusted annually based on drilling results and interpretative analysis.
Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves. If it is determined that the relationship is significantly altered, the corresponding gain or loss will be recognized in the statements of operations.
Costs of oil and gas properties are amortized using the units of production method.
Ceiling test:
Under the full cost method of accounting, the net book value of oil and gas properties, less related deferred income taxes, may not exceed a calculated “ceiling”. The ceiling limitation is the estimated after-tax future net cash flows from proved oil and gas reserves, discounted at 10 percent per annum and adjusted for cash flow hedges. Estimated future net cash flows exclude future cash outflows associated with settling accrued asset retirement obligations.
The Company has adopted U.S. Securities and Exchange Commission (“SEC”) Release 33-8995 and the amendments to ASC 932, “Extractive Industries – Oil and Gas” (the Modernization Rules). Under the Modernization Rules, estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months, held flat for the life of production, except where prices are defined by contractual arrangements.
Any excess of the net book value of proved oil and gas properties, less related deferred income taxes, over the ceiling is charged to expense and reflected as additional depletion, depreciation and amortization expense (“DD&A”) in the accompanying statement of operations. Such limitations are tested quarterly. As of January 31, 2014, the Company had no capitalized oil and gas property costs.
Impairment of Oil and Gas Properties
Unproved oil and gas properties are assessed at each reporting period for impairment of value, and a loss is recognized at the time of the impairment by providing an impairment allowance. An asset would be impaired if the undiscounted cash flows were less than its carrying value. Impairments are measured by the amount by which the carrying value exceeds its fair value. Because the Company uses the successful efforts method, the Company assesses its properties individually for impairment, instead of on an aggregate pool of costs. Impairment of unproved properties is based on the facts and circumstances surrounding each lease and is recognized based on management’s evaluation. Management’s evaluation follows a two-step process where (1) recoverability of the carrying value of the asset is reviewed to determine if there is sufficient value recoverable to support the capitalized value at the report date; and, (2) if assets fail the recoverability test, impairment testing is conducted, including the evaluation of various criteria such as: prior history of successful operations; production currently in place and/or future projected cash flows (if any); reserve reports or evaluations from which management can prepare future cash flow analyses; the Company’s ability to monetize the asset(s) under evaluation; and Management’s intent regarding future development.
Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718,
Compensation – Stock Compensation
which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The fair value of the equity instrument is charged directly to compensation expense and credited to additional paid-in capital over the period during which services are rendered. There has been no stock-based compensation issued to employees.
The Company follows ASC Topic 505-50, formerly EITF 96-18, “
Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services
,” for stock options and warrants issued to consultants and other non-employees. In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. There has been no stock-based compensation issued to non-employees.
Income Taxes
The Company provides for income taxes using an asset and liability approach. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect currently. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. No provision for income taxes is included in the statement due to its immaterial amount, net of the allowance account, based on the likelihood of the Company to utilize the loss carry-forward.
Basic and Diluted Earnings (Loss) Per Share
Basic income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. There are no such common stock equivalents outstanding as of January 31, 2014.
Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flow.
NOTE 3 – DUE TO RELATED PARTIES
During the period, the current sole director and officer, who is also a majority shareholder, advanced the Company $45,098 for operating expenses, which was later forgiven in full for exchange of common shares. (See Note 5)
As of October 31, 2013 and July 31, 2013, the Company was obligated to former officers and a director, for non-interest bearing demand loans with balances of $13,824 and 5,824, respectively. During the quarter ended Jarnuary 31, 2014, $1,084 was repaid in cash and the remaing $12,740, was forgiven in full and recorded as contributed capital, when control of the Company changed on January 23, 2014.
NOTE 4 – OIL AND NATURAL GAS PROPERTIES
On July 23, 2012, the Company purchased a lease from an unrelated third party consisting of approximately 624 net acres in Lewis and Clark County, Montana for a total purchase price of $15,000. In addition, annual rental payments of $937 are due to the State of Montana starting June 1, 2014 through June 5, 2022. The Company has not incurred any exploration or development costs in connection with this lease and, therefore, recorded an impairment loss in the amount of $15,000 as of July 31, 2013.
Minimum annual rental payments total $8,434 for the nine-year term. The lease can be extended after June 5, 2022 so long as oil and gas in paying quantities are produced from the land. As of January 31, 2014, the Company still maintains the lease, although it is considering its leasing options and looking for new prospects.
NOTE 5 – CAPITAL STOCK
The authorized capital of the Company is 100,000,000 common shares with a par value of $0.0001 and 20,000,000 preferred shares with a par value of $0.0001.
During the period ended July 31, 2012, the Company issued 27,000,000 shares of common stock at a price of approximately $0.001 per share for total cash proceeds of $27,160.
During the year ended July 31, 2013, the Company issued 25,200,000 shares of common stock at a price of approximately $0.0015 per share for total cash proceeds of $37,800.
During the year ended July 31, 2013, a related party paid Company expenses in the amount of $3,000 which were later forgiven and recorded as contributed capital.
During the period ended January 31, 2014, realated parties forgave loans of $12,740 which was recorded as contributed capital.
As of January 31, 2014, the Comnpany issued to the sole officer and director, who is also a majority stockholder, 128,852 shares of common stock at a price of approximately $0.35 per share for debt cancellation of $45,098.
There were 52,328,852 and 52,200,000 shares of common stock issued and outstanding as of January 31, 2014 and July 31, 2013, respectively. There were no shares of preferred stock issued and outstanding as of January 31, 2014 and July 31, 2013.
NOTE 6 – INCOME TAXES
For the period ended January 31, 2014, the Company has incurred a net loss and, therefore, has no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved. The cumulative net operating loss carry-forward was approximately $127,280 at January 31, 2014 and will expire beginning in the year 2032.
The provision for Federal income tax consists of the following for the periods ended January 31, 2014 and 2013:
|
|
2014
|
|
|
2013
|
|
Federal income tax benefit attributable to:
|
|
|
|
|
|
|
Current operations
|
|
$
|
15,386
|
|
|
$
|
2,917
|
|
Less: valuation allowance
|
|
|
(15,386
|
)
|
|
|
(2,917
|
)
|
Net provision for Federal income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
The cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows as of January 31, 2014 and July 31, 2013:
|
|
January 31, 2014
|
|
|
July 31, 2013
|
|
Deferred tax asset attributable to:
|
|
|
|
|
|
|
Net operating loss carryover
|
|
$
|
43,275
|
|
|
$
|
26,693
|
|
Less: valuation allowance
|
|
|
(43,275
|
)
|
|
|
(26,693
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry-forwards of $127,280 for Federal income tax reporting purposes are subject to annual limitations. Should
a change in ownership occur, net operating loss carry-forwards may be limited as to use in future years.
NOTE 7 – ENVIRONMENTAL AND OTHER CONTINGENCIES
The Company’s operations and earnings may be affected by various forms of governmental action in the United States. Examples of such governmental action include, but are by no means limited to: tax increases and retroactive tax claims; royalty and revenue sharing increases; import and export controls; price controls; currency controls; allocation of supplies of crude oil and petroleum products and other goods; expropriation of property; restrictions and preferences affecting the issuance of oil and gas or mineral leases; restrictions on drilling and/or production; laws and regulations intended for the promotion of safety and the protection and/or remediation of the environment; governmental support for other forms of energy; and laws and regulations affecting the Company’s relationships with employees, suppliers, customers, stockholders and others. Because governmental actions are often motivated by political considerations and may be taken without full consideration of their consequences, and may be taken in response to actions of other governments, it is not practical to attempt to predict the likelihood of such actions, the form the actions may take or the effect such actions may have on the Company.
Companies in the oil and gas industry are subject to numerous federal, state, and local regulations dealing with the environment. Violation of federal or state environmental laws, regulations and permits can result in the imposition of significant civil and criminal penalties, injunctions and construction bans or delays. A discharge of hazardous substances into the environment could, to the extent such event is not insured, subject the Company to substantial expense, including both the cost to comply with applicable regulations and claims by neighboring landowners and other third parties for any personal injury and property damage that might result.
The Company currently leases a property at which hazardous substances could have been or are being handled. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes were not under the Company’s control. Under existing laws, the Company could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated groundwater) or to perform remedial plugging operations to prevent future contamination. The Company is investigating the extent of any such liability and the availability of applicable defenses and believes the costs related to these sites will not have a material adverse effect on the Company’s net income, financial condition or liquidity in a future period.
The Company’s liability for remedial obligations includes certain amounts that are based on anticipated regulatory approval for proposed remediation of former refinery waste sites. Although regulatory authorities may require more costly alternatives than the proposed processes, the cost of such potential alternative processes is not expected to be a material amount. Certain environmental expenditures are likely to be recovered by the Company from other sources, primarily environmental funds maintained by certain states. Since no assurance can be given that future recoveries from other sources will occur, the Company has not recorded a benefit for likely recoveries.
There is the possibility that environmental expenditures could be required at currently unidentified sites, and new or revised regulations could require additional expenditures at known sites. However, based on information currently available to the Company, the amount of future remediation costs incurred at known or currently unidentified sites is not expected to have a material adverse effect on the Company’s future net income, cash flows or liquidity. The Company has recorded $0 for its estimated asset retirement obligations as of January 31, 2014.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
The Company entered into an informal agreement to rent office space on a month-to-month basis with an unrelated party for $300/month to begin on January 1, 2013. The Company began sharing the office space with other tenants on June 1, 2013, also on a month-to-month basis. These tenants were subleasing the space from the Company for $300/month and for the period ended October 31, 2013, the Company recognized $900 of other income related to the three months of office sharing. During the three month period ended January 31, 2014, the agreement was cancelled and no additional revenue was recognized.
On December 20, 2013 the Company entered into an Office Services Agreement with Abby Office Centers for renting office space, furniture and equipment from January 1, 2014 to December 31, 2014 for a monthly price of $1,251.
NOTE 9 – GOING CONCERN
The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has a working capital deficit and has incurred losses since inception resulting in an accumulated deficit of $127,280 as of January 31, 2014. Further losses are anticipated in the development of the business, raising substantial doubt about the Company’s ability to continue as a going concern.
The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with loans from directors and/or private placement of common stock.
NOTE 10 – SUBSEQUENT EVENTS
In accordance with ASC 855-10, the Company has analyzed its operations subsequent to January 31, 2014 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.