NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
1
|
ORGANIZATION AND DESCRIPTION OF BUSINESS
|
Propell Technologies Group,
Inc. (formerly known as Propell Corporation) (the “Company”), is a Delaware corporation originally formed on January
29, 2008 as CA Photo Acquisition Corp. On April 10, 2008 Crystal Magic, Inc. (“CMI”), a Florida Corporation, merged
with an acquisition subsidiary of Propell’s, and the Company issued an aggregate of 180,000 shares to the former shareholders
of CMI. On May 6, 2008, the Company acquired both Mountain Capital, LLC (doing business as Arrow Media Solutions) (“AMS”)
and Auleron 2005, LLC (doing business as Auleron Technologies) (“AUL”) and made each a wholly owned subsidiary and
issued a total of 41,897 shares of the Company’s common stock to the members of Mountain Capital, LLC and a total of 2,722
shares of the Company’s common stock to the members of AUL. In 2010 AUL and AMS were dissolved and the operations of CMI
were discontinued. On February 4, 2013, the Company entered into a Share Exchange Agreement with Novas Energy (USA), Inc. (“Novas”)
whereby the Company exchanged 100,000,000 shares of its common stock for 100,000,000 shares of common stock in Novas. After the
consummation of the share exchange, Novas became a wholly owned subsidiary of the Company. As a result of the share exchange the
shareholders of Novas obtained the majority of the outstanding shares of the Company. As such, the exchange is accounted for as
a reverse merger or recapitalization of the Company and Novas was considered the acquirer for accounting purposes.
|
b)
|
Description of the business
|
The Company, through its wholly owned subsidiary, Novas, and majority owned subsidiary, NENA, is an innovative
technology and services company whose aim is to improve oil production by introducing modern and innovative technologies. Novas
has a unique Plasma-Pulse Treatment (“PPT”) technology, patented in the USA, which is a new Enhanced Oil Recovery methodology
and process that has been developed to be environmentally friendly, mobile, time efficient and cost effective.
On October 22, 2015, Novas Energy
USA, Inc. (“Novas”), a wholly owned subsidiary of Propell Technologies Group, Inc. (the “Company”), entered
into an operating agreement with Technovita Technologies USA, Inc. (the “Joint Venture Agreement”) through a newly
formed Delaware limited liability company, Novas Energy North America, LLC (“NENA”), whereby Novas agreed to contribute
$1,200,000 ($600,000 delivered on the effective date (October 22, 2015) of the Joint Venture Agreement, $300,000 on November 1,
2015 and $300,000 on the two month anniversary of the Effective Date) to the capital of NENA for 60% of the membership interests
of NENA and Technovita agreed to contribute an aggregate of $800,000 to the capital of NENA for 40% of the membership interests
of NENA. In terms of a side agreement entered into on November 18, 2015, the revenue and expenses incurred by Technovita prior
to entering into the operating agreement, have been included in the joint venture and consolidated into the Company’s results
effective September 1, 2015.
Subject to certain exceptions and pursuant to the terms of a sublicense agreement (the “Novas Sublicense
Agreement”) that was entered into between Novas, NENA and Novas Energy Group Inc. (the “Licensor”), the licensor
of Plasma Pulse Technology currently used by Novas and Technovita, NENA is the exclusive licensor of PPT for the treatment of vertical
wells in the United States. Subject to certain exceptions and pursuant to the terms of Sublicense Agreements (the “Technovita
Sublicense Agreement”) that was entered into between Technovita, NENA and Licensor, NENA is the exclusive licensor of PPT
for the treatment of vertical wells in Canada. Notwithstanding the foregoing, both Novas and Technovita will retain the right to
deploy the PPT Technology on vertical wells owned by Novas or Technovita in the United States or Canada, respectively. If either
Novas or Technovita terminates the Sublicense Agreement with NENA and Licensor, the non- terminating party will receive 100% of
the terminating member’s membership interest in NENA.
The business and affairs of
NENA are to be managed by or under the direction of the Board of Directors, consisting of five (5) members, three (3) of whom shall
be appointed by Novas and two (2) of whom shall be appointed by Technovita. Board approval is required to: (i) incur any indebtedness,
pledge or grant liens on any assets or guarantee, assume, endorse or otherwise become responsible for the obligations of any other
person, except to the extent approved or authorized in NENA’s budget; (ii) make any loan, advance or capital contribution
in any person, except to the extent approved or authorized in the budget; (iii) transfer any equipment necessary in the deployment
of the Vertical Technology to any third party; (iv) enter into or effect any transaction or series of related transactions involving
the sale of NENA or the sale, lease, license, exchange or other disposition (including by merger, consolidation, sale of assets
or similar business transaction) by NENA of any assets in excess of $300,000; (v) appoint or remove NENA’s auditors or make
any changes in the accounting methods or policies of NENA (other than as required by GAAP); (vi) enter into or effect any transaction
or series of related transactions involving the purchase, lease, license, exchange or other acquisition (including by merger, consolidation,
acquisition of stock or acquisition of assets) by NENA of any assets and/or equity interests of any person and/ or assets in excess
of $300,000; or (v) enter into or effect any commercial transaction or series of related commercial transactions involving anticipated
liabilities or revenues of NENA in excess of $500,000 or that materially vary from NENA’s existing strategy or business plan.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND ESTIMATES
|
The accompanying financial statements
have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).
All amounts referred to in the
notes to the financial statements are in United States Dollars ($) unless stated otherwise.
|
b)
|
Principles of Consolidation
|
The consolidated financial statements
include the financial statements of the Company and its subsidiary in which it has a majority voting interest. All significant
inter-company accounts and transactions have been eliminated in the consolidated financial statements. The entities included in
these consolidated financial statements are as follows:
Propell Technologies Group,
Inc. – Parent Company
Nova Energy USA Inc. (wholly
owned)
Novas Energy North America,
LLC (60% owned)
The preparation of 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 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 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.
|
e)
|
Fair Value of Financial Instruments
|
The Company adopted the guidance
of Accounting Standards Codification (“ASC”) 820 for fair value measurements which 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 then 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 amounts reported
in the balance sheets for cash, accounts receivable, prepaid expenses, deposits, accounts payable, accrued liabilities, notes payable,
and convertible notes payable approximate fair value due to the relatively short period to maturity for these instruments. The
recorded derivative liabilities during the year ended December 31, 2014 was noted as subject to level III fair value measurements.
The Company did not identify any other assets or liabilities that are required to be presented on the balance sheets at fair value
in accordance with the accounting guidance.
ASC 825-10 “
Financial
Instruments
” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value
(fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new
election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should
be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding
instruments.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND ESTIMATES (continued)
|
|
f)
|
Risks and Uncertainties
|
The Company's operations will
be subject to significant risk and uncertainties including financial, operational, regulatory and other risks associated, including
the potential risk of business failure. The recent global economic crisis has caused a general tightening in the credit markets,
lower levels of liquidity, increases in the rates of default and bankruptcy, and extreme volatility in credit, equity and fixed
income markets. These conditions not only limit the Company’s access to capital, but also make it difficult for its customers,
vendors and the Company to accurately forecast and plan future business activities.
The Company’s operations
are carried out in the USA, Mexico and Canada. Accordingly, the Company’s business, financial condition and results of operations
may be influenced by the political, economic and legal environment in the USA, Mexico and Canada and by the general state of those
economies. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, and rates and methods of taxation, among other things.
|
g)
|
Recent Accounting Pronouncements
|
In August 2015,
FASB
issued Accounting Standards Update (“ASU”) No.2015-14, “
Revenue from Contracts with Customers (Topic 606):
Deferral of the Effective Date”
defers the effective date ASU No. 2014-09 for all entities by one year. Public business
entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual
reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier
application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods
within that reporting period. All other entities should apply the guidance in Update 2014-09 to annual reporting periods beginning
after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other
entities may apply the guidance in ASU No. 2014-09 earlier as of an annual reporting period beginning after December 15, 2016,
including interim reporting periods within that reporting period. All other entities also may apply the guidance in Update 2014-09
earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting
periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU No. 2014-09.
We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash
flows or financial condition.
In April 2015, FASB issued Accounting
Standards Update (“ASU”) No. 2015-03, Interest
– Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs
, to simplify presentation of debt issuance costs by requiring that debt issuance costs
related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that
debt liability, consistent with debt discounts. The ASU does not affect the recognition and measurement guidance for debt issuance
costs. For public companies, the ASU is effective for financial statements issued for fiscal years beginning after December 15,
2015, and interim periods within those fiscal years. Early application is permitted. This updated guidance is not expected to have
a material impact on our results of operations, cash flows or financial condition.
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.
No segmental information is
required as the Company currently only has one segment of business, the Plasma Pulse Technology for the petroleum industry.
Revenues to date are insignificant.
|
i)
|
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 December
31, 2015 and December 31, 2014, respectively, the Company had no cash equivalents.
The Company minimizes 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 December 31, 2015, the Company had cash balances of $11,700,143, which exceeded the federally
insured limits by $10,877,045. At December 31, 2014, the balance did not exceed the federally insured limit.
|
j)
|
Accounts Receivable and Allowance for Doubtful Accounts
|
Accounts receivable are reported
at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period the related revenue
is recorded. The Company has a standardized approach to estimate and review the collectability of its receivables based on a number
of factors, including the period they have been outstanding. Historical collection and payer reimbursement experience is an integral
part of the estimation process related to allowances for doubtful accounts. In addition, the Company regularly assesses the state
of its billing operations in order to identify issues, which may impact the collectability of these receivables or reserve estimates.
Revisions to the allowance for doubtful accounts estimates are recorded as an adjustment to bad debt expense. Receivables deemed
uncollectible are charged against the allowance for doubtful accounts at the time such receivables are written-off. Recoveries
of receivables previously written-off are recorded as credits to the allowance for doubtful accounts. There were no recoveries
during the period ended December 31, 2015.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND ESTIMATES (continued)
|
The Company had no inventory
as of December 31, 2015 or December 31, 2014.
Plant and equipment is stated
at cost, less accumulated depreciation. Plant and equipment with costs greater than $1,000 are capitalized and depreciated. Depreciation
is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets
are as follows:
Description
|
|
Estimated Useful Life
|
Office equipment and furniture
|
|
2 to 5 years
|
Leasehold improvements and fixtures
|
|
Lesser of estimated useful life or life of lease
|
Plant and equipment
|
|
2 to 3 years
|
Plasma pulse tools
|
|
5 years
|
The cost of repairs and maintenance
is expensed as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts,
and any resulting gains or losses are included in income in the year of disposition.
All
of our intangible assets are subject to amortization. We evaluate the recoverability of intangible assets periodically by taking
into account events or circumstances that may warrant revised estimates of useful lives that indicates the asset may be impaired.
Where intangibles are deemed to be impaired we recognize an impairment loss measured as the difference between the estimated fair
value of the intangible and its book value.
i) License Agreements
License agreements acquired by
the Company are reported at acquisition value less accumulated amortization and impairments.
ii) Amortization
Amortization is reported in the
income statement on a straight-line basis over the estimated useful life of the intangible assets, unless the useful life is indefinite.
Amortizable intangible assets are amortized from the date that they are available for use. The estimated useful life of the license
agreement is five years which is the expected period for which we expect to derive a benefit from the underlying license agreements.
Assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the assets.
The Company records revenue
when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the service is completed without
further obligation, (3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.
|
p)
|
Share-Based Payment Arrangements
|
Generally, all forms of share-based
payments, including stock option grants, restricted stock grants and stock appreciation rights are measured at their fair value
on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation
awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair
value of the share-based payment, whichever is more readily determinable. The expense resulting from share-based payments is recorded
in operating expenses in the consolidated statement of operations.
Income taxes are computed using
the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently
enacted tax rates and laws. A full valuation allowance is provided for the amount of deferred tax assets that, based on available
evidence, are not expected to be realized. It is the Company’s policy to classify interest and penalties on income taxes
as interest expense or penalties expense. As of December 31, 2015, there have been no interest or penalties incurred on income
taxes.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND ESTIMATES (continued)
|
Basic net loss per share is
computed on the basis of the weighted average number of common shares outstanding during the period.
Diluted net loss per share is
computed on the basis of the weighted average number of common shares and common share equivalents outstanding. Dilutive securities
having an anti-dilutive effect on diluted net loss per share are excluded from the calculation (See Note 16, below).
Dilution is computed by applying
the treasury stock method for options and warrants. Under this method, options and warrants are assumed to be exercised at the
beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common shares
at the average market price during the period.
Dilution is computed by applying
the if-converted method for convertible preferred shares. Under this method, convertible preferred stock is assumed to be converted
at the beginning of the period (or at the time of issuance, if later), and preferred dividends (if any) will be added back to determine
income applicable to common stock. The shares issuable upon conversion will be added to weighted average number of common shares
outstanding. Conversion will be assumed only if it reduces earnings per share (or increases loss per share).
Any common shares issued as
a result of the issue of stock options and warrants would come from newly issued common shares from our remaining authorized shares.
Comprehensive income is defined
as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions
resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented
includes net loss.
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 shall disclose all related party transactions. All transactions shall
be 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.
Prepaid expenses consisted of the following as of
December 31, 2015 and December 31, 2014:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
28,180
|
|
|
$
|
8,144
|
|
Expenses in excess of billings
|
|
|
155,606
|
|
|
|
-
|
|
Prepaid professional fees
|
|
|
42,404
|
|
|
|
4,417
|
|
Other
|
|
|
820
|
|
|
|
470
|
|
|
|
$
|
227,010
|
|
|
$
|
13,031
|
|
Plant and Equipment consisted of the following as
of December 31, 2015 and December 31, 2014:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
Capital work in progress
|
|
$
|
453,228
|
|
|
$
|
18,482
|
|
Plasma pulse tool
|
|
|
310,374
|
|
|
|
310,374
|
|
Furniture and equipment
|
|
|
27,667
|
|
|
|
26,643
|
|
Field equipment
|
|
|
19,627
|
|
|
|
19,627
|
|
Computer equipment
|
|
|
3,887
|
|
|
|
1,500
|
|
Total cost
|
|
|
814,783
|
|
|
|
376,626
|
|
Less: accumulated depreciation
|
|
|
(124,245
|
)
|
|
|
(57,052
|
)
|
Property and equipment, net
|
|
$
|
690,538
|
|
|
$
|
319,574
|
|
Depreciation expense was $67,193
and $30,170 for the years ended December 31, 2015 and 2014, respectively.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 on March, 2014. The amended license agreement provides Novas with the exclusive right to develop, use,
market and commercialize the Technology for itself and/or third parties, sublicense and provide services to third parties related
to the Technology in the United States and Mexico including all of its states, districts, territories, possessions and protectorates.
The amended license agreement also provides Novas with the right to design and have manufactured the apparatus and to make modifications
and improvements to the Technology provided that the Licensor is provided a non-exclusive license to any such improvements and
modifications and any patent rights of Novas related to the Technology. The license is limited to the United States and Mexico.
It also provides that Novas will pay the Licensor royalties equal to seven and a half percent (7.5%) of Net Service Sales (as defined
in the license agreement) and Non-Royalty Sublicensing Consideration (as defined in the license agreement) and provides for a minimum
royalty payment of $500,000 per year from United States operations and $500,000 per year from Mexican operations; however, no minimum
royalty payment is due prior to the three year anniversary of the license agreement for revenue derived from the United States
operations and no minimum royalty is due prior to December 31, 2015 for revenue derived from Mexico. Revenue derived from operations
in one territory can be used to satisfy obligations for minimum royalty payments in the other territory. All royalty payments made
by Novas as well as sublicensing revenue paid by Novas to the Licensor are credited towards the minimum royalty payment. If the
minimum royalty is not timely paid, the Licensor has the right to terminate the license with respect to a particular territory
and if the minimum royalty payment for both territories is not paid, to terminate the license agreement. Novas was obligated to
pay an initial license fee of $150,000 on or prior to June 30, 2014, this fee was subsequently waived by the Licensor with effect
from July 30, 2014, the additional $200,000 which was due to the Licensor on June 30, 2015 was waived, subsequent to year-end.
The Licensor is responsible for the cost of filing prosecuting and maintaining the patents and Novas is responsible for costs of
obtaining marketing approvals. The Licensor has the right to terminate the license agreement upon Novas’ breach or default.
If the Licensor dissolves, becomes insolvent or engages in or is the subject of any other bankruptcy proceeding then the technology
and patent rights in the United States shall become our property.
Subject to certain exceptions
and pursuant to the terms of the Novas Sublicense Agreement that was entered into on October 22, 2015, between Novas, NENA and
the Licensor of the Plasma Pulse Technology currently used by Novas and Technovita, NENA will be the exclusive provider of the
Vertical Technology (as defined in the Joint Venture Agreement entered into on October 22, 2015) to third parties in the United
States. Subject to certain exceptions and pursuant to the terms of Sublicense Agreements (the “Technovita Sublicense Agreement”)
that was entered into between Technovita, NENA and Licensor, NENA is the exclusive provider of the Vertical Technology to third
parties in Canada. Notwithstanding the foregoing, both Novas and Technovita will retain the right to deploy the Vertical Technology
on wells owned by Novas or Technovita in the United States or Canada, respectively. If either Novas or Technovita terminates the
Sublicense Agreement with NENA and Licensor, the non- terminating party will receive 100% of the terminating member’s membership
interest in NENA.
Intangibles consisted of the following as of December
31, 2015 and 2014, respectively:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
License agreements
|
|
$
|
350,000
|
|
|
$
|
350,000
|
|
Website development
|
|
|
8,000
|
|
|
|
8,000
|
|
Total cost
|
|
|
358,000
|
|
|
|
358,000
|
|
Less: accumulated amortization
|
|
|
(130,500
|
)
|
|
|
(60,500
|
)
|
Intangibles, net
|
|
$
|
227,500
|
|
|
$
|
297,500
|
|
Amortization expense was $70,000
and $52,500 for the year ended December 31, 2015 and 2014, respectively.
The minimum commitments due under
the license agreement for the next five years are summarized as follows:
|
|
Amount
|
|
|
|
|
|
2016
|
|
$
|
1,000,000
|
|
2017
|
|
|
1,000,000
|
|
2018
|
|
|
1,000,000
|
|
2019
|
|
|
1,000,000
|
|
2020
|
|
|
1,000,000
|
|
|
|
$
|
5,000,000
|
|
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6
|
ACCOUNTS PAYABLE - RELATED PARTY
|
Accounts payable to related parties includes the following:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
Technovita Technologies Corp.
|
|
$
|
1,000
|
|
|
$
|
-
|
|
Energy Conservation Management
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
1,000
|
|
|
$
|
-
|
|
Technovita Technologies Corp.,
is the 40% shareholder in the NENA joint venture which the Company entered into. This payable represents expenses paid on behalf
of the joint venture by Technovita.
Energy Conservation Corp is a
third party contractor associated with the joint venture.
7
|
ACCRUED LIABILITIES AND OTHER PAYABLES
|
Accrued liabilities consisted of the following
as of December 31, 2015 and 2014, respectively:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
Payroll liabilities
|
|
$
|
38,063
|
|
|
$
|
35,823
|
|
Severance accrual
|
|
|
31,109
|
|
|
|
-
|
|
Accrued Royalties
|
|
|
14,653
|
|
|
|
4,603
|
|
License fees payable
|
|
|
200,000
|
|
|
|
200,000
|
|
Other
|
|
|
7,122
|
|
|
|
-
|
|
|
|
$
|
290,947
|
|
|
$
|
240,426
|
|
Subsequent to year-end, the license
fee payable to Novas BVI for the rights to use the plasma pulse technology in Mexico was waived.
The severance accrual relates
to accrued severance costs due to John Huemoeller, whose employment with the Company was terminated on January 1, 2016.
Notes payable consisted of the following as of December
31, 2015 and 2014, respectively:
Description
|
|
Interest
Rate
|
|
|
Maturity
|
|
December 31,
2015
|
|
|
December
31,
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owl Holdings
|
|
|
-
|
|
|
-
|
|
$
|
3,000
|
|
|
$
|
3,000
|
|
JAZ-CEH Holdings, LLC
|
|
|
7.5
|
%
|
|
October 31, 2015
|
|
|
-
|
|
|
|
105,000
|
|
Accrued interest
|
|
|
|
|
|
|
|
|
-
|
|
|
|
9,489
|
|
Total JAZ-CEH holdings, LLC
|
|
|
|
|
|
|
|
|
-
|
|
|
|
114,489
|
|
Total Short term notes payable
|
|
|
|
|
|
|
|
$
|
3,000
|
|
|
$
|
117,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owl Holdings
The note payable advanced by
Owl Holdings to the Company has no interest rate and is repayable on demand.
JAZ-CEH Holdings, LLC
In October 2013, Novas Energy USA, Inc., entered into an unsecured promissory note with JAZ-CEH Holdings LLC
with a face value of $105,000. The note bore interest at 7.5% per annum and matured on October 31, 2015.
On February 20, 2015, the note
to JAZ-CEH Holdings, LLC, including interest thereon was repaid for a total amount of $115,590.
9
|
SHORT-TERM CONVERTIBLE NOTES PAYABLE
|
Short Term Convertible Notes payable consisted of
the following as of December 31, 2015 and 2014, respectively:
|
|
Interest
Rate
|
|
|
Maturity
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LG Capital Funding, LLC
|
|
|
8
|
%
|
|
October 31, 2015
|
|
|
-
|
|
|
|
107,000
|
|
Unamortized debt discount and interest expense
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(4,379
|
)
|
Total LG Capital Funding, LLC
|
|
|
|
|
|
|
|
|
-
|
|
|
|
102,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KBM Worldwide, Inc.
|
|
|
8
|
%
|
|
September 15, 2015
|
|
|
-
|
|
|
|
84,000
|
|
Unamortized debt discount and interest expense
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(3,512
|
)
|
Total KBM Worldwide, Inc.
|
|
|
|
|
|
|
|
|
-
|
|
|
|
80,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Short-Term Notes Payable
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
183,109
|
|
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9
|
SHORT-TERM CONVERTIBLE NOTES PAYABLE (continued)
|
LG Capital Funding, LLC
On October 31, 2014, the Company issued a note in the principal amount of $107,000 to LG Capital Funding,
LLC (“LG”) upon receipt of $100,000 from LG. The terms of the note provided for an original issue discount of 7% amounting
to $7,000 which was added to the face value of the note. The note carried an interest charge of 8% per annum. The note was convertible
into common stock at any time, at the holder’s option, in whole or in part, at a conversion price equal to 62% of the lowest
bid prices in the 10 trading days prior to conversion. The note had a maturity date of October 30, 2015. The holder was not entitled
to exercise any conversion right that would result in the holder owning more than 9.9% of the Company’s common stock. The
Convertible Note was redeemable by the Company within 180 days of the issuance date, after a 3-day notice period, in which notice
period the holder could elect to exercise the conversion feature of the note, at a premium over the principal amount due of 10%,
plus any interest earned thereon, subject to the holders approval. The conversion price of the note had anti-dilutive provisions
which would increase the redemption penalty of the note to 150% of the principal outstanding plus accrued and unpaid interest thereon,
or allow conversion immediately prior to the dilutive event taking place.
On February 20, 2015, the unsecured
promissory note issued to LG in the principal amount of $107,000 was repaid for $125,677, inclusive of interest, original issue
discounts and early settlement penalty accrued thereon. The Company has no further obligations under this note.
KBM Worldwide, Inc.
On December 10, 2014, the Company issued an unsecured convertible note to KBM Worldwide, Inc. (“KBM”)
with a face value of $84,000, in exchange for $80,000 in cash, including an original issue discount of $4,000. The note was convertible
into common stock of the Company and bore interest at the rate of 8% per annum, which interest was payable in cash or common stock,
at the election of the holder, and had a maturity date of September 12, 2015. The conversion price, as well as the formula for
determining the number of shares needed to repay the note and any interest thereon was 58% of the average of the lowest closing
price for any three trading days during the last ten-day trading period prior to conversion or payment of interest. The holder
could only convert the note following the expiration of 180 days from the date of issuance, December 10, 2014. The holder was not
entitled to any conversion right that would result in the holder owning more than 4.99% of the Company’s common stock. This
note could be prepaid by the Company from the date of issuance to 180 days after issuance date at a prepayment penalty ranging
from 110% to 135% of the balance outstanding, including interest thereon, dependent upon the age of the note.
On February 20, 2015, the unsecured
promissory note issued to KBM on December 10, 2014 with a face value of $84,000 was repaid for $102,107, inclusive of interest,
fees and an early settlement penalty accrued thereon. The Company has no further obligations under this note.
10
|
DERIVATIVE FINANCIAL LIABILITY
|
Certain of the short-term convertible
notes disclosed in note 9 above, had variable priced conversion rights with no fixed floor price and would re-price dependent on
the share price performance over varying periods of time. This gave rise to a derivative financial liability, which was valued
at $224,442 at inception of the convertible notes using a Black-Scholes valuation model. The value of this derivative financial
liability is re-assessed at each financial reporting period, with any movement thereon recorded in the statement of operations
in the period in which it is incurred or the convertible debt is converted into equity.
Upon repayment or conversion
of the outstanding notes, the derivative financial liability is no longer required.
The movement in derivative liabilities
is as follows:
|
|
December 31,
2015
|
|
|
December
31, 2014
|
|
|
|
|
|
|
|
|
Opening balance
|
|
$
|
18,455
|
|
|
$
|
237,799
|
|
Derivative financial liability arising on short-term notes with variable conversion prices
|
|
|
-
|
|
|
|
23,060
|
|
Conversion of derivative liability for stock issued at a discount
|
|
|
-
|
|
|
|
(668,756
|
)
|
Fair value adjustments to derivative financial liability
|
|
|
(18,455
|
)
|
|
|
426,352
|
|
|
|
$
|
-
|
|
|
$
|
18,455
|
|
The following assumptions were used in the Black-Scholes
valuation model:
|
|
Year ended
December 31, 2014
|
|
Stock price over the period
|
|
|
$0.17 –$ 0.23
|
|
Risk free interest rate
|
|
|
0.13% to 0.25
|
%
|
Expected life of short-term notes payable
|
|
|
9 to 14 months
|
|
Expected volatility
|
|
|
95.24% - 119.45
|
%
|
Expected dividend rate
|
|
|
0
|
|
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11
|
LONG-TERM CONVERTIBLE NOTES PAYABLE
|
Long Term Convertible Notes payable consisted of the
following as of December 31, 2015 and 2014, respectively:
Description
|
|
Interest
Rate
|
|
|
Maturity
|
|
December 31,
2015
|
|
|
December
31,
2014
|
|
Notes payable
|
|
|
6
|
%
|
|
November 19, 2017
|
|
$
|
-
|
|
|
$
|
11,250
|
|
Accrued interest
|
|
|
|
|
|
|
|
|
-
|
|
|
|
1,470
|
|
Unamortized debt discount
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(6,500
|
)
|
Total long-Term Convertible Notes Payable
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
6,220
|
|
The convertible notes payable
consisted of notes issued to a number of private principals (“the Notes”). The Notes bore interest at the rate of 6%
per annum and were due on November 19, 2017. The Notes were convertible into common stock at a fixed conversion price of $0.02
per share.
On February 6, 2015, the remaining
convertible note with an aggregate principal amount of $11,250, inclusive of interest of $1,539, totaling $12,789 was converted
into 639,432 common shares at a conversion price of $0.02 per share.
12
|
STOCKHOLDERS’ EQUITY (DEFICIT)
|
The Company has authorized 500,000,000
common shares with a par value of $0.001 each, and issued and has outstanding 268,558,931 shares of common stock as of December
31, 2015.
The following common shares
were issued by the Company during the year ended December 31, 2015:
|
i)
|
an aggregate of 639,432 shares of Common Stock to convertible note holders upon conversion of an aggregate of $12,789 of long-term convertible notes, inclusive of interest thereon, at a share price of $0.02 per share;
|
|
ii)
|
an aggregate of 3,750,000 shares of Common Stock were issued upon the conversion of 375,000 shares of Series A-1 Preferred stock in terms of a conversion notice received from a Series A-1 stockholder at a conversion factor of 10 Common shares for one Series A-1Preferred share.
|
|
iii)
|
an aggregate of 3,500,000 shares of Common Stock were issued upon the conversion of 35,000 shares of Series B Preferred stock in terms of a conversion notice received from the Series B stockholder at a conversion factor of 100 Common shares for one Series B Preferred share.
|
|
|
|
|
iv)
|
an aggregate of 500,000 shares of Common Stock were issued for consulting services which were valued at a fair market price of $70,000.
|
Included in the Common stock outstanding are 13,000,000
restricted shares of common stock issued as follows:
|
(a)
|
An aggregate of 10,000,000 shares of restricted common stock were issued to our former Chief Executive
Officer in terms of an employment agreement entered into with him. These shares are restricted. As of December 31, 2015, 5,000,000
shares have already vested. The employment agreement with Mr. Huemoeller was terminated on January 1, 2016 resulting in the immediate
vesting of the remaining 5,000,000 restricted shares. These restricted shares were valued at the closing price
of the common stock on February 4, 2015, the date of approval of the amended and restated employment agreement with our former
Chief Executive officer. Refer to the related party disclosure in note 17 below.
|
|
(b)
|
An aggregate of 3,000,000 shares of restricted common stock were issued to our Director, John Zotos, in terms of a consulting agreement entered into with him. These shares are restricted and vested as to 1,000,000 shares on March 31, 2015, 1,000,000 on September 30, 2015 with the remaining 1,000,000 vesting on March 31, 2016. These restricted shares were valued at the closing price of the common stock on December 5, 2014, the date of approval of the consulting agreement with John Zotos. Refer to the related party disclosure in note 17 below.
|
Our former Chief Executive Officer
was entitled to an additional 1,500,000 shares of restricted common stock which was due to vest in two equal tranches of 750,000
common shares each on January 1, 2016 and 2017. Due to the termination of Mr. Huemoeller’s employment agreement, these shares
will not be issued and are no longer available to Mr. Huemoeller.
The restricted
stock granted and exercisable at December 31, 2015 is as follows:
|
|
|
Restricted Stock Granted
|
|
|
Restricted Stock Vested
|
|
Grant date Price
|
|
|
Number
Granted
|
|
|
Weighted
Average
Fair Value per Share
|
|
|
Number
Vested
|
|
|
Weighted
Average
Fair Value per Share
|
|
$
|
0.15
|
|
|
|
10,000,000
|
|
|
|
|
|
|
|
10,000,000
|
|
|
|
|
|
$
|
0.18
|
|
|
|
3,000,000
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
13,000,000
|
|
|
$
|
0.16
|
|
|
|
12,000,000
|
|
|
$
|
0.16
|
|
The Company has recorded an
expense of $1,536,571 and $620,429 for the year ended December 31, 2015 and 2014, relating to the restricted stock awards. There
will be no further expense, related to these restricted shares.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12
|
STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
|
The Company has 10,000,000 authorized
preferred shares with a par value of $0.001 each with 5,000,000 preferred shares designated as Series A-1 Convertible Preferred
Stock (“Series A-1 Shares”), 500,000 preferred shares designated as Series B Preferred Stock and on February 19, 2015,
the Company amended its articles of incorporation, designating the remaining 4,500,000 preferred shares as Series C Preferred Stock.
|
i)
|
Series A-1 Convertible Preferred Stock
|
The Company has designated 5,000,000
preferred shares as Series A-1 Convertible Preferred Stock (“Series A-1 Shares”), with 3,137,500 Series A-1 Shares
issued and outstanding which are convertible into 31,375,000 shares of common stock.
During the year ended December
31, 2015, holders of 375,000 Series A-1 shares converted their holdings into 3,750,000 shares of the Company’s Common Stock
at a conversion ratio of 10 common shares to 1 Series A-1 Share.
The rights, privileges and preferences
of the Series A-1 Shares are summarized as follows;
Conversion
Each Series A-1 Share has the following
conversion rights:
|
(a)
|
Each share of the Series A-1Shares is convertible into ten shares of Common Stock.
|
|
(b)
|
There shall be no adjustment made to the conversion ratio of the Series A-1 Shares for any stock split, stock dividend, combination, reclassification or other similar event.
|
Company Redemption
The Series A-1 Shares are non-redeemable
by the Company.
Voting Rights
Each holder of Series A-1 Shares
is entitled to vote on all matters submitted to a vote of the stockholders of the Company and shall be entitled to that number
of votes equal to the number of shares of Common Stock into which such holder’s shares of Series A-1 Shares could then be
converted.
Dividends
Until such time that any dividend
is paid to the holders of Common Stock, the holders of Series A-1 Shares shall be entitled to a dividend in an amount per share
equal to that which such holders would have been entitled to receive had they converted all of the shares of Series A-1 Shares
into Common Stock immediately prior to the payment of such dividend
Liquidation Preference
Each share of Series A-1 Shares
is entitled to a liquidation preference of $0.08 per share
No Circumvention
The approval of the holders of
at least 2/3 (66.6%) of the outstanding shares of the Series A-1 Shares, voting together separately as a class, is required for:
|
(a)
|
the merger, sale of all, or substantially all of the assets or intellectual property, recapitalization, or reorganization of the Company;
|
|
(b)
|
the authorization or issuance of any equity security having any right, preference or priority superior to or on a parity with the Series A-1 Shares;
|
|
(c)
|
the redemption, repurchase or acquisition of any of the Company’s equity securities or the payment of any dividends or distributions thereon;
|
|
(d)
|
any amendment or repeal of the Company’s Articles of Incorporation or Bylaws that would have an adverse effect on the rights, preferences or privileges of the Series A-1 Shares; and
|
|
(e)
|
the making of any loan or advance to any person except in the ordinary course of business.
|
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12
|
STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
|
|
b)
|
Preferred Stock (continued)
|
|
ii)
|
Series B Convertible Preferred Stock
|
The Company has designated 500,000
preferred shares as Series B Convertible Preferred Stock (“Series B Shares”), with 40,000 Series B Shares issued and
outstanding which are convertible into 4,000,000 shares of common stock.
The Company issued 75,000 Series
B shares in March 2014 for gross proceeds of $750,000.
During the year ended December 31, 2015, the holder
of 35,000 Series B shares converted his holding into 3,500,000 shares of the Company’s Common Stock at a conversion ratio
of 100 common shares per Series B Share.
The rights, privileges and preferences of the Series
B Shares are summarized as follows:
Conversion
The holders of the Series B Preferred Shares shall have
conversion rights as follows:
|
(a)
|
Each share of the Series B Shares is convertible at any time prior to the issuance of a redemption notice by the Company into such number of shares of Common Stock by dividing the Stated value ($10) of the Series B Shares by $0.10 and is subject to adjustment for dividends or distributions made in common stock, the issue of securities convertible into common stock, stock splits, reverse stock splits, or reclassifications of common stock. No adjustments will be made to the conversion rights or conversion price for any reorganization other than to be entitled to receive the same benefits as if the shares were converted immediately prior to such reorganization. No conversion will take place if the holder of the Series B Shares will beneficially own in excess of 4.99% of the shares of Common Stock outstanding immediately after conversion. As of the date hereof, each Series B Share converts into 100 shares of common stock.
|
|
(b)
|
The conversion right of the holders of Series B Shares are exercised by the surrender of the certificates representing shares to be converted to the Company, accompanied by written notice electing conversion.
|
|
(c)
|
No fractional shares of Common Stock or script will be issued upon conversion of Series B Shares. The Company will pay a cash adjustment in respect to such fractional interest based upon the fair value of a share of Common Stock, as determined in good faith by the Company’s Board of Directors.
|
|
(d)
|
All shares of Common Stock issued upon conversion of Series B Shares will upon issuance be validly issued, fully paid and non-assessable. All certificates representing Series B Shares surrendered for conversion shall be appropriately canceled on the books of the Company and the shares so converted represented by such certificates shall be restored to the status of authorized but unissued shares of preferred stock of the Company.
|
Company Redemption
The Company has the right, at any
time after the date the Series B Shares have been issued, to redeem all or a portion of any Holder's Series B Shares at a price
per Series B Share equal to the issue price per Series B Share multiplied by 120%
Voting Rights
Each holder of Series B Shares
is entitled to vote on all matters submitted to a vote of the stockholders of the Company and is entitled to votes equal to the
number of shares of Common Stock into which Series B Shares could be converted, and the holders of shares of Series B Shares and
Common Stock shall vote together as a single class on all matters submitted to the stockholders of the Company.
Dividends
|
(a)
|
The holders of the Series B Shares are entitled to receive cumulative dividends at the rate of eight percent per annum of the issue price per share, accrued daily and payable annually in arrears on December 31st of each year (“Dividend
Date”). Such dividends accrue on any given share from the day of original issuance of such share. Such dividends are cumulative, whether or not declared by the Board of Directors, but are non-compounding.
|
|
(b)
|
Any dividend payable on a dividend payment date may be paid, at the option of the Company, either (i) in cash or (ii) in shares of common stock at an issue price of $0.10 per common share.
|
|
(c)
|
Nothing contained herein is deemed to establish or require any payment or other charges in excess of the maximum permitted by applicable law.
|
|
(d)
|
In the event that pursuant to applicable law or contract the Company is prohibited or restricted from paying in cash the full dividends to which the holders of the Series B Shares are entitled, the cash amount available pursuant to applicable law or contract will be distributed among the holders of the Series B Shares ratably in proportion to the full amounts to which they would otherwise be entitled and any remaining amount due to holders of the Series B Shares will be payable in cash.
|
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12
|
STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
|
|
b)
|
Preferred Stock (continued)
|
|
ii)
|
Series B Convertible Preferred Stock (continued)
|
Liquidation Preference
In the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary, the holders of the Series B Shares are entitled to receive,
prior and in preference to any distribution of any assets of the Company to the holders of any other preferred stock of the Company
and subordinate to any distribution to the Series A-1 Shares, and prior and in preference to any distribution of any assets of
the Company to the holders of the Common Stock, the amount of 120% of the issue price per share. In addition, the Series B holder
has agreed to vote to subordinate the series B Preferred stock liquidation preferences to the Series C Preferred stock preferences.
No Circumvention
The Company may not amend its certificate
of incorporation, or participate in any reorganization, sale or transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action for the purpose of avoiding or seeking to avoid the observance or performance
of any of the terms to be observed or performed by the Company.
We have undeclared dividends on
the Series B Preferred stock amounting to $91,529 as of December 31, 2015. 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 year ended December 31, 2015 takes into account these undeclared dividends.
|
iii)
|
Series C Convertible Preferred Stock
|
The Company has designated 4,500,000
preferred shares as Series C Convertible Preferred Stock (“Series C Shares”), with 4,500,000 Series C Shares issued
and outstanding which are convertible into 120,000,000 shares of common stock (a conversion price of $0.12291665 per share).
On February 19, 2015, the Company entered
into a Series C Preferred Stock Purchase Agreement (the “Purchase Agreement”) with Ervington Investment Limited, an
entity organized under the laws of the Republic of Cyprus who is wholly owned by Greenleas International Holdings Ltd., which in
turn is wholly owned by Harmony Trust Settlement, and closed the first tranche of a private placement offering under the Purchase
Agreement, raising $5,000,000 in gross proceeds from the sale of 1,525,424 shares of our Series C Preferred Stock (“Series
C Preferred Stock”) at a purchase price of $3.277777778 per share. The Company agreed to use the net proceeds of the offering
for research and development, commercialization of new products, sales and marketing, repayment of debt, accounts payable and administrative
expenses.
In terms of the Purchase Agreement,
the Company sold to Ervington an additional 2,974,576 shares of Series C Preferred Stock for additional gross proceeds to us of
$9,750,000 on June 30, 2015. The proceeds of the second closing are to be used by us for the acquisition, enhancement and maintenance
of an oil field for deployment of our Plasma Pulse Technology.
The Company valued the beneficial
conversion rights of the first tranche of Series C Convertible Preferred Stock issued on February 19, 2015 to be the right to the
additional effective common shares as converted utilizing the opening market price of the common stock of $0.15 per share. Such
computation valued the beneficial conversion rights to be $1,101,696 for purposes of presenting the net loss to common stock holders.
The Company valued the beneficial conversion rights of the second tranche of Series C Convertible Preferred Stock issued on June
30, 2015, to be the right to the additional effective common shares as converted utilizing the open market price of the common
stock of $.014 per share. Such computation valued the beneficial conversion rights to be $1,355,085 for purposes of presenting
the net loss to common stockholders.
In connection with the Purchase
Agreement, the Company also entered into an Investors’ Rights Agreement with Ervington (the “Investors’ Rights
Agreement”). The Investors’ Rights’ Agreement provides that the Holders (as defined in the Investors’ Rights
Agreement) of a majority of the outstanding Registerable Securities (defined therein as the shares of common stock and Series A-1
Convertible Preferred Stock (“Series A-1 Preferred Stock”) issued pursuant to the Secondary Stock Purchase Agreement
(as defined below), the shares of Series C Preferred Stock issued pursuant to the Purchase Agreement and any common stock issued
as dividends thereon or in exchange for such) are entitled to demand registration rights under certain circumstances and piggyback
registration rights. In addition, the Investors’ Rights Agreement provides that Ervington (or its assignee) has the right
to designate a person to be appointed as the Company’s Chief Executive Officer, a board observer right if a representative
of Ervington or its affiliate is not a member of our board of directors and certain consultation rights if a representative of
Ervington or its affiliate is not a member of our board of directors so long as it holds a majority of the Registerable Securities
and at least 36,000,000 shares of our common stock on an “as converted” basis. Ervington and its affiliates also have
a right of first refusal to acquire their pro rata share of any New Securities (as defined in the Investors’ Rights Agreement)
which we propose to issue and sell.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12
|
STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
|
|
b)
|
Preferred Stock (continued)
|
|
iii)
|
Series C Convertible Preferred Stock (continued)
|
In connection with the Purchase
Agreement, Ervington also entered into a stock purchase agreement (the “Secondary Purchase Agreement”) with certain
of our stockholders (the “Selling Stockholders”), pursuant to which the Selling Stockholders sold to Ervington an aggregate
of 7,624,990 shares of our common stock and 2,437,500 shares of our Series A-1 Preferred Stock (representing 24,375,000 shares
of our common stock on an as converted basis) at a purchase price of $.001 per share on the closing of the first tranche on February
19, 2015. In terms of the Secondary Purchase Agreement the Selling Stockholders also sold to Ervington on July 6, 2015, after the
second closing an additional 56,677,477 shares of our common stock and 700,000 shares of our Series A-1 Preferred Stock (representing
7,000,000 shares of our common stock on an as converted basis) on the closing of the second tranche on July 6, 2015.
The Company also entered into a
Stockholders Agreement with the Selling Stockholders and Ervington (the “Stockholders Agreement”) providing that until
a Change of Control Transaction (as defined in the Stockholders Agreement), each person a party thereto shall vote all of such
person’s shares of our common stock in favor of the designees appointed by Ervington and two additional directors appointed
by two of the Selling Stockholders and Ervington agreed to vote its shares in favor of the two designees appointed by the two Selling
Stockholders provided that the certain Selling Stockholders continue to own a certain threshold number of shares of our common
stock or preferred stock convertible into our common stock. In addition, the Selling Stockholders granted Ervington certain drag
along rights in the event of a Change of Control Transaction (as defined in the Stockholders Agreement) and Ervington and its affiliates
were granted certain rights of first refusal.
In accordance with the terms of the Series C Preferred Stock Certificate of Designations (the “Series
C Certificate of Designations”), Ervington appointed Ivan Persiyanov to serve as a director, holding two votes and Maria
Damianou was appointed to serve as a director during July 2015, holding one vote. In addition, James Fuller, Mark Kalow and Dan
Steffens resigned from the Board of Directors effective upon the closing.
In addition, as a condition to
the consummation of the Purchase Agreement, the Company filed a Certificate of Designations to our Certificate of Incorporation
with the Secretary of State of the State of Delaware setting forth the rights, preferences and privileges of the Series C Preferred
Stock, our Bylaws were amended and restated and we entered into an Indemnification Agreement with Ivan Persiyanov.
The terms attached to the Series
C Preferred Stock (“Series C Share”) are summarized below:
Conversion
Subject to adjustment for stock
splits, stock dividends, reorganizations and recapitalizations and similar transactions, each Series C Share is currently convertible
at the option of the holder into 26.67 shares of common stock.
Company Redemption
The Series C Shares are not subject
to redemption by the Company.
Voting Rights
Generally, holders of Series C
Shares will, on an as-converted basis, vote together with the common stock as a single class.
Upon the issuance of at least 1,500,000
shares of Series C Preferred Stock the holders of the Series C Preferred Stock, as a class, are entitled to elect either two directors
holding one vote or one director holding two votes. Upon the issuance of an aggregate of 4,500,000 shares of Series C Preferred
Stock, the holders of the Series C Preferred Stock are entitled to elect either three directors holding one vote each, one director
holding three votes or two directors with one director holding two votes and another director holding one vote.
Dividends
The Series C Shares accrue dividends
at the rate per annum equal to 4% of the stated price (which initially is $3.277777778) payable annually in arrears on December
31 of each year in preference and priority to any payment of any dividend on our common stock, or any other class of preferred
stock.
Liquidation Preference
In the event of our liquidation,
dissolution or winding up and other liquidation events (as defined in the Series C Certificate of Designations), holders of Series
C Shares are entitled to receive from proceeds remaining after distribution to our creditors and prior to the distribution to holders
of common stock or any other class of preferred stock
the (x) stated value (as adjusted
for stock splits, stock dividends, reorganizations, recapitalizations and the like) held by such holder and (y) all accrued but
unpaid dividends
on such shares.
Anti-Dilution
The Series C Shares are entitled to certain weighted
average anti-dilution protection as specified in the Series C Certificate of Designations.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
12
|
STOCKHOLDERS’ EQUITY DEFICIT (continued)
|
|
b)
|
Preferred Stock (continued)
|
|
iii)
|
Series C Convertible Preferred Stock (continued)
|
No Circumvention
The approval by holders of a
majority of the Series C Shares, voting separately as a class, will be required for the following:
|
(i)
|
merger, sale of substantially all of our assets or our recapitalization, reorganization, liquidation, dissolution or winding up;
|
|
(ii)
|
redemption or acquisition of shares of our common stock other than in limited circumstances;
|
|
(iii)
|
declaration or payment of a dividend or distribution with respect to our capital stock;
|
|
(iv)
|
making any loan or advance;
|
|
(v)
|
Amending the Company’s Certificate of Incorporation or Bylaws;
|
|
(vi)
|
authorizing or creating any new class or series of equity security;
|
|
(vii)
|
increasing the number of authorized shares for issuance under any existing stock or option plan;
|
|
(viii)
|
materially changing the nature of the business
|
|
(ix)
|
incurring any indebtedness;
|
|
(x)
|
engaging in or making investments not authorized by our board of directors;
|
|
(xi)
|
acquiring or divesting a material amount of assets;
|
|
(xii)
|
selling, assigning, licensing, pledging or encumbering our material technology or intellectual property;
|
|
(xiii)
|
entering into any corporate strategic relationship involving payment, contribution or assignment by the Company or to the Company of any assets.
|
The Company has undeclared dividends
on the Series C Preferred stock amounting to $369,205 as of December 31, 2015. The computation of loss per common share for the
year ended December 31, 2015 takes into account these undeclared dividends.
The Company’s Board of Directors approved the
Company’s 2008 Stock Option Plan (the “Stock Plan”) for the issuance of up to 5,000,000 shares of common stock
to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent rights,
restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors and consultants of
the Company and its subsidiaries. After the reverse stock split in August 2012, a total of 100,000 shares were available for grant.
Subsequent to the reverse split the Board of Directors approved an increase in the number of awards available for grant to 2,100,000
shares. The exercise price of stock options under the Stock Plan is determined by the Board of Directors, and may be equal to or
greater than the fair market value of the Company’s common stock on the date the option is granted. Options become exercisable
over various periods from the date of grant, and generally expire ten years after the grant date.
At December 31, 2015 and 2014, there were 380,950 Plan options issued and outstanding, respectively, under
the Stock Option Plan.
The vesting provisions for these
stock options are determined by the board of directors at the time of grant, there are no unvested options outstanding as of December
31, 2015.
No options were issued during the year ended December
31, 2015.
In the event of the employees’ termination, the
Company will cease to recognize compensation expense.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
12
|
STOCKHOLDERS’ EQUITY DEFICIT (continued)
|
|
c)
|
Stock Options (continued)
|
|
ii)
|
Non-Plan Stock Options
|
Subsequent to year end, On January
1, 2016, the Company granted, to its newly appointed Chief Executive Officer, 3,000,000 common stock, non-plan options (that are
not covered by the Company’s Stock Option Plan), with an exercise price of $0.09 per share. These options vest as to 1,000,000
on the first anniversary of the grant date; 1,000,000 on the second anniversary of the grant date and a further 1,000,000 on the
third anniversary of the grant date.
Subsequent to year end, on March
1, 2016, the Company granted, to its newly appointed Chief Operating Officer, 1,000,000 common stock, non-plan options (that are
not covered by the Company’s Stock Option Plan), with an exercise price of $0.08 per share. These options vest as to 333,334
on the first anniversary of the grant date; 333,333 on the second anniversary of the grant date and a further 333,333 on the third
anniversary of the grant date.
In the event of the employees’ termination, the
Company will cease to recognize compensation expense.
A summary of all of our option
activity during the period January 1, 2014 to December 31, 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares Underlying Options
|
|
|
Exercise
price per
share
|
|
|
Weighted
average
exercise
price
|
|
Outstanding January 1, 2014
|
|
|
11,452,960
|
|
|
$
|
0.25
to 25.00
|
|
|
$
|
0.30
|
|
Granted – plan options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted – non plan options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
(11,072,010
|
)
|
|
|
0.25 to 25.00
|
|
|
|
0.28
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2014
|
|
|
380,950
|
|
|
$
|
0.51 to 13.50
|
|
|
$
|
0.90
|
|
Granted – plan options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted – non plan options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2015
|
|
|
380,950
|
|
|
|
0.51 to 13.50
|
|
|
|
0.90
|
|
Stock options outstanding as
of December 31, 2015 and 2014 as disclosed in the above table, have an intrinsic value of $0 and $0, respectively.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12
|
STOCKHOLDERS’ DEFICIT (continued)
|
|
c)
|
Stock Options (continued)
|
The options outstanding and exercisable at December
31, 2015 are as follows:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
life in years
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
life in years
|
|
$
|
13.50
|
|
|
|
3,480
|
|
|
|
3.46
|
|
|
$
|
|
|
|
|
3,480
|
|
|
$
|
|
|
|
|
3.46
|
|
$
|
12.50
|
|
|
|
2,000
|
|
|
|
4.78
|
|
|
$
|
|
|
|
|
2,000
|
|
|
$
|
|
|
|
|
4.78
|
|
$
|
8.50
|
|
|
|
500
|
|
|
|
5.50
|
|
|
$
|
|
|
|
|
500
|
|
|
$
|
|
|
|
|
5.50
|
|
$
|
5.00
|
|
|
|
14,800
|
|
|
|
5.79
|
|
|
$
|
|
|
|
|
14,800
|
|
|
$
|
|
|
|
|
5.79
|
|
$
|
0.65
|
|
|
|
36,924
|
|
|
|
7.25
|
|
|
$
|
|
|
|
|
36,924
|
|
|
$
|
|
|
|
|
7.25
|
|
$
|
0.63
|
|
|
|
38,096
|
|
|
|
2.50
|
|
|
$
|
|
|
|
|
38,096
|
|
|
$
|
|
|
|
|
2.50
|
|
$
|
0.51
|
|
|
|
285,150
|
|
|
|
4.29
|
|
|
$
|
|
|
|
|
285,150
|
|
|
$
|
|
|
|
|
4.29
|
|
|
|
|
|
|
380,950
|
|
|
|
4.45
|
|
|
$
|
0.90
|
|
|
|
380,950
|
|
|
$
|
0.90
|
|
|
|
4.45
|
|
No options were granted for
the year ended December 31, 2015.
The Company has applied fair
value accounting for all share based payment awards since inception. The fair value of each option or warrant granted is estimated
on the date of grant using the Black-Scholes option-pricing model. There is no deferred compensation recorded upon initial grant
date, instead, for employees, the fair value of the share-based payment is recognized ratably over the stated vesting period. For
consultants, the fair value is recognized as expense immediately.
The Company has recorded an
expense of $1,536,571 and $1,769,170 for the year ended December 31, 2015 and 2014 relating to options issued.
A summary of all of our warrant activity during the
period January 1, 2014 to December 31, 2015 is as follows:
|
|
Shares Underlying
Warrants
|
|
|
Exercise
price per
share
|
|
|
Weighted
average
exercise
price
|
|
Outstanding January 1, 2014
|
|
|
375,000
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
Granted
|
|
|
5,964,498
|
|
|
|
0.15 to 0.25
|
|
|
|
0.23
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2014
|
|
|
6,339,498
|
|
|
$
|
0.15 to 0.30
|
|
|
$
|
0.24
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2015
|
|
|
6,339,498
|
|
|
$
|
0.15 to 0.30
|
|
|
$
|
0.24
|
|
The warrants outstanding and exercisable at December
31, 2015 are as follows:
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
life in years
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
life in years
|
|
$
|
0.30
|
|
|
|
375,000
|
|
|
|
2.83
|
|
|
$
|
0.30
|
|
|
|
375,000
|
|
|
$
|
0.30
|
|
|
|
2.83
|
|
$
|
0.25
|
|
|
|
1,751,667
|
|
|
|
3.49
|
|
|
$
|
0.25
|
|
|
|
1,751,667
|
|
|
$
|
0.25
|
|
|
|
3.49
|
|
$
|
0.15
|
|
|
|
525,500
|
|
|
|
3.49
|
|
|
$
|
0.15
|
|
|
|
525,500
|
|
|
$
|
0.15
|
|
|
|
3.49
|
|
$
|
0.25
|
|
|
|
1,508,333
|
|
|
|
3.59
|
|
|
$
|
0.25
|
|
|
|
1,508,333
|
|
|
$
|
0.25
|
|
|
|
3.59
|
|
$
|
0.15
|
|
|
|
577,499
|
|
|
|
3.60
|
|
|
$
|
0.15
|
|
|
|
577,499
|
|
|
$
|
0.15
|
|
|
|
3.60
|
|
$
|
0.25
|
|
|
|
968,166
|
|
|
|
3.60
|
|
|
$
|
0.25
|
|
|
|
968,166
|
|
|
$
|
0.25
|
|
|
|
3.60
|
|
$
|
0.25
|
|
|
|
633,333
|
|
|
|
3.65
|
|
|
$
|
0.25
|
|
|
|
633,333
|
|
|
$
|
0.25
|
|
|
|
3.65
|
|
|
|
|
|
|
6,339,498
|
|
|
|
3.52
|
|
|
$
|
0.24
|
|
|
|
6,339,498
|
|
|
$
|
0.24
|
|
|
|
3.52
|
|
The warrants outstanding have
an intrinsic value of $0 and $22,060 as of December 31, 2015 and 2014, respectively.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13
|
EQUITY BASED COMPENSATION
|
Equity based compensation
is made up of the following:
|
|
Year ended
December 31, 2015
|
|
|
Year ended
December 31, 2014
|
|
|
|
|
|
|
|
|
Stock option compensation charge
|
|
$
|
-
|
|
|
$
|
1,769,170
|
|
Restricted stock award compensation charge
|
|
|
1,536,572
|
|
|
|
620,429
|
|
Stock issued for services rendered
|
|
|
70,000
|
|
|
|
348,971
|
|
Stock awards in lieu of directors’ fees
|
|
|
-
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,606,572
|
|
|
$
|
2,765,570
|
|
14
|
OTHER (EXPENSE) INCOME
|
Other (expense) income includes a severance cost provision
of $31,109 in terms of the termination of employment of our previous CEO. The gain realized in the prior year was as a result of
debt forgiveness by our Technology Licensor of $150,000.
A reconciliation of the U.S. Federal statutory income
tax rate to the effective income tax rate is as follows:
|
|
Year ended
December 31, 2015
|
|
|
Year ended
December 31, 2014
|
|
|
|
%
|
|
|
%
|
|
Tax expense at the federal statutory rate
|
|
|
34
|
|
|
|
34
|
|
State tax expense, net of federal tax effect
|
|
|
5
|
|
|
|
5
|
|
Permanent timing differences
|
|
|
(18
|
)
|
|
|
(28
|
)
|
Deferred income tax asset valuation allowance
|
|
|
(21
|
)
|
|
|
(11
|
)
|
|
|
|
-
|
|
|
|
-
|
|
Significant components of the Company’s deferred
income tax assets are as follows:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
3,196,000
|
|
|
$
|
2,180,000
|
|
Valuation allowance
|
|
|
(3,196,000
|
)
|
|
|
(2,180,000
|
)
|
Net deferred income tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The valuation allowance for deferred income tax assets as of December 31, 2015 and December 31, 2014 was $3,196,000
and $2,180,000, respectively. The net change in the deferred income tax assets valuation allowance was an increase of $1,018,000
and $570,000 for Fiscal 2015 and 2014, respectively.
As of December 31, 2015, the
prior three years remain open for examination by the federal or state regulatory agencies for purposes of an audit for tax purposes.
Our net operating loss carry-forwards of $8,137,000 begin to expire in 2030 and continue to expire through
2035. In assessing the realizability of deferred income tax assets, management considers whether or not it is more likely than
not that some portion or all deferred income tax assets will be realized. The ultimate realization of deferred income tax assets
is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the projected future taxable income and tax planning strategies in making this assessment.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 year ended December 31, 2015 and 2014, all stock options, unvested restricted stock awards, warrants,
convertible preferred stock and convertible notes 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:
|
|
Year ended
December 31, 2015
(Shares)
|
|
|
Year ended
December 31, 2014
(Shares)
|
|
|
|
|
|
|
|
|
Options to purchase shares of common stock
|
|
|
380,950
|
|
|
|
380,950
|
|
Restricted stock awards – unvested
|
|
|
1,000,000
|
|
|
|
13,000,000
|
|
Warrants to purchase shares of common stock
|
|
|
6,339,498
|
|
|
|
6,339,498
|
|
Series A-1 convertible preferred shares
|
|
|
31,375,000
|
|
|
|
35,125,000
|
|
Series B convertible preferred shares
|
|
|
4,000,000
|
|
|
|
7,500,000
|
|
Series C convertible preferred shares
|
|
|
120,000,000,
|
|
|
|
-
|
|
Convertible long term notes
|
|
|
-
|
|
|
|
636,010
|
|
|
|
|
163,095,448
|
|
|
|
69,981,458
|
|
17
|
RELATED PARTY TRANSACTIONS
|
On February 4, 2015, the Company
entered into an Amended and Restated Employment Agreement (the “Employment Agreement”) with John Huemoeller II, that
superseded the Company’s prior Employment Agreement with Mr. Huemoeller that was previously entered into on December 5, 2014
(the “Prior Agreement”).
Under the Employment Agreement,
which had a stated term of three (3) years, for his continued service as the Chief Executive Officer and President of the Company,
Mr. Huemoeller would continue to receive the same annual base salary of $180,000 provided for under the Prior Agreement and would
be entitled to bonuses at the discretion of the Company based on performance. The new Employment Agreement restated a previous
grant to Mr. Huemoeller of 10,000,000 shares of the Company’s restricted stock, which would vest on the following schedule:
1,250,000 shares vested on January 1, 2015 and thereafter 1,250,000 shares would vest on each quarter anniversary, commencing April
1, 2015 for seven (7) quarters. The restricted stock grant was in lieu of the options that had previously been granted to Mr. Huemoeller,
which options were canceled on December 5, 2014. The Employment Agreement also provided that Mr. Huemoeller would receive a restricted
stock grant of 750,000 shares of stock on an annual basis commencing January 1, 2016, which will vest upon issuance. In the event
of a Change of Control (as defined in the Employment Agreement), termination without Cause (as defined in the Employment Agreement),
termination due to disability (as defined in the Employment Agreement), death or termination by Mr. Huemoeller for Good Reason
(as defined in the Employment Agreement), Mr. Huemoeller would receive: (i) a severance payment equal to two (2) months base salary
together with payment of medical insurance or COBRA payments for two (2) months after termination; and (ii) all restricted stock
grants that had been issued to Mr. Huemoeller will immediately vest. If Mr. Huemoeller terminated his employment at any time prior
to January 1, 2016 Without Good Reason (as defined in the Employment Agreement) or is terminated for Cause (as defined in the Employment
Agreement) then 5,000,000 of any restricted stock grants would immediately vest. The Employment Agreement also includes customary
confidentiality obligations and inventions assignments by Mr. Huemoeller.
The
Employment Agreement with Mr. Huemoeller, was terminated on January 1, 2016 by mutual consent, the remaining 5,000,000 unvested
restricted stock vested immediately upon termination and Mr. Huemoeller was paid his two months severance in terms of the agreement
and his medical insurance was maintained for a period
of two months, in terms of the agreement.
The restricted
stock grant of 750,000 shares on January 1, 2016 and 2017 was forfeited.
On December 5, 2014, the Company entered into a consulting agreement with John Zotos (“Zotos”),
our director for a two-year period. In terms of the agreement, Zotos will provide consulting services to the Company for a consideration
of $5,000 per month and the grant of 3,000,000 restricted shares of which 2,000,000 were vested as of December 31, 2015 and the
remaining 1,000,000 will vest on March 31, 2016. Early termination of the agreement by either party will result in immediate vesting
of the remaining unvested shares. The Company will also reimburse the consultant for all out of pocket expenses incurred whilst
performing his duties. The consulting agreement also includes customary confidentiality obligations and invention assignments by
Mr. Zotos.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17
|
RELATED PARTY TRANSACTIONS (continued)
|
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 will 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 will 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. In the event of the sale of all of the Company’s assets
or any field acquired by the Company during the employment period which sale occurs after the six-month anniversary of his employment
and before the two-year anniversary of his termination of employment, the Employment Agreement provides that Mr. Boutte will receive
a bonus equal to 3% of net cash proceeds received by the Company from such sale after payment of certain costs and expenses. In
the event that Mr. Boutte’s employment is 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) or upon his death, if any
occur after the one-year anniversary of his employment, Mr. Boutte is entitled to receive a severance payment equal to one year’s
base salary, any bonus earned which remains unpaid at such time and reimbursement of expenses. In the event of a Change of Control
(as defined in the Boutte Employment Agreement), Mr. Boutte will receive a severance payment equal to one year’s base salary,
any bonus earned which remains unpaid at such time and reimbursement of expenses. In addition, if a Change of Control occurs after
the one-year anniversary of the commencement of his employment with the Company, all of Mr. Boutte’s options shall immediately
vest. The Boutte Employment Agreement also includes customary confidentiality obligations and inventions assignments by Mr. Boutte
as well as a non-compete and non-solicitation provision. If his employment is terminated for Cause (as defined below) or by him
Without Good Reason (as defined in the Boutte Employment Agreement), Mr. Boutte is entitled to receive his annual base salary through
the date of termination and any bonus earned but unpaid. For purpose 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 at any time within the six
(6) month period on or immediately following the Change in Control; (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 purposes 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.
On March 1, 2016, the Company entered into a three-year Employment Agreement with David S. Ramsey (the “Ramsey
Employment Agreement”) to serve as the Company’s Chief Operating Officer. Under the Ramsey Employment Agreement, for
his service as the Chief Operating Officer of the Company, Mr. Ramsey will receive an annual base salary of $220,000, and an annual
performance bonus of up to 40% 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. In connection with the entry into the Ramsey Employment Agreement,
Mr. Ramsey was granted an option award exercisable for 1,000,000 shares of the Company’s common stock, which will vest as
to 333,334 shares on the one-year anniversary and 333,333 shares on each of the two and three-year anniversary of the commencement
of his employment with the Company. In the event of the sale of all of the Company’s assets or any field acquired by the
Company during the employment period which sale occurs after the six-month anniversary of his employment and before the two-year
anniversary of his termination of employment, the Ramsey Employment Agreement provides that Mr. Ramsey will receive a bonus equal
to 2% of net cash proceeds received by the Company from such sale after payment of certain costs and expenses. In the event that
Mr. Ramsey’s employment is terminated Without Cause (as defined in the Ramsey Employment Agreement), by Mr. Ramsey for Good
Reason (as defined below), Disability (as defined in the Ramsey Employment Agreement) or upon his death, if any occur after the
one-year anniversary of his employment, Mr. Ramsey is entitled to receive a severance payment equal to one year’s base salary,
any bonus earned which remains unpaid at such time and reimbursement of expenses. In the event of a Change of Control (as defined
in the Ramsey Employment Agreement), Mr. Ramsey will receive a severance payment equal to one year’s base salary, any bonus
earned which remains unpaid at such time and reimbursement of expenses. In addition, if a Change of Control occurs after the one-year
anniversary of the commencement of his employment with the Company, all of Mr. Ramsey’s options shall immediately vest. The
Ramsey Employment Agreement also includes customary confidentiality obligations and inventions assignments by Mr. Ramsey as well
as a non-compete and non-solicitation provision. If his employment is terminated for Cause (as defined below) or by him Without
Good Reason (as defined in the Ramsey Employment Agreement), Mr. Ramsey is entitled to receive his annual base salary through the
date of termination and any bonus earned but unpaid. For purposes of the Ramsey Employment Agreement, “Good Reason”
is defined as (i) any material and substantial breach of the Ramsey Employment Agreement by the Company; (ii) a Change in Control
(as defined in the Ramsey Employment Agreement) occurs and Mr. Ramsey’s employment is terminated at any time within the six
(6) month period on or immediately following the Change in Control; (iii) a reduction in Mr. Ramsey’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 Employment
Agreement; or (iv) the Ramsey Employment Agreement is not assumed by a successor to the Company. For purposes of the 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. Ramsey of any provision
of the Ramsey 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. Ramsey’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. Ramsey, gross insubordination or dereliction of fiduciary
obligations which, to the extent it is curable by Mr. Ramsey, is not cured by Mr. Ramsey within thirty (30) days of receiving written
notice of such violation by the Company.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18
|
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.
The Company leased approximately
2,300 square feet of office space in Houston, Texas, the original term of the lease agreement terminated on January 31, 2014 with
automatic renewals for six month periods unless 60 days written notice is given prior to renewal. The rental was $2,200 per month.
This lease terminated on January 31, 2016 and has not been renewed.
The future minimum lease installments
under this agreement as of December 31, 2015 to January 31, 2016 (the automatic renewal period) is $2,200.
The Company leases a loft space
in Houston, Texas from a related party in terms of a lease agreement entered into on September 1, 2015 and expiring on May 31,
2016. The lease provides for automatic renewal on a month to month basis unless 60 days written notice is given to terminate the
lease. The monthly rental is $3,260 per month.
The future minimum lease installments
under this agreement as of December 31, 2015 to May 31, 2016 is $16,300.
The Company is committed to investing
a further $300,000 in NENA, over and above the $900,000 invested in NENA as of December 31, 2015, based on their cash flow needs.
The Company entered into lease
agreement for approximately 3,733 square feet of office and warehouse space in Houston, the term of the lease is for 39 months
commencing on March 1, 2016 and terminating on May 31, 2019. The lease provides 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 amount to approximately $3,410 per month, escalating at a rate of 1.7% per annum,
after excluding the free rental months.
The future minimum lease installments
under this agreement as of December 31, 2015 to June 30, 2019 is approximately $124,859.
The future minimum operating
lease commitments are as follows:
|
|
Amount
|
|
2016
|
|
|
49,190
|
|
2017
|
|
|
37,974
|
|
2018
|
|
|
38,560
|
|
2019
|
|
|
17,635
|
|
|
|
$
|
143,359
|
|
In terms of the license agreement
commitments disclosed in note 5 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
|
|
|
|
|
|
2016
|
|
$
|
1,000,000
|
|
2017
|
|
|
1,000,000
|
|
2018
|
|
|
1,000,000
|
|
2019
|
|
|
1,000,000
|
|
2020
|
|
|
1,000,000
|
|
|
|
$
|
5,000,000
|
|
Subsequent to year-end, the $200,000 license fee which was due on June 30, 2015 was waived by the Licensor.
PROPELL TECHNOLOGIES GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On October 22, 2015, Novas entered
into an operating agreement with Technovita(the “Joint Venture Agreement”) , NENA, whereby Novas agreed to contribute
$1,200,000 ($600,000 to be delivered on the effective date (October 22, 2015) of the Joint Venture Agreement, $300,000 on November
1, 2015 and $300,000 on the two month anniversary of the Effective Date) to the capital of NENA for 60% of the membership interests
of NENA and Technovita agreed to contribute an aggregate of $800,000 to the capital of NENA for 40% of the membership interests
of NENA. In terms of a side agreement entered into on November 18, 2015, the revenue and expenses incurred by Technovita and the
Company prior to entering into the operating agreement, have been included in the joint venture and consolidated into the Company’s
results effective September 1, 2015.
Subject to certain exceptions
and pursuant to the terms of a sublicense agreement (the “Novas Sublicense Agreement”) that was entered into between
Novas, NENA and Novas Energy Group Inc. (the “Licensor”), the licensor of Plasma Pulse Technology currently used by
Novas and Technovita, NENA will be the exclusive provider of the Vertical Technology (as defined in the Joint Venture Agreement)
to third parties in the United States. Subject to certain exceptions and pursuant to the terms of Sublicense Agreements (the “Technovita
Sublicense Agreement”) that was entered into between Technovita, NENA and Licensor, NENA is the exclusive provider of the
Vertical Technology to third parties in Canada. Notwithstanding the foregoing, both Novas and Technovita will retain the right
to deploy the Vertical Technology on wells owned by Novas or Technovita in the United States or Canada, respectively. If either
Novas or Technovita terminates the Sublicense Agreement with NENA and Licensor, the non- terminating party will receive 100% of
the terminating member’s membership interest in NENA.
The business and affairs of NENA are to be managed
by or under the direction of the Board of Directors, consisting of five (5) members, three (3) of whom shall be appointed by Novas
and two (2) of whom shall be appointed by Technovita. Board approval is required to: (i) incur any indebtedness, pledge or grant
liens on any assets or guarantee, assume, endorse or otherwise become responsible for the obligations of any other person, except
to the extent approved or authorized in NENA’s budget; (ii) make any loan, advance or capital contribution in any person,
except to the extent approved or authorized in the budget; (iii) transfer any equipment necessary in the deployment of the Vertical
Technology to any third party; (iv) enter into or effect any transaction or series of related transactions involving the sale of
NENA or the sale, lease, license, exchange or other disposition (including by merger, consolidation, sale of assets or similar
business transaction) by NENA of any assets in excess of $300,000; (v) appoint or remove NENA’s auditors or make any changes
in the accounting methods or policies of NENA (other than as required by GAAP); (vi) enter into or effect any transaction or series
of related transactions involving the purchase, lease, license, exchange or other acquisition (including by merger, consolidation,
acquisition of stock or acquisition of assets) by NENA of any assets and/or equity interests of any person and/ or assets in excess
of $300,000; or (v) enter into or effect any commercial transaction or series of related commercial transactions involving anticipated
liabilities or revenues of NENA in excess of $500,000 or that materially vary from NENA’s existing strategy or business plan.
On January 1, 2016, the Company
terminated its employment agreement with its former Chief Executive Officer, as disclosed in Note 17 above.
On January 1, 2016, the Company
entered into an employment agreement with a new Chief Executive Officer, as disclosed in Note 17 above.
On March 1, 2016, the Company
entered into an employment agreement with a Chief Operating Officer, as disclosed in Note 17 above.
Subsequent to year-end, the $200,000 license fee due to the Novas BVI for the rights to use the Plasma
Pulse technology in Mexico was waived by the Licensor.
In accordance with ASC 855-10,
the Company has analyzed its operations subsequent to December 31, 2015 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.