NOTE 5 – CRUDE OIL AND NATURAL GAS PROPERTIES

The Company’s crude oil and natural gas properties are located entirely within the United States. The net capitalized costs related to the Company’s crude oil and natural gas producing activities were as follows:


	As of December 31,
	2017		2016
Proved oil and gas properties	$	22,144,366	$	8,132,881
Unproved oil and gas properties (1)		1,919,335		4,092,550
Wells in progress (2)		9,858,262		2,168,092
Total capitalized costs		33,921,963		14,393,523
Accumulated depletion, depreciation and amortization		(2,849,374)		(783,320)
Net capitalized costs	$	31,072,589	$	13,610,203

(1)

Unproved oil and gas properties represent unevaluated costs the Company excludes from the amortization base until proved reserves are established or impairment is determined.

(2)

Costs from wells in progress are excluded from the amortization base until production commences.

Costs Incurred in Crude Oil and Natural Gas Activities. Costs incurred in connection with the Company’s crude oil and natural gas acquisition, exploration and development activities for each of the periods are shown below:


	December 31,
	2017		2016
Exploration costs	$	61,693	$	2,700
Development costs		18,771,794		3,038,339
Acquisition of properties
Proved		—		3,630,195
Unproved		4,049,380		4,045,022
Total	$	22,882,867	$	10,716,256

During the years ended December 31, 2017 and 2016, depletion, depreciation and amortization expense was $2.8 million and $0.1 million, respectively.

2017 Activity

Significant acquisitions during 2017 included the following:

On April 3, 2017, the Company completed an acquisition of oil and gas leases covering approximately 5,874 gross (1,462 net) acres in Adams and Weld Counties, Colorado. The seller reserved to itself all rights in the leases that exist below 50 feet above the top of the uppermost J Sand formation for those lands located in Township 7 North, Range 63 West in Weld County, Colorado. The acquisition was effective January 1, 2017. The net purchase price to the Company’s retained interest in the assets, following the Company’s working interest partner’s 50% participation in the transaction and a reduction in purchase price due to title defects, was $1.3 million. The Company paid $0.5 million of the Company’s net purchase price in cash, and $0.8 million was paid through the issuance of 450,000 shares of the Company’s common stock valued at $1.80 per share.

On April 21, 2017, the Company acquired a 9.37% royalty interest covering approximately 145 net acres located in Adams County, Colorado for a net purchase price of $0.6 million following the Company’s working interest partner’s 50% participation in the transaction. The acquisition was effective April 1, 2017. In connection with the acquisition, the Company paid a finders’ fee of 20,555 shares of common stock valued at $1.80 per share to a lease broker.

On May 9, 2017, the Company acquired 200 gross (70 net) acres in Adams County, Colorado for a net purchase price of $0.4 million following the Company’s working interest partner’s 50% participation in the transaction. The transaction was effective April 1, 2017.

On September 15, 2017, the Company completed a purchase of additional oil and gas leases covering approximately 400 gross (200 net) acres. The gross purchase price was $0.4 million, or $0.2 million to the Company’s retained interest following the Company’s working interest partner’s 50% participation in the transaction. The location of the acreage is contiguous with that of the acreage acquired in the April 3, 2017 transaction described above.

2016 Activity

Significant acquisitions during 2016 included the following:

On March 10, 2016, the Company acquired certain surface rights and easements on lands located in Township 1 South, Range 67 West in its Todd Creek Farms prospect in exchange for $0.2 million in cash. The surface rights and easements allow the Company to access its Shook pad wells.

On March 31, 2016, the Company acquired oil and gas assets on land adjacent to the Company’s Todd Creek Farms prospect, including approximately 160 net acres and a 50% working interest in one well following an assignment to the Company’s working interest partner pursuant to the Participation Agreement. The Company’s net cost for the foregoing assets was $0.6 million.

On April 14, 2016, the Company acquired oil and gas leases in the Todd Creek Farms prospect covering approximately 189 net acres. The Company’s net cost for the leases was $0.3 million.

In connection with obtaining its supplemental line of credit (Note 6), the Company assigned Providence Energy Partners III, LP (“PEP III”) 10% of the Company’s working interest in 278 gross (170 net) net acres in the Wattenberg Field including the Company’s interest in the Jacobucci wells.

On October 14, 2016, the Company completed the acquisition of additional royalty interests in 10 Jacobucci pad wells located on its Todd Creek Farms prospect. The Company’s net cost for the royalty interests was $1.6 million.