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Investment in Masterson West II, LLC

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

4. Investment in Masterson West II, LLC

On December 22, 2016, the Company entered into a subscription and contribution agreement with Masterson West, LLC ("Masterson West") (the "Contribution Agreement") relating to the newly formed Masterson West II, LLC, a Texas limited liability company ("Masterson West II"). Pursuant to the Contribution Agreement, among other things, (a) at the initial closing, the Company agreed to contribute 2,000,000 shares of its common stock, par value $0.001 per share (the "Common Stock"), to Masterson West II, along with an additional 38,000,000 shares of Common Stock and (b) at the final closing, Masterson West has an obligation to contribute certain oil and gas properties (the "Contributed Properties") to Masterson West II in exchange for the Company contributing cash of not less than $9,000,000 and up to $18,000,000 to Masterson West II. There is no assurance that the Company will be able to secure the funds necessary for the final closing. The final closing is scheduled to occur no later than April 1, 2017. If the final closing occurs, the Company will own 50% of Masterson West II if it delivers $18,000,000 of cash at the final closing and 25% of Masterson West II if it delivers $9,000,000 of cash at the final closing.

Also on December 22, 2016, the Company entered into a limited liability agreement of Masterson West II with Masterson West (the "LLC Agreement"). Pursuant to the Contribution Agreement and the LLC Agreement, Masterson West is immediately entitled to a distribution of the 2,000,000 shares of Common Stock, but is only entitled to a distribution of all or a portion of the 38,000,000 shares of Common Stock if and when the final closing occurs.

In connection with the contribution of the Contributed Properties by Masterson West, at the final closing, Masterson West II will assume a credit facility affiliated with the Contributed Properties that has approximately $20,000,000 outstanding as of the date hereof. Masterson West and the Company intends to use the cash consideration paid by the Company at the final closing to pay down such credit facility and/or as working capital to continue to develop the Contributed Properties. If the proceeds are used to pay down part or all of such credit facility, the credit facility will be used to continue to develop the Contributed Properties.

All of Contributed Properties are located in Moore and Potter Counties in Texas and the wells to be included in such Contributed Properties primarily target the red cave formation at a depth of 2,100 to 2,300 feet. Masterson West and affiliate of Masterson West, Adams Affiliates Inc., have owned and operated the Contributed Properties for over 20 years. The Company has targeted this transaction for a number of reasons. First, the Contributed Properties are currently producing approximately 1,000 barrels of oil per day equivalent and include approximately 8,000 net acres of leasehold that are held by such production. Second, the Company believes this transaction is a lower risk oil-weighted infill drilling opportunity as Masterson West has identified approximately 380 locations to develop on five to ten acre spacing units, with approximately 200 proved undeveloped drilling locations. The Company estimates the total cost to complete each well will be approximately $250,000.

As stated above, if the final closing does not occur, the Contributed Properties will not be transferred to Masterson West II and the additional 38,000,000 shares of the Common Stock will not be issued by the Company. Also as stated above, under the Contribution Agreement, the final closing is scheduled to occur no later than April 1, 2017. However, on February 18, 2017, the majority owner of Masterson West, Gary C. Adams, unexpectedly passed away. As a result of such development, the final closing will not occur on April 1, 2017. As of March 31, 2017, the Company was in discussions with the new owners of Masterson West regarding the possibility of postponing the date of the final closing and making other modifications to the Contribution Agreement and/or the LLC Agreement.

Masterson West II had no operations during the year. The following table reflects the balance sheet of Masterson West II as of December 31, 2016:

Masterson West II Summarized Balance Sheet		2016

Total Assets (option and partial consideration to purchase certain oil and gas assets)		$	300,000

Total Liabilities and Equity		$	300,000