NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
1
|
ACCOUNTING POLICIES AND ESTIMATES
|
The accompanying unaudited condensed
financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”)
for interim financial information with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, these unaudited
condensed financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial
statements. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments (consisting
only of normal recurring adjustments), which we consider necessary, for a fair presentation of those financial statements. The
results of operations and cash flows for the three months and nine months ended September 30, 2017 may not necessarily be indicative
of results that may be expected for any succeeding quarter or for the entire fiscal year. The information contained in this quarterly
report on Form 10-Q should be read in conjunction with our audited financial statements included in our annual report on Form 10-K
as of and for the year ended December 31, 2016 as filed with the Securities and Exchange Commission (the “SEC”).
Significant accounting policies
are described in Note 2 to the consolidated financial statements included in Item 8 of our annual report on Form 10-K as of December
31, 2016.
The preparation of unaudited consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions, which are evaluated on
an ongoing basis, that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Management
bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of
revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and judgments.
In particular, significant estimates and judgments include those related to: the estimated useful lives for plant and equipment,
the fair value of warrants and stock options granted for services or compensation, estimates of the probability and potential magnitude
of contingent liabilities, derivative liabilities, the valuation allowance for deferred tax assets due to continuing operating
losses, those related to revenue recognition and the allowance for doubtful accounts.
Making estimates requires management
to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation
or set of circumstances that existed at the date of the unaudited consolidated financial statements, which management considered
in formulating its estimate could change in the near-term due to one or more future confirming events. Accordingly, the actual
results could differ significantly from our estimates.
All amounts referred to in the notes
to the unaudited consolidated financial statements are in United States Dollars ($) unless stated otherwise.
|
b)
|
Principles of Consolidation
|
The unaudited consolidated financial
statements include the financial statements of the Company and its subsidiaries in which it has a majority voting interest. All
significant inter-company accounts and transactions have been eliminated in the unaudited consolidated financial statements. The
entities included in these unaudited consolidated financial statements are as follows:
Pledge Petroleum Corp (formerly
Propell Technologies Group, Inc.) – Parent Company
Novas Energy USA Inc. (wholly owned)
Novas Energy North America, LLC
(60% owned) – Discontinued operation.
PLEDGE PETROLEUM CORP.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
1
|
ACCOUNTING POLICIES AND ESTIMATES (continued)
|
|
c)
|
Recent Accounting Pronouncements
|
In July 2017, the FASB issued Accounting
Standards Update No. (“ASU’’) 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity
(Topic 480) and Derivatives and Hedging (Topic 815). The amendments in this Update provide guidance about:
|
1.
|
Accounting for certain financial instruments with down
round features
|
|
2.
|
Replacement of the indefinite deferral for mandatorily
redeemable financial instruments of certain non-public entities and certain non-controlling interests
|
The amendments in Part I of this
Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round
features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down
round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own
stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding
equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at
fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the
amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down
round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders
in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized
guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options),
including related EPS guidance (in Topic 260).
The amendments in Part II of this
Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the
Codification, to a scope exception. Those amendments do not have an accounting effect.
The amendments in Part I of this
Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early
adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an
interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The
amendments in Part 1 of this Update should be applied in either of the following ways: 1. Retrospectively to outstanding financial
instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the
beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective
2. Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in
accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10.
The amendments in Part II of this
Update do not require any transition guidance because those amendments do not have an accounting effect.
PLEDGE PETROLEUM CORP.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1
|
ACCOUNTING POLICIES AND ESTIMATES (continued)
|
|
c)
|
Recent Accounting Pronouncements (continued)
|
The Company is currently
evaluating the impact this ASU will have on its consolidated financial In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging, an amendment to Topic 815. The amendments in this Update better align an entity’s risk
management activities and financial reporting for hedging relationships through changes to both the designation and
measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the
amendments expand and refine hedge accounting for both nonfinancial and financial risk components 2 and align the recognition
and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in
this Update require an entity to present the earnings effect of the hedging instrument in the same income statement line item
in which the earnings effect of the hedged item is reported.
The amendments in this Update are
effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application
is permitted in any interim period after issuance of the Update. All transition requirements and elections should be applied to
hedging relationships existing (that is, hedging relationships in which the hedging instrument has not expired, been sold, terminated,
or exercised or the entity has not removed the designation of the hedging relationship) on the date of adoption. The effect of
adoption should be reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact
this ASU will have on its consolidated financial statements.
In September 2017, the FASB issued
ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases
(Topic 842). The amendments in this ASU deals with the transition and effective dates of implementing to ASU 2014-09, Revenue from
contracts with customers, ASU 2016-08, Revenue from contracts with customers, principal versus agent considerations, ASU 2016-10,
revenues from contacts with customers; identifying performance obligations and licensing, ASU 2016-12, revenues from contacts with
customers, narrow scope improvements and practical expedients, 2016-20, technical corrections and improvements and ASU 2017-05,
other income, gains and losses from the derecognition of non-financial assets.
The transition provisions require
adoption of Topic 606 for annual reporting periods commencing after December 15, 2017 and the adoption of Topic 842 for annual
reporting periods beginning after December 15, 2018 for public business entities, if the requirements of a public business entity
as defined in ASU 2017-122 are not met, may adopt Topic 606 for annual reporting periods commencing after December 15, 2018 and
for Topic 842 for annual reporting periods commencing after December 15, 2019. Early adoption is permitted of both Topics. The
Company is currently evaluating the impact this ASU will have on its consolidated financial statements.
Any new accounting standards, not
disclosed above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected to
have a material impact on the financial statements upon adoption.
PLEDGE PETROLEUM CORP.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
1
|
ACCOUNTING POLICIES AND ESTIMATES (continued)
|
The preparation of unaudited consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions, which are evaluated on
an ongoing basis, that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Management
bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of
revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and judgments.
In particular, significant estimates and judgments include those related to: the estimated useful lives for plant and equipment,
the fair value of warrants and stock options granted for services or compensation, estimates of the probability and potential magnitude
of contingent liabilities, derivative liabilities, the valuation allowance for deferred tax assets due to continuing operating
losses, those related to revenue recognition and the allowance for doubtful accounts.
Making estimates requires management
to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation
or set of circumstances that existed at the date of the unaudited consolidated financial statements, which management considered
in formulating its estimate could change in the near-term due to one or more future confirming events. Accordingly, the actual
results could differ significantly from our estimates.
Certain conditions may exist as
of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when
one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such
assessment inherently involves an exercise of judgment.
If the assessment of a contingency
indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential
material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of
the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case
the guarantee would be disclosed.
|
f)
|
Cash and Cash Equivalents
|
The Company considers all highly
liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. At September
30, 2017 and December 31, 2016, respectively, the Company had no cash equivalents.
The Company assesses credit risk
associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may
exceed federally insured limits. At September 30, 2017, the Company had cash balances of $8,755,803, which exceeded the federally
insured limits by $8,450,408.
PLEDGE PETROLEUM CORP.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
1
|
ACCOUNTING POLICIES AND ESTIMATES (continued)
|
Parties are considered to be related
to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company, or own in aggregate, on a fully diluted basis 5% or more of the Company’s stock.
Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners
of the Company and its management and other parties with which the Company may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented
from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions are recorded
at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related
party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to related party.
Certain reclassifications have been
made to the prior year financial statement numbers to conform to the current presentation of the financial statements.
The Company has cash balances of
$8,755,803 as of September 30, 2017, which is sufficient to meet current expenses for at least the next twelve month period, however
the Board of Directors are considering various options as to the future direction of the Company, including the possible sale of
its technology and PPT assets. The Company formed a special committee to investigate a possible share buyback of the majority stockholder,
Ervington Investments Limited, and/or a possible dissolution of the Company.
Due to uncertainties surrounding
the Company’s ability to realize the full value of its assets, the Company cannot make any assurances regarding the amount
available for distribution to its stockholders.
The Company has made certain projections
relating to the amount of cash it expects to have to distribute to its stockholders upon dissolution of the Company. These projections
generally relate to the amount of liabilities which must be satisfied before the Company is dissolved and the amount its preferred
stockholders is expected to receive for their equity interest. The above projections are subject to multiple variables, including
the timing of a dissolution affecting the amount of dividends payable and the amount of liabilities owed at the time of dissolution.
Based upon current estimates, if the Company were to dissolve this quarter, no assurance can be given that common stockholders
or subordinate preferred stockholders will receive any such distribution.
|
3
|
DISCONTINUED OPERATIONS
|
On October 4, 2016, Novas Energy
USA, Inc. (“Novas USA”), a wholly owned subsidiary of the Company, delivered a notice to Technovita Technologies USA,
Inc. (“Technovita”) electing to dissolve its joint venture with Technovita (the “Joint Venture”), effective
November 1, 2016, pursuant to Section 11.1(b) of the Operating Agreement of Novas Energy North America, LLC (“NENA”),
dated October 22, 2015 (the “Operating Agreement”), by and among Novas USA and Technovita.
PLEDGE PETROLEUM CORP.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
3
|
DISCONTINUED OPERATIONS (continued)
|
The assets and liabilities of discontinued
operations as of September 30, 2017 and December 31, 2016, respectively is as follows:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
19,480
|
|
|
$
|
19,480
|
|
Accounts receivable, net
|
|
|
61,661
|
|
|
|
61,661
|
|
Prepaid expenses and other current assets
|
|
|
29,896
|
|
|
|
29,896
|
|
Total current assets
|
|
|
111,037
|
|
|
|
111,037
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
Plant and equipment, net
|
|
|
6,480
|
|
|
|
6,480
|
|
Total assets
|
|
|
117,517
|
|
|
|
117,517
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
94,784
|
|
|
|
94,784
|
|
Related party payables
|
|
|
932,478
|
|
|
|
932,478
|
|
Accrued liabilities and other payables
|
|
|
115,971
|
|
|
|
115,971
|
|
Total liabilities
|
|
|
1,143,233
|
|
|
|
1,143,233
|
|
Discontinued operations
|
|
$
|
1,025,716
|
|
|
$
|
1,025,716
|
|
Loss from discontinued operations is as follows:
|
|
Three months
ended
September 30
2017
|
|
|
Three months
ended
September 30,
2016
|
|
|
Nine months
ended
September 30,
2017
|
|
|
Nine months
ended
September 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
-
|
|
|
$
|
48,560
|
|
|
$
|
-
|
|
|
$
|
196,328
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
13,017
|
|
|
|
-
|
|
|
|
139,950
|
|
Gross profit
|
|
|
-
|
|
|
|
35,543
|
|
|
|
-
|
|
|
|
56,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
|
-
|
|
|
|
848
|
|
|
|
-
|
|
|
|
11,729
|
|
Professional fees
|
|
|
-
|
|
|
|
20,573
|
|
|
|
-
|
|
|
|
57,496
|
|
Business development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
145,319
|
|
Consulting fees
|
|
|
-
|
|
|
|
230,268
|
|
|
|
-
|
|
|
|
802,460
|
|
General and administrative expenses
|
|
|
-
|
|
|
|
137,340
|
|
|
|
-
|
|
|
|
457,876
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
477
|
|
|
|
-
|
|
|
|
1,280
|
|
Total expense
|
|
|
-
|
|
|
|
389,506
|
|
|
|
-
|
|
|
|
1,476,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
-
|
|
|
|
(353,963
|
)
|
|
|
-
|
|
|
|
(1,419,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on discontinuance of subsidiary
|
|
|
-
|
|
|
|
(9,377
|
)
|
|
|
-
|
|
|
|
(9,377
|
)
|
Foreign currency (losses) gains
|
|
|
-
|
|
|
|
(81
|
)
|
|
|
-
|
|
|
|
992
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
-
|
|
|
$
|
(363,421
|
)
|
|
$
|
-
|
|
|
$
|
1,428,157
|
|
PLEDGE PETROLEUM CORP.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Prepaid expenses consisted of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
13,851
|
|
|
$
|
22,607
|
|
Prepaid professional fees
|
|
|
5,833
|
|
|
|
3,333
|
|
|
|
$
|
19,684
|
|
|
$
|
25,940
|
|
Plant and Equipment consisted of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
Cost
|
|
|
Amortization
and Impairment
|
|
|
Net book value
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plasma pulse tool
|
|
$
|
945,423
|
|
|
$
|
(945,423
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Furniture and equipment
|
|
|
6,700
|
|
|
|
(2,122
|
)
|
|
|
4,578
|
|
|
|
5,583
|
|
Field equipment
|
|
|
19,627
|
|
|
|
(19,627
|
)
|
|
|
-
|
|
|
|
341
|
|
Computer equipment
|
|
|
11,130
|
|
|
|
(5,510
|
)
|
|
|
5,620
|
|
|
|
8,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
982,880
|
|
|
$
|
(972,682
|
)
|
|
$
|
10,198
|
|
|
$
|
14,326
|
|
Depreciation expense was $4,128 and
$82,053 for the nine months ended September 30, 2017 and 2016, respectively.
Licenses
Novas licenses the “Plasma-Pulse
Technology” (“the Technology”) from Novas Energy Group Limited, the Licensor, pursuant to the terms of an exclusive
perpetual royalty bearing license it entered into in January 2013, which was amended during March 2014.
On July 19, 2016, the Company received
a notice from Licensor purporting to effectively terminate the License Agreement for non-payment of required royalties, asserting,
among other things, that as of June 30, 2016, Novas owed Licensor a pro rata amount of $1,458,333 for the Licensed Plasma Pulse
Technology for the United States and Mexico, of which $1,000,000 was alleged to be in arrears. Novas has recently been contacted
by Licensor with a request for settlement discussions; however, there can be no assurance that such discussions will occur or what
the outcome of any such discussions will be. The Company and Novas believe that there is no legal basis for Licensor to terminate
the License Agreement and intend to vigorously defend against any attempt by Licensor to enforce a termination of the License Agreement.
Further, we believe that Licensor has failed to materially perform its obligations under the License Agreement, and that such failures
on Licensor’s part may impact what, if any, payments are due under the License Agreement by Novas to Licensor.
PLEDGE PETROLEUM CORP.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
6
|
INTANGIBLES (continued)
|
On October 4, 2016, Novas Energy
USA, Inc. (“Novas USA”), a wholly owned subsidiary of the Company, delivered a notice to Technovita Technologies USA,
Inc. (“Technovita”) electing to dissolve its joint venture with Technovita (the “Joint Venture”), effective
November 1, 2016, pursuant to Section 11.1(b) of the Operating Agreement of Novas Energy North America, LLC (“NENA”),
dated October 22, 2015 (the “Operating Agreement”), by and among Novas USA and Technovita.
Pursuant to the Operating Agreement,
Novas USA had entered into a sublicense agreement (the “Novas Sublicense Agreement”) with NENA and Novas Energy Group
Limited for NENA to be the exclusive provider of Plasma Pulse Technology for treatment of vertical wells to third parties in the
United States. The Sublicense Agreement was terminated upon termination of the Joint Venture.
Intangibles consisted of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
Cost
|
|
|
Amortization
and Impairment
|
|
|
Net book value
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License agreements
|
|
$
|
350,000
|
|
|
$
|
(350,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Website development
|
|
|
8,000
|
|
|
|
(8,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
358,000
|
|
|
$
|
(358,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Amortization expense was $0 and $52,500
for the nine months ended September 30, 2017 and 2016, respectively.
|
7
|
ACCRUED LIABILITIES AND OTHER PAYABLES
|
Accrued liabilities consisted of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Royalties payable
|
|
$
|
14,653
|
|
|
$
|
14,653
|
|
Other
|
|
|
207
|
|
|
|
-
|
|
Severance accrual
|
|
|
-
|
|
|
|
19,814
|
|
|
|
$
|
14,860
|
|
|
$
|
34,467
|
|
The severance accrual relates to
accrued severance costs due to the COO, whose employment with the Company was terminated on December 15, 2016 as part of a cost
reduction exercise.
|
i)
|
Series B Convertible Preferred Stock
|
The Company has undeclared dividends
on the Series B Preferred stock amounting to $154,553 as of September 30, 2017. If the dividends are paid in stock, the beneficial
conversion feature of these undeclared dividends will be recorded upon the declaration of these dividends. The computation of loss
per common share for the nine months ended September 30, 2017 takes into account these undeclared dividends.
PLEDGE PETROLEUM CORP.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
INANCIAL STATEMENTS
|
8
|
STOCKHOLDERS’ EQUITY (continued)
|
|
a)
|
Preferred stock (continued)
|
|
ii)
|
Series C Convertible Preferred Stock
|
The Company has undeclared dividends
on the Series C Preferred stock amounting to $1,402,110 as of September 30, 2017. The computation of loss per common share for
the nine months ended September 30, 2017 takes into account these undeclared dividends.
At September 30, 2017 and December
31, 2016 there were 380,950 Plan options issued and outstanding, respectively, under the Stock Option Plan.
No options were issued during the nine
months ended September 30, 2017 and the year ended December 31, 2016.
|
ii)
|
Non-Plan Stock Options
|
On January 1, 2016, the Company granted,
to its then Chief Executive Officer, non - plan options for 3,000,000 shares of common stock (that are not covered by the Company’s
Stock Option Plan), with an exercise price of $0.08 per share and which options will expire thirty days after resignation. These
options vested as to 1,000,000 on January 1, 2017, the first anniversary of the grant date; 1,000,000 was due to vest on the second
anniversary of the grant date and a further 1,000,000 was due to vest on the third anniversary of the grant date.
On March 31, 2017, the Chief Executive
Officer, Mr. Brian Boutte tendered his resignation and the remaining unvested options for 2,000,000 shares of common stock were
cancelled. The 1,000,000 options which vested on January 1, 2017, were not exercised within 30 days of resignation by Mr. Boutte
and have been forfeited.
A summary of all of our option activity
during the period January 1, 2016 to September 30, 2017 is as follows:
|
|
No. of shares
|
|
|
Exercise price
per share
|
|
Weighted
average exercise
price
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2016
|
|
|
380,950
|
|
|
$0.08 to $13.50
|
|
$
|
0.18
|
|
Granted
|
|
|
4,000,000
|
|
|
$0.08 to $0.09
|
|
|
0.09
|
|
Forfeited/cancelled
|
|
|
(1,000,000
|
)
|
|
$0.08
|
|
|
0.08
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding December 31, 2016
|
|
|
3,380,950
|
|
|
$0.09 to $13.50
|
|
$
|
0.18
|
|
Granted - non-plan options
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited/cancelled
|
|
|
(3,000,000
|
)
|
|
$0.08
|
|
|
0.08
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding September 30, 2017
|
|
|
380,950
|
|
|
$0.51 to $13.50
|
|
$
|
0.90
|
|
Stock options outstanding as of September
30, 2017 and December 31, 2016 as disclosed in the above table, have an intrinsic value of $0 and $0, respectively.
PLEDGE PETROLEUM CORP.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
8
|
STOCKHOLDERS’ EQUITY (continued)
|
|
b)
|
Stock Options (continued)
|
The options outstanding and exercisable at September
30, 2017 are as follows:
|
|
|
Options outstanding
|
|
|
Options exercisable
|
|
Exercise price
|
|
|
No. of shares
|
|
|
Weighted
average
remaining years
|
|
|
Weighted
average exercise
price
|
|
|
No. of shares
|
|
|
Weighted
average exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13.50
|
|
|
|
3,480
|
|
|
|
1.71
|
|
|
|
|
|
|
|
3,480
|
|
|
|
|
|
$
|
12.50
|
|
|
|
2,000
|
|
|
|
3.03
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
$
|
8.50
|
|
|
|
500
|
|
|
|
3.75
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
$
|
5.00
|
|
|
|
14,800
|
|
|
|
4.04
|
|
|
|
|
|
|
|
14,800
|
|
|
|
|
|
$
|
0.65
|
|
|
|
36,924
|
|
|
|
5.50
|
|
|
|
|
|
|
|
36,924
|
|
|
|
|
|
$
|
0.63
|
|
|
|
38,096
|
|
|
|
0.75
|
|
|
|
|
|
|
|
38,096
|
|
|
|
|
|
$
|
0.51
|
|
|
|
285,150
|
|
|
|
2.54
|
|
|
|
|
|
|
|
285,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
380,950
|
|
|
|
2.70
|
|
|
|
0.90
|
|
|
|
380,950
|
|
|
|
0.90
|
|
The Company has recorded an expense
of $18,066 and $66,035 for the nine months ended September 30, 2017 and 2016, respectively relating to options issued.
The warrants outstanding and exercisable at September
30, 2017 are as follows:
|
|
|
Warrants outstanding
|
|
|
Warrants exercisable
|
|
Exercise price
|
|
|
No. of shares
|
|
|
Weighted
average
remaining years
|
|
|
Weighted
average exercise
price
|
|
|
No. of shares
|
|
|
Weighted
average
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.30
|
|
|
|
375,000
|
|
|
|
1.08
|
|
|
|
|
|
|
|
375,000
|
|
|
|
|
|
$
|
0.25
|
|
|
|
1,751,667
|
|
|
|
1.74
|
|
|
|
|
|
|
|
1,751,667
|
|
|
|
|
|
$
|
0.15
|
|
|
|
525,500
|
|
|
|
1.74
|
|
|
|
|
|
|
|
525,500
|
|
|
|
|
|
$
|
0.25
|
|
|
|
1,508,333
|
|
|
|
1.84
|
|
|
|
|
|
|
|
1,508,333
|
|
|
|
|
|
$
|
0.15
|
|
|
|
577,499
|
|
|
|
1.85
|
|
|
|
|
|
|
|
577,499
|
|
|
|
|
|
$
|
0.25
|
|
|
|
968,166
|
|
|
|
1.85
|
|
|
|
|
|
|
|
968,166
|
|
|
|
|
|
$
|
0.25
|
|
|
|
633,333
|
|
|
|
1.90
|
|
|
|
|
|
|
|
633,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,339,498
|
|
|
|
1.77
|
|
|
|
0.24
|
|
|
|
6,339,498
|
|
|
|
0.24
|
|
The warrants outstanding have an intrinsic value of $0
and $0 as of September 30, 2017 and December 31, 2016, respectively.
PLEDGE PETROLEUM CORP.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
|
Three
months
ended 30
September 2017
|
|
|
Three
months
ended 30
September 2016
|
|
Nine months
ended
September 30,
2017
|
|
|
Nine months
ended
September 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
$
|
-
|
|
$
|
4,059
|
|
$
|
-
|
|
|
$
|
203,296
|
|
Other income in the prior period includes the forgiveness
of the $200,000 license fee due to Novas BVI during the prior period.
Basic loss per share is based on
the weighted-average number of common shares outstanding during each period. Diluted loss per share is based on basic shares as
determined above plus common stock equivalents, including convertible preferred shares and convertible notes as well as the incremental
shares that would be issued upon the assumed exercise of in-the-money stock options using the treasury stock method. The computation
of diluted net loss per share does not assume the issuance of common shares that have an anti-dilutive effect on net loss per share.
For the nine months ended September 30, 2017 and 2016, all stock options, warrants and convertible preferred stock were excluded
from the computation of diluted net loss per share. Dilutive shares which could exist pursuant to the exercise of outstanding stock
instruments and which were not included in the calculation because their affect would have been anti-dilutive are as follows:
|
|
Three and Nine
months
ended
September 30,
2017
|
|
|
Three and Nine
months
ended
September 30,
2016
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
380,950
|
|
|
|
4,380,950
|
|
Warrants to purchase shares of common stock
|
|
|
6,339,498
|
|
|
|
6,339,498
|
|
Series A-1 convertible preferred shares
|
|
|
31,375,000
|
|
|
|
31,375,000
|
|
Series B convertible preferred shares
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
Series C convertible preferred shares
|
|
|
120,000,000
|
|
|
|
120,000,000
|
|
|
|
|
162,095,448
|
|
|
|
166,095,448
|
|
PLEDGE PETROLEUM CORP.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
11
|
RELATED PARTY TRANSACTIONS
|
On January 1, 2016, the “Company
entered into a three-year Employment Agreement with C. Brian Boutte (the “Boutte Employment Agreement”) to serve as
the Company’s Chief Executive Officer. Mr. Boutte was to also serve as the Company’s interim Chief Financial Officer.
Under the Boutte Employment Agreement, for his service as the Chief Executive Officer of the Company, Mr. Boutte was to receive
an annual base salary of $265,000, a sign on bonus of $60,000 and an annual performance bonus of up to 55% of his base salary,
such bonus payable in cash or equity upon attainment of certain performance indicators established by the Company’s Board
of Directors and Mr. Boutte. In connection with the entry into the Boutte Employment Agreement, Mr. Boutte was granted an option
award exercisable for 3,000,000 shares of the Company’s common stock, which will vest as to 1,000,000 shares on each of the
one, two and three-year anniversary of the commencement of his employment with the Company. The Boutte Employment Agreement was
amended on December 31, 2016 to provide for a term of six months ending June 30, 2017, a reduced annual base salary of $165,000
and a provision for immediate vesting of the options upon a Change of Control (as defined in the amendment). In the event that
Mr. Boutte’s employment was terminated Without Cause (as defined in the Boutte Employment Agreement), by Mr. Boutte for Good
Reason (as defined below), Disability (as defined in the Boutte Employment Agreement), upon his death or a change in control, Mr.
Boutte would be entitled to receive a severance payment equal to $65,000. Upon a change in control, Mr. Boutte’s options
would immediately vest. The Boutte Employment Agreement also included customary confidentiality obligations and inventions assignments
by Mr. Boutte as well as a non- compete and non-solicitation provision. If his employment was terminated for Cause (as defined
below) or by him Without Good Reason (as defined in the Boutte Employment Agreement), Mr. Boutte was entitled to receive his annual
base salary through the date of termination and any bonus earned but unpaid. For purposes of the Boutte Employment Agreement, “Good
Reason” is defined as (i) any material and substantial breach of the Boutte Employment Agreement by the Company; (ii) a Change
in Control (as defined in the Boutte Employment Agreement) occurs and Mr. Boutte’s employment is terminated; (iii) a reduction
in Mr. Boutte’s Annual Base Salary as in effect at the time in question, or any other failure by the Company to comply with
the compensation terms of the Boutte Employment Agreement; or (iv) the Boutte Employment Agreement is not assumed by a successor
to the Company. For purpose of the Boutte Employment Agreement, “Cause” is defined as (i) acts of embezzlement or misappropriation
of funds or fraud; (ii) conviction of a felony or other crime involving moral turpitude, dishonesty or theft; (iii) a material
violation by Mr. Boutte of any provision of the Boutte Employment Agreement, including willful failure to perform assigned tasks,
willful and unauthorized disclosure of Company material confidential information; (iv) being under the influence of drugs (other
than prescription medicine or other medically related drugs to the extent that they are taken in accordance with their directions)
during the performance of Mr. Boutte’s duties and that performance of his duties is affected; (v) engaging in behavior that
would constitute grounds for liability for harassment (as proscribed by the U.S. Equal Employment Opportunity Commission Guidelines
or any other applicable state or local regulatory body) or other egregious conduct that violates laws governing the workplace;
or (vi) willful failure to perform his assigned tasks, where such failure is attributable to the fault of Mr. Boutte, gross insubordination
or dereliction of fiduciary obligations which, to the extent it is curable by Mr. Boutte, is not cured by Mr. Boutte within thirty
(30) days of receiving written notice of such violation by the Company.
Mr. Boutte tendered his resignation
to the Board of Directors on March 31, 2017.
|
12
|
COMMITMENTS AND CONTINGENCIES
|
The Company disposed of its Crystal
Magic, Inc. subsidiary effective December 31, 2013. In terms of the sale agreement entered into by the Company, the purchaser has
been indemnified against all liabilities whether contingent or otherwise, claimed by third parties, this includes claims by creditors
of the Company amounting to $372,090 and claims against long-term liabilities of $848,916. Management does not consider it likely
that these claims will materialize and accordingly no provision has been made for these contingent liabilities.
PLEDGE PETROLEUM CORP.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
12
|
COMMITMENTS AND CONTINGENCIES (continued)
|
The Company entered into a lease
agreement for approximately 3,733 square feet of office and warehouse space in Houston, the term of the lease was for 39 months
commencing on March 1, 2016 and terminating on May 31, 2019. The lease provided for the first month to be rent free, the fourteenth
month to be rent free and the twenty-seventh month to be rent free. Monthly rentals, including estimated operating costs, for the
first 12 months, excluding the free rental month amounted to approximately $3,410 per month, escalating at a rate of 1.7% per annum,
after excluding the free rental months. This lease agreement was amended, and the lease terminated with effect from May 31, 2017
with a final payment of $2,000 and the forfeiture of the security deposit of $6,968.
The Company entered into an Office
Service Agreement on May 16, 2017 whereby it has the license to use an office in a business center, together with all telecommunication
services and access to conference rooms, kitchens and all utilities, the agreement is for a period of six months commencing on
June 1, 2017 and terminating on November 30, 2017. The Company pays a monthly amount of $530 in terms of the Office Service Agreement.
In terms of the license agreement
commitments disclosed in note 6 above, the minimum commitments due under the amended license agreement entered into on January
30, 2013, for the next five years, are summarized as follows:
|
|
Amount
|
|
|
|
|
|
2017
|
|
$
|
500,000
|
|
2018
|
|
|
500,000
|
|
2019
|
|
|
500,000
|
|
2020
|
|
|
500,000
|
|
2021
|
|
|
500,000
|
|
Total
|
|
$
|
2,500,000
|
|
The Company has entered into
an Asset Purchase Agreement (the “Asset Purchase Agreement”) with an affiliate (the “Purchaser”) of Ervington
Investment Limited (“Ervington”), the current holder of a majority of the Company’s outstanding voting securities,
pursuant to which the Company has agreed to sell to the Purchaser substantially all of its assets, including all pertinent intellectual
property rights, comprising its business of implementing its plasma pulse technology, for $650,000 (the “Asset Sale”).
The Asset Purchase Agreement provides, among other things, that the Asset Sale is conditioned on its approval by holders of a majority
of the Company’s voting securities, exclusive of the securities held by Ervington (a “majority of the minority”).
The Company has also entered
into an agreement with Ervington (the “Share Repurchase Agreement”) to repurchase all of its outstanding securities
held by Ervington for $8,500,000 (the “Share Repurchase”), which repurchase will occur at the same time as the Asset
Sale. The repurchase will constitute a change of control and upon consummation of the repurchase, Ivan Persiyanov, will resign
from all positions he holds as an officer and director of the Company and its subsidiaries. After the completion of the Asset Sale,
the Company expects to cease all activities related to its existing business while evaluating other business opportunities, which
include potentially acquiring an oilfield services business, of which two of the Company’s current directors (Messrs. Huemoeller
and Zotos) own a minority equity interest. The Company has not entered into an agreement with any potential acquisition candidate
and has only been in the early stages of discussion.
The purchase price for the shares
being repurchased and assets being sold together with documents necessary to effect the Asset Sale pursuant to the Asset Purchase
Agreement and the Share Repurchase pursuant to the Share Repurchase Agreement, including, but not limited to, a bill of sale for
the assets being sold, an assignment of intellectual property rights, stock certificates and stock powers for the shares to be
repurchased from Ervington, and the resignation of Ivan Persiyanov, have been placed in escrow pending the approval of the Asset
Sale by a majority of the minority and will be released at the subsequent closing of the transactions contemplated by the Asset
Purchase Agreement and Share Repurchase Agreement.
Other than disclosed above, in
accordance with ASC 855-10, the Company has analyzed its operations subsequent to September 30, 2017 to the date these financial
statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial
statements.