See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
Notes To The Condensed Consolidated Financial
Statements
Three and nine months ended September 30,
2016 and 2015
(Unaudited)
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Note 1.
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Nature of Operations and Summary of Significant Accounting Policies
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Business
Foothills Exploration,
Inc., (“Company” or “Foothills Exploration”) was incorporated in the State of Delaware on May 13, 2010
under the name of “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 pre split (56.4 post split) million 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 we
entered into a Share Exchange Agreement with shareholders of FPI whereby we acquired all of the outstanding shares of FPI in exchange
for 4,500,000 shares of our common stock and also issued 1,503,759 shares of our common stock on automatic conversion of debt (please
see discussion below under Company's Business Overview) for an aggregate of 6,003,759 shares of our common stock (the “Share
Exchange”). As a result of the Share Exchange, FPI became our wholly owned subsidiary and the FPI Acquired Shares were returned
to treasury and deemed cancelled. For accounting purposes, this transaction is being accounted for as a reverse acquisition and
has been treated as a recapitalization of the Company with FPI considered the accounting acquirer, and the financial statements
of the accounting acquirer became the financial statements of the registrant. The completion of the Share Exchange resulted in
a change of control. The FPI Shareholders obtained approximately 96% of voting control on the date of Share Exchange. FPI was the
acquirer for financial reporting purposes and the Company was the acquired company. The unaudited condensed consolidated financial
statements after the acquisition include the balance sheets of both companies at historical cost, the historical results of FPI
and the results of the Company from the acquisition date. All share and per share information in the accompanying unaudited condensed
consolidated financial statements and footnotes has been retroactively restated to reflect the recapitalization.
Prior to the Share
Exchange, we had minimal assets and recognized no revenues from operations, and were accordingly classified as a shell company.
On June 24, 2016, we filed an amendment to our Current Report on Form 8-K originally filed on June 10, 2016, indicating that we
were no longer a shell company as defined by Rule 12b-2 of the Exchange Act. In light of closing the Share Exchange transaction
with the shareholders of FPI the Company became actively engaged in oil and gas operations through its wholly owned subsidiary.
On June 30, 2016,
we entered into a securities purchase agreement to sell 3,007,519 shares of our common stock to a single investor for proceeds
totaling $2,000,000, and in July 2016, the Company received the funds. For a more complete description of this transaction please
see our Form 8-K filed with the Securities and Exchange Commission ("SEC") on July 7, 2016.
On August 4, 2016
we were advised that the Financial Industry Regulatory Association had approved (i) our name change from Key Link Assets Corp.
to Foothills Exploration, Inc., and (ii) a change of trading symbol from KYLK to FTXP. Please see our Form 8-K filed with the SEC
on August 9, 2016.
On August
18, 2016 the Company appointed Ritchie Lanclos as Executive Vice President of the Company and as Vice President of Exploration
of its wholly owned subsidiary, Foothills Petroleum, Inc. (“FPI”), and appointed Eleazar Ovalle as Executive Vice President
of the Company and Vice President of Geology & Geophysical of FPI.
FPI has
agreed to pay Mr. Lanclos an annual salary of $84,000 upon successful completion of a 90 day probationary period. Mr. Lanclos was
entitled to receive a $10,000 bonus upon commencement of employment and will also be entitled to receive bonuses that will be based
on performance standards that will be established by FPI. Mr. Lanclos will receive 100,000 restricted stock units (RSUs) of the
Company of which (i) 20,000 shall vest 180 days from August 15, 2016, (ii) another 20,000 shall vest 270 days from August 15, 2016
and (iii) the remaining 60,000 shall vest 365 days from August 15, 2016. Upon approval of the Company’s Board of Directors,
Mr. Lanclos may become eligible to participate in the Company’s equity incentive plan, should one be established.
FPI has
agreed to pay Mr. Ovalle an annual salary of $84,000 upon successful completion of a 90 day probationary period. Mr. Ovalle was
entitled to receive a $10,000 bonus upon commencement of employment and will also be entitled to receive bonuses that will be based
on performance standards and goals that will be established by FPI. Mr. Ovalle will receive 100,000 restricted stock units (RSUs)
of the Company of which (i) 20,000 shall vest 180 days from August 15, 2016, (ii) another 20,000 shall vest 270 days from August
15, 2016 and (iii) the remaining 60,000 shall vest 365 days from August 15, 2016. Upon approval by the Company’s Board of
Directors, Mr. Ovalle may become eligible to participate in the Company’s equity incentive plan, should one be established.
In connection
with the hiring of Ritchie Lanclos and Eleazar Ovalle, FPI agreed to pay Wilshire Energy Partners LLC, one of our principal shareholders,
pursuant to a Services Agreement entered into by and between FPI and Wilshire Energy Partners, a fee of 25% of gross annual salary,
including all cash and equity compensation, but excluding any bonuses to be received by Mr. Lanclos and Mr. Ovalle. FPI has agreed
to pay Wilshire Energy Partners $50,000 for its services in recruiting Messrs. Lanclos and Ovalle to the Company and FPI management
teams. In the event either of Mr. Lanclos or Mr. Ovalle leaves FPI of his own volition or is terminated for cause within 90 days
from commencement of their employment, Wilshire Energy Partners shall refund FPI 100% of fees received, minus $2,500.
On September
2, 2016, Shawn P. Clark resigned as Interim Chief Financial Officer and member of the Board of Directors of Foothills Exploration,
Inc. In connection with Mr. Clark’s resignation, there were no disagreements with the Company, known to an executive officer
of the Company, as defined in 17 CFR 240.3b-7, on any matter relating to the Company’s operations, policies or practices.
Nature of Operations
FPI was incorporated
in Nevada in December 2015. FPI is an independent oil and gas exploration company with a focus on the acquisition and development
of oil and gas properties in the Rockies and Gulf Coast. FPI seeks to acquire dislocated and underdeveloped oil and gas assets
and maximize those assets to create shareholder value (the "Business"). Its principal obligations, consisting of convertible
promissory notes in the aggregate amount of approximately $1,000,000 plus interest accruing at a rate of 8% per annum (the "Note"),
issued to a single investor as part of convertible debt financing, was converted into 1,503,759 shares of common stock of the Company
at the closing of the Share Exchange transaction at a conversion price of $0.665 per share with any accrued and outstanding interest
under the Note waived.
From its inception in December 2015 through the date of the Share Exchange, FPI produced no revenues from
its business and principal properties and is currently an exploration stage company. Prior to January 2016, FPI had minimal operations
that were focused mainly on administrative activities connected to the identification and evaluation of potential oil and gas prospects
and other potential leasehold acquisitions in our geographical areas of interest. As of September 30, 2016, FPI had acquired the
rights to 41,421 acres of oil and gas property in the state of Wyoming. Please see Note 8, Subsequent Events, for additional acreage
obtained subsequent to September 30, 2016.
FPI’s technical
team and strategic advisors have a proven track record of finding, exploiting and developing oil resources in the Rockies and Gulf
Coast, with a deep technical and operational knowledge of the area.
Basis of Presentation and Functional Currency
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), and should be read in conjunction with the Company’s audited financial statements
for the year ended December 31, 2015. In the opinion of management all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the financial position and the results of operations for the interim period presented have
been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected
for the full year. The Company was formed on December 17, 2015, therefore there are no comparative financial statements for the
period for three and nine months statement of operations and cash flows.
Exploration Stage
The Company has not produced revenues from
its principal business and is in the exploration stage. The Company is engaged in the acquisition, exploration, development
and production of oil and gas properties. As of September 30, 2016, the Company had acquired the rights to 41,421 acres
of oil and gas property in the state of Wyoming through its transaction with the shareholders of FPI, and other acquisitions made
by the Company since its inception.
The Company’s success will depend in
large part on its ability to obtain and develop oil and gas interests within the Rocky Mountain and Gulf Coast regions. There can
be no assurance that oil and gas properties obtained by the Company will contain reserves or that properties with reserves will
be profitable to extract. The Company will be subject to local and national laws and regulations which could impact its ability
to execute its business plan.
As discussed in Note 2, the accompanying unaudited
condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern.
On
June 30, 2016, the Company sold 3,007,519 shares of its common stock for an aggregate amount of $2,000,000, and
in
July 2016 the Company received the $2,000,000 funding.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual
results could materially differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash equivalents. The carrying value of those investments approximates
their fair market value due to their short maturity and liquidity. Cash and cash equivalents include cash on hand and amount on
deposit with financial institutions, which amounts may at times exceed federally insured limits. The Company has not experienced
any losses on such accounts and it does not believe it is exposed to any significant credit risk. As of September 30, 2016, the
Company had no cash equivalents.
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 unproven 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.
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:
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Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
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·
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Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
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Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
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The Company analyzes all financial instruments
with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815.
As of September 30, 2016, the Company did not
identify any assets and liabilities that are required to be presented on the balance sheet at fair value.
Net Earnings (Loss) Per Common Share
The Company computes earnings per share under
ASC 260-10, “Earnings Per Share”. Basic earnings (loss) per share is computed by dividing the net income (loss) attributable
to the common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator)
during the reporting periods. Diluted loss per share is computed by increasing the denominator by the weighted average number
of additional shares that could have been outstanding from securities convertible into common stock (using the “treasury
stock” method), unless their effect on net loss per share is anti-dilutive. There were 225,000 potentially dilutive shares,
which include outstanding warrants, for the period ended September 30, 2016. The potential shares are excluded from the determination
of basic and diluted net loss per share as their effect is anti-dilutive.
Stock-Based Compensation
All share-based payments, including grants
of stock to employees, directors and consultants, are recognized in the consolidated financial statements based upon their estimated
fair values.
The Company’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.
Principles of Consolidation
These condensed consolidated financial statements
include the accounts of Foothills Exploration, Inc., and its wholly-owned subsidiary Foothills Petroleum Inc. All intercompany
balances and transactions have been eliminated in consolidation.
Recent Accounting Pronouncements
There were various updates recently issued,
most of which represented technical corrections to the accounting literature or application to specific industries and are not
expected to a have a material impact on the Company's financial position, results of operations or cash flows.
As shown in the accompanying financial statements,
the Company has incurred an accumulated loss of $1,426,488 through September 30, 2016, and had working capital of $1,533,410 at
September 30, 2016. The Company is subject to those risks associated with exploration stage companies. The Company has
sustained losses since inception and additional debt and equity financing will be required by the Company to fund its development
activities and to monetize economically recoverable oil and gas reserves.
On June 30, 2016, the Company sold 3,007,519 shares of its common stock for an aggregate amount of $2,000,000
and in July 2016, the Company received the $2,000,000 funding.
As a result,
Management
believes that its existing cash on hand will be sufficient to fund its operations for the next nine (9) months. However, no assurance
can be given that the Company will be able to obtain additional financing to further its ongoing activities so that profitable
operations can be attained. The Company also continues to search for producing and/or additional productive properties and seeks
to strategically lease additional acreage positions adjoining leases currently owned by the Company. There can be no
assurance that the Company's efforts will be successful, or that those efforts will translate in a beneficial manner to the Company.
The accompanying statements do not include any adjustments relating to the recoverability and classification of assets and/or liabilities
that might be necessary, should the Company be unable to continue as a going concern.
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Note 3.
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Share Exchange Agreement
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On May 2, 2016, Foothills Petroleum Inc., a
Nevada corporation ("FPI”) acquired over 14.1 pre split (56.4 post split) million shares of Key Link’s common
stock from five persons constituting approximately 96% of our issued and outstanding shares (the "FPI Acquired Shares").
In conjunction with this purchase we incurred a charge of $316,035 for the purchase of these shares. Please see our Form 8-K filed
with the SEC on May 6, 2016.
As of May 16, 2016, the Company effected a
4:1 forward split of our shares of common stock. Please see our Form 8-K filed with the SEC on May 19, 2016.
On May 27, 2016, the Company entered into a
Share Exchange Agreement ("Share Exchange Agreement") with the shareholders of FPI whereby the Company acquired all of
the outstanding shares of FPI for an aggregate of 6,003,759 shares of common stock of which 4,500,000 shares of common stock were
issued to Wilshire Energy Partners, LLC ("Wilshire") and 1,503,759 of shares of common stock were issuable to Alternus
Capital Holdings Ltd. ("Alternus") (the “Share Exchange”). As a result of the Share Exchange, FPI became
the Company’s wholly owned subsidiary and the FPI Acquired Shares were subsequently returned to treasury, deemed canceled
and no longer outstanding.
The Company also exchanged warrants to purchase
700,000 shares of FPI’s common stock that were issued to Wilshire for a like amount of warrants to purchase shares of Key
Link’s common stock (the "Wilshire Warrants"). The Wilshire Warrants:
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have
a term of five years;
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are
exercisable at $1.25 per share as to 100,000 shares;
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are
exercisable at $2.00 per share as to 200,000 shares;
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·
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are
exercisable at $3.00 per share as to 400,000 shares;
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·
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do
not have a cashless exercise feature; and
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are
not exercisable for one year from the date of issuance.
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Following the closing of the Share Exchange
transaction the Company had approximately 8,363,759 shares of common stock outstanding (excluding the FPI Acquired Shares, which
are deemed canceled following the Share Exchange), of which Wilshire and Alternus own in the aggregate 6,003,759 shares, or approximately
52% of the outstanding common stock. As of the date of this filing the Company has 25,000,000 shares of preferred stock authorized
of which no shares are issued and outstanding.
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Note 4.
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Oil and Gas Properties
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Upon organization
of Foothills Petroleum Inc., on December 24, 2015, Wilshire Energy Partners LLC contributed its 100% membership interest in Foothills
Exploration, LLC, a Wyoming limited liability company, to FPI in exchange for 4,500,000 shares of FPI's common stock. At the time
of contribution Wilshire Energy Partners LLC had acquired and owned rights to 38,120 acres of oil and gas leases in the State of
Wyoming (as described above in Note 1, Nature of Operations) . On completion of the Share Exchange, effective May 27, 2016, Wilshire
Energy Partners LLC exchanged its FPI shares for 4,500,000 shares of the Company's common stock. As a result the Company owns 100%
of FPI and Foothills Exploration, LLC is now a wholly owned indirect subsidiary of the Company that retains title to these oil
and gas leases.
This transaction is treated as the founding
transaction by the Company. The asset was valued at $72,430 at the time of transfer based on costs associated with the payment
of lease bonuses, fees and taxes paid during the formation of the asset.
On March 29, 2016, FPI acquired a 35% working interest in the Ladysmith Anticline prospect that is located
in Fremont County, Wyoming. Total acreage position is 3,061 acres located between the Great Divide/Greater Green River Basin and
the Wind River Basin, in return for covering certain costs of operation in the amount of $20,000, and to a share of the working
interest in the land. The primary target zones are the variable Phosphoria and Tensleep sandstone with secondary considerations
in the Madison limestone and Flathead sandstone. The prospect generation was based on a licensed 2-D seismic comprising of two
seismic lines covering the Chevron/Echo – Greater Green River Basin. The asset is valued at $20,000 based on the agreement.
During the nine months ended September 30, 2016, the Company capitalized an additional $97,920 in costs related to this asset.
On December 24, 2015, FPI entered into a convertible
promissory note in the amount of $600,000 with Alternus Capital Holdings Limited, a BVI company. The two-year note matures on December
23, 2017, and accrues interest at 8% per year. By its terms the note was automatically required to convert the outstanding principal
and interest due under the terms of the note upon a merger or other combination occurring between FPI and an entity with shares
listed for trading (“Pubco”). The conversion price in the note was established at $0.665 per share, (the “Conversion
Price”) subject to adjustment as described below. On April 5, 2016, and under substantially similar terms described herein,
FPI received an additional $400,000 from Alternus Capital Holdings Limited. Under the agreements between Alternus and FPI, Alternus
had the right but not the obligation to subscribe for an aggregate of up to $3,500,000 of convertible notes which, in the event
of that full subscription would convert into not less than 30% of the outstanding shares of Pubco. Through May 27, 2016, the date
of the Share Exchange, Alternus had invested $1,000,000 and based on the Conversion Price 1,503,759 shares of Common Stock of Pubco
(Key Link) were issued in full satisfaction of its two notes.
Alternus transferred to Berwin
Trading Limited its right to purchase the remaining $2,500,000 in equity in the Company at substantially the same terms as the
conversion of the convertible note purchase agreement. Berwin agreed to purchase $2,000,000 or 3,007,519 common shares and completed
the documents related to the purchase of equity on June 30, 2016, and funded its investment on July 6, 2016. The additional investment
option has expired.
On December 24, 2015, FPI issued 4,500,000 shares of its common
stock to Wilshire Energy Partners, LLC, as more fully discussed in Note 4 of these financial statements.
On December 24, 2015, FPI entered into a convertible
promissory note in the amount of $600,000 with Alternus Capital Holdings Limited, a British Virgin Islands company. The two-year
note matures on December 23, 2017, and accrues interest at 8% per year. By its terms the note was automatically required to convert
the outstanding principal and interest due under the terms of the note upon a merger or other combination occurring between FPI
and an entity with shares listed for trading (“Pubco”). The conversion price of the note was established at $0.665
per share (the “Conversion Price”), subject to adjustment as described below. On April 5, 2016, and under substantially
similar terms described herein, FPI received an additional $400,000 from Alternus Capital Holdings Limited. On May 27, 2016, the
shareholders of FPI entered into the Share Exchange Agreement with Key Link, pursuant to which the principal amount of the notes
together with any accrued, but unpaid interest was converted into the shares of the Company at a conversion price of $0.665 per
share. The total amount of shares issued to Alternus Capital Holdings Limited pursuant to the conversion of the note is 1,503,759.
All accrued interest was waived and recorded as additional paid in capital.
Effective April 1, 2016, FPI appointed two
directors to its board. Each director was granted 125,000 shares of its common stock (the "FPI Directors Shares"), vesting
according to the following schedule: (i) 40% vesting ninety (90) days from the appointment date; (ii) 20% vesting one hundred eighty
(180) days from the appointment date; (iii) 20% vesting two hundred seventy (270) days following the appointment date; (iv) 20%
vesting three hundred sixty (360) days following the Effective Date. As of September 30, 2016, 50,000 shares were issued to each
director. These shares were valued at $1,000.
On May 2, 2016, Foothills
Petroleum Inc., a Nevada corporation ("FPI”) acquired 14,112,250 pre-split shares of the common stock of Key Link Assets
Corp. (“Key Link” or the “Company”) from five persons constituting approximately 96% of our issued and
outstanding shares (the "FPI Acquired Shares"). These shares were acquired for cash of $316,035, which was expensed in
the period it was incurred. Please see our Form 8-K filed with the Securities and Exchange Commission on May 6, 2016.
As of May 16, 2016, we effected a 4:1 forward
split of our shares of common stock. Please see our Form 8-K filed with the SEC on May 19, 2016. All references to the number
of shares issued and outstanding in these financial states have been retrospectively restated for the forward split.
The 14,112,250 pre-split
shares were converted into 56,449,000 shares, and were returned to treasury for cancellation. A total of 2,360,000 shares remained
outstanding held by the shareholders of the merged public company post the reverse merger acquisition.
On May 2, 2016, after obtaining the FPI Acquired
Shares, FPI caused the Company to appoint its two non-executive directors to the Board of the Company. These directors exchanged
their rights to the FPI Directors Shares for Company shares having substantially the same terms and provisions. On May 2, 2016
the Company also granted 150,000 shares of its common stock to its CEO as a part of his compensation package. The shares have the
same vesting schedule as directors’ shares described above. As of September 30, 2016, 60,000 shares were issued to the Company’s
CEO. These shares were valued at $600.
During the nine months ended September 30,
2016, the Company issued 5,000 shares to a service provider per consulting agreement. The shares were valued at $7,650.
On May 27, 2016, we
entered into a Share Exchange Agreement ("Share Exchange Agreement") with the shareholders of FPI whereby we acquired
all of the outstanding shares of FPI for an aggregate of 6,003,759 shares of our common stock, of which 4,500,000 shares of our
common stock were issued to Wilshire Energy Partners, LLC ("Wilshire") and 1,503,759 of our shares of common stock were
issuable to Alternus Capital Holdings Ltd. ("Alternus") (“Share Exchange”). As a result of the Share Exchange,
FPI became our wholly owned subsidiary and the FPI Acquired Shares were to be returned to treasury, deemed canceled and no longer
outstanding. We also exchanged warrants to purchase 700,000 shares of FPI common stock, that were issued to Wilshire on May
4, 2016, for a like amount of warrants to purchase shares of Company common stock (the "Wilshire Warrants"). The Wilshire
Warrants:
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have a term of five years;
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are exercisable at $1.25 per share as to 100,000 shares;
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·
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are exercisable at $2.00 per share as to 200,000 shares;
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are exercisable at $3.00 per share as to 400,000 shares;
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do not have a cashless exercise feature; and
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·
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are not exercisable for one year.
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Following the closing
of the Share Exchange transaction we had 8,363,759 shares of common stock outstanding (excluding the FPI Acquired Shares, which
were deemed canceled following the Share Exchange), of which Wilshire and Alternus own in the aggregate 6,003,759 shares, or approximately
71.8% of the outstanding common stock. As of the date of this filing the Company has no shares of preferred stock issued and outstanding.
On June
30, 2016, we entered into a Securities Purchase Agreement with Berwin Trading Limited, a British Virgin Islands company (“Berwin”),
pursuant to which we sold and agreed to issue 3,007,519 shares of our common stock, $0.0001 par value, at a purchase price of $0.665
per share for an aggregate amount of $2,000,000.
As of September 30, 2016, the Company had 11,536,278 shares of common
stock issued and outstanding.
Restricted Stock Units (RSUs)
On August
11, 2016, FPI granted Mr. Lanclos 100,000 restricted stock units (RSUs) of the Company of which (i) 20,000 shall vest 180 days
from August 15, 2016, (ii) another 20,000 shall vest 270 days from August 15, 2016 and (iii) the remaining 60,000 shall vest 365
days from August 15, 2016.
The Company has a right, but not an obligation to repurchase all or any portion of RSUs granted
to the executive at a purchase price of $0.665 per share if executive’s employment with the Company is terminated for any
reason within 30 months of start of employment on August 15, 2015.
As of September 30, 2016,
t
hese shares were valued at $9,178.
On August
15, 2016, FPI granted Mr. Ovalle 100,000 restricted stock units (RSUs) of the Company of which (i) 20,000 shall vest 180 days from
August 15, 2016, (ii) another 20,000 shall vest 270 days from August 15, 2016 and (iii) the remaining 60,000 shall vest 365 days
from August 15, 2016.
The Company has a right, but not an obligation to repurchase all or any portion of RSUs granted to
the executive at a purchase price of $0.665 per share if executive’s employment with the Company is terminated for any reason
within 30 months of start of employment on August 15, 2015.
As of September 30, 2016, t
hese
shares were valued at $8,444.
Warrants
On May 27, 2016, the Company granted to Wilshire
Energy Partners warrants for services (“Wilshire Warrants”) to purchase (i) 100,000 shares at a strike price of $1.25
per share, (ii) 200,000 shares at a strike price of $2.00 per share and (iii) 400,000 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 will expire on June 1, 2021.
On May 27, 2016, the Company granted to an
unrelated party warrants to purchase (i) 125,000 shares at a strike price of $1.25 per share, (ii) 100,000 shares at a strike price
of $2.00 per share and (iii) 100,000 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 will expire on June
1, 2021.
The fair value of all warrants was determined
to be $2,144 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.
The following table summarizes all stock warrant
activity for the nine months ended September 30, 2016:
|
|
Number of Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual
Term
|
|
Balance outstanding, December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted
|
|
|
1,025,000
|
|
|
|
2.32
|
|
|
|
4.92
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, September 30, 2016
|
|
|
1,025,000
|
|
|
$
|
2.32
|
|
|
|
4.92
|
|
Exercisable, September 30, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Options
On May 19, 2016, the Company granted to each
of its three directors options to purchase (i) 50,000 shares at a strike price of $2 per share, vesting when the Company achieves
and maintains a total average daily production level of 100 boe/d for at least 30 days, (ii) 50,000 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 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.
The following table summarizes all stock option
activity for the nine months ended September 30, 2016:
|
|
Number of Option
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual
Term
|
|
Balance outstanding, December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted
|
|
|
450,000
|
|
|
|
3.00
|
|
|
|
9.89
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, September 30, 2016
|
|
|
450,000
|
|
|
$
|
3.00
|
|
|
|
9.89
|
|
Exercisable, September 30, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Note 7.
|
Related Party Transactions
|
Wilshire Energy Partners, LLC and Aegis
International LLC
Effective as of December 18, 2015, in connection
with the then formation and organization of Foothills Petroleum Inc., Wilshire Energy Partners, LLC (“Wilshire”), Aegis
International LLC (“Aegis”) and FPI entered into a Business Development Services Agreement (“BDSA”). Under
the BDSA the parties agreed that:
|
1.
|
Wilshire would transfer 100% of Foothills Exploration LLC, a Wyoming limited liability company (“FEL”) to FPI, and that FPI would issue 4.5 million shares of its common stock to Wilshire on its organization or as soon thereafter as may be practicable.
|
|
2.
|
Wilshire would endeavor in good faith, with the assistance of Aegis, to obtain $3 to $3.5 million of financing in the form of equity and/or convertible notes to implement the business plan that is under formation on behalf of FPI.
|
|
3.
|
Aegis would perform the following business development services:
|
|
·
|
provide senior management principally in the form of services of B.P. Allaire;
|
|
·
|
deliver or oversee administrative services on day to day basis;
|
|
·
|
assist in securing a chief financial officer;
|
|
·
|
formulate, craft and deliver a detailed business plan including forecasts;
|
|
·
|
formulate or assist in formulating, budgets and other financial information;
|
|
·
|
recruit or assist in recruiting experienced executive directors with proven track records whose backgrounds will be attractive to the oil and gas community and potential investors;
|
|
·
|
create and deliver a website that depicts the FPI operations; and
|
|
·
|
provide such other services as may be appropriate and necessary to implement and execute upon the business plan of FPI.
|
|
4.
|
For its services as outlined under the BDSA, Foothills Petroleum would pay to Aegis from funds received, $150,000 through September 30, 2016 (the “Foothills Initial Organizational Term”). As of September 30, 2016, the payment was made in full.
|
|
5.
|
Following the
Foothills Initial Organizational Term, FPI on at-will basis would pay B.P. Allaire $5,000 per month for his services as chief
operating officer and executive director, on terms subject to cancellation, on 30 days notice, by either of FPI or B.P.
Allaire. Effective September 1, 2016, the Company increased Mr. Allaire’s salary to $7,000 per month.
|
|
6.
|
Wilshire would assign, effective no later than December 29, 2015, all right, title and interest in FEL in exchange for 4.5 million shares of common stock of Foothills.
|
In furtherance of the BDSA, Wilshire assigned FEL to FPI on its organization in exchange for 4.5 million shares
of Foothills Petroleum, and Foothills Petroleum thereby acquired control of the Springs Prospect, owned by FEL, consisting of 38,120
contiguous acres. FPI regards the Springs Prospect as a valuable multiple objective oil resource play in the Greater Green River
Basin of Wyoming. Through Wilshire’s assistance Foothills Petroleum entered into two agreements with Alternus Capital Holdings
Ltd whereby Foothills obtained a total of $1,000,000 of financing in the form of convertible notes that upon completion of the
Share Exchange were converted, at $0.665 per share, into 1,503,759 shares of common stock of the Company.
In connection with the hiring of Ritchie Lanclos
as Executive Vice President of the Company and Vice President of Exploration of FPI, and Eleazar Ovalle as Executive Vice President
of the Company and Vice President of Geology and Geophysical of FPI, FPI agreed to pay Wilshire, one of our principal shareholders,
pursuant to a Services Agreement entered into by and between FPI and Wilshire Energy Partners and attached as Exhibit 10.3 to our
Current Report on Form 8-K filed with the Commission on August 19, 2016, a fee of 25% of gross annual salary, including all cash
and equity compensation, but excluding any bonuses to be received by Mr. Lanclos or Mr. Ovalle. In the event either of Mr. Lanclos
or Mr. Ovalle leaves FPI of his own volition or is terminated for cause within 90 days from commencement of their employment, Wilshire
shall refund FPI 100% of fees received, minus $2,500.
Alternus Capital Holdings Limited
On December 24, 2015, FPI entered into a convertible
promissory note in the amount of $600,000 with Alternus Capital Holdings Limited, a British Virgin Islands company. The two year
note matures on December 23, 2017, and accrues interest at 8% per year. By its terms the note was automatically required to convert
the outstanding principal and interest due under the terms of the note upon a merger or other combination occurring between FPI
and an entity with shares listed for trading. The conversion price of the note was established at $0.665 per share (the “Conversion
Price”), subject to adjustment as described below. On April 5, 2016, and under substantially similar terms described herein,
FPI received an additional $400,000 from Alternus Capital Holdings Limited. Under the agreements between Alternus and FPI, Alternus
had the right but not the obligation to subscribe for an aggregate of up to $3,500,000 of convertible notes which, in the event
of that full subscription would convert into not less than 30% of the outstanding shares of the “public” company. Through
May 27, 2016, the date the Share Exchange, Alternus had invested $1,000,000 and based on the Conversion Price was issued 1,503,759
shares of Common Stock of Key Link in full satisfaction of its two notes. All accrued interest was waived and recorded as additional
paid in capital.
|
Note 8.
|
Subsequent Events
|
Subsequent to September 30, 2016, the Company
launched its Exploration Division and opened a new office in Houston to support division’s staff. The Company’s Exploration
Division consists of geologists and petroleum engineers engaged in the exploration and development of hydrocarbons and tasked with
building a portfolio of exploration projects in the Gulf Coast region.
Subsequent to September 30, 2016, the
Company entered into a farm-out agreement with Koch Exploration Company, LLC ("Koch"), a subsidiary of Koch
Industries, Inc., in relation to the Ironwood and Paw Paw Prospects located in the Big Horn Basin of Wyoming. The Company has
already completed detailed work on the Paw Paw prospect, including geological analysis, 3-D seismic interpretation and we are
now in midst of preparations to commence drilling operations. The Ironwood and Paw Paw prospects cover about 10,583 acres
with total possible recoverable reserves from the two prospects amounting to approximately 7 million barrels of oil. The
farm-out agreement provides the Company with access to an immediate drilling prospect, defined by 3-D seismic with short and
long-term production potential. The team at FTXP believes that the Paw Paw and Ironwood prospects considerably increase the
Company's potential scope of operations in the Rockies.