| Summary of Significant Accounting Policies | Note 3 – Summary of Significant Accounting
Policies Principles of Consolidation The financial statements include the accounts
of Foothills Exploration, Inc., and all of its direct and indirect wholly-owned subsidiaries including Foothill Petroleum, Inc.,
Foothills Petroleum Operating, Inc., Foothills Exploration Operating, Inc., Foothills Exploration LLC, Tiger Energy Partners International,
LLC, Tiger Energy Operating, LLC and Tiger Energy Mineral Leasing, LLC. Intercompany balances and transactions have been eliminated
in consolidation. Basis of Presentation and Functional Currency Pursuant to the rules and regulations of the
Securities and Exchange Commission for Form 10-Q, the unaudited condensed consolidated financial statements, footnote disclosures
and other information normally included in consolidated financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The condensed consolidated financial statements contained in this report are unaudited
but, in the opinion of management, reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair
presentation of the consolidated financial statements. All significant inter-company accounts and transactions have been eliminated
in consolidation. The results of operations for any interim period are not necessarily indicative of results for the full year.
The condensed consolidated balance sheet at December 31, 2017 has been derived from the audited consolidated financial statements
at that date but does not include all of the information and footnotes required by accounting principles generally accepted in
the United States of America for complete financial statements. These consolidated financial statements and
related notes are presented in accordance with accounting principles generally accepted in the United States of America and are
expressed in United States dollars (USD). Use of Estimates The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the
reported amounts of revenues and expenses during the reporting period(s). Management bases its estimates on historical experience
and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the
estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions.
After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those
estimates. Significant estimates include those related to assumptions used in impairment testing of long term assets, accruals
for potential liabilities and valuing equity instruments issued for services. Actual results could differ from those estimates. Reclassifications Certain reclassifications
have been made to amounts in prior year to conform to the current year presentation. All reclassifications have been applied consistently
to the periods presented and had no effects on previously reported results of operations. Cash and Cash Equivalents Cash and cash equivalents include all highly
liquid debt instruments with maturity of three months or less. Restricted Cash Cash and cash equivalents
that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in restricted cash in
the current assets section of our consolidated balance sheet. At June 30, 2018 and December 31, 2017, the Company had restricted
cash of $240,000. This amount is being held in escrow for the benefit of the State of Utah for certain properties located in Utah,
covered under a certain Modification to Stipulated Order between the Utah Division of Oil, Gas and Mining and TEPI dated August
1, 2014 (Case No. SI/TA-102). These funds held in escrow, will be released to the Company once the Company finishes its reclamation
of the various wells in question. During July and August 2018, $120,000 was released to the Company when we finished reclamation
of two wells. Accounts receivable and allowance for doubtful
accounts Accounts receivable are stated at the historical
carrying amount net of an allowance for uncollectible accounts. The carrying amount of the Company’s accounts receivable
approximates fair value because of the short-term nature of the instruments. The Company routinely assesses the collectability
of all material trade and other receivables. Trade accounts receivable comprise receivables
from joint interest owners which are recorded when the Company incurs expenses on behalf of the non-operator interest owners of
the properties the Company operates. The Company’s oil and gas revenues receivable
comprise receivables from purchasers of the Company’s production of oil and gas and other hydrocarbons and from operators
of properties in which the Company has a non-operated interest, as well as from joint interest owners of properties the Company
operates. As of June 30, 2018, the Company applied $633,993 of net revenue receivable from EOG Resources, the operator of two wells
in which the Company has a working interest, to costs incurred of drilling two wells by EOG Resources. During the six months ended
June 30, 2018, those costs were $1,908,086. See Note 4 – Property and Equipment. The Company’s
reported balance of accounts receivable, net of allowance for doubtful accounts, represents management’s estimate of the
amount that ultimately will be realized in cash or used in the future to offset an operator’s joint interest billings. The Company reviews
the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical payment trends, the age of the receivables
and knowledge of the individual customers or joint interest owners. When the analysis indicates, management increases or decreases
the allowance accordingly. However, if the financial condition of our customers were to deteriorate, additional allowances might
be required. Oil and Gas Properties The Company follows
the full cost method of accounting for its investments in oil and gas properties. Under the full cost method, all costs associated
with the exploration of properties are capitalized into appropriate cost centers within the full cost pool. Internal costs that
are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities
undertaken and do not include any costs related to production, general corporate overhead, or similar activities. Cost centers
are established on a country-by-country basis. Capitalized costs
within the cost centers are amortized on the unit-of-production basis using proved oil and gas reserves. The cost of investments
in unevaluated properties and major development projects are excluded from capitalized costs to be amortized until it is determined
whether or not proved reserves can be assigned to the properties. Until such a determination is made, the properties are assessed
annually to ascertain whether impairment has occurred. The costs of drilling exploratory dry holes are included in the amortization
base immediately upon determination that the well is dry. For each cost center,
capitalized costs are subject to an annual ceiling test, in which the costs shall not exceed the cost center ceiling. The cost
center ceiling is equal to: (i) the present value of estimated future net revenues computed by applying current prices of oil and
gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future
production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures
(based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten
percent and assuming continuation of existing economic conditions; plus (ii) the cost of properties not being amortized; plus (iii)
the lower of cost or estimated fair value of unproved properties included in the costs being amortized; and less (iv) income tax
effects related to differences between the book and tax basis of the properties. If unamortized costs capitalized within a cost
center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense and separately disclosed
during the period in which the excess occurs. Support Facilities
and Equipment Our support facilities
and equipment are generally located in proximity to certain of our principal fields. Depreciation of these support facilities is
calculated on a units-of-production basis. Maintenance and repair
costs that do not extend the useful lives of property and equipment are charged to expense as incurred. Proved Reserves Estimates of the Company’s
proved reserves included in this report are prepared in accordance with US GAAP and guidelines from the United States Securities
and Exchange Commission (“SEC”). The Company’s engineering estimates of proved oil and natural gas reserves directly
impact financial accounting estimates, including depreciation, depletion, amortization expense and impairment. Proved oil and natural
gas reserves are the estimated quantities of oil and natural gas reserves that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs under period-end economic and operating conditions.
The process of estimating quantities of proved reserves is very complex, requiring significant subjective decisions in the evaluation
of all geological, engineering and economic data for each reservoir. The accuracy of a reserves estimate is a function of: (i)
the quality and quantity of available data; (ii) the interpretation of that data; (iii) the accuracy of various mandated economic
assumptions, and (iv) the judgment of the persons preparing the estimate. The data for a given reservoir may change substantially
over time as a result of numerous factors, including additional development activity, evolving production history and continual
reassessment of the viability of production under varying economic conditions. Changes in oil and natural gas prices, operating
costs, and expected performance from a given reservoir also will result in revisions to the amount of the Company’s estimated
proved reserves. The Company engages independent reserve engineers to estimate its proved reserves. Fixed Assets The Company capitalizes
expenditures related to property and equipment not directly associated with our production of oil and gas, subject to a minimum
rule, that have a useful life greater than one year for: (1) assets purchased; (2) existing assets that are replaced, improved
or the useful lives have been extended; or (3) all land, regardless of cost, acquisitions of new assets, additions, replacements
and improvements (other than land) costing less than the minimum rule in addition to maintenance and repair costs, including any
planned major maintenance activities, are expensed as incurred. Depreciation is
calculated using the straight-line method over the estimated useful lives of the assets. Office equipment –
3 years Vehicle(s) –
5 years Land – not depreciated Asset Retirement
Obligations The Company follows the provisions of the Accounting
Standards Codification ASC 410 - Asset Retirement and Environmental Obligations. The fair value of an asset retirement obligation
is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the
estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. The Company’s asset
retirement obligations relate to the abandonment of oil and gas producing facilities and facilities that support the production
of oil and gas. The amounts recognized are based upon numerous estimates and assumptions, including future retirement costs, future
inflation rates and the credit-adjusted risk-free interest rate. After recording these amounts, the ARO will be accreted to its
future estimated value using the same assumed cost of funds, and the capitalized costs are depreciated on a unit-of-production
basis. Both the accretion and the depreciation will be included in depreciation, depletion and amortization expense on our consolidated
statements of operations. Fair Value of Financial
Instruments For certain of the
Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, accounts payable,
accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities. ASC
Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying
amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments
and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as
follows:
● Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
● Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that the Company values using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instruments, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.
● Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). Level 3 instruments include derivative warrant instruments. The Company does not have sufficient corroborating evidence to support classifying these assets and liabilities as Level 1 or Level 2. The Company analyzes
all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,”
and ASC 815. The carrying amounts of the Company’s financial assets and liabilities, including cash, prepaid expenses, accounts
payable, accrued expenses, and other current liabilities, approximate their fair values because of the short maturity of these
instruments. The fair value of notes payable and convertible notes approximates their fair values since the current interest rates
and terms on these obligations are the same as prevailing market rates. Certain of the Company’s debt and equity
instruments include embedded derivatives that require bifurcation from the host contract under the provisions of ASC 815-40, Derivatives
and Hedging. The estimated fair value of the derivative warrant instruments was calculated using a Black Scholes valuation model. The following table sets forth by level within
the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of
June 30, 2018 and December 31, 2017:
Fair Value Measurement at
Carrying Value June 30, 2018
Level 1 Level 2 Level 3
Derivative assets, debt and equity instruments $ — $ — $ — $ —
Derivative liabilities, debt and equity instruments 623,869 — — 623,869
Fair Value Measurement at
Carrying Value December 31, 2017
Level 1 Level 2 Level 3
Derivative assets, debt and equity instruments $ — $ — $ — $ —
Derivative liabilities, debt and equity instruments 458,387 — — 458,387 The Company did not identify any other assets
and liabilities that are required to be presented on the consolidated balance sheet at fair value. Revenue Recognition The Company recognizes revenue in accordance
with the requirements of ASC 606, which directs that it should recognize revenue when a customer obtains control of promised goods
or services for an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.
All of our revenue is attributable to sales of oil, gas, and other hydrocarbons which are sold daily, with sales aggregated on
a monthly basis. In the case of revenue received for a non-operated working interest, we are paid by the operator, which is a joint
interest partner and not the purchaser of the product. In the case of revenue received for an operated working interest, we are
paid by the marketer to whom we sell the commodities directly pursuant to contractual arrangements. Debt Issuance Costs, Debt Discount and Detachable
Debt-Related Warrants Costs incurred to issue debt are deferred and
recorded as a reduction to the debt balance in our consolidated balance sheets. We amortize debt issuance costs over the expected
term of the related debt using the effective interest method. Debt discounts relate to the relative fair value of warrants issued
in conjunction with the debt and are also recorded as a reduction to the debt balance and accreted over the expected term of the
debt to interest expense using the effective interest method. Net Earnings (Loss)
Per Common Share The Company computes earnings per share under
ASC 260-10, “Earnings Per Share.” The Company’s earnings (loss) per share are computed by dividing net income
by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects the potential
dilution of securities, if any, that could share in the earnings (loss) of the Company and are calculated by dividing net income
by the diluted weighted average number of common shares. The diluted weighted average number of common shares is computed using
the treasury stock method for common stock that may be issued for outstanding stock options, warrants, and convertible debt.
For the Three Months Ended June 30, For the Six Months Ended June 30,
2018 2017 2018 2017
Numerator:
Net loss available to stockholders (1,528,456 ) (1,257,778 ) (2,390,301 ) (3,417,277 )
Basic net income allocable to participating securities (1) - - - -
Loss available to Foothills Exploration, Inc.’s stockholders (1,528,456 ) (1,257,778 ) (2,390,301 ) (3,417,277 )
Denominator:
Weighted average number of common shares outstanding-Basic 14,941,836 14,181,865 14,921,345 14,076,518
Effect of dilutive securities:
Options and warrants (2) - - - -
Stock payable (3) 4,491,111 120,000 4,491,111 120,000
Weighted average number of common shares outstanding-Diluted 19,432,947 14,301,865 19,412,456 14,196,518
Net income (loss) per share:
Basic $ (0.10 ) $ (0.09 ) $ (0.16 ) $ (0.24 )
Diluted $ (0.08 ) $ (0.09 ) $ (0.12 ) $ (0.24 )
(1) Restricted share awards that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in computing earnings using the two-class method. Participating securities, however, do not participate in undistributed net losses.
(2) For the three and six months ended June 30, 2018, “out of the money” stock options representing 2,050,000 and 2,050,000 shares and warrants representing 2,683,515 and 2,683,515 shares were antidilutive and, therefore, excluded from the diluted share calculation. For the three and six months ended June 30, 2017, “out of the money” stock options representing 2,050,000 and 2,050,000 shares and warrants representing 1,270,000 and 1,270,000 shares were antidilutive and, therefore, excluded from the diluted share calculation.
(3) For the three and six months ended June 30, 2018, stock payable representing 4,491,111 and 4,491,111 shares were anti-dilutive. For the three and six months ended June 30, 2017, stock payable representing 120,000 and 120,000 shares were 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 accounts for stock, stock options,
and stock warrants issued for services and compensation by employees under the fair value method. For non-employees, the fair market
value of the Company’s stock is measured on the date of stock issuance or the date an option/warrant is granted as appropriate
under ASC 718 “Compensation – Stock Compensation”. The Company determined the fair market value of the warrants/options
issued under the Black-Scholes Pricing Model. Under the provisions of ASC 718, share-based compensation cost is measured at the
grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period
(generally the vesting period of the equity grant). The Company’s
accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows ASC Topic
505. As such, the value of the applicable stock-based compensation is periodically re-measured and income or expense is recognized
during their vesting terms. The measurement date for the fair value of the equity instruments issued is determined at the earlier
of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant
or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity
instrument is primarily recognized over the term of the consulting agreement. In accordance with FASB guidance, an asset acquired
in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset
to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Recent Accounting
Pronouncements In November 2015,
the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes In February 2016,
the FASB issued Accounting Standards Update No. 2016-02, Leases In March 2016, the
FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting In November 2016,
the FASB issued ASC Update No. 2016-18 (Topic 230) Statement of Cash Flows – Restricted Cash (a consensus of the FASB Emerging
Issues Task Force). The amendments in this update require that restricted cash and restricted cash equivalents be included with
cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash
flows. Current GAAP does not include specific guidance on the cash flow classification and presentation of changes in restricted
cash. The updated guidance is effective for interim and annual periods beginning after December 15, 2017 and is required to be
applied using a retrospective transition method to each period presented. The Company implemented this guidance effective January
1, 2018. Implementing this guidance did not have a material impact on the Company’s statement of cash flows. In January 2017, the
FASB issued Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business In January 2017, the
FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment In July 2017, the
FASB issued Accounting Standards Update No. 2017-11, Accounting for Certain Financial Instruments with Down Round Features Other recent accounting
pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants,
and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s
present or future consolidated financial statements. |
