NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 – Organization
Business
Foothills
Exploration, Inc., (“Company”, “Foothills Exploration”, or “Foothills”) was incorporated in
the state of Delaware on May 13, 2010, under the name “Key Link Assets Corp.” for the purpose of acquiring a portfolio
of heavily discounted real estate properties in the Chicago metropolitan area. The Company changed its focus and planned to acquire
small and medium sized grocery stores in non-urban locales that are not directly served by large national supermarket chains.
On
May 2, 2016, Foothills Petroleum Inc., a Nevada corporation (“FPI”), acquired over 14.1 million pre-split (56.4 million
post-split) shares of the Company’s common stock constituting approximately 96% of our then issued and outstanding shares
(“FPI Acquired Shares”). As of May 16, 2016, we effected a 4:1 forward split of our shares of common stock.
On
May 27, 2016, the Company entered into a Share Exchange Agreement with shareholders of FPI.
Prior
to the Share Exchange, the Company had minimal assets and recognized no revenues from operations and was accordingly classified
as a shell company. In light of closing the Share Exchange transaction with the shareholders of FPI, the Company became actively
engaged in oil and gas operations and is no longer a shell company.
The
consolidated balance sheets include the accounts of the Company, and its wholly-owned direct and indirect subsidiaries, Foothills
Exploration, Inc. (“FTXP”), Foothills Petroleum, Inc. (“FPI”), Foothills Exploration, LLC (“FEL”),
Foothills Petroleum Operating, Inc. (“FPOI”), Foothills Exploration Operating, Inc. (“FEOI”), Tiger Energy
Partners International, LLC (“TEPI”), Tiger Energy Operating, LLC (“TEO”), and Tiger Energy Mineral Leasing,
LLC (“TEML”).
The
Company’s oil and gas operations are conducted by its wholly owned indirect subsidiaries. FEL is a qualified oil and gas
operator in the states of Wyoming and Colorado, and TEO is a qualified oil and gas operator in the state of Utah.
The
Company’s operating entities have historically employed, and will continue in the future to employ, on an as-needed basis,
the services of drilling contractors, other drilling related vendors, field service companies and professional petroleum engineers,
geologists, and landmen as required in connection with future drilling and production operations.
On
May 23, 2019, Foothills Exploration, Inc., through its indirect wholly owned subsidiary, Foothills Exploration, LLC (the “Company”),
entered into a letter agreement for the purchase and sale of oil and gas assets (the “Agreement”) with an unrelated
third party (the “Seller”), concerning the acquisition of a total of 87 wells and associated acreage located in Montana
(the “Assets”).
The
Assets consist of 29 natural gas wells, 10 producing and 19 shut-in, plus associated acreage, additional miscellaneous leases,
associated pipelines, gathering systems, compression and processing facilities, and related yards and equipment, located in Sweet
Grass and Stillwater counties, Montana – comprising of the Rapelje, Lake Basin and Six Shooter Fields. The Assets also include
oil properties consisting of 58 oil and injection wells with associated acreage located in Musselshell and Rosebud Counties, Montana
– 12 proved developed producing wells, 25 proved developed non-producing wells, and 21 injection wells – comprising
of the Sumatra and Big Wall / Little Wall fields. The oil properties currently generate approximately $1.1 million in annual gross
revenues.
Closing
of this transaction is subject to the approval of transfer from the Montana Board of Oil and Gas Conservation. Furthermore, no
assurances can be made that the Closing will occur based on financing and other market conditions. For further details on this
pending acquisition, please refer to the Company’s Current Report on Form 8-K filed with the SEC on May 30, 2019.
Closing
of this transaction is subject to the approval of transfer from the Montana Board of Oil and Gas Conservation. Furthermore, no
assurances can be made that the Closing will occur based on financing and other market conditions.
On
June 17, 2019, Foothills Exploration, Inc. (the “Company”) received from the Secretary of State of the State of Delaware
confirmation of the effective filing of the Company’s Certificate of Amendment to its Certificate of Incorporation (the
“Charter Amendment”), increasing the number of shares of Common Stock the Company is authorized to issue from One
Hundred Million (100,000,000) to Four Hundred Seventy-Five Million (475,000,000) (the “Increase in Authorized Shares”).
On
June 26, 2019, Foothills Exploration, Inc., through its indirect wholly owned subsidiary, Foothills Exploration, LLC (the “Company”),
entered into a letter agreement (the “Agreement”) with an unrelated third party seller (the “Seller”),
with respect to a proposed transaction (the “Transaction”) to acquire a total of 12 shut-in wells and approximately
5,769 acres located in Montana (the “Assets”). The Assets consist of four natural gas wells, associated acreage, additional
miscellaneous leases, associated pipelines, gathering systems, compression and processing facilities, and related yards and equipment,
located in Stillwater and Golden Valley counties, Montana.
The
transaction documents contain additional terms and provisions, representations and warranties, including further provisions covering
effective time of transfer, venue, and governing law. Closing of this transaction is subject to the approval of transfer from
the Montana Board of Oil and Gas Conservation No assurances can be given that the Company will complete the acquisition. For further
details on this pending acquisition, please refer to the Company’s Current Report on Form 8-K filed with the SEC on July
1, 2019.
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has incurred
recurring losses from inception through June 30, 2019, has a working capital deficit at June 30, 2019, of $23,789,371, and has
limited sources of revenue. These conditions have raised substantial doubt as to the Company’s ability to continue as a
going concern for one year from the issuance of the financial statements. These financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
To
address these matters, the Company is actively meeting with investors for possible equity investments, including business combinations;
investigating other possible sources to refinance our existing debt; and in continuing discussions with various individuals and
groups that could be willing to provide capital to fund operations and growth of the Company.
Note
2 - Significant Accounting Policies
Principles
of Consolidation
The
financial statements include the accounts of Foothills Exploration, Inc., and all of its direct and indirect wholly-owned subsidiaries
including Foothill Petroleum, Inc., Foothills Petroleum Operating, Inc., Foothills Exploration Operating, Inc., Foothills Exploration
LLC, Tiger Energy Partners International, LLC, Tiger Energy Operating, LLC and Tiger Energy Mineral Leasing, LLC. Intercompany
balances and transactions have been eliminated in consolidation.
Basis
of Presentation and Functional Currency
Pursuant
to the rules and regulations of the Securities and Exchange Commission for Form 10-Q, the unaudited condensed consolidated financial
statements, footnote disclosures and other information normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. The condensed consolidated financial statements
contained in this report are unaudited but, in the opinion of management, reflect all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the consolidated financial statements. All significant inter-company accounts
and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative
of results for the full year. The condensed consolidated balance sheet at June 30, 2019 has been derived from the audited consolidated
financial statements at that date but does not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements.
These
condensed consolidated financial statements and related notes are presented in accordance with accounting principles generally
accepted in the United States of America and are expressed in United States dollars (USD).
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial
statements and the reported amounts of revenues and expenses during the reporting period(s). Management bases its estimates on
historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken
as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions
used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience
and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results
could differ from those estimates. Significant estimates include those related to assumptions used in impairment testing of long-term
assets, accruals for potential liabilities and valuing equity instruments issued for services. Actual results could differ from
those estimates.
Reclassifications
Certain
reclassifications have been made to amounts in prior year to conform to the current year presentation. All reclassifications have
been applied consistently to the periods presented and had no effects on previously reported results of operations.
Cash
and Cash Equivalents
Cash
and cash equivalents include all highly liquid debt instruments with maturity of three months or less.
Restricted
Cash
Cash
and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded
in restricted cash in the current assets section of our consolidated balance sheet. At June 30, 2019 and December 31, 2018, the
Company had restricted cash of $120,000 and $120,000, respectively. This amount is being held in escrow for the benefit of the
State of Utah for certain properties located in Utah, covered under a certain Modification to Stipulated Order between the Utah
Division of Oil, Gas and Mining and TEPI dated August 1, 2014 (Case No. SI/TA-102). These funds held in escrow, will be released
to the Company once the Company finishes its reclamation of the various wells in question.
Accounts
receivable and allowance for doubtful accounts
Accounts
receivable are stated at the historical carrying amount net of an allowance for uncollectible accounts. The carrying amount of
the Company’s accounts receivable approximates fair value because of the short-term nature of the instruments. The Company
routinely assesses the collectability of all material trade and other receivables.
Trade
accounts receivable comprise receivables from joint interest owners which are recorded when the Company incurs expenses on behalf
of the non-operator interest owners of the properties the Company operates.
The
Company’s oil and gas revenues receivable comprise receivables from purchasers of the Company’s production of oil
and gas and other hydrocarbons and from operators of properties in which the Company has a non-operated interest, as well as from
joint interest owners of properties the Company operates. During the six months ended June 30, 2019, the Company accrued $89,902
of net revenue receivable related to GRB Assets. See Note 4 – Property and Equipment. EOG Resources, Inc. (“EOG”),
the operator of two wells in which the Company has a 21.62% working interest. The Company has been informed that EOG will apply
to unpaid invoices of the Company’s share of costs to drill two wells until EOG has recovered those costs. During the six
months ended June 30, 2019, those costs were $238,244, of which $170,146 were capitalized. See Note 4 – Property and Equipment.
The
Company’s reported balance of accounts receivable, net of allowance for doubtful accounts, represents management’s
estimate of the amount that ultimately will be realized in cash or used in the future to offset an operator’s joint interest
billings.
The
Company reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical payment trends, the
age of the receivables and knowledge of the individual customers or joint interest owners. When the analysis indicates, management
increases or decreases the allowance accordingly. However, if the financial condition of our customers were to deteriorate, additional
allowances might be required.
Oil
and Gas Properties
The
Company follows the full cost method of accounting for its investments in oil and gas properties. Under the full cost method,
all costs associated with the exploration of properties are capitalized into appropriate cost centers within the full cost pool.
Internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration,
and development activities undertaken and do not include any costs related to production, general corporate overhead, or similar
activities. Cost centers are established on a country-by-country basis.
Capitalized
costs within the cost centers are amortized on the unit-of-production basis using proved oil and gas reserves. The cost of investments
in unevaluated properties and major development projects are excluded from capitalized costs to be amortized until it is determined
whether or not proved reserves can be assigned to the properties. Until such a determination is made, the properties are assessed
annually to ascertain whether impairment has occurred. The costs of drilling exploratory dry holes are included in the amortization
base immediately upon determination that the well is dry.
For
each cost center, capitalized costs are subject to an annual ceiling test, in which the costs shall not exceed the cost center
ceiling. The cost center ceiling is equal to: (i) the present value of estimated future net revenues computed by applying current
prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to
estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated
future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount
factor of ten percent and assuming continuation of existing economic conditions; plus (ii) the cost of properties not being amortized;
plus (iii) the lower of cost or estimated fair value of unproved properties included in the costs being amortized; and less (iv)
income tax effects related to differences between the book and tax basis of the properties. If unamortized costs capitalized within
a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense and separately
disclosed during the period in which the excess occurs.
Support
Facilities and Equipment
Our
support facilities and equipment are generally located in proximity to certain of our principal fields. Depreciation of these
support facilities is calculated on a units-of-production basis.
Maintenance
and repair costs that do not extend the useful lives of property and equipment are charged to expense as incurred.
Proved
Reserves
Estimates
of the Company’s proved reserves included in this report are prepared in accordance with US GAAP and guidelines from the
United States Securities and Exchange Commission (“SEC”). The Company’s engineering estimates of proved oil
and natural gas reserves directly impact financial accounting estimates, including depreciation, depletion, and amortization expense
and impairment. Proved oil and natural gas reserves are the estimated quantities of oil and natural gas reserves that geological
and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under period-end
economic and operating conditions. The process of estimating quantities of proved reserves is very complex, requiring significant
subjective decisions in the evaluation of all geological, engineering and economic data for each reservoir. The accuracy of a
reserves estimate is a function of: (i) the quality and quantity of available data; (ii) the interpretation of that data; (iii)
the accuracy of various mandated economic assumptions, and (iv) the judgment of the persons preparing the estimate. The data for
a given reservoir may change substantially over time as a result of numerous factors, including additional development activity,
evolving production history and continual reassessment of the viability of production under varying economic conditions. Changes
in oil and natural gas prices, operating costs, and expected performance from a given reservoir also will result in revisions
to the amount of the Company’s estimated proved reserves. The Company engages independent reserve engineers to estimate
its proved reserves.
Fixed
Assets
The
Company capitalizes expenditures related to property and equipment not directly associated with our production of oil and gas,
subject to a minimum rule, that have a useful life greater than one year for: (1) assets purchased; (2) existing assets that are
replaced, improved or the useful lives have been extended; or (3) all land, regardless of cost, acquisitions of new assets, additions,
replacements and improvements (other than land) costing less than the minimum rule in addition to maintenance and repair costs,
including any planned major maintenance activities, are expensed as incurred.
Depreciation
is calculated using the straight-line method over the estimated useful lives of the assets.
Office
equipment – 3 years
Vehicle(s)
– 5 years
Land
– not depreciated
Asset
Retirement Obligations
The
Company follows the provisions of the Accounting Standards Codification ASC 410 - Asset Retirement and Environmental Obligations.
The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount
of the long-lived asset. The Company’s asset retirement obligations relate to the abandonment of oil and gas producing facilities
and facilities that support the production of oil and gas. The amounts recognized are based upon numerous estimates and assumptions,
including future retirement costs, future inflation rates and the credit-adjusted risk-free interest rate. After recording these
amounts, the ARO will be accreted to its future estimated value using the same assumed cost of funds, and the capitalized costs
are depreciated on a unit-of-production basis. Both the accretion and the depreciation will be included in depreciation, depletion
and amortization expense on our consolidated statements of operations.
Fair
Value of Financial Instruments
For
certain of the Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, accounts
payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities.
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying
amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments
and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined
as follows:
|
●
|
Level
1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in
sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
●
|
Level
2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially
the full term of the asset or liability. This category includes those derivative instruments that the Company values using
observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative
instruments, can be derived from observable data, or supported by observable levels at which transactions are executed in
the marketplace.
|
|
|
|
|
●
|
Level
3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement
and less observable from objective sources (i.e. supported by little or no market activity). Level 3 instruments include derivative
warrant instruments. The Company does not have sufficient corroborating evidence to support classifying these assets and liabilities
as Level 1 or Level 2.
|
The
Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities
from Equity,” and ASC 815. The carrying amounts of the Company’s financial assets and liabilities, including cash,
prepaid expenses, accounts payable, accrued expenses, and other current liabilities, approximate their fair values because of
the short maturity of these instruments. The fair value of notes payable and convertible notes approximates their fair values
since the current interest rates and terms on these obligations are the same as prevailing market rates.
Certain
of the Company’s debt and equity instruments include embedded derivatives that require bifurcation from the host contract
under the provisions of ASC 815-40, Derivatives and Hedging. The estimated fair value of the derivative warrant instruments was
calculated using a Black Scholes valuation model.
The
following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for
at fair value on a recurring basis as of June 30, 2019 and December 31, 2018:
|
|
|
Carrying
|
|
|
Fair
Value Measurement at
|
|
|
|
|
Value
|
|
|
June
30, 2019
|
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets, debt and equity instruments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivative
liabilities, debt and equity instruments
|
|
|
6,506,062
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,506,062
|
|
|
|
|
Carrying
|
|
|
Fair
Value Measurement at
|
|
|
|
|
Value
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets, debt and equity instruments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivative
liabilities, debt and equity instruments
|
|
|
661,320
|
|
|
|
—
|
|
|
|
—
|
|
|
|
661,320
|
|
The
Company did not identify any other assets and liabilities that are required to be presented on the consolidated balance sheet
at fair value.
Revenue
Recognition
The
Company recognizes revenue in accordance with the requirements of ASC 606, which directs that it should recognize revenue when
a customer obtains control of promised goods or services for an amount that reflects the consideration the entity expects to receive
in exchange for those goods or services. All of our revenue is attributable to sales of oil, gas, and other hydrocarbons which
are sold daily, with sales aggregated on a monthly basis. In the case of revenue received for a non-operated working interest,
we are paid by the operator, which is a joint interest partner and not the purchaser of the product. In the case of revenue received
for an operated working interest, we are paid by the marketer to whom we sell the commodities directly pursuant to contractual
arrangements.
Debt
Issuance Costs, Debt Discount and Detachable Debt-Related Warrants
Costs
incurred to issue debt are deferred and recorded as a reduction to the debt balance in our consolidated balance sheets. We amortize
debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts relate to the
relative fair value of warrants issued in conjunction with the debt and are also recorded as a reduction to the debt balance and
accreted over the expected term of the debt to interest expense using the effective interest method.
Net
Earnings (Loss) Per Common Share
The
Company computes earnings per share under ASC 260-10, “Earnings Per Share.” The Company’s earnings (loss) per
share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted
earnings (loss) per share reflects the potential dilution of securities, if any, that could share in the earnings (loss) of the
Company and are calculated by dividing net income by the diluted weighted average number of common shares. The diluted weighted
average number of common shares is computed using the treasury stock method for common stock that may be issued for outstanding
stock options, warrants, and convertible debt.
|
|
|
For
the Three Months Ended
June 30,
|
|
|
For
the Six Months Ended
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to stockholders
|
|
|
(1,259,812
|
)
|
|
|
(1,528,456
|
)
|
|
|
(8,360,207
|
)
|
|
|
(2,390,301
|
)
|
|
Basic
net income allocable to participating securities (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Income
(loss) available to Foothills Exploration, Inc.’s stockholders
|
|
|
(1,259,812
|
)
|
|
|
(1,528,456
|
)
|
|
|
(8,360,207
|
)
|
|
|
(2,390,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of common shares outstanding-Basic
|
|
|
23,672,003
|
|
|
|
14,941,836
|
|
|
|
22,739,440
|
|
|
|
14,921,345
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and warrants (2)
|
|
|
64,081,948
|
|
|
|
-
|
|
|
|
64,081,948
|
|
|
|
-
|
|
|
Stock
payable (3)
|
|
|
96,666
|
|
|
|
4,491,111
|
|
|
|
96,666
|
|
|
|
4,491,111
|
|
|
Convertible
notes (4)
|
|
|
49,505,985
|
|
|
|
4,580,493
|
|
|
|
49,505,985
|
|
|
|
4,580,493
|
|
|
Weighted
average number of common shares outstanding-Diluted
|
|
|
88,500,616
|
|
|
|
19,932,947
|
|
|
|
137,271,552
|
|
|
|
24,492,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.15
|
|
|
|
(0.10
|
)
|
|
|
(0.35
|
)
|
|
|
(0.16
|
)
|
|
Diluted
|
|
|
0.04
|
|
|
|
(0.08
|
)
|
|
|
(0.06
|
)
|
|
|
(0.10
|
)
|
|
(1)
|
Restricted
share awards that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in
computing earnings using the two-class method. Participating securities, however, do not participate in undistributed net
losses.
|
|
|
|
|
(2)
|
For
the three months ended June 30, 2019 and 2018, “out of the money” stock options representing 2,050,000 and 2,050,000
shares and warrants representing 2,466,015 and 2,683,515 shares were antidilutive and, therefore, excluded from the diluted
share calculation. For the six months ended June 30, 2019 and 2018, “out of the money” stock options representing
2,050,000 and 2,050,000 shares and warrants representing 2,466,015 and 2,683,515 shares were antidilutive and, therefore,
excluded from the diluted share calculation.
|
|
|
|
|
(3)
|
For
the three months ended June 30, 2019 and 2018, stock payable representing 96,666 and 4,491,111 shares were anti-dilutive.
For the six months ended June 30, 2019 and 2018, stock payable representing 96,666 and 4,491,111 shares were anti-dilutive.
|
|
|
|
|
(4)
|
For
the three months ended June 30, 2019 and 2018, convertible notes representing 220,000
and 0 shares were anti-dilutive. For the six months ended June 30, 2019 and 2018, convertible
notes representing 220,000 and 0 shares were anti-dilutive.
|
Income
Taxes
The
Company accounts for income taxes using the asset and liability method whereby deferred tax assets are recognized for deductible
temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
Stock-Based
Compensation
All
share-based payments, including grants of stock to employees, directors and consultants, are recognized in the consolidated financial
statements based upon their estimated fair values.
The
Company accounts for stock, stock options, and stock warrants issued for services and compensation by employees under the fair
value method. For non-employees, the fair market value of the Company’s stock is measured on the date of stock issuance
or the date an option/warrant is granted as appropriate under ASC 718 “Compensation – Stock Compensation”. The
Company determined the fair market value of the warrants/options issued under the Black-Scholes Pricing Model. Under the provisions
ASC 718, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized
as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).
The
Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services
follows ASC Topic 505. As such, the value of the applicable stock-based compensation is periodically re-measured and income or
expense is recognized during their vesting terms. The measurement date for the fair value of the equity instruments issued is
determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii)
the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants,
the fair value of the equity instrument is primarily recognized over the term of the consulting agreement. In accordance with
FASB guidance, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be
presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for
accounting purposes.
Recent
Accounting Pronouncements
In
November 2016, the FASB issued ASC Update No. 2016-18 (Topic 230) Statement of Cash Flows – Restricted Cash (a consensus
of the FASB Emerging Issues Task Force). The amendments in this update require that restricted cash and restricted cash equivalents
be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. Current GAAP does not include specific guidance on the cash flow classification and presentation of changes
in restricted cash. The updated guidance is effective for interim and annual periods beginning after December 15, 2017 and is
required to be applied using a retrospective transition method to each period presented. The Company implemented this guidance
effective January 1, 2018. Implementing this guidance did not have a material impact on the Company’s statement of cash
flows.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business (“ASU
2017-01”). The standard clarifies the definition of a business by adding guidance to assist entities in evaluating whether
transactions should be accounted for as acquisitions of assets or businesses. ASU 2017-01 is effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. Under ASU 2017-01, to be considered a business, the assets
in the transaction need to include an input and a substantive process that together significantly contribute to the ability to
create outputs. Prior to the adoption of the new guidance, an acquisition or disposition would be considered a business if there
were inputs, as well as processes that when applied to those inputs had the ability to create outputs. Early adoption is permitted
for certain transactions. Adoption of ASU 2017-01 did not have a material impact on the Company’s consolidated financial
statements.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU
2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test,
which requires a hypothetical purchase price allocation and may require the services of valuation experts. ASU 2017-04 is effective
for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective
basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017. The Company does not carry any Goodwill on its Consolidated Balance Sheets and does not anticipate the adoption of ASU 2017-04
will have a material impact on its consolidated financial statements.
In
July 2017, the FASB issued Accounting Standards Update No. 2017-11, Accounting for Certain Financial Instruments with Down
Round Features (“ASU 2017-11”). When determining whether certain financial instruments should be classified as
liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument
is indexed to an entity’s own stock. ASU 2017-11 is effective for annual or interim periods within those fiscal years beginning
after December 15, 2018 and should be applied on a retrospective basis. Early adoption is permitted for all entities, including
adoption in an interim period. The Company adopted ASU 2017-11 on its consolidated financial statements.
In
June 2018, the FASB issued “ASU 2018-07 - Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting”. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions
for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards
except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over
which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic
718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a
grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply
to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling
goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. Adoption
of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.
Effective
January 1, 2019 the Company adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Update No. 2016-02, “Leases (Topic 842)” which superseded previous lease guidance ASC 840, Leases. Topic 842 is a
new lease model that requires a company to recognize right-of-use (“ROU”) assets and lease liabilities on the balance
sheet. The adoption of Topic 842 did not have a material impact on the Company’s consolidated income statement or consolidated
cash flow statement.
The
Company adopted the package of practical expedients and transition provisions available for expired or existing contracts, which
allowed the Company carryforward its historical assessments of 1) whether contracts are or contain leases, 2) lease classification
and 3) initial direct costs. Additionally, for real estate leases, the Company adopted the practical expedient that allows lessees
to treat the lease and non-lease components of leases as a single lease component. The Company also elected the hindsight practical
expedient to determine the reasonably certain lease term for existing leases. Further, the Company elected the short-term lease
exception policy, permitting it exclude the recognition requirements for leases with terms of 12 months or less. See Note 11 for
additional information about leases.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
Note
4 – Property and Equipment
Oil
and Gas Properties
The
Company’s oil and gas properties at June 30, 2019 and December 31, 2018 are located in the United States of America.
The
carrying values of the Company’s oil and gas properties, net of depletion, depreciation, amortization, and impairment at
June 30, 2019 and December 31, 2018 are set forth below in the following table:
|
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
|
Unproved
leasehold (1)
|
|
$
|
106,299
|
|
|
$
|
106,299
|
|
|
Proved
leasehold and Properties subject to depletion, net of depletion
|
|
|
12,569,237
|
|
|
|
12,036,804
|
|
|
Exploratory
wells – construction-in-progress (1)
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
12,675,536
|
|
|
$
|
12,143,103
|
|
|
(1)
|
Not
subject to depletion;
|
|
|
|
|
|
|
Exploration
and
|
|
|
|
|
|
Depreciation,
Depletion, Amortization,
|
|
|
|
|
|
Year
|
|
Acquisition
|
|
|
Development
|
|
|
Disposition
|
|
|
and
|
|
|
|
|
|
Incurred
|
|
Costs
|
|
|
Costs
|
|
|
of
Assets
|
|
|
Impairment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
and prior
|
|
$
|
10,252,568
|
|
|
$
|
1,181,421
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,433,989
|
|
|
2017
|
|
|
—
|
|
|
|
3,223,931
|
|
|
|
—
|
|
|
|
(1,525,784
|
)
|
|
|
1,698,147
|
|
|
2018
|
|
|
—
|
|
|
|
1,897,502
|
|
|
|
|
|
|
|
(2,886,535
|
)
|
|
|
(989,033
|
)
|
|
2019
|
|
|
657,304
|
|
|
|
419,449
|
|
|
|
|
|
|
|
(544,320
|
)
|
|
|
532,433
|
|
|
Total
|
|
$
|
10,909,872
|
|
|
$
|
6,722,303
|
|
|
$
|
—
|
|
|
$
|
(4,956,639
|
)
|
|
$
|
12,675,536
|
|
|
●
|
In
2017, the Company acquired a 21.62% non-operated working interest with a 17.1% net revenue interest in two exploratory horizontal
gas wells in the Uinta Basin from an undisclosed party, and the Company incurred $1,479,282 in well costs. During the year
ended December 31, 2018, the company incurred an additional $1,868,370 of well costs. At December 31, 2018, the Company’s
share total costs for drilling and completing the two wells was $3,347,776. Although these wells produced economic quantities
of natural gas liquids and residue gas through December 31, 2017, well completion activities were completed during the year
ended December 31, 2018, so costs were reclassed from construction-in-progress to proved properties subject to depletion through
December 31, 2018. As of December 31, 2018, we recorded impairment expense of $1,521,776 for the amount exceeding the ceiling
test limitation. During the six months ended June 30, 2019, the company capitalized additional costs of $170,146.
|
|
●
|
In
2017, the Company drilled a test well on the Labokay prospect to the total measured depth of 8,795 feet, where hydrocarbons
shows were not in commercial quantities to warrant completion. This well was plugged and abandoned. Since the well was not
commercially viable the Company’s working interest in the underlying mineral lease terminated and we no longer have
a right to acquire title to said property. During the year ended December 31, 2017, we incurred costs of $1,209,675 in the
drilling of this well and $1,352,982 was charged to impairment expense. Civil lawsuits were filed against FPOI arising from
unpaid accounts in connection with drilling of this well – see Note 11 – Commitments and Contingencies for additional
information on the lawsuits.
|
|
|
|
|
●
|
In
2017, the Company worked over two Duck Creek wells obtaining production from the Green River formation. We incurred $79,989
in capitalized workover costs associated with these wells. The wells require additional workover and were shut-in in July
2017. The Company recorded asset retirement costs of $291,659 related to Duck Creek wells. During the year ended December
31, 2018, we incurred $8,821 in capitalized workover costs associated with these wells. As of December 31, 2018, due to the
Duck Creek wells subsequently becoming subject to a Sherriff’s sale stemming from a legal matter with our indirect subsidiary,
the Duck Creek wells should be impaired to the extent of total intangible costs, which were capitalized for these properties
during 2017 and 2018. Accordingly, the impairment expense for the period ending December 31, 2018 is $88,810. We did not incur
any cost during the six months ended June 30, 2019.
|
|
●
|
In
2017, the Company incurred costs of $22,691 for bonding, legal, title, engineering, geological and surveying in our Ladysmith
project in Fremont County, Wyoming.
|
|
|
|
|
●
|
In
2017, the Company incurred costs of $3,750 related to Springs Project. The Company allowed the BLM leases for the Springs
project to expire without paying additional delay rental payments. The primary terms on these leases were due to expire in
Q4 2018 and in the view of management it was not in the best interest of the Company to continue exploratory efforts on this
speculative play. Management concluded that Company resources would be better redirected to continue seeking lower-risk acquisitions
of producing oil and gas properties rather than take additional wildcat drilling risk on this prospect. The Company currently
no longer owns the mineral rights for this project. As the result, the Company recognized impairment of oil and gas property
in amount of $154,787, during the year ended December 31, 2017. During the year ended 31, 2018, the Company has decided to
allow Ladysmith leases to expire without making further delay rental payments to the BLM, as the result we recorded impairment
expense of $78,469.
|
|
|
|
|
●
|
In
2017, the Company incurred costs of $100,191 for exploration and development efforts associated with the proved oil and gas
assets in Utah, which were acquired on December 30, 2016, from Total Belief Limited, a wholly owned subsidiary of New Times
Energy Corporation Limited. These assets include certain oil and gas wells throughout the Uinta Basin in Utah on acreage with
over 30 proved undeveloped drilling locations, additional non- operating interest in other leases, and access to approximately
6,000 acres in the Uinta Basin with proven and probable reserves and existing infrastructure in place. In connection with
the TBL acquisition, Foothills entered into a promissory note in the amount of $6,000,000. This note bears no interest during
its term. The Company recorded ($342,804) of imputed interest as debt discount. Starting from July 1, 2018 the note bears
10% annual interest. During the year ended December 31, 2018, we incurred cost of $20,000 exploration and development efforts
associated with these properties. During the six months ended June 30, 2019, we incurred costs of $24,722 exploration and
development efforts associated with these properties.
|
|
|
|
|
●
|
In
2017, the Company incurred costs of $379,498 for exploration and development efforts associated with numerous unproved oil
and gas properties in the Company’s geographic areas of interest, including farmout properties (Paw Paw and Ironwood)
and numerous others that were being evaluated and considered for a prospective acquisition and/or farmout by the Company.
During the year ended December 31, 2018, we incurred cost of $312 exploration and development efforts associated with these
properties. As of December 31, 2018, the Company determined it is unlikely that it will be able to obtain enough production
from this test well at the present time to warrant continued development. As the result we recorded $778,034 impairment expense
of Pawpaw during the year ended December 31, 2018.
|
|
|
|
|
●
|
On
March 6, 2019, the Company, through its indirect wholly-owned subsidiary, Foothills Exploration, LLC, closed on the acquisition
of 22 natural gas wells and approximately 18,214 gross acres (14,584 core), 78% held by production, located in the Greater
Green River Basin in Wyoming (the “GRB Assets”). Some of the underlying leases come with certain depth restrictions
and roughly 80% of the acreage remains undeveloped. The GRB assets were purchased for $671,481, in an all-cash transaction,
which was financed through Company borrowings. The Company’s optimization program targeting the first several wells
has already generated an 11% increase in production rates and as such the Company is continuing to optimize additional wells
to further increase production. $657,304 were recorded in oil and gas and property and $14,177 were allocated to Support Facilities
and Equipment. We recorded $222,194 as asset retirement cost related to these wells. During the six months ended June 30,
2019, we incurred costs of $2,388 exploration and development efforts associated with these properties.
|
|
|
|
|
●
|
In
2017, we recorded depreciation, depletion and amortization cost related to oil and gas properties of $18,017. During the year
ended December 31, 2018, we recorded depreciation, depletion, amortization costs related to oil and gas properties of $411,821.
During the six months ended June 30, 2019 and 2018, we recorded depreciation, depletion, amortization costs related to oil
and gas properties of $544,320 and $214,179, respectively.
|
Support
Facilities and Equipment
The
Company’s support facilities and equipment serve its oil and gas production activities. The following table summarizes these
properties and equipment, together with their estimated useful lives:
|
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
|
|
Tank
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
|
Vehicles
|
|
|
69,446
|
|
|
|
69,446
|
|
|
Uinta
Basin facilities
|
|
|
184,887
|
|
|
|
186,428
|
|
|
Sweetwater
facilities
|
|
|
14,177
|
|
|
|
—
|
|
|
Accumulated
depreciation
|
|
|
(3,954
|
)
|
|
|
(1,717
|
)
|
|
Construction
in progress (1)
|
|
|
-
|
|
|
|
-
|
|
|
Total
support facilities and equipment, net
|
|
$
|
294,556
|
|
|
$
|
284,157
|
|
|
(1)
|
Facilities
constructed in conjunction with drilling for our two exploratory horizontal wells in Uintah County, Utah, not subject to depreciation.
During the months ended June 30, 2019, construction-in-progress was reclassified to Uinta Basin facilities and became eligible
for depreciation upon the completion of the construction.
|
The
Company recognized depreciation expense of $2,237 and $354 during the six months ended June 30, 2019 and 2018, respectively.
Office
Furniture, Equipment, and Other
As
of June 30, 2019 and December 31, 2018, office furniture, equipment, and other consisted of the following:
|
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
|
Computer
equipment and fixtures
|
|
$
|
22,453
|
|
|
$
|
22,453
|
|
|
Accumulated
depreciation
|
|
|
(19,828
|
)
|
|
|
(16,116
|
)
|
|
Office
furniture, equipment, and other, net
|
|
$
|
2,625
|
|
|
$
|
6,337
|
|
During
the six months ended June 30, 2019 and 2018, we recorded depreciation expense of $3,711 and $3,711, respectively.
Note
5 – Asset Retirement Obligation
The
following table provides a reconciliation of the changes in the estimated present value of asset retirement obligations for the
six months ended June 30, 2019 and December 31, 2018.
|
|
|
For
the period ended
|
|
|
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
|
|
Beginning
asset retirement obligations
|
|
$
|
340,117
|
|
|
$
|
303,327
|
|
|
Liabilities
established
|
|
|
222,194
|
|
|
|
23,709
|
|
|
Accretion
expense
|
|
|
20,626
|
|
|
|
13,081
|
|
|
Ending
asset retirement obligations
|
|
$
|
582,937
|
|
|
$
|
340,117
|
|
Accretion
expense for the six months ended June 30, 2019 and 2018 was $7,546 and $6,067, respectively.
Note
6 – Notes Payable
A
summary of the outstanding amounts of our notes payable as of June 30, 2019 and December 31, 2018 is as follows:
|
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
|
13.5%
unsecured note payable due September 8, 2017 (1)
|
|
$
|
1,050,000
|
|
|
$
|
1,050,000
|
|
|
0%
unsecured note payable due January 2, 2018 (2)
|
|
|
250,000
|
|
|
|
250,000
|
|
|
12% unsecured
note payable June 30, 2019 (3)
|
|
|
120,629
|
|
|
|
120,629
|
|
|
0%
unsecured note payable due August 6, 2018 (4)
|
|
|
38,000
|
|
|
|
38,000
|
|
|
9%
unsecured note payable due December 15, 2018(5)
|
|
|
100,000
|
|
|
|
100,000
|
|
|
8%
unsecured note payable due October 22, 2018(6)
|
|
|
50,000
|
|
|
|
50,000
|
|
|
15%
unsecured note payable due February 5, 2020(7)
|
|
|
209,525
|
|
|
|
—
|
|
|
Less:
unamortized discount
|
|
|
(25,203
|
)
|
|
|
(12,932
|
)
|
|
Total
debt
|
|
$
|
1,792,951
|
|
|
$
|
1,595,697
|
|
|
Less:
current maturities
|
|
|
1,792,951
|
|
|
|
1,595,697
|
|
|
Long-term
debt, net of current maturities
|
|
$
|
-
|
|
|
$
|
-
|
|
At
June 30, 2019, the principal amounts due under our debt agreements were all classified as current on our Consolidated Balance
Sheets.
|
(1)
|
Effective
August 9, 2017, Foothills borrowed $1,050,000 from Profit Well Limited, a Hong Kong limited liability company. The Company
executed a Bridge Note with an annual percentage interest rate of 13.5% and a maturity date of September 8, 2017. Proceeds
of this Bridge Note were primarily used to repay Full Wealth for the debenture dated June 1, 2017. On November 3, 2017, Profit
Well Limited agreed to defer repayment of this note to a later date and acknowledged that the Company is not in default regarding
this Debenture. Profit Well Limited also reaffirmed its belief that the Company will either extend or repay the obligation
to the satisfaction of Profit Well. As partial consideration for the deferment, the Company agreed to issue Profit Well Limited
100,000 shares of its restricted common stock, valued at $48,000. The issuance of the shares in exchange for the maturity
extension was treated as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications
and Extinguishments” (“ASC 470-50”). On February 28, 2018, Profit Well and the Company agreed to extend
the maturity date of the debenture to June 30, 2018, and as consideration for the extension, the Company agreed to compensate
Profit Well with 200,000 shares of restricted common stock valued at $46,700. The issuance of the shares in exchange for the
maturity extension was treated as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt –
Modifications and Extinguishments” (“ASC 470-50”). In addition, the parties agreed that if payment of said
principal and interest due and payable is made late, then a penalty payment of $100,000 shall become due and payable to Profit
Well by the Company. On June 30, 2018, we recorded $100,000 penalty as additional interest payable. The penalty payment was
treated as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments”
(“ASC 470-50”). On July 29, 2018, Profit Well Limited agreed to defer repayment of this note to a later date and
acknowledged that the Company is not in default regarding this Debenture, and as consideration for the extension, the Company
agreed to compensate Profit Well with 100,000 shares of restricted common stock valued at $12,000. The issuance of the shares
in exchange for the maturity extension was treated as a modification of existing debt pursuant to the guidance of ASC 470-50
“Debt – Modifications and Extinguishments” (“ASC 470-50”).
|
|
(2)
|
On
September 29, 2017, the Company issued to an unaffiliated investor a promissory note and three tranches of warrants for an
aggregate consideration of $250,000. The Note recites that it accrues no interest if paid when due and is due and payable
on January 2, 2018. If principal is not paid on or before maturity, interest will accrue at the rate of 15% per year until
paid. On November 6, 2017, the Company agreed to compensate the investor with 75,000 shares of the Company’s restricted
common stock in connection with a more favorable term of a note entered into with FirstFire Global Opportunities Fund, LLC
(“FirstFire”). On December 30, 2017, the Company and the investor agreed to extend the maturity date of this Note
to January 23, 2018, in return for a payment at maturity of the principal, accrued interest as provided in the Note, plus
30,000 shares of the Company’s restricted common stock. Because the fair value of the shares was greater than 10% of
the present value of the remaining cash flows under the Note, the issuance of the shares in connection with a more favorable
term of a note entered with FirstFire was treated as a debt extinguishment and reissuance of a new debt instrument pursuant
to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”).
|
Since
January 23, 2018, the Company and the investor have been in ongoing discussions to extend the term of this Note. On March 28,
2018, the investor acknowledged that the Company is not in default regarding this Note and reaffirmed its belief that the Company
will either extend the Note’s due date or repay its obligation on terms that are mutually satisfactory. The warrants have
the following terms:
|
●
|
375,000
warrants to purchase 375,000 shares of common stock of the Company at a strike price of $0.665 per share expiring on September
29, 2019;
|
|
|
|
|
●
|
375,000
warrants to purchase 375,000 shares of common stock of the Company at a strike price of $1.25 per share expiring on September
29, 2020; and
|
|
|
|
|
●
|
185,000
warrants to purchase 185,000 shares of common stock of the Company at a strike price of $2.00 per share expiring on September
29, 2020.
|
The
aggregate relative fair value of three tranches of warrants was determined to be $105,000 on September 29, 2017, using the Black-Scholes
option-pricing model based on the following assumptions: (i) volatility rate of 94%, (ii) discount rate of 0%, (iii) zero expected
dividend yield, and (iv) expected life of 2-3 years. $2,536 imputed interest was recorded as debt discount. $2,536 was determined
using the present value method based on the following assumptions: (i) adjusted interest rate 4% (ii) expected life of 0.26 year.
The aggregate value of the warrants and imputed interest of $107,536 was considered as debt discount upon issuance and will be
amortized as interest over the term of the Note or in full upon the conversion of the Note. At June 30, 2019, $250,000 of principal
was outstanding under the Note.
Each
tranche of warrants is subject to down round adjustment provisions if the Company during the term of that tranche issues additional
securities for consideration per share, after giving effect to fees, commission and expenses, that is less, or which on conversion
or exercise of the underlying security is less, than $0.665 per share (as adjusted for any change resulting from forward or reverse
splits, stock dividends and similar events).
To
satisfy most favored nation provisions in previously entered securities purchase agreements that are triggered by the transaction
described above, the Company issued 136,015 shares of common stock and warrants to purchase 136,015 shares of common stock, in
the aggregate, to certain investors who purchased units from the Company, at a $1.00 per unit, with each unit consisting of one
share and one warrant. See the Company’s Current Report on the Form 8-K filed with the SEC on June 5, 2017. Of this amount,
100,752 shares and warrants to purchase 100,752 shares of common stock will be issued to Wilshire Energy Partners LLC, an entity
controlled by Kevin J. Sylla, our Executive Chairman and Chief Executive Officer of FPI. The exercise price of these investor
warrants was adjusted to $0.665 per share. We measured the value of the effect of the down round feature as the difference between
the fair value of the financial instrument at an original exercise price of $1.50 and an adjusted exercise price of $0.665 and,
as a result, $59,801 was recorded as down round feature as interest expense under ASC 260-10-30-1. Foothills determined the amount
of $59,801 using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 94%, (ii) discount
rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 3 years.
|
(3)
|
A
promissory note was issued on November 1, 2017, for services rendered, bearing an interest rate of 12% per annum and with
a maturity date of June 30, 2018. On August 22, 2018, the Note Holder agreed to defer repayment of this note to a later date
and acknowledged that the Company is not in default regarding this Debenture. As partial consideration for the deferment,
the Company agreed to issue the Note Holder 60,000 shares of its restricted common stock. The issuance of the shares in exchange
for the maturity extension was treated as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt
– Modifications and Extinguishments” (“ASC 470-50”).
|
|
|
|
|
(4)
|
On
July 19, 2018, the Company borrowed $38,000 from an unaffiliated investor with an original discount of $3,207. The Note recites
that it accrues no interest if paid when due and is due and payable on August 6, 2018. If principal is not paid on or before
maturity, interest will accrue at the rate of 10% per year until paid. In connection with the issuance of this note, the Company
issued 300,000 shares for late SEC filing, valued at $36,000. $74 imputed interest was recorded as debt discount. $74 was
determined using the present value method based on the following assumptions: (i) adjusted interest rate 4% (ii) expected
life of 0.05 year. The relative aggregate value of the shares and imputed interest was determined to be $32,793 using the
allocation of proceed, $32,793 was considered as debt discount upon issuance and will be amortized as interest over the term
of the Note or in full upon the conversion of the Note. Pursuant to this Note, the investor shall be assigned an undivided
two percent (2%) overriding royalty of all oil, gas, and other minerals and hydrocarbons produced, saved, and sold from each
well now or hereinafter located on certain leases and wells owned by the Company. On August 23, 2018, the lender agreed to
defer repayment of this note to a later date and acknowledged that the Company is not in default regarding this Debenture,
and as consideration for the extension, the Company agreed to compensate the lender with 15,000 shares of restricted common
stock valued at $1,950. The issuance of the shares in exchange for the maturity extension was treated as a modification of
existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC
470-50”). At June 30, 2019, $38,000 of principal was outstanding under the Note.
|
|
|
|
|
(5)
|
On
September 14, 2018, the Company borrowed $100,000 from an unaffiliated investor, bearing an interest rate of 9% per annum
and with a maturity date of December 15, 2018. In connection with the issuance of this note, the Company issued 250,000 shares
of its common stock, valued at $22,500, which was considered as debt discount upon issuance and will be amortized as interest
over the term of the Note or in full upon the conversion of the Note. At June 30, 2019, $100,000 of principal was outstanding
under the Note.
|
|
|
|
|
(6)
|
On
October 22, 2018, the Company issued a term sheet to an unaffiliated investor for a promissory note in the principal amount
of $50,000 with a Volumetric Production Payment (“VPP”) equal to 1,250 barrels of oil equivalent (“BOE”).
The Note has a maturity date of October 22, 2019, with the Principal and accrued unpaid interest due in full at Maturity.
VPP will be made after deduction of 20% royalties due to mineral owners, paid within the term on the Note and at the discretion
of the Company as to amount and volume; provided, however, that the VPP for any month shall not be less than 5% of
the month’s total crude oil sales. Payment may be made “in-kind” at the election of the Investor. If election
is made by Investor to be paid “in-kind,” then Investor shall bear responsibility for paying mineral owner royalties
due on said “in-kind” payments. All VPP’s to be made from the production of the Company’s operating
subsidiaries, Foothills Exploration Operating, Inc. and Tiger Energy Operating, LLC, from the well bores of the Company’s
Duck Creek wells, subject to the terms of the Leases covering such wells. Such VPP will continue until paid in full, regardless
of payment in full of the Note and shall be secured by the assets. In the event that the West Texas Intermediate (WTI) crude
oil market price closes below USD $40.00 per barrel for 10 consecutive trading days, the Investor shall be allocated a revised
VPP equal to 2 times the remaining VPP barrels left over at that time.
|
|
|
Pursuant
to this Note, the investor shall be assigned an un undivided one-half percent (0.5%)
overriding royalty interest (“ORRI”) in all oil, gas and other minerals produced,
saved, and marketed from each well now or hereinafter located on wells owned by the Company,
subject to the terms of the Leases covering such wells. Upon any default in payment of
principal hereunder, the Company shall pay interest on the principal balance of this
Note then outstanding and on the accrued but unpaid interest from the date of such default
until such default is cured and the Note paid in full at the rate of Fifteen Percent
(15%). The Company agreed to issue the investor 200,000 shares of the Company’s
restricted common stock as additional consideration for entering into the Note with the
Company, valued at $16,000, which was considered as debt discount upon issuance and will
be amortized as interest over the term of the Note or in full upon the conversion of
the Note.
Pursuant
to this Note, Investor has the right to participate in any future offering by the Company for a period of twelve (12)
months for an amount equal to the principal amount detailed in this Term Sheet. So long as the Note is outstanding, if
the Company enters into a subsequent financing with another individual or entity (a third party) on terms that are more
favorable to that third party, the agreements between the Company and the investor shall be amended to include such better
terms. During the six months ended June 30, 2019, the Company amortized $7,935 of such discount to interest expense. At
June 30, 2019, unamortized debt discount was $4,997 and $50,000 of principal was outstanding under the Note.
|
|
|
|
|
(7)
|
On
February 5, 2019, the Company borrowed $209,525 from an unaffiliated investor with an original discount of $33,524. The Note
has a maturity date of February 5, 2020 and bears 10% interest. The Company failed to pay $71,000 principal payment, which
was due on March 15, 2019. As the result, we incurred $100,000 penalty and interest were increased to 15%. As of June 30,
2019, $209,525 of principal was outstanding under the Note.
|
During
the six months ended June 30, 2019 and 2018, respectively, we incurred $227,168 and $226,435 of interest expense, including amortization
of discount of $21,253 and $2,264 and shares issued for extension of $0 and $46,700 and penalty of $100,000 and $100,000, respectively.
Note
7 – Notes Payable - Related Party
|
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
|
13.25%
unsecured note payable due May 5, 2017 (1)
|
|
$
|
1,250,000
|
|
|
$
|
1,250,000
|
|
|
10%
unsecured note payable due December 31, 2018 (2)
|
|
|
6,000,000
|
|
|
|
6,000,000
|
|
|
Less:
unamortized discount of imputed interest of 4% (2)
|
|
|
-
|
|
|
|
-
|
|
|
Total
debt
|
|
|
7,250,000
|
|
|
|
7,250,000
|
|
|
Less:
current maturities
|
|
|
7,250,000
|
|
|
|
7,250,000
|
|
|
Long-term
debt, net of current maturities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(1)
|
Effective
January 5, 2017, Foothills borrowed $1,250,000 from Berwin Trading Limited that, due to its 20% beneficial ownership in the
Company, is a related party. This note called for interest at 9% per annum; but because it was not paid when due interest
was to have accrued at a default rate of 11% from the due date of the note. The Company used net proceeds of this loan to
satisfy certain obligations under a Purchase and Sale Agreement with Total Belief Limited, dated December 30, 2016, for general
working capital and to support certain target drilling activities.
|
|
|
|
|
|
On
May 4, 2017, the Company and Berwin agreed to extend the maturity date of the debenture to June 20, 2017, in return for an
annual interest rate increase from 9% to 13.5% per annum for the life of the debenture. On November 3, 2017, Berwin agreed
to defer repayment of this note to a later date and acknowledged that the Company is not in default regarding this Debenture.
As partial consideration for the deferment, the Company issued Berwin 100,000 shares of its restricted common stock, valued
at $48,000. The issuance of the shares in exchange for the maturity extension was treated as a modification of existing debt
pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”).
On February 28, 2018, Berwin and the Company agreed to extend the maturity date of the debenture to June 30, 2018, and as
consideration for the extension, the Company agreed to compensate Berwin with 250,000 shares of restricted common stock valued
at $58,375. The issuance of the shares in exchange for the maturity extension was treated as a modification of existing debt
pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”).
In addition, the parties agreed that if payment of said principal and interest due and payable is made late, then a penalty
payment of $125,000 shall become due and payable to Berwin by the Company. On June 30, 2018, we recorded $125,000 penalty
as additional interest payable. The penalty payment was treated as a modification of existing debt pursuant to the guidance
of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”). The Company and Berwin
are in ongoing discussions to extend the term of this Note and the Company believes it will either extend, rework or repay
the obligation to the satisfaction of Berwin. On July 29, 2018, Berwin agreed to defer repayment of this note to a later date
and acknowledged that the Company is not in default regarding this Debenture, and as consideration for the extension, the
Company agreed to compensate Berwin with 100,000 shares of restricted common stock valued at $12,000. The issuance of the
shares in exchange for the maturity extension was treated as a modification of existing debt pursuant to the guidance of ASC
470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”).
|
|
(2)
|
On
December 30, 2016, in connection with the TBL acquisition, Foothills entered into a promissory note in the amount of $6,000,000.
This note bears no interest during its term. The Company calculated and recorded $342,804 of imputed interest as debt discount.
Starting from July 1, 2018, the note bears 10% annual interest.
|
During
the six months ended June 30, 2019 and 2018, respectively, we incurred $383,797 and $381,324 of interest expense, including amortization
of discount of $0 and $114,268 and shares issued for extension of $0 and $58,375, respectively.
Note
8 – Convertible Note Payable
|
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
|
10%
convertible note payable due May 10, 2018 (1)
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
13.5%
convertible note payable due February 11, 2020 (2)
|
|
|
44,000
|
|
|
|
44,000
|
|
|
12%
convertible note payable due May 1, 2019 (3)
|
|
|
85,000
|
|
|
|
380,000
|
|
|
12%
convertible note payable due December 6, 2019 (4)
|
|
|
45,500
|
|
|
|
45,000
|
|
|
10%
convertible note payable due September 19, 2019 (5)
|
|
|
64,130
|
|
|
|
58,300
|
|
|
10%
convertible note payable due September 1, 2019 (6)
|
|
|
625,882
|
|
|
|
-
|
|
|
12%
convertible note payable due September 6, 2019 (7)
|
|
|
380,000
|
|
|
|
-
|
|
|
10%
convertible note payable due December 19, 2019 (8)
|
|
|
52,250
|
|
|
|
-
|
|
|
12%
convertible note payable due March 20, 2020 (9)
|
|
|
40,018
|
|
|
|
-
|
|
|
12%
convertible note payable due May 15, 2020 (10)
|
|
|
131,250
|
|
|
|
-
|
|
|
10%
convertible note payable due May 29, 2020 (11)
|
|
|
57,000
|
|
|
|
-
|
|
|
12%
convertible note payable due May 31, 2020 (12)
|
|
|
86,625
|
|
|
|
-
|
|
|
10%
convertible note payable due May 31, 2020 (13)
|
|
|
60,000
|
|
|
|
-
|
|
|
8%
convertible note payable due June 4, 2020 (14)
|
|
|
46,200
|
|
|
|
-
|
|
|
12%
convertible note payable due June 19, 2020 (15)
|
|
|
113,000
|
|
|
|
-
|
|
|
Less:
unamortized debt discount on convertible notes
|
|
|
(899,442
|
)
|
|
|
(363,265
|
)
|
|
Total
debt
|
|
|
981,413
|
|
|
|
214,535
|
|
|
Less:
current maturities
|
|
|
981,413
|
|
|
|
181,637
|
|
|
Long-term
debt, net of current maturities
|
|
$
|
-
|
|
|
$
|
32,898
|
|
|
(1)
|
On
May 10, 2017, we entered into a convertible note agreement with an unrelated party, pursuant to which we borrowed $50,000
at an annual percentage rate of 10% with a term of 12 months, which is due on May 10, 2018. This note may, at the option of
the lender, be converted at any time prior to May 10, 2018, into fully-paid, restricted and non-assessable shares of common
stock of the Company at a price equal to 100% of the selling price of such common stock in a private placement to institutional
and/or accredited investors initiated by the Company during the term of this convertible note until May 10, 2018. On November
7, 2017, the Company issued 50,000 warrants to purchase 50,000 shares of common stock of the Company at a strike price of
$1.00 per share expiring on May 7, 2019. If the Company fails to pay the principal and accrued unpaid interest due and payable
to Lender on or before the due date of the convertible note, then the Lender shall be provided the right to convert at either
$0.665 per share or upon the same terms offered in FirstFire Global Opportunities Fund, LLC Note’s conversion options.
The relative fair value of warrant was determined to be $3,381 on November 7, 2017, using the Black-Scholes option-pricing
model based on the following assumptions: (i) volatility rate of 77%, (ii) discount rate of 0%, (iii) zero expected dividend
yield, and (iv) expected life of 1.5 years. The issuance of the warrants in exchange for the maturity extension was treated
as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments”
(“ASC 470-50”). On September 17, 2018, the note holder agreed to defer repayment of this note to December 15,
2018, the Company agreed to compensate the note holder with 50,000 shares of restricted common stock valued at $4,500. On
April 4, 2019, note holder confirmed that the Company is not in default with respect to this note. The issuance of the shares
in exchange for the maturity extension was treated as a modification of existing debt pursuant to the guidance of ASC 470-50
“Debt – Modifications and Extinguishments” (“ASC 470-50”).
|
|
|
|
|
(2)
|
On
August 11, 2018, the Company borrowed $44,000 from an unaffiliated investor, bearing an interest rate of 12.5% per annum and
with a maturity date of February 11, 2020. As part of this transaction the Company also issued (i) warrants having a 24-month
term, to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.665 per share and (ii) 44,000
shares of the Company’s restricted common stock. The Note agreements give the lender the right to convert the loan amounts
due into common stock at a fixed conversion price of $0.20. The aggregate relative fair value of the warrant was determined
to be $9,035 on August 11, 2018, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility
rate of 221%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 2 year. Fair value of
44,000 shares of common stock was determined to be $5,280 using market price. The aggregate value of the warrant and 44,000
shares of common stock of $14,315 was considered as debt discount upon issuance and is being amortized to interest expense
over the term of the Note or in full upon the conversion of the Note. During the six months ended June 30, 2019, the Company
amortized the $5,209 of such discount to interest expense. At June 30, 2019, unamortized debt discount was $5,893 and $44,000
of principal was outstanding under the Note.
|
|
(3)
|
On
November 1, 2018, the Company entered into a loan transaction with an unaffiliated investor
(“Holder”), which funded and closed on November 5, 2018. The Company issued
the lender a convertible promissory note (“Note”) dated November 1, 2018,
in the principal amount of $380,000 with an original issue discount of 10% and received
proceeds of $342,000, before giving effect to certain transactional costs including legal
fees on November 5, 2018. As part of this transaction the Company also issued (i) 650,000
shares of the Company’s restricted common stock and two tranches of warrants :
(ii) tranche 1 are warrants having a 5-year term to purchase 687,500 shares of the Company’s
restricted common stock at an exercise price of $0.20 per share with cashless exercise
option and (ii) tranche 2 are warrants having a 5-year term to purchase 2,062,500 shares
of the Company’s restricted common stock at an exercise price of $0.20 per share
with cashless exercise option. Tranche 2 warrants may be redeemed by the Company for
$20,000 (“Call Payment”) beginning on the date of issuance, November 1, 2018,
and ending on the date which is 180 calendar days following the issuance date (the “Call”).
If Company exercises the Call, then the Company shall make the Call Payment to the Holder
within five business days of the date that the Company exercises the Call. If the Call
Payment is not made within the required time frame, then the Company will lose its right
to exercise the Call for the tranche 2 warrants.
The
Note accrues interest at 12% per year, and is due and payable on May 1, 2019 (“Maturity Date”). The Company
may prepay the Note without prepayment penalty if prepaid during the first 180 days following issuance date. No prepayment
is permitted after the initial 180 days from issuance. The Note agreements give the lender the right to convert the loan
amounts due into common stock at a conversion price equal to the lesser of (i) 50% multiplied by the lowest trading price
during the previous twenty (20) trading day period ending on the latest complete trading day prior to the date of this
Note and (ii) 50% multiplied by the during the twenty (20) trading day period ending on the latest complete trading day
prior to the conversion date.
The aggregate relative fair value of the warrant was determined to be $89,908 on November 1, 2018, using the
Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 226%, (ii) discount rate of 0%, (iii)
zero expected dividend yield, and (iv) expected life of 5.0 year. Fair value of 650,000 shares of common stock was determined to
be $53,300 using allocation of proceeds. The Company accounted for the conversion feature, which was recorded as a derivative valued
at $558,923, of which $364,131 was expensed immediately to interest expense. $194,792 was determined using the Black-Scholes option-pricing
model based on the following assumptions: (i) volatility rate of 226%, (ii) discount rate of 0%, (iii) zero expected dividend yield,
and (iv) expected life of 0.50 year. The aggregate value of the original debt discount, warrant, conversion feature and 650,000
shares of common stock of $380,000 was considered as debt discount upon issuance and is being amortized to interest expense over
the term of the Note or in full upon the conversion of the Note. During the six months ended June 30, 2018, we paid $295,000. As
of June 30, 2019, $85,000 in principal was outstanding under this Note.
|
|
(4)
|
On
December 6, 2018, Foothills Exploration, Inc. (the “Company”), entered into
a convertible loan transaction with an unaffiliated investor (“Holder”) in
the principal amount of $136,500 (the “Note”). The Note is divided into three
tranches, the first tranche of which, in the face amount of $45,500, funded and closed
on December 7, 2018, before giving effect to certain transactional costs including legal
fees yielding a net of $41,500. The Note carries an original issue discount of $12,000
(the “OID”) prorated to each tranche, to cover the Holder’s accounting
fees, due diligence fees, monitoring, and/or other transactional costs incurred in connection
with the negotiation, purchase and sale of the Note, which is included in the principal
balance of this Note.
For
each tranche funded under the Note, the Company agreed to issue warrants having a 5-year term to purchase up to 227,500
shares of the Company’s restricted common stock at an exercise price of $0.20 per share with a cashless exercise
option. The warrants are subject to adjustment in certain events such as forward or reverse stock splits or if subsequent
financings are at terms that are more favorable to persons in subsequent issuances of securities.
The
Note agreements give the Holder, after the 180th calendar day after the issue date, the right to convert all
or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of this Note due into fully
paid and non-assessable shares of Common Stock at 50% multiplied by the lowest trading Price for the Common Stock during
the twenty (20) Trading Day period prior to the Conversion Date.
Each
tranche of the Note funded accrues interest at 12% per year. The maturity date for each tranche funded shall be twelve
(12) months from the effective date of each payment (each a “Maturity Date”), and is the date upon which the
principal sum of each respective tranche, as well as any accrued and unpaid interest and other fees relating to that respective
tranche, shall be due and payable. This Company may prepay any amount outstanding under each tranche of this Note, during
the initial 60 calendar day period after the issuance of the respective tranche of this Note, by making a payment to the
Holder of an amount in cash equal to 125% multiplied the amount that the Company is prepaying Notwithstanding anything
to the contrary contained in this Note, the Company may prepay any amount outstanding under each tranche of this Note,
during the 61st through 120 calendar day period after the issuance of the respective tranche of this Note,
by making a payment to the Holder of an amount in cash equal to 135% multiplied the amount that the Company is prepaying.
Notwithstanding anything to the contrary contained in this Note, the Company may prepay any amount outstanding under each
tranche of this Note, during the 121st through 180 calendar day period after the issuance of the respective
tranche of this Note, by making a payment to the Holder of an amount in cash equal to 145% multiplied the amount that
the Company is prepaying.
|
|
|
The
Company may not prepay any amount outstanding under each tranche of this Note after the
180th calendar day after the issuance of the respective tranche of this Note.
Any amount of principal or interest due pursuant to this Note, which is not paid by the
Maturity Date, shall bear interest at the rate of the lesser of (i) fifteen percent (15%)
per annum or (ii) the maximum amount permitted by law from the due date thereof until
the same is paid (“Default Interest”). Interest shall commence accruing on
the date that each tranche of the Note is fully paid and shall be computed on the basis
of a 365-day year and the actual number of days elapsed. Net proceeds obtained in this
transaction will be used for general corporate and working capital purposes. No assurance
can be given that any other tranche of the Note will be funded or that any amount due
there under will be prepaid. No broker-dealer or placement agent was retained or involved
in this transaction.
The aggregate relative fair value of the warrant was determined to be $7,880 on December 6, 2018, using the
Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 225%, (ii) discount rate of 0%, (iii)
zero expected dividend yield, and (iv) expected life of 5.0 year. The Company accounted for the conversion feature, which was recorded
as a derivative valued at $74,970, of which $42,850 was expensed immediately to interest expense. $74,970 was determined using
the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 225%, (ii) discount rate of 0%,
(iii) zero expected dividend yield, and (iv) expected life of 1.00 year. The aggregate value of the original debt discount, warrant
and conversion feature of $45,500 was considered as debt discount upon issuance and is being amortized to interest expense over
the term of the Note or in full upon the conversion of the Note. On June 5, 2019, we paid an additional $5,000 for an extension
and in exchange the Holder agreed not to convert the Note into common stock until July 6, 2019. The $5,000 paid
in exchange for not converting was treated as a modification of existing debt pursuant to the guidance of ASC 470-50 “Debt
– Modifications and Extinguishments” (“ASC 470-50”). As of June 30, 2019, $45,500 in principal was outstanding
under this Note.
|
|
|
|
|
(5)
|
On
December 19, 2018, Foothills Exploration, Inc. (the “Company”), entered into
a convertible loan transaction with an unaffiliated investor (“Holder”) in
the principal amount of $58,300 (the “Note”), which funded and closed on
December 21, 2018, before giving effect to certain transactional costs including legal
fees yielding a net of $53,000. The Note carries an original issue discount of $5,300
(the “OID”), to cover the Holder’s accounting fees, due diligence fees,
monitoring, and/or other transactional costs incurred in connection with the negotiation,
purchase and sale of the Note, which is included in the principal balance of this Note.
The Note agreements give the Holder, after the 180th calendar day after the issue date, the right
to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of this Note due into
fully paid and non-assessable shares of Common Stock at the Conversion Price, which is equal the lesser of (i) 60% multiplied by
the lowest trading price during the previous twenty-five (25) trading days before the issue date of this Note or (ii) 60% multiplied
by the lowest trading price for the common stock during the twenty-five (25) trading day period ending on the latest complete trading
day prior to the conversion date.
The Note accrues interest
at 10% per year. The maturity date for the Note is September 19, 2019 (“Maturity Date”), and is the date upon which
the principal sum, as well as any accrued and unpaid interest, shall be due and payable. This Company may prepay any amount outstanding
under this Note, during the initial 60 calendar day period after the issuance of this Note, by making a payment to the Holder of
an amount in cash equal to 125% multiplied the amount that the Company is prepaying. Notwithstanding anything to the contrary contained
in this Note, the Company may prepay any amount outstanding under each tranche of this Note, during the 61st through
120th calendar day period after the issuance of the respective tranche of this Note, by making a payment to the Holder
of an amount in cash equal to 135% multiplied the amount that the Company is prepaying. Notwithstanding anything to the contrary
contained in this Note, the Company may prepay any amount outstanding under each tranche of this Note, during the 121st through
180th calendar day period after the issuance of the respective tranche of this Note, by making a payment to the Holder
of an amount in cash equal to 140% multiplied the amount that the Company is prepaying.
The Company may not prepay any amount outstanding
under each tranche of this Note after the 180th calendar day after the issuance of the respective tranche of this Note. Any amount
of principal or interest due pursuant to this Note, which is not paid by the Maturity Date, shall bear interest at the rate of
the lesser of (i) eighteen percent (18%) per annum or (ii) the maximum amount permitted by law from the due date thereof until
the same is paid (“Default Interest”). Interest shall commence accruing on the date that each tranche of the Note is
fully paid and shall be computed on the basis of a 360-day year and the actual number of days elapsed. Net proceeds obtained in
this transaction will be used for general corporate and working capital purposes. No broker-dealer or placement agent was retained
or involved in this transaction.
The Company accounted for the conversion feature, which was recorded as a derivative valued at $102,942, of
which $52,942 was expensed immediately to interest expense. $102,942 was determined using the Black-Scholes option-pricing model
based on the following assumptions: (i) volatility rate of 228%, (ii) discount rate of 0%, (iii) zero expected dividend yield,
and (iv) expected life of 0.75 year. The fair value of the conversion feature of $50,000 was considered as debt discount upon issuance
and is being amortized to interest expense over the term of the Note or in full upon the conversion of the Note. On June 24, 2019,
we increased the principal balance by 10% in the amount of $5,830 and in exchange the noteholder agreed not to convert the Note
into common stock until July 21, 2019. The $5,830 in
exchange for not converting was treated as an extinguishment of existing debt pursuant to the guidance of ASC 470-50 “Debt
– Modifications and Extinguishments” (“ASC 470-50”). As of June 30, 2019, $64,130 was outstanding under
this Note.
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|
(6)
|
On March 4, 2019,
the Company closed on a loan transaction with FirstFire Global Opportunities Fund, LLC, (“FirstFire”) pursuant to which
the Company issued FirstFire a senior secured convertible promissory note (“FirstFire Note”) in the principal amount
of $705,882, and received proceeds of $592,500, with original discount of $113,382. As part of this transaction the Company issued
(i) warrants having an 18-month term, to purchase 1,125,000 shares of the Company’s common stock at an exercise price of
$0.50 per share, with a cashless exercise feature. The exercise price subject to adjustment if the Company at any time while this
Warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose
of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any common stock or securities
entitling any person or entity to acquire shares of Common Stock (upon conversion, exercise or otherwise) (including but not limited
to under the FirstFire Note), at an effective price per share less than the then Exercise Price. The exercise price shall be reduced
to equal the effective price, and the number of warrant shares issuable hereunder shall be calculated by the original total number
of warrant shares multiplied by the initial exercise price divided by the effective price. As the result, the exercise price of
the warrants was reset to the lesser of (i) $0.50 or (ii) 50% multiplied by the lowest trading price during the previous twenty
(20) trading days prior to the exercise price upon issuance.
The FirstFire Note
accrues interest of 10% per annum, and matures on September 1, 2019, which is the date upon which the principal sum, the original
issue discount, as well as any accrued and unpaid interest and other fees, shall be due and payable. The Company agreed to make
payments of $20,000 per month pursuant to a cash management agreement as described in the note agreements. The FirstFire Note is
collateralized by the GRB Assets, which principally are being acquired by the Company with the net proceeds of this Note.
FirstFire has the
right to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of this Note due
into fully paid and non-assessable shares of common stock at the conversion price which equal the lesser of (i) $0.50 or (ii) 50%
multiplied by the lowest trading price during the previous twenty (20) trading days prior to the conversion date.
The aggregate relative fair value of the warrant was determined to be $3,553,635 on March 4, 2019, using the
Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 248%, (ii) discount rate of 0%, (iii)
zero expected dividend yield, and (iv) expected life of 1.5 year. The fair value of the warrant of $273,735 was considered as debt
discount upon issuance and is being amortized to interest expense over the term of the FirstFire Note or in full upon the conversion
of the FirstFire Note. The conversion feature was recorded as a derivative valued at $4,135,070, of which $3,816,305 was expensed
immediately to interest expense. $4,135,070 was determined using the Black-Scholes option-pricing model based on the following
assumptions: (i) volatility rate of 248%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life
of 0.50 year. The fair value of the conversion feature of $318,765 was considered as debt discount upon issuance and is being amortized
to interest expense over the term of the FirstFire Note or in full upon the conversion of the FirstFire Note. During the six months
ended June 30, 2019, we paid $80,000 towards the principal of the FirstFire Note. As of June 30, 2019, $625,882 was outstanding
under the FirstFire Note.
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|
(7)
|
On March 6, 2019,
the Company closed on a loan transaction with Labrys Fund, L.P., a Delaware limited partnership, (“Labrys”), pursuant
to which, the Company issued a convertible promissory note dated March 6, 2019, in the principal amount of $380,000, with an original
issue discount of 10% and received proceeds of $338,000, with original discount of $42,000 including legal fees (the “Labrys
Note”). The Company utilized proceeds in part to pay (i) $110,000 to Labrys as partial repayment of a convertible promissory
note issued on November 1, 2018 and (ii) $40,000 to the Company’s auditor. As part of this transaction the Company also issued
Labrys warrants having a five-year term to purchase 608,000 shares of the Company’s restricted common stock, at an exercise
price of $0.50 per share, with a cashless exercise feature. The exercise price is subject to adjustment if the Company at any time
while this warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise
dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any common stock or securities
entitling any person or entity to acquire shares of common stock (upon conversion, exercise or otherwise) (including but not limited
to under the Labrys Note), at an effective price per share less than the then exercise price. The exercise price shall be reduced
to equal the effective price, and the number of warrant shares issuable hereunder shall be calculated by the original total number
of warrant shares multiplied by the initial exercise price divided by the effective price. As the result, the exercise price of
the warrants was reset to the lesser of (i) 50% multiplied by the lowest trading price during the previous twenty (20) trading
days prior to the issuance date or (ii) 50% multiplied by the lowest trading price during the previous twenty (20) trading days
prior to the conversion date.
The Labrys Note accrues
interest at 12% per year and is due and payable on September 6, 2019. The Company may prepay the Labrys Note without prepayment
penalty if prepaid during the first 180 days following issuance date. No prepayment is permitted after the initial 180 days from
issuance. The warrants are subject to adjustment in certain events such as forward or reverse stock splits or if subsequent financings
are at terms that are more favorable to persons in subsequent issuances of securities.
Labrys has the right to convert all or any part of the outstanding and unpaid principal amount and accrued
and unpaid interest of the Labrys Note due into fully paid and non-assessable shares of common stock at the conversion price which
equal the lesser of (i) 50% multiplied by the lowest trading price during the previous twenty (20) trading days prior to the issuance
date. (ii) 50% multiplied by the lowest trading price during the previous twenty (20) trading days prior to the conversion date.
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|
|
The aggregate relative fair value of the warrant was determined to be $2,306,364 on March 6, 2019, using the
Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 248%, (ii) discount rate of 0%, (iii)
zero expected dividend yield, and (iv) expected life of 5 years. The fair value of the warrant of $158,860 was considered as debt
discount upon issuance and is being amortized to interest expense over the term of the Note or in full upon the conversion of the
Note. The conversion feature was recorded as a derivative valued at $2,599,866, of which $179,140 was expensed immediately to interest
expense. $2,599,866 was determined using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility
rate of 248%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 0.50 year. The fair value
of the conversion feature of $179,140 was considered as debt discount upon issuance and is being amortized to interest expense
over the term of the Labrys Note or in full upon the conversion of the Labrys Note.
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|
|
|
|
(8)
|
On March 19, 2019,
the Company entered into a securities purchase agreement (the “JSC SPA”) with Jefferson Street Capital, LLC, an unaffiliated
investor (“JSC”), pursuant to which the Company issued and sold to JSC a convertible promissory note (the “JSC
Note”) in the principal amount of $52,250 (the “JSC Principal”). The foregoing transaction closed on March 28,
2019 and the Company received $40,000, with original discount of $12,250. As part of this transaction the Company also issued JSC
warrants having an 18-month term to purchase 83,078 shares of the Company’s restricted common stock, at an exercise price
of $0.50 per share, with a cashless exercise feature. The exercise price subject to adjustment if the Company at any time while
this warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose
of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any common stock or securities
entitling any person or entity to acquire shares of common stock (upon conversion, exercise or otherwise) (including but not limited
to under the JSC Note), at an effective price per share less than the then exercise price. The exercise price shall be reduced
to equal the effective price, and the number of warrant shares issuable hereunder shall be calculated by the original total number
of warrant shares multiplied by the initial exercise price divided by the effective price. As the result, the exercise price of
the warrants was reset to the lesser of (i) 60% multiplied by the lowest trading price during the previous twenty-five (25) trading
days before the issue date of the JSC Note or (ii) 60% multiplied by the market price.
The JSC Note accrues interest at 10% per year and carries an original issue discount of $4,750. The maturity
date for the JSC Note is December 19, 2019, at which time the JSC principal, and any accrued but unpaid interest, is due and payable.
JSC may convert after the 180th calendar day after the issue date of the JSC Note, all or any part of the outstanding
and unpaid principal amount and accrued and unpaid interest of the JSC Note due into shares of common stock of the Company at the
conversion price that is equal to the lesser of (i) 60% multiplied by the lowest trading price during the previous twenty-five
(25) trading days before the issue date of the JSC Note or (ii) 60% multiplied by the market price.
|
|
|
The aggregate relative fair value of the warrant was determined to be $296,143 on March 19, 2019, using the
Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 266%, (ii) discount rate of 0%, (iii)
zero expected dividend yield, and (iv) expected life of 1.5 year. The fair value of the warrant of $18,160 was considered as debt
discount upon issuance and is being amortized to interest expense over the term of the Note or in full upon the conversion of the
Note. The conversion feature was recorded as a derivative valued at $356,844, of which $335,004 was expensed immediately to interest
expense. $356,844 was determined using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility
rate of 266%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 0.75 year. The fair value
of the conversion feature of $21,840 was considered as debt discount upon issuance and is being amortized to interest expense over
the term of the JSC Note or in full upon the conversion of the JSC Note.
|
|
|
|
|
(9)
|
On March 20, 2019, the Company, entered into Amendment #1 to the Securities Purchase Agreement dated December
6, 2018, with Crown Bridge Partners, LLC, an unaffiliated investor (“Holder”) pursuant to which the Company closed
on March 28, 2019 a second tranche under the Note, dated December 6, 2017, with a face value of $40,018 (the “Second Tranche”
of the “Note”). The Company received $35,000 with original discount of $5,018 including legal fees. The Note carries
an original issue discount of $12,000 (the “OID”) to face value prorated to each tranche, to cover the Holder’s
transaction related costs incurred in connection with the negotiation, purchase and sale of the note. Each tranche of the note
funded accrues interest at a rate of 12% per year. The principal amount of each respective tranche, as well as any accrued and
unpaid interest and other fees relating to that respective tranche, is due and payable twelve (12) months from the date on which
each respective tranche is delivered to the Company. The Company may not prepay any amount outstanding under each tranche of this
Note after the 180th calendar day after the issuance of the respective tranche received pursuant to the Note. As part
of this transaction the Company also issued warrants having a 5 years term to purchase 80,036 shares of the Company’s restricted
common stock, at an exercise price of $0.50 per share, with a cashless exercise feature. The exercise price subject to adjustment
if the Company at any time while this warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any
right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition)
any common stock or securities entitling any person or entity to acquire shares of common ctock (upon conversion, exercise or otherwise)
(including but not limited to under the Note), at an effective price per share less than the then exercise price. The exercise
price shall be reduced to equal the effective price, and the number of warrant shares issuable hereunder shall be calculated by
the original total number of warrant shares multiplied by the initial exercise price divided by the effective price. As the result,
the exercise price of the warrants was reset to 50% multiplied by the lowest trading price during the previous twenty 20 trading
days prior to notice of conversion.
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|
|
The Holder may convert
all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of the Note due into shares of common
stock of the Company at the conversion price that is equal to 50% multiplied by the lowest trading price during the previous twenty
20 trading days prior to notice of conversion.
The aggregate relative fair value of the warrant was determined to be $106,534 on March 20, 2019, using the
Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 266%, (ii) discount rate of 0%, (iii)
zero expected dividend yield, and (iv) expected life of 5 years. The fair value of the warrant of $18,480 was considered as debt
discount upon issuance and is being amortized to interest expense over the term of the Note or in full upon the conversion of the
Note. The conversion feature was recorded as a derivative valued at $95,370, of which $78,850 was expensed immediately to interest
expense. $16,520 was determined using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility
rate of 266%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1 year. The fair value of
the conversion feature of $21,840 was considered as debt discount upon issuance and is being amortized to interest expense over
the term of the Note or in full upon the conversion of the Note.
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(10)
|
On May 15, 2019, the Company closed on a loan
transaction with Odyssey Capital Funding, LLC (“Odyssey”), pursuant to which the Company issued Odyssey a convertible
redeemable promissory note (“Odyssey Note”) in the principal amount of $131,250, and received proceeds of $125,000,
before giving effect to certain transactional costs. The Odyssey Note accrues interest of 12% per annum, and matures on May 15,
2020.
Odyssey is entitled, at its option, at any
time after the 180th daily anniversary of the Odyssey Note, to convert all or any amount of the principal face amount
of the Odyssey Note then outstanding into shares of the Company’s common stock at a price for each share of common stock
equal to 55% of the lowest trading price of the common stock for the twenty (20) prior trading days including the day upon which
a notice of conversion is received by the Company.
The conversion feature was recorded as a derivative valued at $230,389, of which $105,389 was expensed immediately
to interest expense. $230,389 was determined using the Black-Scholes option-pricing model based on the following assumptions: (i)
volatility rate of 254%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1 year. The fair
value of the conversion feature of $125,000 and original debt discount of $6,250 was considered as debt discount upon issuance
and is being amortized to interest expense over the term of the Odyssey Note or in full upon the conversion of the Odyssey Note.
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(11)
|
On May 29, 2019, the
Company closed on a convertible loan transaction with third party in the principal amount of $57,000, and received proceeds of
$55,000 with an original issue discount of $2,000 (the “Note”). The Note accrues interest of 10% per annum, and matures
on May 29, 2020.
The conversion feature
was recorded as a derivative valued at $88,261, of which $33,261 was expensed immediately to interest expense. $88,261 was determined
using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 253%, (ii) discount rate
of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1 year. The fair value of the conversion feature of $55,000
and original debt discount of $2,000 was considered as debt discount upon issuance and is being amortized to interest expense over
the term of the Note or in full upon the conversion of the Note.
The exercise price of this Note was adjusted to 75% of the conversion price of the GW Note dated May 31, 2019.
We measured the value of the effect of the down round feature as the difference between the fair value of the financial instrument
at an original exercise price and an adjusted exercise price and, as a result, $45,638 was recorded as down round feature as interest
expense under ASC 260-10-30-1. Foothills determined the amount of $45,638 using the Black-Scholes option-pricing model based on
the following assumptions: (i) volatility rate of 253%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv)
expected life of 3 years.
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(12)
|
On May 31, 2019, the
Company closed on a convertible loan transaction with GW Holdings Group, LLC (“GW”) in the principal amount of $86,625
with an original issue discount of $11,625, before giving effect to certain transactional costs including legal fees yielding a
net of $75,000 (the “Note”). The maturity date for this Note is May 31, 2020 (“Maturity Date”).
GW is entitled, at
its option, at any time after the 180th daily anniversary of the Note, to convert all or any amount of the principal
face amount of this Note then outstanding into shares of the Company’s common stock at a price equal to 50% of the lowest
trading price of the common stock for the twenty (20) prior trading days including the day upon which a notice of conversion is
received,
As part of this transaction
the Company also issued warrants having a five-year term to purchase 160,000 shares of the Company’s restricted common stock
at an exercise price of $0.50 per share with a cashless exercise feature.
The aggregate relative fair value of the warrants was determined to be $159,495 on May 31, 2019, using the
Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 253%, (ii) discount rate of 0%, (iii)
zero expected dividend yield, and (iv) expected life of 5 years. The fair value of the warrant of $38,775 was considered as debt
discount upon issuance and is being amortized to interest expense over the term of the Note or in full upon the conversion of the
Note. The conversion feature was recorded as a derivative valued at $148,885, of which $112,660 was expensed immediately to interest
expense. $148,885 was determined using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility
rate of 253%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1 year. The fair value of
the conversion feature of $36,225 was considered as debt discount upon issuance and is being amortized to interest expense over
the term of the Note or in full upon the conversion of the Note.
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(13)
|
On May 31, 2019, the
Company closed on a convertible loan transaction with third party in the principal amount of $60,000, and received proceeds of
$50,000 with an original issue discount of $10,000 (the “Note”). This Note accrues interest of 10% per annum, and matures
on May 31, 2020. This Note is convertible into shares of the Company’s common stock at a price equal to 55% of the lowest
trading price of the common stock for the twenty-five (25) prior trading days including the day upon which a notice of conversion
is received,
The conversion feature
was recorded as a derivative valued at $92,904, of which $42,904 was expensed immediately to interest expense. $92,904 was determined
using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 253%, (ii) discount rate
of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1 year. The fair value of the conversion feature of $50,000
and original debt discount of $10,000 was considered as debt discount upon issuance and is being amortized to interest expense
over the term of the Note or in full upon the conversion of the Note.
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(14)
|
On June 4, 2019, the
Company closed on a convertible loan transaction with third party in the principal amount of $46,200, and received proceeds of
$40,000 with an original issue discount of $6,200 (the “Note”). This Note accrues interest of 8% per annum, and matures
on June 4, 2020. This Note is convertible into shares of the Company’s common stock at a price equal to 60% of the lowest
trading price of the common stock for the twenty (20) prior trading days including the day upon which a notice of conversion is
received.
The conversion feature
was recorded as a derivative valued at $73,627, of which $33,627 was expensed immediately to interest expense. $73,627 was determined
using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 253%, (ii) discount rate
of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1 year. The fair value of the conversion feature of $40,000
and original debt discount of $6,200 was considered as debt discount upon issuance and is being amortized to interest expense over
the term of the Note or in full upon the conversion of the Note.
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(15)
|
On June 19, 2019,
the Company closed on a convertible loan transaction with an unaffiliated lending entity (“Holder”) in the principal
amount of $113,000, before giving effect to certain transactional costs including legal fees yielding a net of $113,000 (the “Note”).
The maturity date for this Note is June 17, 2020.
The Holder is entitled,
at its option, at any time after the 180th daily anniversary of the Note, to convert all or any amount of the principal
face amount of this Note then outstanding into shares of the Company’s common stock at a price for each share of common stock
equal to 61% of the lowest trading price of the common stock for the twenty (20) prior trading days including the day upon which
a notice of conversion is received.
The conversion feature
was recorded as a derivative valued at $274,884, of which $164,884 was expensed immediately to interest expense. $274,884 was determined
using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 274%, (ii) discount rate
of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1 year. The fair value of the conversion feature of $110,000
and original debt discount of $3,000 was considered as debt discount upon issuance and is being amortized to interest expense over
the term of the Note or in full upon the conversion of the Note.
|
During
the six months ended June 30, 2019 and 2018, respectively, the Company incurred $1,209,546 and $307,081 of interest expense, including
amortization of discount of $1,136,048 and $245,657. At June 30, 2019, the unamortized discount was $899,443, respectively.
The
following table reconciles, for the period ended June 30, 2019, the beginning and ending balances for financial instruments that
are recognized at fair value in the consolidated financial statements:
|
Balance
of embedded derivative as of December 31, 2018
|
|
$
|
661,320
|
|
|
Additions
related to embedded conversion features of convertible debt issued
|
|
|
8,169,519
|
|
|
Change
in fair value of conversion features
|
|
|
(1,078,591
|
)
|
|
Reductions
in fair value due to principal repayments and conversion
|
|
|
(1,246,186
|
)
|
|
Balance
of embedded derivatives at June 30, 2019
|
|
$
|
6,506,062
|
|
Derivative
liabilities were determined using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate
of 248 - 276 %, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 0.08 – 1.00 year.
Note
9 – Common Stock
During
the six months ended June 30, 2019, the Company issued 1,175,000 shares to various consultants for services rendered, valued at
$179,848.
During
the six months ended June 30, 2019, the Company authorized 96,666 shares of restricted common stock to various employees, valued
at $18,733, these shares were recorded as common stock payable as of June 30, 2019.
On
February 25, 2019, a third-party debt holder cashless exercised 875,000 shares of warrant to purchase common stock.
On
March 4, 2019, 650,000 shares were returned in connection with partial repayment made to debt holder and the same holder cashless
exercised 1,110,000 shares of warrant to purchase common stock.
As
of June 30, 2019, the Company had 24,585,738 shares of common stock issued and outstanding.
Warrants
On
May 27, 2016, the Company granted to Wilshire Energy Partners, LLC, warrants (“Wilshire Warrants”) to purchase (i)
100,000 common shares at a strike price of $1.25 per share, (ii) 200,000 common shares at a strike price of $2.00 per share and
(iii) 400,000 common shares at a strike price of $3.00 per share. The Wilshire Warrants commence to be exercisable on the earlier
of (i) 12-month anniversary of the closing of a going public transaction or (ii) June 30, 2017 and expire on June 1, 2021.
On
May 27, 2016, the Company granted to an unrelated party warrants to purchase (i) 125,000 common shares at a strike price of $1.25
per share, (ii) 100,000 common shares at a strike price of $2.00 per share and (iii) 100,000 common shares at a strike price of
$3.00 per share. The warrants commence to be exercisable on the earlier of (i) 12-month anniversary of the closing of a going
public transaction or (ii) June 30, 2017 and expire on June 1, 2021.
The
fair value of above warrants was determined to be $2,144 on May 27, 2016, using the Black-Scholes option-pricing model based on
the following assumptions: (i) volatility rate of 120%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv)
expected life of 5 years.
On
November 7, 2017, the Company issued 50,000 warrants to purchase 50,000 shares of common stock of the Company at a strike price
of $1.00 per share expiring on May 7, 2019 in connection with a senior convertible promissory note in the principal amount of
$50,000. If the Company fails to pay the principal and accrued unpaid interest due and payable to Lender on or before the due
date of the convertible note, then the Lender shall be provided the right to convert at either $0.665 per share or upon the same
terms offered in FirstFire Global Opportunities Fund, LLC Note’s conversion options. The relative fair value of warrant
was determined to be $3,381 on November 7, 2017, using the Black-Scholes option-pricing model based on the following assumptions:
(i) volatility rate of 77%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1.5 years.
On November 17, 2017, the Company issued an unaffiliated investor warrants to purchase 267,500 shares of the
Company’s common stock at an exercise price of $1.00 per share and expires in 18 months, in connection with a senior convertible
promissory note in the principal amount of $267,500. The aggregate relative fair value of warrant was determined to be $10,750
on November 17, 2017, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 78%,
(ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1.5 year. The exercise price subject to
adjustment if the Company at any time while this warrant is outstanding, shall sell or grant any option to purchase, or sell or
grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other
disposition) any Common Stock or securities entitling any person or entity to acquire shares of common stock (upon conversion,
exercise or otherwise) (including but not limited to under the Note), at an effective price per share less than the then exercise
price. The exercise price shall be reduced to equal the effective price, and the number of warrant shares issuable hereunder shall
be calculated by the original total number of warrant shares multiplied by the initial exercise price divided by the effective
price. As the result, the exercise price of the warrants was reset to the lesser of (i) 50% multiplied by the lowest trading price
during the previous twenty (20) trading days prior to March 4, 2019, which is $0.025. (ii) 50% multiplied by the lowest trading
price during the previous twenty (20) trading days prior to the conversion date. The fair value of the warrant was determined to
be $1,381,963 on March 4, 2019, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility
rate of 248%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 0.2 year. The same was considered
as deemed dividend.
On
August 11, 2018, the Company issued an unaffiliated investor warrants to purchase 100,000 shares of common stock at a strike price
of $0.665 per share expiring in 24 months, in connection with a convertible promissory note in the principal amount of $44,000.
The aggregate relative fair value of the warrant was determined to be $9,035 on August 11, 2018, using the Black-Scholes option-pricing
model based on the following assumptions: (i) volatility rate of 221%, (ii) discount rate of 0%, (iii) zero expected dividend
yield, and (iv) expected life of 2 year.
On November 1, 2018, the Company issued an unaffiliated investor two tranches of warrants in connection with
a convertible promissory note in the principal amount of $380,000. (i) tranche 1 are warrants having a 5-year term to purchase
687,500 shares of the Company’s restricted common stock at an exercise price of $0.20 per share with cashless exercise option
and (ii) tranche 2 are warrants having a 5-year term to purchase 2,062,500 shares of the Company’s restricted common stock
at an exercise price of $0.20 per share with cashless exercise option. Tranche 2 warrants may be redeemed by the Company for $20,000
(“Call Payment”) beginning on the date of issuance, November 1, 2018, and ending on the date which is 180 calendar
days following the issuance date (the “Call”). The aggregate relative fair value of the warrant was determined to be
$89,908 on November 1, 2018, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate
of 226%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 5.0 year. The exercise price subject
to adjustment if the Company at any time while this warrant is outstanding, shall sell or grant any option to purchase, or sell
or grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or
other disposition) any common stock or securities entitling any person or entity to acquire shares of common stock (upon conversion,
exercise or otherwise) (including but not limited to under the Note), at an effective price per share less than the then exercise
price. The exercise price shall be reduced to equal the effective price, and the number of warrant shares issuable hereunder shall
be calculated by the original total number of warrant shares multiplied by the initial exercise price divided by the effective
price. As the result, the exercise price of the warrants was reset to the lesser of (i) 50% multiplied by the lowest trading price
during the previous twenty (20) trading days prior to March 4, 2019, which is $0.025. (ii) 50% multiplied by the lowest trading
price during the previous twenty (20) trading days prior to the conversion date. The fair value of the warrant was determined to
be $3,421,241 on March 4, 2019, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility
rate of 248%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 4.7 year. The same was considered
as deemed dividend.
On December 6, 2018 the Company issued an unaffiliated
investor warrants to purchase 227,500 shares of common stock at a strike price of $0.20 per share expiring in 5 years, in connection
with a convertible promissory note in the principal amount of $45,500. The relative fair value of the warrant was determined to
be $7,880 on December 6, 2018, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility
rate of 225%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 5.0 year. The exercise price
subject to adjustment if the Company at any time while this warrant is outstanding, shall sell or grant any option to purchase,
or sell or grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase
or other disposition) any common stock or securities entitling any person or entity to acquire shares of common stock (upon conversion,
exercise or otherwise) (including but not limited to under the Note), at an effective price per share less than the then exercise
price. The exercise price shall be reduced to equal the effective price, and the number of warrant shares issuable hereunder shall
be calculated by the original total number of warrant shares multiplied by the initial exercise price divided by the effective
price. As the result, the exercise price of the warrants was reset to the lesser of (i) 50% multiplied by the lowest trading price
during the previous twenty (20) trading days prior to March 4, 2019, which is $0.025. (ii) 50% multiplied by the lowest trading
price during the previous twenty (20) trading days prior to the conversion date. The fair value of the warrant was determined to
be $299,594 on March 4, 2019, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate
of 248%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 4.8 year. The same was considered
as deemed dividend.
On March 4, 2019, the Company issued warrants
having an 18-month term, to purchase 1,125,000 shares of the Company’s common stock at an exercise price of $0.50 per share,
with a cashless exercise feature. The exercise price subject to adjustment if the Company at any time while this warrant is outstanding,
shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or announce
any offer, sale, grant or any option to purchase or other disposition) any common stock or securities entitling any person or entity
to acquire shares of common stock (upon conversion, exercise or otherwise) (including but not limited to under the Note), at an
effective price per share less than the then exercise price. The exercise price shall be reduced to equal the effective price,
and the number of warrant shares issuable hereunder shall be calculated by the original total number of warrant shares multiplied
by the initial exercise price divided by the effective price. As the result, the exercise price of the warrants was reset to the
lesser of (i) $0.5 or (ii) 50% multiplied by the lowest trading price during the previous twenty (20) trading days prior to the
exercise price upon issuance. The fair value of the warrant was determined to be $3,553,635 on March 4, 2019, using the Black-Scholes
option-pricing model based on the following assumptions: (i) volatility rate of 248%, (ii) discount rate of 0%, (iii) zero expected
dividend yield, and (iv) expected life of 1.5 year.
On March 6, 2019, the Company issued Labrys warrants having a five-year term to purchase 608,000 shares of
the Company’s restricted common stock, at an exercise price of $0.50 per share, with a cashless exercise feature. The exercise
price subject to adjustment if the Company at any time while this warrant is outstanding, shall sell or grant any option to purchase,
or sell or grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase
or other disposition) any common stock or securities entitling any person or entity to acquire shares of common stock (upon conversion,
exercise or otherwise) (including but not limited to under the Note), at an effective price per share less than the then exercise
price. The exercise price shall be reduced to equal the effective price, and the number of warrant shares issuable hereunder shall
be calculated by the original total number of warrant shares multiplied by the initial exercise price divided by the effective
price. As the result, the exercise price of the warrants was reset to the lesser of (i) 50% multiplied by the lowest trading price
during the previous twenty (20) trading days prior to the issuance date. (ii) 50% multiplied by the lowest trading price during
the previous twenty (20) trading days prior to the conversion date. The fair value of the warrant was determined to be $2,306,364
on March 6, 2019, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 248%,
(ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 5 years.
On March 19, 2019, the Company issued warrants
having an 18-month term to purchase 83,078 shares of the Company’s restricted common stock, at an exercise price of $0.50
per share, with a cashless exercise feature. The exercise price subject to adjustment if the Company at any time while this warrant
is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue
(or announce any offer, sale, grant or any option to purchase or other disposition) any common stock or securities entitling any
person or entity to acquire shares of common stock (upon conversion, exercise or otherwise) (including but not limited to under
the Note), at an effective price per share less than the then exercise price. The exercise price shall be reduced to equal the
effective price, and the number of warrant shares issuable hereunder shall be calculated by the original total number of warrant
shares multiplied by the initial exercise price divided by the effective price. As the result, the exercise price of the warrants
was reset to the lesser of (i) 60% multiplied by the lowest trading price during the previous twenty-five (25) trading days before
the issue date of this Note or (ii) 60% multiplied by the market price. The fair value of the warrant was determined to be $296,143
on March 19, 2019, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 266%,
(ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 1.5 year.
On March 20, 2019, the Company also issued
warrants having a 5 years term to purchase 80,036 shares of the Company’s restricted common stock, at an exercise price of
$0.50 per share, with a cashless exercise feature. The exercise price subject to adjustment if the Company at any time while this
warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose
of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any common stock or securities
entitling any person or entity to acquire shares of common stock (upon conversion, exercise or otherwise) (including but not limited
to under the Note), at an effective price per share less than the then exercise price. The exercise price shall be reduced to equal
the effective price, and the number of warrant shares issuable hereunder shall be calculated by the original total number of warrant
shares multiplied by the initial exercise price divided by the effective price. As the result, the exercise price of the warrants
was reset to 50% multiplied by the lowest trading price during the previous twenty 20 trading days prior to notice of conversion.
The fair value of the warrant was determined to be $106,534 on March 20, 2019, using the Black-Scholes option-pricing model based
on the following assumptions: (i) volatility rate of 266%, (ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv)
expected life of 5 years.
On May 31, 2019, the Company issued warrants having a five-year term to purchase 160,000 shares of the Company’s
restricted common stock at an exercise price of $0.50 per share with a cashless exercise feature. The exercise price subject to
adjustment if the Company at any time while this warrant is outstanding, shall sell or grant any option to purchase, or sell or
grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other
disposition) any common stock or securities entitling any person or entity to acquire shares of common stock (upon conversion,
exercise or otherwise) (including but not limited to under the Note), at an effective price per share less than the then exercise
price. The exercise price shall be reduced to equal the effective price, and the number of warrant shares issuable hereunder shall
be calculated by the original total number of warrant shares multiplied by the initial exercise price divided by the effective
price. As the result, the exercise price of the warrants was reset to 50% multiplied by the lowest trading price during the previous
twenty 20 trading days prior to this note or notice of conversion. The fair value of the warrant was determined to be $159,495
on May 31, 2019, using the Black-Scholes option-pricing model based on the following assumptions: (i) volatility rate of 253%,
(ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 5 years. The fair value of the warrant
of $38,775 was considered as debt discount upon issuance.
The
following table summarizes all stock warrant activity for the six months ended June 30, 2019 and 2018:
|
|
|
Number
of Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Remaining
Contractual Term
|
|
|
Balance
outstanding, December 31, 2018
|
|
|
5,761,015
|
|
|
|
1.56
|
|
|
|
2.65
|
|
|
Granted
|
|
|
70,225,495
|
|
|
|
0.49
|
|
|
|
2.69
|
|
|
Exercised
|
|
|
(2,074,665
|
)
|
|
|
0.55
|
|
|
|
2.36
|
|
|
Cancelled
or expired
|
|
|
(9,829,897
|
)
|
|
|
1.00
|
|
|
|
(0.12
|
)
|
|
Balance
outstanding, June 30, 2019
|
|
|
64,081,948
|
|
|
$
|
0.25
|
|
|
|
3.14
|
|
|
Exercisable,
June 30, 2019
|
|
|
64,081,948
|
|
|
$
|
0.25
|
|
|
|
3.14
|
|
|
|
|
Number
of Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Remaining
Contractual
Term
|
|
|
Balance
outstanding, December 31, 2017
|
|
|
2,683,515
|
|
|
|
1.56
|
|
|
|
2.65
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance
outstanding, June 30, 2018
|
|
|
2,683,515
|
|
|
$
|
1.56
|
|
|
|
2.65
|
|
|
Exercisable,
June 30, 2018
|
|
|
2,683,515
|
|
|
$
|
1.56
|
|
|
|
2.65
|
|
Options
On
May 19, 2016, the Company granted to each of its then three directors options to purchase (i) 50,000 common shares at a strike
price of $2 per share, vesting when the Company achieves and maintains a total average daily production level of 100 barrels of
oil equivalent per day (“BOE/D”) for at least 30 days, (ii) 50,000 common shares at a strike price of $3 per share,
vesting when the Company achieves and maintains a total average daily production level of 200 BOE/D for at least 60 days, and
(iii) 50,000 common shares at a strike price of $4 per share, vesting when the Company achieves and maintains a total average
daily production level of 500 BOE/D for at least 90 days.
On
February 27, 2017, the Company granted to Mr. Christopher Jarvis, currently an officer and director, options to purchase 400,000
common shares at a strike price of $1.99 per share, vesting quarterly over two years commencing with the first quarter following
the 90-day probationary period.
The
fair value of 400,000 options was determined to be $616,055 on February 27, 2017, using the Black-Scholes option-pricing model
based on the following assumptions: (i) volatility rate of 129%, (ii) discount rate of 0%, (iii) zero expected dividend yield,
and (iv) expected life of 5 years.
On
February 27, 2017, the Company granted to Mr. Kevin J. Sylla, currently our Executive Chairman of the Board, options to purchase
1,200,000 common shares at a strike price of $1.99 per share, vesting quarterly over the term of three years.
The
fair value of 1,200,000 options was determined to be $1,986,902 on February 27, 2017, using the Black-Scholes option-pricing model
based on the following assumptions: (i) volatility rate of 129%, (ii) discount rate of 0%, (iii) zero expected dividend yield,
and (iv) expected life of 7 years.
During
the three months ended June 30, 2019 and 2018, we recorded $165,122 and $241,917 option expense. During the six months ended June
30, 2019 and 2018, we recorded $377,377 and $481,177 option expense. As of June 30, 2019, the unamortized option expense was $439,114.
The
following table summarizes all stock option activity for the six months ended June 30, 2019 and 2018:
|
|
|
Number
of
Option
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Remaining
Contractual
Term
|
|
|
Balance
outstanding, December 31, 2018
|
|
|
2,050,000
|
|
|
|
2.21
|
|
|
|
5.26
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance
outstanding, June 30, 2019
|
|
|
2,050,000
|
|
|
$
|
2.21
|
|
|
|
5.26
|
|
|
Exercisable,
June 30, 2019
|
|
|
1,750,000
|
|
|
$
|
2.29
|
|
|
|
4.78
|
|
|
|
|
Number
of
Option
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Remaining
Contractual
Term
|
|
|
Balance
outstanding, December 31, 2017
|
|
|
2,050,000
|
|
|
|
2.21
|
|
|
|
6.26
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance
outstanding, June 30, 2018
|
|
|
2,050,000
|
|
|
$
|
2.21
|
|
|
|
6.26
|
|
|
Exercisable,
June 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Note
10– Other Related Party Transactions
Wilshire
Energy Partners, LLC
Wilshire
Energy Partners, LLC, is controlled by Kevin J. Sylla, our Executive Chairman and Chief Executive Officer of FPI, and has been
determined to be a Related Party. During the six months ended June 30, 2019 and 2018, Wilshire advanced the Company $0 and $55,210
for operating purposes and the Company repaid $15,973 and $0, respectively.
As
of June 30, 2019, and December 31, 2018, total amount due to officers and directors were $1,023,371 and $687,770.
Note
11 – Commitments and Contingencies
During
the audit process, a vendor for whom the Company has recorded $50,000 in accounts payable, confirmed an open invoice due to them
that was greater than what was reported on the Company’s financial statements. The Company believes that this invoice is
legally disputable, as follows:
|
1.
|
The
invoice was only prepared and submitted after the request for a confirmation letter. No demand has ever been made to the Company
for payment either orally, invoice or letter.
|
|
|
|
|
2.
|
The
invoice fails to reflect any payments made to the account, although Company records show that certain amounts were paid to
this account.
|
|
|
|
|
3.
|
The
invoice includes a bonus fee for services rendered in connection with a lease transfer. This fee was not earned in that the
milestone for the bonus was a lease transfer which remains in litigation and the terms of the oral modification of the written
contract between the parties required the successful completion of the transfer as the milestone.
|
|
|
|
|
4.
|
The
contract between the parties was terminated in May, 2018.
|
The
Company believes that the invoice is completely irregular and does not represent any legitimate debt of the Company to this vendor.
Contractual
Obligations
Leases
Effective
March 4, 2019, the Company entered into a sublease agreement, expiring November 30, 2020, for approximately 3,236 square feet
of office space in Los Angeles, California, at a monthly rental amount of $9,500, and subsequently moved its corporate headquarters
to the new location.
The
Company records the lease asset and lease liability at the present value of lease payments over the lease term. The leases typically
do not provide an implicit rate; therefore, the Company uses its estimated incremental borrowing rate at the time of lease commencement
to discount the present value of lease payments. The Company’s discount rate for operating leases at June 30, 2019 was 12%.
Lease expense is recognized on a straight-line basis over the lease term. Our weighted-average remaining lease term is 1.67 years.
As
of June 30, 2019, the maturities of operating leases liabilities are as follows:
|
|
|
Operating
Leases
|
|
|
Remaining
2019
|
|
$
|
57,000
|
|
|
2020
|
|
|
107,350
|
|
|
Total
|
|
|
164,350
|
|
|
Less:
amount representing interest
|
|
|
(17,150
|
)
|
|
Present
value of future minimum lease payments
|
|
|
147,200
|
|
|
Less:
current obligations under leases
|
|
|
101,225
|
|
|
Long-term
lease obligations
|
|
$
|
45,975
|
|
Rent
expense is recognized on a straight-line basis over the life of the lease. Rent expense consists of the following:
|
|
|
Six
months ended
|
|
|
|
|
June
30, 2019
|
|
|
Operating
lease costs
|
|
$
|
44,250
|
|
|
Variable
rent costs
|
|
|
(-
|
)
|
|
Total
rent expense
|
|
$
|
44,250
|
|
Other
information related to leases is as follows:
|
|
|
Six
months ended
|
|
|
|
|
June
30, 2019
|
|
|
Other
information:
|
|
|
|
|
|
Cash
paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating
cash flows from operating leases
|
|
$
|
44,250
|
|
|
|
|
|
|
|
|
Weighted-average
remaining lease term - operating leases
|
|
|
1.42
yr
|
|
|
Weighted-average
discount rate - operating leases
|
|
|
12
|
%
|
Legal
proceedings
The
Company has determined that judgments rendered in the second quarter of 2018 in connection with all but four of the following
legal proceedings against the Company are Type 1 subsequent events that provide additional evidence with respect to conditions
that existed at the date of the balance sheet. Therefore, the financial statements reflect the effects of prejudgment judgments
awards to plaintiffs through June 30, 2019, noted below in accordance with Auditing Standard 2801.03.
Utah
Wells
Graco
Fishing & Rental Tools, Inc. vs. Tiger Energy Operating LLC (Case No. 160800005 8th Judicial District Court, Duchesne
County, State of Utah)
Plaintiff
in this case sought collection of unpaid debt incurred by TEO for services rendered in connection with its workover of wells in
Duchesne County, Utah. On June 1, 2016, a default judgment of $159,965 was obtained against TEO by Plaintiff. Graco filed a writ
of execution against the A Rust 2, Dye-Hall 2-21 A1, Wilkins 1-24 A5 and Rust 3-22A-4 wells located in Duchesne County executing
on properties not owned by us. A Motion to Set Aside the sheriff’s sale of these properties was filed with the court based
on the fact that TEO was not the owner of these properties. A hearing for this matter was held on May 1, 2017, in Duchesne County,
Utah, at which time a Company representative was present to comply with the court’s order to produce documents. Prior to
the hearing, TEO made an initial settlement offer, which was eventually rejected by Graco. A writ of execution was issued to seize
the property subject of litigation on March 8, 2018.
Graco
had scheduled certain foreclosure sales of TEO’s interests in various oil and gas wells to take place on May 3, 2018 (the
“Sales”). On April 27, 2018, the parties reached a settlement and release agreement whereby TEO agreed to make five
(5) payments totaling $163,964.59 to Graco. The first payment due on May 9, 2018, has already been made to the judgment holder.
The second payment of $32,792.92 is due on July 9, 2018; the third payment of $32,792.92 is due on September 9, 2018; the fourth
payment of $32,792.92 is due on November 9, 2018; and fifth and final payment of $32,792.92 is due on January 9, 2019. If any
of the above payments are not made when due, Grace will have the right to immediately execute the Sales. Graco will maintain and
apply liens and notices of its judgment until the total payment has been paid in full by TEO. TEO shall be provided with a 10-day
period within which to cure any default under the settlement agreement, other than making the first payment described above. TEO
made its second payment of $32,793 on July 19, 2018, within the 10-day cure period provided in the settlement agreement. TEO made
its third payment of $32,793 on September 11, 2018, within the 10-day cure period provided in the settlement agreement. TEO also
made its fourth payment of $32,793 on November 15, 2018. On January 25, 2019, the Plaintiff issued a Writ of Execution Notice.
A Notice of Sheriff Sale was filed on February 1, 2019.
Regarding
the Company’s Utah properties, there was a settlement agreement between Graco Fishing & Rental Tools, Inc. (“Graco”)
and Tiger Energy Operating, LLC (“TEO”), an indirect subsidiary of the Company and the Operator of the Duck Creek
wells. Graco obtained a default judgment of $159,965 against TEO, subsequent to which they were also issued Writs of Execution
against the certain TEO wells, located in Uintah and Duchesne County, Utah.
Graco
had scheduled foreclosure sales of TEO’s interests in four wells (A Rust 2, Dye-Hall 2-21-A1, Wilkins 1-24A5, and Rust 3-22A4),
which was to take place on May 3, 2018 (the “Sales”). On April 27, 2018, the parties reached a settlement and release
agreement whereby TEO agreed to make five (5) payments totaling $163,965 to Graco. If any of the above payments were not made
when due, Graco had the right to immediately execute the Sales. Graco also had the right to maintain and apply liens and notices
of its judgment until the total payment has been paid in full by TEO. On June 27, 2018, Finley Resources, Inc. (“Finley”),
acquired all of Graco’s right, title and interest in the settlement agreement.
The
first four settlement payments to the judgment holder were made timely but the last and final payment was made late, and the judgment
holder (i.e. Finley) rejected TEO’s final payment. The Company disputes this because the final date of the 10-day cure period
was on a Saturday, which is not considered a business day and therefore, the payment was made on the following business day. On
January 25, 2019, Finley issued a Writ of Execution Notice and a Notice of Sheriff Sale was filed on February 1, 2019, for the
four wells: A Rust 2, Dye-Hall 2-21-A1, Wilkins 1-24A5, and Rust 3-22A4. While it believes it could prevail should it protest
Finley’s actions, the Company believes that the production value of the affected properties is limited. For additional details,
please review the Legal Proceedings section of the 10-K report.
Conquest
Well Servicing, LLC vs. Foothills Exploration Operating, Inc. (Case No. 179800421 8th Judicial District Court in and
for Uintah County, State of Utah)
Plaintiff
filed this action on September 11, 2017, for collection of unpaid services and materials in the amount of $49,689 in connection
with a workover of wells in Uintah County, Utah. A Settlement Agreement and Stipulation to Entry of Judgment was agreed to by
the parties and filed with the court on October 10, 2017. Judgment in the amount of $54,937.10 including $5,248.10 in pre-judgement
interest was filed on December 18, 2017. An order requesting company asset inquiry was issued on February 20, 2018. As of June
30, 2019, we recorded $13,489 of prejudgment interest expense. A hearing on contempt by FEOI for failure to appear and an answer
as to assets was set for September 13, 2018. A stipulation was filed with the court to continue the hearing to October 22, 2018.
FEOI inadvertently failed to appear at this hearing, resulting in a contempt of court citation being issued. Currently, FEOI is
seeking to reschedule this hearing and intends to purge any contempt by compliance with the court’s order.
BIA
Administrative Appeal – Tiger Energy Partners International, LLC
|
Notice
of Appeal:
|
Dated
May 8, 2013
|
|
Appellant:
|
Tiger
Energy Partners International, LLC
|
|
Appellee:
|
Superintendent
Uintah and Ouray Agency
|
|
Decision
|
April
12, 2013
|
|
Concerning:
|
Notice
of Expiration of Oil and Gas Leases
|
This
Administrative appeal concerns the ownership and validity of Northern Ute (the “Tribe”) Tribal leases acquired by
Tiger Energy Partners International, LLC (TEPI) in a transaction with Mountain Oil and Gas and its affiliated companies. Pursuant
to the Global Settlement Agreement (GSA) negotiated between the Tribe and TEPI, the Company proposes to resolve any issues regarding
the ownership of the subject leases and other lands thus acquired. The status of the appeal by TEPI remained unchanged at June
30, 2019, awaiting decision by the Regional Director of the BIA on the merits of the appeal. The decision of the Regional Director
is stayed by the parties having entered into the GSA. The Tribe and Tiger remain in discussion regarding approval of the Global
Settlement Agreement by the Regional Director. There has been no change in the status of this matter as of the date of this current
report.
Labokay
Well – Parish of Calcasieu, State of Louisiana
R.W.
Delaney Construction Company vs. Foothills Petroleum Operating, Inc. (Cause No. 2017-CV-0330 – County Court of Adams County,
Mississippi)
This
case was filed on September 18, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $72,495 in connection with drilling the Labokay test well in Calcasieu Parish, Louisiana.
A
judgment was entered on January 22, 2018, in the County Court of Adams County, Mississippi in the principal amount of $72,495,
plus pre-judgement interest in the amount of $12,763, plus attorney’s fees in the amount of $18,124, plus costs in the amount
of $196, for a total amount of $103,578, plus post-judgment interest at the rate of 8% per annum. On May 9, 2018, District Court
for the City and County of Denver, Colorado, granted plaintiff with an order granting their petition to domesticate this foreign
judgment with the Denver District Court, which now has the same effect and is subject to the same procedures, defenses, and proceedings
for reopening, vacating, or staying as a judgment from the Denver District Court, and may be enforced or satisfied in like manner.
No further action has been filed in this matter as of the date of this current report.
Performance
Drilling Company, LLC vs. Foothills Petroleum Operating, Inc. (Case No. 2017-3916 DIV G 14th Judicial District Court
in Parish of Calcasieu, State of Louisiana)
This
case was filed on September 25, 2017, for payment of services performed by plaintiff in the amount of $205,251 for unpaid accounts
in connection with its drilling of the Labokay test well. On January 16, 2018, a default judgment was entered against FPOI, in
the amount of $205,251.24; together with accrued interest of $29,861 from March 18, 2017, through December 31, 2017; plus, additional
interest from January 1, 2018, at the rate of one and one-half percent (1.5%) per month until paid (a per diem rate of $103.69);
plus, an additional sum for reasonable attorney’s fees of $2,500, and all costs of the court proceedings. FPOI was cited
to appear through its authorized representative, B.P. Allaire, in Open Court, on 27th of July at 9:00 a.m. to be examined
as a Judgment Debtor. FPOI was ordered to produce at the above time and place all the books, papers and other documents so requested
in the petition. FPOI inadvertently failed to appear at this hearing and is currently seeking to reschedule this hearing. No further
action has been taken as of the date of this current report.
Monster
Rentals, LLC dba Deepwell Equipment Rentals vs. Foothills Petroleum Operating, Inc. (Case No. 2017-11013 DIV E – 15th
Judicial District Court in Parish of Acadia, State of Louisiana)
This
case was filed on October 24, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $53,943.53 in connection with the Labokay test well in Calcasieu Parish, Louisiana. On December 5, 2017, a default
judgement was entered against FPOI in favor of Plaintiff in the amount of $53,943.53, plus attorneys’ fees of $3,483 and
court costs and expenses in the amount of $476.84, plus judicial interest from the date of the judicial demand, until paid, and
for all costs of these proceedings. No further action has been filed in this matter as of the date of this current report.
Canal
Petroleum Products, Inc. vs. Foothills Petroleum Operating, Inc. (Case No. 2017-6574; DIV. C – 15th Judicial
District Court, Lafayette Parish, Louisiana)
This
case was filed on November 14, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $35,981 for unpaid accounts in connection with its drilling of the Labokay test well.
On
January 25, 2018, a default judgment was entered against FPOI in the amount of $35,981 inclusive of interest as of September 6,
2017; plus, finance charges to accrue after September 6, 2017, of one and one-half percent per month (18% per annum) until paid
on the unpaid principal amount of $32,956; plus, legal fees of $8,239 together with related court costs. No further action filed
in this matter as of the date of this current report.
Smith
International, Inc. vs. Foothills Petroleum Operating, Inc. (Case No. 2017-004617; DIV. E – 14th Judicial District
Court, Calcasieu Parish, Louisiana)
This
case was filed on November 7, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $30,244 in connection with its drilling of the Labokay test well.
On
March 23, 2018, the court issued a preliminary judgement in favor of plaintiff in the amount of $30,244, plus interest in the
contractual amount of 18% per annum from the date the payment was originally due until the judgment date, plus legal interest
from the judgment date until amounts are paid, plus reasonable attorneys’ fees. On April 3, 2018, a final judgment was entered
in favor of plaintiff. No further action filed in this matter as of the date of this current report.
M-I,
L.L.C. d/b/a MI-SWACO vs. Foothills Petroleum Operating, Inc. (Case No. 2017-004616; DIV. G – 14th Judicial
District Court, Calcasieu Parish, Louisiana)
This
case was filed on November 7, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $51,275 in connection with the Labokay test well.
On
March 23, 2018, the court issued a preliminary judgment in favor of plaintiff in the amount of $51,275, plus interest in the contractual
amount of 1.5% per month from the date the payment was originally due until the judgement date, plus legal interest from the judgment
date until amounts are paid, plus reasonable attorney’s fees expended in the prosecution and collection of debt. On April
3, 2018, a final judgment was entered in favor of plaintiff. No further action has been filed in this matter as of the date of
this current report.
Schlumberger
Technology Corporation vs. Foothills Petroleum Operating, Inc. (Case No. 2017-004618; DIV. E – 14th Judicial
District Court, Calcasieu Parish, Louisiana)
This
case was filed on November 7, 2017 and concerns the collection of amounts incurred by FPOI for services performed by plaintiff
in the amount of $28,904 for unpaid accounts in connection with its drilling of the Labokay test well in Calcasieu Parish, Louisiana.
On
March 23, 2018, the court issued a preliminary judgment in favor of plaintiff in the amount of $28,904, plus interest in the contractual
amount of 1.5% per month from the date the payment was originally due until the judgment date, plus legal interest from the judgment
date until amounts are paid, plus reasonable attorney’s fees expended in the prosecution and collection of debt. On April
3, 2018, a final judgment was entered in favor of plaintiff. No further action has been filed in this matter as of the date of
this current report.
Zealous
Energy Services, LLC vs. Foothills Petroleum Operating, Inc. (Docket No. 086708 Div. C 16th Judicial District Court,
Parish of St. Martin, Louisiana)
On
September 28, 2018, the Court after reviewing the record of these proceedings, found the law and evidence supported Plaintiff’s
demands and, without holding a hearing, ruled as follows: the Court ordered, adjudged and decreed that a money judgement be rendered
in favor of Zealous Energy Services, LLC and against Foothills Petroleum Operating, Inc. in the full and true amount of $53,026.58,
plus interest at the judicial interest rate of 5% per annum from January 24, 2018, the date of judicial demand, until finally
paid, plus attorney’s fees of $1,260.00 and all cost. On March 1, 2019, a Motion to Examine Judgment Debtor was filed with
the court.
633
17th Street Operating Company LLC v. Foothills Exploration, Inc. (Case No. 2019CV30189, District Court, City and County
of Denver, Colorado)
This
case was filed on January 16, 2019, seeking unpaid leasehold obligations in the amount of $75,107 from the Defendant. On June
25, 2019 a judgement was granted to Plaintiff in the amount of $139,793.42. A Writ of Garnishment was filed against Foothills
debtor, Bank of America on July 16, 2019.
As
of June 30, 2019, and December 31, 2018, the balance of other liabilities was $389,599 and $282,676, respectively.
Note
13 – Subsequent Events
Exercise
of Warrants
In
August 2019, we issued 551,396 shares of common stock for warrant exercise.
Odyssey
Capital Funding, LLC Placement
On
July 11, 2019, Foothills Exploration, Inc. (the “Company”), closed on a convertible redeemable loan transaction with
an unaffiliated lending entity, Odyssey Capital Funding, LLC (“Odyssey”) in the principal amount of $236,250 (the
“Note”), before giving effect to certain transactional costs including legal fees yielding a net of $236,250.
Odyssey is entitled,
at its option, at any time after the 180th daily anniversary of the Note, to convert all or any amount of the principal face amount
of this Note then outstanding into shares of the Company’s common stock (the “Common Stock”) at a price (“Conversion
Price”) for each share of Common Stock equal to 55% of the lowest trading price of the Common Stock as reported on the National
Quotations Bureau OTC Marketplace exchange which the Company’s shares are traded or any exchange upon which the Common Stock
may be traded in the future (“Exchange”), for the twenty (20) prior trading days including the day upon which a notice
of conversion is received by the Company or its transfer agent (provided such notice of conversion is delivered by fax or other
electronic method of communication to the Company or its transfer agent after 4 P.M. Eastern Standard or Daylight Savings Time
if Odyssey wishes to include the same day closing price).
Interest on any
unpaid principal balance of this Note shall be paid at the rate of 12% per annum. Interest shall be paid by the Company in Common
Stock (“Interest Shares”). Odyssey may, at any time, after the 180th daily anniversary of the Note, send in a notice
of conversion to the Company for Interest Shares based on the formula described above. The dollar amount converted into Interest
Shares shall be all or a portion of the accrued interest calculated on the unpaid principal balance of this Note to the date of
such notice.
The maturity date for this Note is July 11, 2020 (“Maturity Date”), and
is the date upon which the principal sum, as well as any accrued and unpaid interest, shall be due and payable. For further details,
please refer to the Company’s Current Report on Form 8-K filed with the SEC on July 16, 2019.
Power
Up Lending Group Ltd. Placement
On
July 22, 2019, Foothills Exploration, Inc. (the “Company”), closed on a convertible loan transaction with Power Up
Lending Group Ltd. (“Power Up”) in the principal amount of $78,000 (the “Note”), before giving effect
to certain transactional costs including legal fees yielding a net of $78,000.
Power Up is entitled,
at its option, at any time after the 180th daily anniversary of the Note, to convert all or any amount of the
principal face amount of this Note then outstanding into shares of the Company’s common stock (the “Common Stock”)
at a price (“Conversion Price”) for each share of Common Stock equal to 61% of the lowest trading price of the Common
Stock as reported on the National Quotations Bureau OTC Marketplace exchange which the Company’s shares are traded or any
exchange upon which the Common Stock may be traded in the future (“Exchange”), for the twenty (20) prior trading days
including the day upon which a Notice of Conversion is received by the Company or its transfer agent (provided such Notice of
Conversion is delivered by fax or other electronic method of communication to the Company or its transfer agent after 4 P.M. Eastern
Standard or Daylight Savings Time if Power Up wishes to include the same day closing price).
Interest on any
unpaid principal balance of this Note shall be paid at the rate of 12% per annum. Interest shall be paid by the Company in Common
Stock (“Interest Shares”). Power Up may, at any time, after the 180th daily anniversary of the Note,
send in a notice of conversion to the Company for Interest Shares based on the formula described above. The dollar amount converted
into Interest Shares shall be all or a portion of the accrued interest calculated on the unpaid principal balance of this Note
to the date of such notice.
The maturity date for this Note is July 17, 2020 (“Maturity Date”), and
is the date upon which the principal sum, as well as any accrued and unpaid interest, shall be due and payable. For further details,
please refer to the Company’s Current Report on Form 8-K filed with the SEC on July 26, 2019.
GS
Capital Partners, LLC Placement
On
July 24, 2019, the Company closed on a convertible redeemable loan transaction with GS Capital Partners, LLC (“GS”)
in the principal amount of $110,000 (the “Note”) with an original issue discount of $10,000, before giving effect
to certain transactional costs including legal fees yielding a net of $100,000.
GS
is entitled, at its option, at any time after the 180th daily anniversary of the Note, to convert all or any amount
of the principal face amount of this Note then outstanding into shares of the Company’s common stock (the “Common
Stock”) at a price (“Conversion Price”) for each share of Common Stock equal to 55% of the lowest trading price
of the Common Stock as reported on the National Quotations Bureau OTC Marketplace exchange which the Company’s shares are
traded or any exchange upon which the Common Stock may be traded in the future (“Exchange”), for the twenty-five (25)
prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer agent (provided
such Notice of Conversion is delivered by fax or other electronic method of communication to the Company or its transfer agent
after 4 P.M. Eastern Standard or Daylight Savings Time if GS wishes to include the same day closing price).
Interest
on any unpaid principal balance of this Note shall be paid at the rate of 10% per annum. Interest shall be paid by the Company
in Common Stock (“Interest Shares”). GS may, at any time, after the 180th daily anniversary of the
Note, send in a notice of conversion to the Company for Interest Shares. The dollar amount converted into Interest Shares shall
be all or a portion of the accrued interest calculated on the unpaid principal balance of this Note to the date of such notice.
The
maturity date for this Note is July 23, 2020 (“Maturity Date”), and is the date upon which the principal sum, as
well as any accrued and unpaid interest, shall be due and payable. For further details, please refer to the Company’s
Current Report on Form 8-K filed with the SEC on July 26, 2019.
Active
Management of Convertible Debt.
On
July 12, 2019, the Company retired in full the first tranche of the convertible promissory note with Crown Bridge Partners, LLC,
dated December 6, 2018, in the principal amount of $45,500. The Company made several payments totaling $350,000 towards the principal
balance of the convertible promissory note with Labrys Fund, L.P. dated November 1, 2018, in the principal amount of $380,000.
The Company entered into an extension agreement with Labrys Fund, L.P. for the repayment of said note and has one final payment
of $55,000 remaining. The Company also entered into an extension agreement for the repayment of the Jefferson Street Capital Note
dated December 19, 2018, in the principal amount of $58,300. The Company has paid a total of $25,000 towards the principal balance
of the Jefferson Street Capital note and anticipates repaying the note in full in accordance to the extension agreement reached
with the lender.