NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PERSENTATION
Organization and nature of business
PetroGas Company (Formerly America Resources Exploration Inc. (the “Company”)), was incorporated in the State of Nevada on January 24, 2014. The Company was incorporated under the name Alazzio Entertainment Corp. and changed its name to America Resources Exploration Inc. on April 17, 2015. Subsequently, on January 20, 2016, the Company changed its name to PetroGas Company. On June 12, 2015, the Company completed an acquisition of working interests in certain oil & gas properties as discussed in Note 4 below.
On April 16, 2015, the Company filed a Certificate of Amendment with the Nevada Secretary of State whereby it amended its Articles of Incorporation by increasing the Company's authorized number of shares of common stock from 75 million to 300 million and increasing all of its issued and outstanding shares of common stock at a ratio of fifteen (15) shares for every one (1) share held.
On January 20, 2016, the Company filed a Certificate of Amendment with the Nevada Secretary of State (the “Nevada SOS”) whereby decreasing all of its issued and outstanding shares of common stock at a ratio of one (1) share for every one hundred (100) shares held. The Company’s Board of Directors approved this amendment on January 13, 2016 and shareholders holding 68.65% of the Company’s issued and outstanding shares approved this amendment via a written consent executed on January 14, 2016.
All share and per share amounts in these financial statements have been adjusted to reflect this stock split.
Financial Statements Presented
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 210 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. Operating results for the nine months ended December 31, 2016, are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2017. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 as filed with the Securities and Exchange Commission on September 27, 2016.
Certain reclassifications have been made to the prior period’s financial statements to conform to the current period’s presentation.
NOTE 2 – GOING CONCERN
The Company has experienced net losses to date, and it has not generated revenue from operations, we will need additional working capital to service debt and for ongoing operations, which raises substantial doubt about its ability to continue as a going concern. Management of the Company has developed a strategy to meet operational shortfalls which may include equity funding, short term or long term financing or debt financing, to enable the Company to reach profitable operations.
The accompanying consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. If we fail to generate positive cash flow or obtain additional financing, when required, we may have to modify, delay, or abandon some or all of our business and expansion plans.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates, which have been made using careful judgment. Actual results may vary from these estimates.
The financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below:
Basis of Consolidation
These consolidated financial statements include the accounts of the Company and its 94% owned subsidiary, Seabourn Oil Company, LLC. All intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year End
The Company has selected March 31 as its fiscal year end.
Cash and Cash Equivalents
Cash and cash equivalents consist of commercial accounts and interest-bearing bank deposits and are carried at cost, which approximates current value. Items are considered to be cash equivalents if the original maturity is three months or less.
Equipment and Facilities
Equipment and facilities are recorded at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets, ranging from one to twenty-five years.
Oil and Gas Properties – Full Cost Method
The Company follows the full cost accounting method to account for oil and natural gas properties, whereby costs incurred in the acquisition, exploration and development of oil and gas reserves are capitalized. Such costs include lease acquisition, geological and geophysical activities, rentals on nonproducing leases, drilling, completing and equipping of oil and gas wells and administrative costs directly attributable to those activities and asset retirement costs. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capital costs and proved reserves of oil and gas, in which case the gain or loss is recognized to operations.
The capitalized costs of oil and gas properties, excluding unevaluated and unproved properties, are amortized as depreciation, depletion and amortization expense using the units-of-production method based on estimated proved recoverable oil and gas reserves.
Oil and Gas Properties – Full Cost Method (Cont’d)
The costs associated with unevaluated and unproved properties, initially excluded from the amortization base, relate to unproved leasehold acreage, wells and production facilities in progress and wells pending determination of the existence of proved reserves, together with capitalized interest costs for these projects. Unproved leasehold costs are transferred to the amortization base with the costs of drilling the related well once a determination of the existence of proved reserves has been made or upon impairment of a lease. Costs associated with wells in progress and completed wells that have yet to be evaluated are transferred to the amortization base once a determination is made whether or not proved reserves can be assigned to the property. Costs of dry wells are transferred to the amortization base immediately upon determination that the well is unsuccessful.
All items classified as unproved property are assessed on a quarterly basis for possible impairment or reduction in value. Properties are assessed on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of various factors, including, but not limited to, the following: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; assignment of proved reserves; and economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and become subject to amortization.
Under full cost accounting rules for each cost center, capitalized costs of evaluated oil and gas properties, including asset retirement costs, less accumulated amortization and related deferred income taxes, may not exceed an amount (the "cost ceiling") equal to the sum of (a) the present value of future net cash flows from estimated production of proved oil and gas reserves, based on current prices and operating conditions, discounted at ten percent (10%), plus (b) the cost of properties not being amortized, plus (c) the lower of cost or estimated fair value of any unproved properties included in the costs being amortized, less (d) any income tax effects related to differences between the book and tax basis of the properties involved. If capitalized costs exceed this limit, the excess is charged to operations. For purposes of the ceiling test calculation, current prices are defined as the unweighted arithmetic average of the first day of the month price for each month within the 12-month period prior to the end of the reporting period. Prices are adjusted for basis or location differentials. Unless sales contracts specify otherwise, prices are held constant for the productive life of each well. Similarly, current costs are assumed to remain constant over the entire calculation period.
The Company’s proved properties have not operated for in excess of two years and under present circumstances, cannot be placed on production. Given the decline and continuing volatility of oil and gas prices which has prevented the Company from bringing its proven wells online, an estimate of discounted future net cash flows from proved oil and gas reserves is indeterminable. In addition, development of certain unproved properties is not viable, nor are revenues from the Company’s ORR’s related to these projects. As a result, the Company evaluated its proved and unproven assets as at March 31, 2016 and has fully impaired these assets. We recognized a cumulative total of $713,550 and $0 of impairment costs during the years ended March 31, 2016 and 2015, respectively in respect of our proven and unproven oil and gas assets, in addition to a total of $494,737 which was impaired during the nine months ended December 31, 2015 as a result of the loss on acquisition of certain ORR’s of $46,237, and an amount of $448,500 impairment of oil and gas leases.
During the three month period ended December 31, 2016, the Company has capitalized a total of $21,913 in Unproved Property. Based on the Company’s analysis, no impairment has been recorded on the Unproved Property.
Impairment
FASB ASC 360-10-35-21 requires that assets to be held and used be reviewed for impairment annually, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Oil and gas properties accounted for using the full cost method of accounting (which the Company uses) are excluded from this requirement but continue to be subject to the full cost method's impairment rules.
Revenue Recognition
Oil and gas sales result from undivided interests held by the Company in oil and gas properties. Sales of oil and gas produced from oil and gas operations are recognized when the product is delivered to the purchaser and title transfers to the purchaser. Charges for gathering and transportation are included in production expenses. The Company had no sales of oil and gas during the nine months ended December 31, 2016 and 2015.
Asset Retirement Obligations
The Company records a liability for asset retirement obligations ("ARO") associated with its oil and gas wells when those assets are placed in service. The corresponding cost is capitalized as an asset and included in the carrying amount of oil and gas properties and is depleted over the useful life of the properties. Subsequently, the ARO liability is accreted to its then-present value.
Inherent in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded as a gain or loss upon settlement.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with the requirements of ASC 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1- Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2- Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3- Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information,
The carrying value of all assets and liabilities approximated their fair values as December 31, 2016 and March 31, 2016, respectively.
Stock-Based Compensation
The Company follows the guidance included in ASC 718 Compensation-Stock Compensation (“ASC 718”) using the modified prospective transition method. The Company recognizes compensation expense in the financial statements for share-based awards based on the grant date fair value of those awards.
Income Taxes
The Company accounts for income taxes pursuant to ASC 740,
Income Taxes
. Deferred tax assets and liabilities are recorded for differences between the financial statements and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings in the period in which they become known. The estimates on depreciation were based on the estimated useful lives of the Company's assets. Any estimates during the period have had an immaterial effect on earnings.
Earnings or Loss Per Share
In accordance with ASC Topic 280 – “Earnings Per Share”, the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per common share is computed similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations. The Company regularly reviews and analyses the recent accounting pronouncements.
NOTE 4 – OIL AND GAS PROPERTIES
During the fiscal year ended March 31, 2016 the Company entered into certain agreements whereunder they acquired 94% control of Seabourn Oil Company, LLC, a company that holds a100% working interest and an 80% net revenue interest in a total of 960 acres located in two tracts in Callahan County, Texas.
On June 10, 2015, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) where under it acquired the rights to certain oil and gas leases located in Frio and Atascosa Counties, Texas, consisting of a total of 714 total acres of land, two (2) working wells and a total of seven (7) wells (the “Leases”).
Further, on June 11, 2015 the Company entered into additional assignment agreements for the acquisition of multiple oil and gas leases and overriding royalty interests (“ORR’s”) in various counties in Oklahoma, Texas and Utah.
During the fiscal year ended March 31, 2016, the Company completed various workovers and other improvements to certain of its existing wellbores, which amounts totaling $53,687 were capitalized under Proved Properties. As at the fiscal year ended March 31, 2016, the Company expensed these costs as the Company has not yet determined when the wells will be brought online. Further a total of $211,363 in proven and unproven oil and gas assets acquired as set out above, including ORR’s were fully impaired at March 31, 2016 following an evaluation by the Company’s management which determined recovery of costs was not likely to occur during the foreseeable future as a result of current industry economics.
On November 30, 2016, the Company acquired various royalty interests in Oklahoma and Texas for $10,485. On December 14, 2016, the Company acquired two oil and gas leases in Ohio for $2,705. For the three month period ending December 31, 2016, the Company capitalized an additional $8,723, related to fees and premiums for the related projects. As of December 31, 2016, a total of $21,913 is recorded.
NOTE 5 – ASSET RETIREMENT OBLIGATIONS
The Company has asset retirement obligations for any wells that are permanently removed from service. The primary obligations involve the removal and disposal of surface equipment, plugging and abandoning the wells and site restoration. For the purpose of determining the fair value of ARO incurred during the fiscal year ended March 31, 2016, the Company used the following assumptions.
Inflation Rate
|
3%
|
Estimated asset life
|
20 years
|
Credit adjusted risk free interest rate
|
18%
|
As at March 31, 2016, the Company determined to fully impair its shut in wells given a lack of production over a period in excess of two years, and the uncertainty in returning the wells to production in the future. As a result, the Company has recorded a long term liability equal to the full value of the ARO.
The following table shows the change in the Company’s ARO during the fiscal year ended March 31, 2016:
Asset retirement obligations at April 1, 2015
|
|
$
|
-
|
|
Asset retirement obligations incurred
|
|
|
9,075
|
|
Accretion expense
|
|
|
89
|
|
Adjust obligation to reflect impairment of non producing wells
|
|
|
74,594
|
|
Asset retirement obligations at March 31, 2016
|
|
$
|
83,580
|
|
Based on the Company’s analysis and review of agreements related to the royalty interests and oil and gas leases acquired in the three months ended December 31, 2016, no Asset retirement obligation has been recorded in relation to these projects, as no future obligations have been identified.
NOTE 6 – LOANS PAYABLE AND CONVERTIBLE NOTES
On August 10, 2015 the Company received loan proceeds of $60,000 from the Company’s majority shareholder, Rise Fast which amount bears interest at a rate of 5% per annum and is due and payable on December 31, 2017. During the period ended December 31, 2015, the Company repaid $55,980 of this loan leaving a total of $4,020 in principal outstanding.
On September 1, 2015 the Company received a further $50,000 in loan proceeds from Rise Fast which amount bears interest at 5% per annum and is due and payable on December 31, 2017.
On January 2, 2016, the remaining principal balance of the aforementioned loans payable totaling $54,020 and accrued interest of $1,225 thereon were converted to several 4% convertible notes with varying conversion prices. A portion of these notes were concurrently assigned to several third parties. A total of $21,635 of the principal value of the convertible notes have a conversion price at $0.001 per share, and the remaining $33,610 in principal value of the convertible notes have a conversion price at $0.005 per share.
On the transaction date, the Company recognized the intrinsic value of the embedded beneficial conversion feature of $55,245 as additional paid-in capital and the debt discount in full was recorded as interest expense.
The following table summarizes information in respect to the convertible notes:
|
|
Principal
Amount
($)
|
|
|
Debt
Discount
($)
|
|
|
Carrying Value
($)
|
|
|
Accrued
interest payable
($)
|
|
March 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Additions
|
|
|
55,245
|
|
|
|
(55,245
|
)
|
|
|
-
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
55,245
|
|
|
|
55,245
|
|
|
|
-
|
|
Interest expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
552
|
|
March 31, 2016
|
|
|
55,245
|
|
|
|
-
|
|
|
|
55,245
|
|
|
|
552
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
590
|
|
Shares issuance due to conversion
|
|
|
(55,245
|
)
|
|
|
-
|
|
|
|
(55,245
|
)
|
|
|
-
|
|
December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,142
|
|
The Company analyzed the conversion feature of above Convertible Notes for derivative accounting consideration under FASB ASC 470 and determined that the conversion feature did not create embedded derivatives.
NOTE 7 – PROMISSORY NOTE
On December 31, 2016, the Company entered into a promissory note with a majority shareholder, Rise Fast Limited, for an amount of $240,683. The promissory note bears interest at a rate of 2% per annum, and is payable on December 31, 2019.
NOTE 8 – COMMON STOCK
On April 16, 2015, the Company filed a Certificate of Amendment with the Nevada Secretary of State whereby it amended its Articles of Incorporation by increasing the Company's authorized number of shares of common stock from 75 million to 300 million and increasing all of its issued and outstanding shares of common stock at a ratio of fifteen (15) shares for every one (1) share held.
On January 20, 2016, the Company filed a Certificate of Amendment with the Nevada Secretary of State (the “Nevada SOS”) whereby decreasing all of its issued and outstanding shares of common stock at a ratio of one (1) share for every one hundred (100) shares held. The Company’s Board of Directors approved this amendment on January 13, 2016 and shareholders holding 68.65% of the Company’s issued and outstanding shares approved this amendment via a written consent executed on January 14, 2016.
All share amounts in these financial statements have been adjusted to reflect this stock split.
Shares issued during the nine months ended December 31, 2016
On July 1, 2016 the Company issued 21,635,730 shares of common stock to settle certain convertible notes in the principal amount of $21,635. (ref: Note 6 above)
On July 11, 2016 the Company issued 6,721,920 shares of common stock to settle certain convertible notes in the principal amount of $33,610. (ref: Note 6 above)
Shares issued during the fiscal year ended March 31, 2016
On June 12, 2015, Company issued 40,000 shares of common stock related to the acquisition of oil and gas property to (
see Note 4)
Zheng Xiangwu. Mr. Zheng is the owner of Rise Fast Limited, a Hong Kong corporation (“Rise Fast”), which is the majority shareholder of the Company. Rise Fast owned 900,000 shares of the Company’s common stock representing 68.94% of the Company’s issued and outstanding common stock at the date of the transaction.
On June 12, 2015, the Company accepted a Subscription Agreement for the sale of up to 25,500 shares of its common stock from the Company’s majority shareholder, Rise Fast. No underwriters were utilized in connection with this sale of securities. The Subscription Agreement provides that the shares shall be sold as follows: (i) upon execution thereof, the purchase irrevocably agrees to purchase 10,000 at $15 per share; (ii) within sixty (60) days of the date of the Subscription Agreement, the purchaser has the right to purchase an additional 7,500 shares at the price of $20 per share; and (iii) within one hundred twenty (120) days of the date of the Subscription Agreement, the purchaser has the right to purchase an additional 8,000 shares at the price of $20 per share. On July 23, 2015, the Company approved the issuance of 10,000 shares of common stock for cash proceeds of $150,000.
Between July 6 and July 9, 2015 the Company issued a further 6,500 shares of common stock to Mr. Zheng Xiangwu related to the acquisition of certain lease land and ORR’s. (
see Note 4)
.
On August 19, 2015 the Company issued a total of 5,000 shares to Hans Johnson, owner of Inceptus Resources LLC in respect of the acquisition of certain lease lands. (
see Note 4)
.
On November 2, 2015, the Company issued 10,000 shares of common stock to Mr. Joe Seabourn as part of an employee compensation agreement, which shares were valued at market price on the date of the transaction, totaling $30,600.
As at December 31, 2016 and March 31, 2016, the Company had a total of 29,684,381 and 1,326,281 shares issued and outstanding, respectively.
NOTE 9 – RELATED PARTY TRANSACTIONS
During the nine months ended December 31, 2016 the Company received advances totaling $122,826 from its majority shareholder, Rise Fast Limited, in order to fund ongoing operations in the normal course. On December 31, 2016, the Company issued a promissory note for amount owing to Rise Fast of $240,683, which replaced the full amount of $240,683 previous amounts advanced up to December 31, 2016.
NOTE 10 – INCOME TAXES
The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which the Company operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. The Company recorded no income tax expense for the nine months ended December 31, 2016 and 2015. The Company has a valuation allowance that fully offsets net deferred tax assets.