NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
1
|
ORGANIZATION AND DESCRIPTION OF BUSINESS
|
Pledge Petroleum Corp. (formerly Propell
Technologies Group, Inc. and 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
|
During the past year, our
management, at the direction of the Board of Directors, has evaluated, considered, and brought forward various opportunities to
acquire producing oil fields; however, to date, an oil field meeting the criteria acceptable to the Board of Directors (which
criteria include among other things, low general and administrative costs, ability to generate cash flow and ability to fully
utilize the PPT) has not been found. At this point, the Board is reevaluating its business plan and strategy and has
reduced operating expenses, including staffing, in order to preserve capital. The Board continues to evaluate its options including
the possible sale of our technology and PPT assets, forming a special committee to investigate a possible share buyback of the
majority shareholder, Ervington Investments, and/or a possible dissolution of the Company.
On October 4, 2016, Novas Energy
USA, Inc. (“Novas USA”), a wholly owned subsidiary of the Company, delivered a notice to Technovita Technologies USA,
Inc. (“Technovita”) electing to dissolve its joint venture with Technovita (the “Joint Venture”), effective
November 1, 2016, pursuant to Section 11.1(b) of the Operating Agreement of Novas Energy North America, LLC (“NENA”),
dated October 22, 2015 (the “Operating Agreement”), by and among Novas USA and Technovita.
Section 11.1(b) of the Operating
Agreement provides that the Joint Venture may be dissolved upon the election of Novas USA in the event the Joint Venture fails
to satisfy any Year 1 Key Performance Indicator by an amount greater than five percent (5%) of the applicable metric (the “Year
1 Milestone”). The Joint Venture has not achieved the Year 1 Milestone. For the purposes of the Operating Agreement, the
Year 1 Key Performance Indicators are defined as: during a continuous twelve (12) month period commencing upon September 1, 2015
each of: (1) sales from activities in the United States of greater than or equal to $2,829,000; (2) sales from activities in Canada
of greater than or equal to $2,829,000; (3) EBITDA from activities in the United States of greater than or equal to $524,000;
and (4) EBITDA from activities in Canada of greater than or equal to $524,000. Upon a dissolution, all intellectual property assets
of the Joint Venture, including any improvements to Technology (as defined in the Operating Agreement) is to be distributed to
Technovita solely for use in Canada, its territories and its possessions and Novas USA solely for use in the United States and
its territories.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND ESTIMATES
|
The accompanying financial statements have
been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).
All amounts referred to in the notes to
the financial statements are in United States Dollars ($) 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)
– Discontinued Operation
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.
PLEDGE PETROLEUM CORP.
(formerly 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 and Mexico. Accordingly, the Company’s business, financial condition and results of operations
may be influenced by the political, economic and legal environment in the USA and Mexico 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 January 2016, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01, which amends the guidance
in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the
accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements
for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing
deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal
years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means
of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is
effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under
the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating
the impact of adopting this guidance.
In February 2016, the FASB issued
Accounting Standards Update (ASU) 2016-02, which amends the guidance in U.S. GAAP on accounting for operating leases, a lessee
will be required to recognize assets and liabilities for operating leases with lease terms of more than 12 months on the balance
sheet. The new standard is effective for fiscal years and interim periods beginning after December 15, 2018, and upon adoption,
an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first
reporting period in which the guidance is effective. Early adoption is not permitted. The Company is currently evaluating the impact
of adopting this guidance.
In March 2016, the FASB issued
an Accounting Standards Update (ASU) “ASU 2016 – 09 Improvements to Employee Share-Based Payment Accounting”
which is intended to improve the accounting for employee share-based payments. The ASU simplifies several aspects of the accounting
for share-based payment award transactions, including; the income tax consequences, classification of awards as either equity or
liabilities, and the classification on the statement of cash flows. The new standard is effective for fiscal years and interim
periods beginning after December 15, 2016, and upon adoption, an entity should apply the amendments by means of a cumulative-effect
adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption
is permitted. The Company is currently evaluating the impact of adopting this guidance.
In April 2016, the FASB issued
an Accounting Standards Update (ASU) “ASU 2016 – 10 Revenue from Contract with Customers: identifying Performance Obligations
and Licensing”. The amendments in this Update clarify the two following aspects (a) contracts with customers to transfer
goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides
a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right
to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended to
reduce the degree of judgement necessary to comply with Topic 606. This guidance has no effective date as yet. The Company is currently
evaluating the impact of adopting this guidance.
In June 2016, the FASB issued
ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." ASU 2016-13 will replace the current incurred loss
approach with an expected loss model for instruments measured at amortized cost and require entities to record allowances for available-for-sale
debt securities rather than reduce the carrying amount under the current other-than-temporary impairment model. ASU 2016-13 is
effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is
permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. The Company is currently
evaluating the effect ASU 2016-13 will have on our consolidated financial statements.
In August 2016, FASB issued
ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 is intended to reduce diversity
in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company is
currently evaluating the effect ASU 2016-15 will have on our consolidated statements of cash flows.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2
|
ACCOUNTING POLICIES AND ESTIMATES (continued)
|
|
g)
|
Recent Accounting Pronouncements (continued)
|
In October 2016, the FASB issued
Accounting Standards Update No. (“ASU”) 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory."
ASU 2016-16 requires immediate recognition of income tax consequences of intercompany asset transfers, other than inventory transfers.
Existing GAAP prohibits recognition of income tax consequences of intercompany asset transfers whereby the seller defers any net
tax effect and the buyer is prohibited from recognizing a deferred tax asset on the difference between the newly created tax basis
of the asset in its tax jurisdiction and its financial statement carrying amount as reported in the consolidated financial statements.
ASU 2016-16 specifically excludes from its scope intercompany inventory transfers whereby the recognition of tax consequences will
take place when the inventory is sold to third parties. ASU 2016-16 is effective for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual reporting
period for which financial statements have not been issued or made available for issuance. The Company is currently evaluating
the effect ASU 2016-16 will have on our consolidated financial statements.
In October 2016, the FASB issued
Accounting Standards Update No. (“ASU”) 2016-17, Consolidation (Topic 810): Amendments to the Consolidation Analysis.
Upon the effective date of Update 2015-02, a single decision maker of a variable interest entity (VIE) is required to consider
indirect economic interests in the entity held through related parties on a proportionate basis when determining whether it is
the primary beneficiary of that VIE unless the single decision maker and its related parties are under common control. If a single
decision maker and its related parties are under common control, the single decision maker is required to consider indirect interests
in the entity held through those related parties to be the equivalent of direct interests in their entirety. The Board is issuing
this Update to amend the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat
indirect interests in the entity held through related parties that are under common control with the reporting entity when determining
whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling
financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has
a direct interest in a related party that, in turn, has a direct interest in the VIE. As part of a separate initiative, the Board
will consider whether other changes to the consolidation guidance for common control arrangements are necessary. The amendments
in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal
years. Early adoption is permitted. The Company does not expect this guidance to have a material impact on its financial statements.
In November 2016, FASB issued
Accounting Standards Update No. (“ASU”) 2016-18, Topic 230, Statement of Cash Flows. Entities classify transfers between
cash and restricted cash as operating, investing, or financing activities, or as a combination of those activities, in the statement
of cash flows. The amendments in this Update apply to all entities that have restricted cash or restricted cash equivalents and
are required to present a statement of cash flows under Topic 230. The amendments in this Update require that a statement of cash
flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted
cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents
should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown
on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash
equivalents. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. Early adoption is permitted. The amendments in this Update should be applied using a retrospective transition
method to each period presented. The Company does not expect this guidance to have a material impact on its financial statements.
In December 2016, the FASB issued
Accounting Standards Update No. (“ASU”) 2016-19, Technical Corrections and Improvements. Several topics are amended:
a. The amendment to Subtopic 350-40,
Intangibles—Goodwill and Other— Internal-Use Software, adds a reference to guidance to use when accounting for internal-use
software licensed from third parties that is within the scope of Subtopic 350-40. The transition guidance for that amendment is
the same as the transition guidance in Accounting Standards Update No. 2015-05, Intangibles—Goodwill and Other— Internal-Use
Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, to which the amendment
relates. The Company does not expect this guidance to have a material impact on its financial statements.
b. The amendment to Subtopic 360-20,
Property, Plant, and Equipment— Real Estate Sales, corrects the guidance to include the final decision of the EITF that loans
insured under the Federal Housing Administration and the Veterans Administration do not have to be fully insured by those government-insured
programs to recognize profit using the full accrual method. The transition guidance for that amendment must be applied prospectively
because it could potentially involve the use of hindsight that includes fair value measurements. The Company does not expect this
guidance to have a material impact on its financial statements.
c. The amendment to Topic 820, Fair
Value Measurement, clarifies the difference between a valuation approach and a valuation technique when applying the guidance in
that Topic. That amendment also requires an entity to disclose when there has been a change in either or both a valuation approach
and/or a valuation technique. The transition guidance for the amendment must be applied prospectively because it could potentially
involve the use of hindsight that includes fair value measurements. The Company does not expect this guidance to have a material
impact on its financial statements.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
|
2
|
ACCOUNTING POLICIES AND ESTIMATES (continued)
|
|
g)
|
Recent Accounting Pronouncements (continued)
|
|
d.
|
The amendment to Subtopic 405-40, Liabilities—Obligations
Resulting from Joint and Several Liability Arrangements, which clarifies that for an amount of an obligation under an arrangement
to be considered fixed at the reporting date, the amount that must be fixed is not the amount that is the entity’s portion
of the obligation but, rather, is the obligation in its entirety. The transition guidance for that amendment must be applied prospectively
because it could potentially involve the use of hindsight that includes fair value measurements. The Company does not expect this
guidance to have a material impact on its financial statements.
|
|
e.
|
The amendment to Subtopic 860-20, Transfers and Servicing—Sales
of Financial Assets, aligns implementation guidance in paragraph 860-20- 55-41 with its corresponding guidance in paragraph 860-20-25-11.
That amendment clarifies the considerations that should be included in an analysis to determine whether a transferor once again
has effective control over transferred financial assets. The transition guidance for that amendment must be applied prospectively
because it could potentially involve the use of hindsight that includes fair value measurements. The Company does not expect this
guidance to have a material impact on its financial statements.
|
|
f.
|
The amendment to Subtopic 860-50, Transfers and Servicing—Servicing
Assets and Liabilities, adds guidance that existed in AICPA Statement of 5 Position 01-6, Accounting by Certain Entities (Including
Entities with Trade Receivables) That Lend to or Finance the Activities of Others, on the accounting for the sale of servicing
rights when the transferor retains loans that was omitted from the Accounting Standards Codification. The transition guidance
for the amendment must be applied prospectively because it could potentially involve the use of hindsight that includes fair value
measurements. The Company does not expect this guidance to have a material impact on its financial statements.
|
In November 2016, the FASB issued
Accounting Standards Update No. (“ASU”) 2016-20, an amendment to Accounting Standards Update No. 2014-09, Revenue from
Contracts with Customers (Topic 606). This ASU addressed several areas related to contracts with customers. This topic is not yet
effective and will become effective with Topic 606. The Company is currently evaluating the impact this topic will have on its
financial statements.
In January 2017, the FASB issued
Accounting Standards Update No. (“ASU”) 2017-02, an amendment to Topic 805, Business Combinations. The amendments in
this Update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this Update affect
all reporting entities that must determine whether they have acquired or sold a business. The amendments in this Update provide
a more robust framework to use in determining when a set of assets and activities is a business. The amendments in this Update
apply to annual periods beginning after December 15, 2017. The amendments in this Update should be applied prospectively on or
after the effective date. No disclosures are required at transition. The Company does not expect this guidance to have a material
impact on its financial statements.
In January 2017, the FASB issued
Accounting Standards Update No. (“ASU”) 2017-04, an amendment to Topic 350, Intangibles – Goodwill and Other,
An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair
value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination.
Because these amendments eliminate Step 3 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating
goodwill for impairment. An entity should apply the amendments in this Update on a prospective basis. The amendments in this Update
are effective for Goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating
the impact this guidance will have on its financial statements.
In February 2017, the FASB issued
Accounting Standards Update No. (“ASU”) 2017-05, an amendment to Subtopic 610-20, Other Income—Gains and Losses
from the Derecognition of Nonfinancial Assets The amendments in this Update are required for public business entities and other
entities that have goodwill reported in their financial statements, under the amendments in this Update, an entity should perform
its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The
amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of goodwill
exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value.
An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair
value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination.
An entity should apply the amendments in this Update on a prospective basis. The amendments in this Update are effective for fiscal
years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed
on testing dates after January 1, 2017. The Company is currently evaluating the impact this guidance will have on its financial
statements.
Any new accounting standards,
not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the financial statements upon adoption.
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.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
|
2
|
ACCOUNTING POLICIES AND ESTIMATES (continued)
|
|
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, 2016 and December 31, 2015, 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, 2016, the Company had cash balances of $9,170,286, which exceeded the federally insured limits
by $8,911,226.
|
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, 2016.
The Company had no inventory as of December
31, 2016 or December 31, 2015.
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.
Where fixed assets are deemed
to be impaired we recognize an impairment loss measured as the difference between the estimated fair value of the fixed asset and
its book value.
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.
License agreements acquired by the Company
are reported at acquisition value less accumulated amortization and impairments.
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.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
|
2
|
ACCOUNTING POLICIES AND ESTIMATES (continued)
|
|
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, 2016, there have been no interest or penalties incurred on income
taxes.
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 17, 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.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company
has cash balances of $9,170,286 as of December 31, 2016, which is sufficient to meet current expenses for at least the next twelve
month period, however the Board of Directors are considering various options as to the future direction of the Company, including
the possible sale of our technology and PPT assets, forming a special committee to investigate a possible share buyback of the
majority shareholder, Ervington Investments, and/or a possible dissolution of the Company.
Due to uncertainties surrounding our liabilities and
whether we are able to realize the full value of our assets, we cannot make any assurances regarding the amount available for distribution
to our shareholders.
We have made certain projections relating to the amount
of cash the Company expects to have to distribute to its shareholders upon dissolution of the Company. These projections generally
relate to the amount of liabilities which must be satisfied before our company is dissolved, the amount we expect preferred stockholders
to receive for their equity interest. Each of the above projections is subject to multiple variables, including the timing of a
dissolution affecting the amount of dividends payable and the amount of liabilities owed at the time of dissolution. Based upon
current estimates, if we were to dissolve this quarter, no assurance can be given that common shareholders or subordinate preferred
shareholders will receive any such distribution.
|
4
|
DISCONTINUED OPERATIONS
|
On October 4, 2016, Novas Energy USA, Inc.
(“Novas USA”), a wholly owned subsidiary of the Company, delivered a notice to Technovita Technologies USA, Inc. (“Technovita”)
electing to dissolve its joint venture with Technovita (the “Joint Venture”), effective November 1, 2016, pursuant
to Section 11.1(b) of the Operating Agreement of Novas Energy North America, LLC (“NENA”), dated October 22, 2015 (the
“Operating Agreement”), by and among Novas USA and Technovita.
Section 11.1(b) of the Operating Agreement
provides that the Joint Venture may be dissolved upon the election of Novas USA in the event the Joint Venture fails to satisfy
any Year 1 Key Performance Indicator by an amount greater than five percent (5%) of the applicable metric (the “Year 1 Milestone”).
The Joint Venture has not achieved the Year 1 Milestone. For the purposes of the Operating Agreement, the Year 1 Key Performance
Indicators are defined as: during a continuous twelve (12) month period commencing upon September 1, 2015 each of: (1) sales from
activities in the United States of greater than or equal to $2,829,000; (2) sales from activities in Canada of greater than or
equal to $2,829,000; (3) EBITDA from activities in the United States of greater than or equal to $524,000; and (4) EBITDA from
activities in Canada of greater than or equal to $524,000. Upon a dissolution, all intellectual property assets of the Joint Venture,
including any improvements to Technology (as defined in the Operating Agreement) is to be distributed to Technovita solely for
use in Canada, its territories and its possessions and Novas USA solely for use in the United States and its territories.
Pursuant to the Operating Agreement, Novas
USA had entered into a sublicense agreement (the “Novas Sublicense Agreement”) with NENA and Novas Energy Group Limited
for NENA to be the exclusive provider of Plasma Pulse Technology for treatment of vertical wells to third parties in the United
States. The Sublicense Agreement was terminated upon termination of the Joint Venture. The Operating Agreement also provided, among
other things, that Novas USA would contribute an aggregate of $1,200,000 to the capital of the Joint Venture for its 60% interest
in the Joint Venture. Novas USA has contributed $900,000 to the Joint Venture to date and believes that it has valid defenses to
any claim that may be made that it contribute additional funds.
The assets and liabilities of discontinued
operations as of December 31, 2016 and 2015, respectively is as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
19,480
|
|
|
$
|
469,007
|
|
Accounts receivable, net
|
|
|
61,661
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
29,896
|
|
|
|
178,441
|
|
Total current assets
|
|
|
111,037
|
|
|
|
647,448
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
Plant and equipment, net
|
|
|
6,480
|
|
|
|
3,176
|
|
Total assets
|
|
$
|
117,517
|
|
|
$
|
650,624
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
94,784
|
|
|
$
|
15,091
|
|
Related party payables
|
|
|
932,478
|
|
|
|
3,282
|
|
Accrued liabilities and other payables
|
|
|
115,971
|
|
|
|
8,902
|
|
Total liabilities
|
|
$
|
1,143,233
|
|
|
$
|
27,275
|
|
Loss from discontinued operations is as follows:
|
|
Year ended
December 31,
2016
|
|
|
Year ended
December 31,
2015
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
196,328
|
|
|
$
|
-
|
|
Cost of goods sold
|
|
|
148,475
|
|
|
|
102,405
|
|
Gross Profit
|
|
|
47,853
|
|
|
|
(102,405
|
)
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
|
11,932
|
|
|
|
47
|
|
Professional fees
|
|
|
62,331
|
|
|
|
10,269
|
|
Business development
|
|
|
179,980
|
|
|
|
37,742
|
|
Consulting fees
|
|
|
898,640
|
|
|
|
463,180
|
|
General and administrative expenses
|
|
|
543,558
|
|
|
|
262,820
|
|
Depreciation and amortization
|
|
|
1,478
|
|
|
|
236
|
|
Total expense
|
|
|
1,697,919
|
|
|
|
774,294
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,650,066
|
)
|
|
|
(876,699
|
)
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
10
|
|
|
|
47
|
|
Foreign currency gains
|
|
|
992
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(1,649,064
|
)
|
|
$
|
(876,652
|
)
|
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Prepaid expenses consisted of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
22,607
|
|
|
$
|
24,259
|
|
Prepaid professional fees
|
|
|
3,333
|
|
|
|
23,500
|
|
Other
|
|
|
-
|
|
|
|
832
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,940
|
|
|
$
|
48,591
|
|
Plant and Equipment consisted of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
Cost
|
|
|
Amortization
and Impairment
|
|
|
Net book value
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital work in progress
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
453,228
|
|
Plasma pulse tool
|
|
|
945,423
|
|
|
|
(945,423
|
)
|
|
|
-
|
|
|
|
232,284
|
|
Furniture and equipment
|
|
|
6,700
|
|
|
|
(1,117
|
)
|
|
|
5,583
|
|
|
|
-
|
|
Field equipment
|
|
|
19,627
|
|
|
|
(19,286
|
)
|
|
|
341
|
|
|
|
1,850
|
|
Computer equipment
|
|
|
11,130
|
|
|
|
(2,728
|
)
|
|
|
8,402
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
982,880
|
|
|
|
(968,554
|
)
|
|
$
|
14,326
|
|
|
$
|
687,362
|
|
Depreciation expense was
$130,933 and $66,957for the years ended December 31, 2016 and 2015, respectively. An impairment charge of $741,754 was made
against the Plasma Pulse tool as the Board of Directors is currently evaluating the business strategy and limited use is
being made of the tools.
Licenses
During the year ended December
31, 2016, the Company fully impaired the carrying value of all its intangible assets.
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.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
7
|
INTANGIBLES (continued)
|
On July 19, 2016, we received a notice from Licensor purporting to effectively terminate the License Agreement
for non-payment of required royalties, asserting, among other things, that as of June 30, 2016, Novas owed Licensor a pro rata
amount of $1,458,333 for the Licensed Plasma Pulse Technology for the United States and Mexico, of which $1,000,000 was alleged
to be in arrears. Novas has recently been contacted by Licensor with a request for settlement discussions; however, there can be
no assurance that such discussions will occur or what the outcome of any such discussions will be. We and Novas believe that there
is no legal basis for Licensor to terminate the License Agreement and intend to vigorously defend against any attempt by Licensor
to enforce a termination of the License Agreement. Further, we believe that Licensor has failed to materially perform its obligations
under the License Agreement, and that such failures on Licensor’s part may impact what, if any, payments are due under the
License Agreement by Novas to Licensor.
On October 4, 2016, Novas Energy
USA, Inc. (“Novas USA”), a wholly owned subsidiary of the Company, delivered a notice to Technovita Technologies USA,
Inc. (“Technovita”) electing to dissolve its joint venture with Technovita (the “Joint Venture”), effective
November 1, 2016, pursuant to Section 11.1(b) of the Operating Agreement of Novas Energy North America, LLC (“NENA”),
dated October 22, 2015 (the “Operating Agreement”), by and among Novas USA and Technovita.
Pursuant to the Operating Agreement,
Novas USA had entered into a sublicense agreement (the “Novas Sublicense Agreement”) with NENA and Novas Energy Group
Limited for NENA to be the exclusive provider of Plasma Pulse Technology for treatment of vertical wells to third parties in the
United States. The Sublicense Agreement was terminated upon termination of the Joint Venture.
Intangibles consisted of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
Cost
|
|
|
Amortization
and Impairment
|
|
|
Net book value
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License agreements
|
|
$
|
350,000
|
|
|
$
|
(350,000
|
)
|
|
$
|
-
|
|
|
$
|
227,500
|
|
Website development
|
|
|
8,000
|
|
|
|
(8,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
358,000
|
|
|
$
|
(358,000
|
)
|
|
$
|
-
|
|
|
$
|
227,500
|
|
Amortization expense was $70,000
and $70,000 for the years ended December 31, 2016 and 2015, respectively. Due to the lack of revenue generated under this license
agreement, the remaining unamortized balance at December 31, 2016 of $157,500 was impaired.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
8
|
ACCRUED LIABILITIES AND OTHER PAYABLES
|
Accrued liabilities consisted of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Payroll liabilities
|
|
$
|
-
|
|
|
$
|
34,000
|
|
Royalties payable
|
|
|
14,653
|
|
|
|
14,653
|
|
License fee payable
|
|
|
-
|
|
|
|
200,000
|
|
Severance accrual
|
|
|
19,814
|
|
|
|
31,110
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,467
|
|
|
$
|
279,763
|
|
The severance accrual relates to accrued severance costs due
to the COO, whose employment with the Company was terminated on December 15, 2016 as part of a cost reduction exercise.
The note payable advanced by Owl Holdings to the Company has
no interest rate and is repayable on demand.
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, 2016.
No shares were issued during the current year.
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 4,500,000 preferred shares designated 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.
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
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
10
|
STOCKHOLDERS’ EQUITY (continued)
|
|
b)
|
Preferred Stock (continued)
|
|
i)
|
Series A-1 Convertible Preferred Stock (continued)
|
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.
|
|
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 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.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
10
|
STOCKHOLDERS’ EQUITY (continued)
|
|
b)
|
Preferred Stock (continued)
|
|
ii)
|
Series B Convertible Preferred Stock (continued)
|
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.
|
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).
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.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
10
|
STOCKHOLDERS’ EQUITY (continued)
|
|
b)
|
Preferred Stock (continued)
|
|
iii)
|
Series C Convertible Preferred Stock (continued)
|
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.
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, 2016 and 2015, 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, 2016.
No options were issued during the year ended December 31, 2016.
In the event of the employees’ termination, the Company
will cease to recognize compensation expense.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
10
|
STOCKHOLDERS’ EQUITY (continued)
|
|
c)
|
Stock Options (continued)
|
|
b.
|
Non-Plan Stock Options
|
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.
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.
These options were cancelled on December 15, 2016 upon the termination of the employment agreement with Mr. Ramsey due to a rationalization
of the Company’s costs.
In the event of the employees’ termination,
the Company will cease to recognize compensation expense.
The Company has applied fair value accounting
for all share based payment awards since inception. The fair value of each option 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 fair value of the options issued were
valued at $277,674 using a Black-Scholes option pricing model using the following weighted average assumptions:
|
|
Year ended
December 31,
2016
|
|
|
|
|
|
Stock price
|
|
$0.08 to $0.09
|
|
Risk free interest rate
|
|
1.31% to 1.73
|
%
|
Expected life of warrants (years)
|
|
5 years
|
|
Expected volatility of underlying stock
|
|
106.1% to 113.2
|
%
|
Expected dividend rate
|
|
0
|
%
|
A summary of all of our option activity during the period January
1, 2015 to December 31, 2016 is as follows:
|
|
No. of shares
|
|
|
Exercise price
per share
|
|
|
Weighted
average exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2015
|
|
|
380,950
|
|
|
|
$0.51 to $13.50
|
|
|
$
|
0.90
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2015
|
|
|
380,950
|
|
|
|
$0.51 to $13.50
|
|
|
|
0.90
|
|
Granted - non plan options
|
|
|
4,000,000
|
|
|
|
$0.08 to $0.09
|
|
|
|
0.09
|
|
Forfeited/cancelled
|
|
|
(1,000,000
|
)
|
|
$
|
0.08
|
|
|
|
0.08
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2016
|
|
|
3,380,950
|
|
|
|
$0.08 to $13.50
|
|
|
$
|
0.18
|
|
Stock options outstanding as of December 31, 2016 and 2015 as
disclosed in the above table, have an intrinsic value of $0 and $0, respectively.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10
|
STOCKHOLDERS’ EQUITY (continued)
|
|
c)
|
Stock Options (continued)
|
The options outstanding and exercisable at December 31, 2016
are as follows:
|
|
|
Options outstanding
|
|
|
Options exercisable
|
|
Exercise price
|
|
|
No. of shares
|
|
|
Weighted
average
remaining years
|
|
|
Weighted
average exercise
price
|
|
|
No. of shares
|
|
|
Weighted
average exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13.50
|
|
|
|
3,480
|
|
|
|
2.45
|
|
|
|
|
|
|
|
3,480
|
|
|
|
|
|
$
|
12.50
|
|
|
|
2,000
|
|
|
|
3.78
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
$
|
8.50
|
|
|
|
500
|
|
|
|
4.50
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
$
|
5.00
|
|
|
|
14,800
|
|
|
|
4.79
|
|
|
|
|
|
|
|
14,800
|
|
|
|
|
|
$
|
0.65
|
|
|
|
36,924
|
|
|
|
6.25
|
|
|
|
|
|
|
|
36,924
|
|
|
|
|
|
$
|
0.63
|
|
|
|
38,096
|
|
|
|
1.50
|
|
|
|
|
|
|
|
38,096
|
|
|
|
|
|
$
|
0.51
|
|
|
|
285,150
|
|
|
|
3.28
|
|
|
|
|
|
|
|
285,150
|
|
|
|
|
|
$
|
0.09
|
|
|
|
3,000,000
|
|
|
|
4.00
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,380,950
|
|
|
|
3.94
|
|
|
|
0.18
|
|
|
|
380,950
|
|
|
|
0.90
|
|
The Company has recorded an expense of
$88,330 and $1,536,571 for the year ended December 31, 2016 and 2015 relating to options issued.
A summary of all of our warrant activity
during the period January 1, 2015 to December 31, 2016 is as follows:
|
|
No. of shares
|
|
|
Exercise price
per share
|
|
|
Weighted
average
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2015
|
|
|
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
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2016
|
|
|
6,339,498
|
|
|
|
$0.15 to $0.30
|
|
|
$
|
0.24
|
|
The warrants outstanding and
exercisable at December 31, 2016 are as follows:
|
|
|
Warrants outstanding
|
|
|
Warrants exercisable
|
|
Exercise price
|
|
|
No. of shares
|
|
|
Weighted
average
remaining years
|
|
|
Weighted
average exercise
price
|
|
|
No. of shares
|
|
|
Weighted
average
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.30
|
|
|
|
375,000
|
|
|
|
1.83
|
|
|
|
|
|
|
|
375,000
|
|
|
|
|
|
$
|
0.25
|
|
|
|
1,751,667
|
|
|
|
2.49
|
|
|
|
|
|
|
|
1,751,667
|
|
|
|
|
|
$
|
0.15
|
|
|
|
525,500
|
|
|
|
2.58
|
|
|
|
|
|
|
|
525,500
|
|
|
|
|
|
$
|
0.25
|
|
|
|
1,508,333
|
|
|
|
2.58
|
|
|
|
|
|
|
|
1,508,333
|
|
|
|
|
|
$
|
0.15
|
|
|
|
577,499
|
|
|
|
2.60
|
|
|
|
|
|
|
|
577,499
|
|
|
|
|
|
$
|
0.25
|
|
|
|
968,166
|
|
|
|
2.60
|
|
|
|
|
|
|
|
968,166
|
|
|
|
|
|
$
|
0.25
|
|
|
|
633,333
|
|
|
|
2.65
|
|
|
|
|
|
|
|
633,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,339,498
|
|
|
|
2.52
|
|
|
|
0.24
|
|
|
|
6,339,498
|
|
|
|
0.24
|
|
The warrants outstanding have an intrinsic value of $0 and $0
as of December 31, 2016 and 2015, respectively.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies Group,
Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
11
|
EQUITY BASED COMPENSATION
|
Equity based compensation is made up as follows:
|
|
Year ended
December 31,
2016
|
|
|
Year ended
December 31,
2015
|
|
|
|
|
|
|
|
|
Stock option compensation charge
|
|
$
|
88,330
|
|
|
$
|
-
|
|
Restricted stock award compensation charge
|
|
|
-
|
|
|
|
1,536,572
|
|
Stock issued for services rendered
|
|
|
-
|
|
|
|
70,000
|
|
|
|
$
|
88,330
|
|
|
$
|
1,606,572
|
|
|
12
|
OTHER INCOME (EXPENSE)
|
|
|
Year ended
December 31,
2016
|
|
|
Year ended
December 31,
2015
|
|
|
|
|
|
|
|
|
License fee forgiven
|
|
$
|
200,000
|
|
|
$
|
-
|
|
Severance costs
|
|
|
-
|
|
|
|
(31,109
|
)
|
Other
|
|
|
(6,333
|
)
|
|
|
-
|
|
|
|
$
|
193,667
|
|
|
$
|
(31,109
|
)
|
Other income includes the forgiveness of the $200,000
license fee due to Novas BVI during the current year. Other expense in the prior year represents the severance costs paid to our
previous CEO.
A reconciliation of the U.S. Federal statutory income
tax rate to the effective income tax rate is as follows:
|
|
Year ended
December 31,
2016
|
|
|
Year ended
December 31,
2015
|
|
|
|
%
|
|
|
%
|
|
Tax expense at the federal statutory rate
|
|
|
34
|
|
|
|
34
|
|
State tax expense, net of the federal effect
|
|
|
5
|
|
|
|
5
|
|
Permanent timing differences
|
|
|
(5
|
)
|
|
|
(18
|
)
|
deferred income tax valuation allowance
|
|
|
(34
|
)
|
|
|
(21
|
)
|
|
|
|
-
|
|
|
|
-
|
|
Significant components of the Company’s deferred
income tax assets are as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
4,703,000
|
|
|
$
|
3,196,000
|
|
Valuation allowance
|
|
|
(4,703,000
|
)
|
|
|
(3,196,000
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The valuation allowance for deferred
income tax assets as of December 31, 2016 and December 31, 2015 was $4,703,000 and $3,196,000, respectively. The net change in
the deferred income tax assets valuation allowance was an increase of $1,507,000 and $1,018,000 for Fiscal 2016 and 2015, respectively.
The increase includes a true up of the previous years estimate of net operating losses.
As of December 31, 2016, 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 $11,974,000 begin to expire in 2031 and continue to expire through 2036. 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.
PLEDGE PETROLEUM CORP.
(formerly 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, 2016 and 2015, 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,
2016
|
|
|
Year ended
December 31,
2015
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
3,380,950
|
|
|
$
|
380,950
|
|
Restricted stock awards – unvested
|
|
|
-
|
|
|
|
1,000,000
|
|
Warrants to purchase shares of common stock
|
|
|
6,339,498
|
|
|
|
6,339,498
|
|
Series A-1 convertible preferred shares
|
|
|
31,375,000
|
|
|
|
31,375,000
|
|
Series B convertible preferred shares
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
Series C convertible preferred shares
|
|
|
120,000,000
|
|
|
|
120,000,000
|
|
|
|
$
|
165,095,448
|
|
|
$
|
163,095,448
|
|
|
15
|
RELATED PARTY TRANSACTIONS
|
On January 1, 2016, the “Company
entered into a three-year Employment Agreement with C. Brian Boutte (the “Boutte Employment Agreement”) to serve as
the Company’s Chief Executive Officer. Mr. Boutte 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 was to receive
an annual base salary of $265,000, a sign on bonus of $60,000 and an annual performance bonus of up to 55% of his base salary,
such bonus payable in cash or equity upon attainment of certain performance indicators established by the Company’s Board
of Directors and Mr. Boutte. In connection with the entry into the Boutte Employment Agreement, Mr. Boutte was granted an option
award exercisable for 3,000,000 shares of the Company’s common stock, which will vest as to 1,000,000 shares on each of
the one, two and three-year anniversary of the commencement of his employment with the Company. The Boutte Employment Agreement
was amended on December 31, 2016 to provide for a term of six months ending June 30, 2017, a reduced annual base salary of $165,000
and a provision for immediate vesting of the options upon a Change of Control (as defined in the amendment). In the event that
Mr. Boutte’s employment was terminated Without Cause (as defined in the Boutte Employment Agreement), by Mr. Boutte for
Good Reason (as defined below), Disability (as defined in the Boutte Employment Agreement), upon his death or a change in control,
Mr. Boutte would be entitled to receive a severance payment equal to $65,000. Upon a change in control, Mr. Boutte Mr. Boutte’s
options would immediately vest. The Boutte Employment Agreement also included customary confidentiality obligations and inventions
assignments by Mr. Boutte as well as a non- compete and non-solicitation provision. If his employment was terminated for Cause
(as defined below) or by him Without Good Reason (as defined in the Boutte Employment Agreement), Mr. Boutte was entitled to receive
his annual base salary through the date of termination and any bonus earned but unpaid. For 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;
(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.
Mr. Boutte tendered his resignation
to the Board of directors on March 31, 2017.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies
Group, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
|
15
|
RELATED PARTY TRANSACTIONS (continued)
|
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.
On December 15, 2016, Mr. Ramsey’s
employment was terminated due to a rationalization exercise undertaken by the Company.
|
16
|
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 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. This lease agreement was amended and the lease terminated with effect from May
31, 2017 with a final payment of $2,000 and the forfeiture of the security deposit of $6,968.
PLEDGE PETROLEUM CORP.
(formerly Propell Technologies
Group, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
|
16
|
COMMITMENTS AND CONTINGENCIES (continued)
|
In terms of the license agreement
commitments disclosed in note 7 above, the minimum commitments due under the amended license agreement entered into on January
30, 2013, for the next five years, are summarized as follows:
|
|
Amount
|
|
|
|
|
|
2017
|
|
$
|
500,000
|
|
2018
|
|
|
500,000
|
|
2019
|
|
|
500,000
|
|
2020
|
|
|
500,000
|
|
2021
|
|
|
500,000
|
|
Total
|
|
$
|
2,500,000
|
|
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.
On October 4, 2016, Novas Energy
USA, Inc. (“Novas USA”), a wholly owned subsidiary of the Company, delivered a notice to Technovita Technologies USA,
Inc. (“Technovita”) electing to dissolve its joint venture with Technovita (the “Joint Venture”), effective
November 1, 2016, pursuant to Section 11.1(b) of the Operating Agreement of Novas Energy North America, LLC (“NENA”),
dated October 22, 2015 (the “Operating Agreement”), by and among Novas USA and Technovita.
Pursuant to the Operating Agreement,
Novas USA had entered into a sublicense agreement (the “Novas Sublicense Agreement”) with NENA and Novas Energy Group
Limited for NENA to be the exclusive provider of Plasma Pulse Technology for treatment of vertical wells to third parties in the
United States. The Sublicense Agreement was terminated upon termination of the Joint Venture.
On March 31, 2017, our Chief
Executive Officer, Mr. Brain Boutte, tendered his resignation to the Board of Directors.
In accordance with ASC 855-10, the Company has analyzed
its operations subsequent to December 31, 2016 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.