Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations and Organization
Cardinal
Energy Group, Inc. (the “Company”) was incorporated in the State of Nevada on June 19, 2007. On September 28, 2012,
the Company changed the focus of its business when it acquired all of the ownership interests of Cardinal Energy Group, LLC, an
Ohio limited liability company which was engaged in the business of exploring, purchasing, developing and operating oil and gas
leases. The Company changed its name to Cardinal Energy Group, Inc. on October 10, 2012 in connection with this acquisition. On
June 10, 2015 the Company moved its executive offices from Dublin, Ohio to Abilene, Texas. In February 2016, the Company closed
its Abilene, Texas office and relocated their executive offices to Upper Arlington, Ohio.
The
Company has been engaged in the development, exploitation and production of oil and natural gas. The Company sells its oil and
gas products to domestic purchasers of oil and gas production. Its operations were focused in the states of California, Ohio and
Texas during 2012 and 2013. In 2014 and 2015, management decided to focus its oil and gas operations entirely within the state
of Texas. The Company established a regional operations office in Albany, Texas and retained the services of operating personnel
with ties to the exploration and development of oil and gas fields in Texas. In February 2016, the Company sold its operations
facility in Albany, Texas (see Note 14).
On
April 30, 2015 the Company formed High Performance Energy Fund Corporation, a Delaware corporation (“High Performance”),
for the purposes of identifying, developing and financing new prospective oil and gas properties. High Performance is a wholly-owned
subsidiary of the Company.
Basis
of Presentation and Use of Estimates
These
financial statements have been prepared in accordance with accounting principles generally accepted in United States of America
which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures
of revenues and expenses for the reported year. Actual results may differ from those estimates. Included in these estimates are
assumptions about collection of accounts receivable, impairment of oil and gas properties, useful life of property and equipment,
amounts and timing of closure obligations, assumptions used to calculate fair value of stocks and warrants granted, stock based
compensation, beneficial conversion of convertible notes payable, deferred income tax asset valuation allowances, and valuation
of derivative liabilities.
Revenues
and direct operating expenses of the California and Ohio properties represent members’ interest in the properties acquired
for the periods prior to the closing date and are presented on the accrual basis of accounting and in accordance with generally
accepted accounting principles. The financial statements presented herein include the revenues and operating expenses of the California
and Ohio properties for the period of January 1, 2014 through the sale date of the properties on April 1, 2014.
Principles
of Consolidation
Our
consolidated financial statements include the accounts of subsidiaries in which a controlling interest is held. All intercompany
transactions have been eliminated. Undivided interests in oil and gas exploration and production joint ventures are consolidated
on a proportionate basis. Investments in entities without a controlling interest are accounted for by the equity method or cost
basis. The equity method is used to account for investments in non-controlled entities when the Company has the ability to exercise
significant influence over operating and financial policies. In applying the equity method of accounting, the investments are
initially recognized at cost, and subsequently adjusted for the Company’s proportionate share of earnings, losses and distributions.
The cost method is used when the Company does not have the ability to exert significant influence.
Cash
and Cash Equivalents
The
Company considers all highly liquid debt instruments and other short-term investments with maturities of three months or less,
when purchased, to be cash equivalents. The Company places its cash with a high credit quality financial institution. The Company’s
accounts at this institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As
of December 31, 2015, the Company had not reached bank balances exceeding the FDIC insurance limit. To reduce its risk associated
with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution
in which it holds deposits.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance
for Doubtful Accounts
Uncollectible
accounts receivable are charged directly against earnings when they are determined to be uncollectible. Use of this method does
not result in a material difference from the valuation method required by generally accepted accounting principles. At December
31, 2015 and 2014, no reserve for allowance for doubtful accounts was needed.
Oil
and Gas Properties
The
Company follows the full cost method of accounting for its oil and natural gas properties, whereby all costs incurred in connection
with the acquisition, exploration for and development of petroleum and natural gas reserves are capitalized. Such costs include
lease acquisition, geological and geophysical activities, rentals on non-producing leases, drilling, completing and equipping
of oil and gas wells and administrative costs directly attributable to those activities and asset retirement costs. Disposition
of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment
would significantly alter the relationship between capital costs and proved reserves of oil and gas, in which case the gain or
loss is recognized to income.
Depletion
and depreciation of proved oil and gas properties is calculated on the units-of-production method based upon estimates of proved
reserves. Such calculations include the estimated future costs to develop proved reserves. Oil and gas reserves are converted
to a common unit of measure based on the energy content of 6,000 cubic feet of gas to one barrel of oil. Costs of unevaluated
properties are not included in the costs subject to depletion. These costs are assessed periodically for impairment. As of December
31, 2015 and 2014 there were no proved reserves.
During
year ended December 31, 2014, the Company completed the acquisition of 100% working interests in the Powers-Sanders and Stroebel-Broyles
leases, a 93.75% working interest in the Bradford “A” and “B” leases, a 43.75% working interest in the
Fortune lease and the remaining 15% working interest in the Dawson-Conway leases for a combined cash consideration of $1,010,000.
These properties are located in Shackelford and Eastland counties in north-central Texas. The cash for these acquisitions was
sourced from a portion of the proceeds of a private offering of Senior Secured Convertible Promissory Notes. The acquisition cost
for these properties was capitalized. Also, during the same period, the Company sold its interests in oil and gas properties located
in California and Ohio to California Hydrocarbons, Inc. in exchange for the return of 3,000,000 shares of the Company’s
common stock valued at $2,010,000. The Company has recorded the return of the shares as the acquisition of Treasury Stock at cost
and relieved the balance sheet of the affected assets and liabilities. During the year ended December 31, 2015, the Company disposed
of its working interests in the Stroebel-Broyles leases in Eastland County, Texas. The Company assigned its interests in the leases
to two local companies in exchange for the assumption of the plugging and abandonment liability associated with the thirty-two
wells located on the properties. The disposition is in keeping with the Company’s decision to focus its drilling and development
activities in and adjacent to its properties in Shackelford County, Texas.
On
September 2, 2014 the Company sold its interests in the Bradford “A” and “B” leases to the Bradford Joint
Venture Partnership (“Bradford JV”) for $325,000. The Company’s wholly-owned subsidiary CEGX of Texas, LLC provides
drilling and production services to Bradford JV. The additional cost for developing the leases is $2,175,000 to include infrastructure
development, drilling and completion of 14 new wells, remediation of 6 existing wells, and conversion of 1 existing producing
well to an injector. The Company acquired a 20% equity interest in participating units of the Bradford JV during December 2014
on the same terms as the original investors, being valued at $25,000 per 1% unit of the JV. In connection with the acquisition,
the Company received $16,608 cash representing cash distributions which had been reserved by the Joint Venture in connection with
the units the Company acquired. In June 2015, the Company transferred its 20% interests in the Bradford “A” and Bradford
“B” leases to Keystone Energy, LLC pursuant to a Participation Interest Purchase Agreement (see Note 13).
Our
oil and gas leases were classified as unproved properties at December 31, 2015 and 2014 due to the limited quantities of oil and
gas produced during the 2013 through 2015 time frame. In light of the precipitous fall in crude oil prices during the last 20
months and the relatively small production volumes from the Company’s leases we elected to reduce the carrying value of
our oil and gas properties during the fourth quarter of 2015. This reduction to the estimated net recoverable values of our oil
and gas properties is reflected in the financial statements as an impairment charge of $2,654,824 on the income statement.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property
and Equipment
Support
equipment and other property and equipment are valued at cost and depreciated over their estimated useful lives, using the straight-line
method over estimated useful lives of 3 to 5 years. Additions are capitalized and maintenance and repairs are charged to expense
as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed, and any resulting gains
or losses are included in the consolidated statement of operations.
Valuation
of Long-Lived Assets
The
Company follows ASC 360 regarding the valuations and carrying values of its long-lived assets. Long-lived tangible assets and
definite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. The Company uses an estimate of undiscounted future net cash flows
of the assets over the remaining useful lives in determining whether the carrying value of the assets is recoverable. If the carrying
values of the assets exceed the expected future cash flows of the assets, the Company recognizes an impairment loss equal to the
difference between the carrying values of the assets and their estimated fair values. The Company recorded impairment losses in
the amounts of $2,654,824 and $0 during the years ended December 31, 2015 and 2014, respectively.
Stock-based
Compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718, “Compensation —
Stock Compensation” (“ASC 718”), which requires recognition in the consolidated financial statements of the
cost of employee and director services received in exchange for an award of equity instruments over the period the employee or
director is required to perform the services in exchange for the award (presumptively, the vesting period). ASC 718 also requires
measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value
of the award.
Pursuant
to ASC Topic 505-50, “Equity Based Payments to Non-employees”, for share-based payments to consultants and other third-parties,
compensation expense is determined at the measurement date. The expense is recognized over the vesting period of the award. Until
the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation
expense based on the fair value of the award at the reporting date.
Earnings
(Loss) per Share
Basic
earnings (loss) per share (EPS) is calculated by dividing the Company’s net earnings (loss) applicable to common stockholders
by the weighted average number of common shares during the period. Diluted EPS assumes the exercise of stock option and warrants
and the conversion of convertible debt, provided the effect is not antidilutive. The effect of computing diluted loss per share
is anti-dilutive and, as such, basic and diluted losses per share are the same for the years ended December 31, 2015 and 2014.
Asset
Retirement Obligation
The
Company follows FASB ASC 410, Asset Retirement and Environmental Obligations which requires entities to record the fair value
of a liability for asset retirement obligations (“ARO”) and to record a corresponding increase in the carrying amount
of the related long-lived asset. The asset retirement obligation primarily relates to the abandonment of oil and gas properties.
The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of oil and gas properties
and is depleted over the useful life of the asset. The settlement date fair value is discounted at our credit adjusted risk-free
rate in determining the abandonment liability. The liability is accreted with the passage of time to its expected settlement fair
value. Revisions to such estimates are recorded as adjustments to ARO and are charged to operations in the period in which they
become known. At the time the abandonment cost is incurred, the Company is required to recognize a gain or loss if the actual
costs do not equal the estimated costs included in ARO. The ARO is based upon numerous estimates and assumptions, including future
abandonment costs, future recoverable quantities of oil and gas, future inflation rates, and the credit adjusted risk free interest
rate. Different, but equally valid, assumptions and judgments could lead to significantly different results. Future geopolitical,
regulatory, technological, contractual, legal and environmental changes could also impact future ARO cost estimates. Because of
the intrinsic uncertainties present when estimating asset retirement costs as well as asset retirement settlement dates, our ARO
estimates are subject to ongoing volatility. The ARO is $96,063 and $162,321 as of December 31, 2015 and 2014, respectively. The
reduction in the ARO at December 31, 2015 reflects the aforementioned sale of the Stroebel-Broyles leases in March of 2015. The
Company accreted $14,987 and $19,985 to ARO during the years ended December, 2015 and 2014, respectively.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Available-for-Sale
Securities
The
Company’s available-for-sale securities consist of investments in marketable securities. The Company carries its investment
at fair value based upon quoted market prices which amounted to $30,800 and $69,300 at December 31, 2015 and 2014, respectively.
Unrealized holding gains (losses) on available-for-sale securities are excluded from earnings and reported as accumulated other
comprehensive gain (loss), a separate component of stockholders’ equity (deficit), until realized. The Company recorded
unrealized loss of $38,500 and gain of $45,465 during the years ended December 31, 2015 and 2014, respectively. Accumulated Other
Comprehensive Losses were $2,186,800 and $2,148,300 as of December 31, 2015 and 2014, respectively.
Income
Taxes
The
Company accounts for income taxes pursuant to the provisions of ASC 740-10, “Income Taxes” which requires, among other
things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for
which management believes it is more likely than not that the net deferred asset will not be realized.
The
Company also follows the provisions of ASC 740-10 related to accounting for uncertain income tax positions. When tax returns are
filed, some positions taken may be sustained upon examination by the taxing authorities, while others may be subject to uncertainty
about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the
guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based
on all available evidence, management believes it is more likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other
positions. As of December 31, 2015 and 2014, the Company has had no uncertain tax positions. The Company recognizes interest and
penalties, if any, related to uncertain tax positions as general and administrative expenses. The Company currently has no federal
or state tax examinations nor has it had any federal or state examinations since its inception. The Company’s 2015, 2014,
and 2013 tax years may still be subject to federal and state tax examination.
Concentration
During
the year ended December 31, 2015 sales to two customers represented approximately 92% of the Company’s net revenues. During
the year ended December 31, 2014 sales to one customer represented approximately 95% of the Company’s net revenues. As of
December 31, 2015 and 2014, the Company had one customer representing 100% of accounts receivable and one customer representing
approximately 77% of accounts receivable, respectively.
Revenue
and Cost Recognition
The
Company uses the sales method to account for the sales of crude oil and natural gas. Under this method, revenues are recognized
based on the actual volumes of oil and gas sold to purchasers. The volumes sold may differ from the volumes to which the Company
is entitled based on its interest in the properties. These differences create imbalances which are recognized as a liability or
as an asset only when the imbalance exceeds the estimate of remaining reserves. For the years ending December 31, 2015 and 2014
there were no such differences.
The
Company has agreed with the Bradford JV and Keystone Energy, LLC to provide drilling, infrastructure and work-over services to
support the development of certain oil leases. The revenue and costs arising from the drilling and other services are matched
and recorded as income and expense as each project is completed in accordance with their agreements, effectively recognizing income
on the percentage of completion basis.
Costs
associated with the production of oil and gas (sometimes referred to as “lifting costs”) are expensed in the period
incurred.
During
the last week of December 2014, the Company obtained 20 units (out of 100 total units) in the Bradford Joint Venture exploration
and drilling program located in Shackelford County, Texas. The operation is accounted for as an investment as of December 31,
2014. The Company purchased their interest for $25,000 per unit on December 31, 2014.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
On
June 12, 2015 the Company transferred its 20% interest in the Bradford JV to Keystone Energy, LLC (“Keystone”) in
a series of transactions which resulted in Keystone securing a line of credit to be used to further develop the Bradford “A”
and Bradford “B” leases. Keystone acquired an option (exercisable within 365 days) to purchase all of the interests
in the Bradford JV and the Company exchanged 10 units of its ownership interests in the Bradford JV for a 5% equity interest in
Keystone.
Derivative
Liabilities
The
Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for in accordance with Accounting Standards Codification
topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”) as well as related interpretations
of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the
balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly
and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized
as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based
on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.
The
result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date
and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair
value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation
of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then
that the related fair value is reclassified to equity. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are
initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the
instrument on the reclassification date.
ASC
815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments
and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a)
the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic
characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument
and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with
changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception
to this rule when the host instrument is deemed to be conventional.
The
Company marks to market the fair value of the embedded derivative convertible notes and derivative warrants at each balance sheet
date and records the change in the fair value of the embedded derivative convertible notes and derivative warrants as other income
or expense in the consolidated statements of operations.
The
Company estimates fair values of derivative financial instruments using the Black-Scholes model, adjusted for the effect of dilution,
because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates)
necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development
of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes
in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile
and sensitive to changes in the trading market price of our common stock.
Recent
Accounting Pronouncements
In
August 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements—Going
Concern” (“ASU No. 2014-15”). The provisions of ASU No. 2014-15 require management to assess an entity’s
ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing
standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every
reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s
plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s
plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment
for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in
this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.
The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In
November 2014, FASB issued ASU No. 2014-17, “Business Combinations: Pushdown Accounting” (“ASU No. 2014-17”).
This ASU amended the Business Combination Accounting Standards Codification to provide guidance on whether and at what threshold
an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its separate financial statements.
The Company’s adoption of ASU No. 2014-17 effective November 14, 2014 did not have an impact on the Company’s consolidated
results of operations, financial position and related disclosures.
In
April 2015, FASB issued ASU 2015-03, “Interest – Imputation of Interest” (Subtopic 835-30) which focuses on
simplifying the presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to
a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments
in this update. The ASU will be effective for periods beginning after December 15, 2015 for public companies. Early adoption is
permitted, including adoption in an interim period. The Company is currently assessing the impact of this ASU on the Company’s
consolidated financial statements.
In
November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”
(“ASU 2015-17”),
which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet.
The ASU simplifies the current guidance in ASC Topic 740, “Income Taxes”, which requires entities to separately present
deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. ASU 2015-17 is effective for fiscal
years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for all
entities as of the beginning of an interim or annual reporting period. The Company does not expect the impact of ASU 2015-17 to
be material on the Company’s consolidated financial statements.
In
February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying
leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase
by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or
on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability
for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less
will be accounted for similar to existing guidance for operating leases. The new guidance will be effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period and is applied retrospectively.
Early adoption is permitted. The Company is currently in the process of assessing the impact the adoption of this guidance will
have on the Company’s consolidated financial statements.
Other
accounting standards 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 consolidated financial statements upon adoption. The Company does not discuss recent pronouncements
that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or
disclosures.
Reclassifications
Certain
items in prior year financial statements have been reclassified to conform to the 2015 presentation. These reclassifications had
no effect on the reported results.
NOTE
2 - GOING CONCERN
The
Company’s consolidated financial statements are prepared using accounting principles generally accepted in the United States
of America applicable to a going concern, which contemplate the realization of assets and the liquidation of liabilities in the
normal course of business. The Company currently utilizes revenues from the sale of crude oil and natural gas and contract drilling
and operating services plus the proceeds from the private sales of common stock and/or convertible debt instruments to fund its
operating expenses. The Company’s minimal cash flows from operations, working capital deficit and the projected cost of
capital improvements of its oil and gas wells raise substantial doubt about its ability to continue as a going concern. The Company
has not yet established an adequate ongoing source of operating revenues sufficient to cover its operating costs and to allow
it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining
adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it
could be forced to cease development of operations.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
2 - GOING CONCERN (continued)
The
Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which
contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the consolidated financial statements, the Company had an accumulated deficit of $13,955,074 at December 31, 2015,
a net loss of $8,613,362 and net cash used in operating activities of $922,367 for the year ended December 31, 2015. These factors
raise substantial doubt about the Company’s ability to continue as a going concern.
Management’s
plans to continue as a going concern include raising additional capital through increased sales of oil and gas, providing additional
contract drilling and operating services for the development of proven undeveloped shallow oil projects and by the sale of debt
and equity securities in both public and private transactions. However, management cannot provide any assurances that the Company
will be successful in accomplishing any of its plans. The ability of the Company to continue as a going concern is dependent upon
its ability to successfully accomplish the plans described above, restructuring its current debt and eventually securing additional
sources of financing and attaining consistent profitable operations. These consolidated financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as a going concern.
NOTE
3 - FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC
820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market
participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs
to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company
classifies fair value balances based on the observability of those inputs.
The
following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that
were accounted for at fair value as of December 31, 2015 and 2014. As required by ASC 820, a financial instrument’s level
within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s
assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation
of fair value assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between
fair value hierarchy levels as of December 31, 2015 and 2014.
The
following table presents assets and liabilities that are measured and recognized at fair value as of December 31, 2015 and 2014,
on a recurring basis:
Assets
and liabilities at fair value on a recurring basis at December 31, 2015:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
$
|
30,800
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30,800
|
|
Total
|
|
$
|
30,800
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
30,800
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,355,580
|
|
|
$
|
2,355,580
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,355,580
|
|
|
$
|
2,355,580
|
|
Assets
and liabilities at fair value on a recurring basis at December 31, 2014:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
$
|
69,300
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
69,300
|
|
Total
|
|
$
|
69,300
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
69,300
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
|
|
-
|
|
|
|
-
|
|
|
$
|
382,836
|
|
|
$
|
382,836
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
382,836
|
|
|
$
|
382,836
|
|
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
3 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The
following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of December
31:
|
|
2015
|
|
|
2014
|
|
Balance, beginning
of year
|
|
$
|
382,836
|
|
|
$
|
32,528
|
|
Excess of fair value over
debt discount
|
|
|
2,577,683
|
|
|
|
-
|
|
Debt discount in connection
with conversion option of Debentures and detachable warrants
|
|
|
931,181
|
|
|
|
693,630
|
|
Extinguished derivative
liability
|
|
|
(826,901
|
)
|
|
|
(22,068
|
)
|
Change
in fair value of derivative liabilities
|
|
|
(709,219
|
)
|
|
|
(321,254
|
)
|
Balance,
end of year
|
|
$
|
2,355,580
|
|
|
$
|
382,836
|
|
|
|
|
|
|
|
|
|
|
Net
gain for the period included in earnings relating to the liabilities held at December 31, 2015
|
|
$
|
709,219
|
|
|
$
|
321,254
|
|
The
carrying value of short term financial instruments including cash, accounts receivable, prepaid expense, loans payable, accounts
payable, accrued expenses and short-term borrowings approximate fair value due to the short period of maturity for these instruments.
The long-term debentures payable approximates fair value since the related rates of interest approximate current market rates.
NOTE
4 - OIL AND GAS PROPERTIES
The
Company holds oil and gas leases in Texas. The oil and gas leases were classified as unproved properties at December 31, 2015
and 2014 due to the absence of sustained commercial levels oil and gas production from the properties.
In
July 2013, the Company purchased an 85% working interest and 75% net revenue interest in certain oil and gas leases (Dawson-Conway
leases) for a purchase price of $400,000. The Company initially issued a promissory note in the amount of $400,000 to finance
the purchase, that amount was initially reduced to $340,000 during March of 2014 and subsequently reduced to zero as the result
of litigation filed by the Company in 2015 (see Note 7 for additional details). The Company has reflected these actions as adjustments
to the cost basis of the leases. On March 11, 2014 the Company purchased the remaining 15% working interest in Dawson Conway Leases
property for a cash payment of $30,000. On June 30, 2015 the Company announced that it had settled the dispute with Concho Oilfield
Services (“Concho”) over services provided by Concho. As a part of the settlement Concho agreed to re-enter the #5B
well on the Dawson-Conway 195B lease to repair damage to the wellbore and production string and to return the well to production.
In July 2015 Concho did return to the #5B well and commenced jarring and fishing operations in an attempt to repair the well.
These operations did not result in success and the well remains shut-in at this time. In June 2015 the Company filed suit in the
District Court for Shackelford County against HLA Interests, LLC and Sedco (a former operator of the Dawson-Conway leases) alleging
misrepresentation and fraud concerning title to the leases and compliance in regards to various regulations and permitting requirements
of the Texas Railroad Commission. During December 2015, the Company accessed the potential development options for the Dawson-Conway
leases and the Company decided that all operations at the Dawson-Conway leases should be suspended pending eventual sale of the
property.
On
March 5, 2014, the Company acquired a 100% working interest (80% net revenue interest) in the Powers-Sanders lease located in
Shackelford County, Texas from Sabor X Energy Services, Inc. for $600,000. The property consists of 385 acres and 5 producing
oil wells. The property has been shut-in since August of 2015 due to mechanical downhole issues. In December 2015, the Company
accessed the potential development options for the Powers-Sanders lease and the Company decided that all operations at the Powers-Sanders
leases should be suspended pending the eventual sale of the property.
On
March 6, 2014, the Company acquired a 100% working interest in the Stroebel-Broyles leases located in Eastland County, Texas from
Hunting Dog Capital, LLC for $75,000. We held a 76.0% net revenue interest in the Broyles lease and a 78.0% net revenue interest
in the Stroebel lease. The property consisted of 235 acres and 32 wells. The Company disposed of its working interests in the
Stroebel-Broyles leases in Eastland County, Texas during the first quarter of 2015.
On
June 16, 2014, we acquired a 93.75% working interest in the Bradford “A” and Bradford “B” leases located
in Shackelford County, Texas for $225,000 pursuant to the terms of Purchase & Sale and Farmout agreements. At the time of
the acquisition the property consisted of 320 acres with 7 producing wells. Under the terms of the Farmout Agreement our wholly-owned
subsidiary, CEGX of Texas, LLC, was obligated to spud the initial “Earning Well” by September 15, 2014. The initial
well was part of a “continuous drilling program” which afforded Cardinal the opportunity to earn additional 2-acre
producing units on the Bradford leases by drilling and completing injection and production wells. The property, which heretofore
had never been water flooded, had a two tank batteries. On
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
4 - OIL AND GAS PROPERTIES (continued)
September
2, 2014 the Company sold its interests in the Bradford “A” and Bradford “B” leases to the Bradford Joint
Venture Partnership (“Bradford JV”). At the time of the sale neither the parent company nor CEGX held any ownership
in Bradford JV. In late December 2014, Cardinal Energy (the “parent company”) purchased a 20% interest in Bradford
JV on the same terms as offered to the general public. On June 12, 2015 the Company transferred its 20% interest in the Bradford
JV to Keystone Energy, LLC (“Keystone”) in a series of transactions which resulted in Keystone securing a line of
credit to be used to further develop the Bradford “A” and Bradford “B” leases, Keystone acquiring an option
(exercisable within 365 days) to purchase all of the interests in the Bradford JV and Cardinal Energy exchanging 10 units of its
ownership interests in the Bradford JV for a 5% equity interest in Keystone.
On
September 2, 2014, we acquired a 43.75% working interest (32.375% net revenue interest) in the Fortune prospect located in Shackelford
County, Texas for a cash payment of $80,000. P.I.D. Drilling, Inc. serves as the operator for the property. The prospect consists
of leasehold interests in five tracts of land aggregating just over 310 acres. During the fourth quarter of 2014 the plugged well
on the Fortune Prospect was re-drilled and completed in the prolific Caddo limestone formation and two new wells were drilled
and completed in the Cooke sandstone formation. The remote location of the lease caused some delays in getting electricity to
the location, obtaining approval for hook-up to a natural gas pipeline and the delivery and installation of tank batteries and
associated production equipment. The lease came on production in January 2015 and production peaked at just under 25 barrels of
oil equivalent (“BOE”) per day. Production from the three wells has steadily declined from its peak to approximately
13 BOE per day for the first quarter of 2015 to just under 7 BOE per day during the second quarter of 2015 and approximately 3
BOE per day during the third quarter of 2015.
Following
the initial completion of the three producers, the Company asked for a full accounting of the drilling costs and requested a refund
for excess charges billed by the operator. In March 2015 the Company received refunds totaling $40,000 from the operator voted
to remove the operator. The refunds were treated as a reduction in our cost basis of the property. In June 2015 the Company filed
suit in the District Court for Shackelford County seeking recovery of damages. Future development activities for the prospect
have been placed on hold pending the outcome of the litigation.
On
December 31, 2014 the Company acquired a 100% working interest (77% net revenue interest) in the Bradford West lease for a cash
payment of $20,000. The prospect comprising 200 acres is located adjacent to and just to the west of the existing Bradford “A”
and “B” leases. During the second quarter of 2015, the Company drilled the initial well (Bradford West #1). We perforated
and treated the well, ran the production tubing and set the pump jack. The results from this well were disappointing and the Company
elected not to continue the drilling program called for under the Asset Sale & Purchase, and Farm-In agreements. The well
was suspended and the lease and well were subsequently transferred to the previous owners during the fourth quarter of 2015.
The
aforementioned Powers-Sanders, Stroebel-Broyles, Bradford “A” and “B” and Fortune acquisitions and the
additional 15% working interest in the Dawson-Conway leases were financed from the proceeds of a $4,500,000 offering of 12% Senior
Secured Convertible Notes which matured in December 2015 (see Note 6 for additional details).
As
of December 31, 2015, based on management’s review of the carrying value of oil and gas properties, management determined
that there is evidence that the cost of these acquired oil and gas properties will not be fully recovered and accordingly, the
Company has determined that an adjustment to the carrying value of these properties was required.
The Company determined
and recognized an impairment expense of $2,654,824 during the year ended December 31, 2015. The impairment expense equals to the
difference between the carrying values of the oil and gas properties and their estimated fair values. As of the date of these
consolidated financial statements, the carrying values for oil and gas properties amounted to $310,226 and $3,449,487 at December
31, 2015 and 2014, respectively.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
5 - PROPERTY AND EQUIPMENT
The
following is a summary of property and equipment - at cost, less accumulated depreciation as of December 31, 2015 and 2014:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Office equipment
|
|
$
|
63,235
|
|
|
$
|
63,128
|
|
Computer hardware and
software
|
|
|
26,652
|
|
|
|
23,527
|
|
Leasehold improvements
|
|
|
25,453
|
|
|
|
25,270
|
|
Transportation equipment
|
|
|
132,622
|
|
|
|
180,485
|
|
Building
|
|
|
110,699
|
|
|
|
110,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
358,661
|
|
|
|
403,005
|
|
Less:
accumulated depreciation
|
|
|
(114,583
|
)
|
|
|
(63,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
244,078
|
|
|
$
|
339,753
|
|
Depreciation
expense for the years ended December 31, 2015 and 2014 amounted to $63,294 and $40,093, respectively.
During
2015, the Company sold a truck with a net book value worth approximately $35,000 to third parties for a sales price of approximately
$28,000 and settled the equipment purchase contract payable of $28,000, realizing a loss on sale of assets of approximately $7,000.
The depreciation expense related to the sold truck amounted to approximately $7,000 which is included in the $63,294 above. During
2014, the Company sold a truck that had been purchased in 2014. No depreciation was recognized on the truck and a minor gain of
approximately $1,000 was realized.
NOTE
6 - SENIOR SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE
Senior
secured convertible notes payable consisted of the following:
|
|
December
31, 2015
|
|
|
December
31,
2014
|
|
12%
Senior secured convertible promissory notes
|
|
$
|
4,500,000
|
|
|
$
|
4,500,000
|
|
Discount
|
|
|
(519,286
|
)
|
|
|
(519,286
|
)
|
Accumulated
amortization of discount
|
|
|
519,286
|
|
|
|
224,158
|
|
Remaining
discount
|
|
|
-
|
|
|
|
(295,128
|
)
|
12%
Senior secured convertible notes payable, net
|
|
$
|
4,500,000
|
|
|
$
|
4,204,872
|
|
In
March 2014, the Company issued senior secured convertible promissory notes in an aggregate principal amount of $3,225,000 (the
“Senior Secured Convertible Notes”) together with common stock purchase warrants (the “Warrants”) to purchase
an aggregate of 1,290,000 shares of the Company’s common stock at an exercise price of $1.00 per share as part of a private
placement offering. The Senior Secured Convertible Notes bear interest at a rate of 12.0% per annum until they mature on December
15, 2015 or are converted. The note is secured by senior secured interest in the assets of the Company’s working interest
in the Dawson-Conway Lease, Powers-Sanders Lease, and Stroebel-Broyles Lease and a pledge of a number of shares of restricted
Stock (the “Stock Coverage”) whose value based on the bid price of the Stock is twice (or 200%) the amount in outstanding
and unpaid principal and interest of the Notes.
During
fiscal 2014, the Company issued additional Senior Secured Convertible Notes in an aggregate principal amount of $1,275,000 together
with common stock purchase warrants (the “Warrants”) to purchase an aggregate of 510,000 shares of the Company’s
common stock at an exercise price of $1.00 per share as part of the same private placement offering. The remaining $500,000 of
principal available under the facility was not secured during the fourth quarter of 2014 and the offering of units was closed
during February 2015.
In
accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature in the notes. The Company allocated
a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and
measured an aggregate of nil of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
6 - SENIOR SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)
In
connection with the issuance of the convertible promissory notes, the Company issued detachable warrants granting the holders
the right to acquire an aggregate of 1,800,000 shares of the Company’s common stock for $1.00 per share. The warrants expire
on December 31, 2019. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount
of $519,286 to additional paid-in capital and as a discount against the notes. The Company valued the warrants in accordance with
ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 2 years, an average risk
free interest rate of 0.69%, a dividend yield of 0% and volatility of 238.45%. The debt discount attributed to the value of the
warrants issued was amortized over the notes’ maturity and recorded to amortization of debt discount.
The
Company amortized debt discount $224,158 to current operations as a component of interest expense for the year ended December
31, 2014. During the year ended December 31, 2015 the Company amortized an additional $295,128 to current operations as amortization
of debt discount under other expenses.
Through
the end of December 2014, the Company had prepaid $515,000 in commissions and fees related to the financing. During the year ended
December 31, 2015 and 2014, the Company amortized prepaid debt issuance cost of $294,163 and $220,837, respectively, of the commissions
and fees to interest expense. As of December 31, 2015, accrued interest amounted to $540,000 and was included in accounts payable
and accrued expenses as reflected in the consolidated balance sheet.
The
Company failed to make the $270,000 semi-annual interest payment that was due to the noteholders on July 31, 2015 and the final
semi-annual interest and principal payments due on December 15, 2015 remain outstanding at December 31, 2015. The Company has
held several telephone conference calls with the noteholders and has been in continuous contact with Syndicated Capital, the placement
agent for the Notes, to discuss plans to either bring the interest payments to a current status or to restructure the unpaid interest
and principal outstanding into common and or preferred equity securities of the Company. To date, the noteholders have elected
not to exercise their rights to trigger certain default provisions under the senior secured promissory notes.
The
net proceeds from the borrowing were used primarily to acquire selected oil and gas properties in Texas, to fund the Company’s
well work-over and drilling programs, to purchase and equip a regional office, to purchase various well testing and production
equipment, to fund lease operating expenses and to retire short-term debt.
In
July 2015 the Company identified embedded derivatives related to the theoretical default of the Senior Secured Convertible Promissory
Notes. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments
requires that the Company to record the fair value of the derivatives as of the inception date of the Senior Secured Convertible
Promissory Note and to adjust the fair value as of each subsequent balance sheet date (see Note 8).
NOTE
7 – LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
Loan
Payable
Loan
payable outstanding at December 31, 2015 and 2014 consisted the following:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
|
|
|
|
|
|
|
|
|
Loan
payable obtained in November 2015 of $172,800, net of debt discount of $36,759,
payable
over 273 days beginning on November 18, 2015 with daily payments of $633.
|
|
$
|
119,584
|
|
|
$
|
-
|
|
Such
loan was obtained in connection with a Revenue Based Factoring Agreement executed in November 2015 whereby the Company sells,
assigns, and transfers all of the Company’s future receipts, accounts and contract rights and other obligations arising
from or relating to payment of monies from customers in the ordinary course of the Company’s business, until such time the
loan amount has been paid off by the Company. In March 2016, the Company received a default notice from the lender (see Note 14).
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)
Notes
Payable
Equipment
purchase contracts payable
Between
June 2014 and September 2014, the Company issued notes payable in the aggregate amount of $100,285 in connection with the acquisition
of three pieces of transportation equipment. The notes payable bear interest ranging approximately from 9% to 10% per annum and
are secured by a lien on the transportation equipment. The notes are payable in 60 equal monthly payments. During fiscal 2015,
the Company sold one piece of transportation equipment. The Company used the sales proceeds to pay off the remaining balance of
the note of approximately $25,000.
Notes
payable — short and long term portion consisted of the following:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Total
notes payable
|
|
$
|
56,226
|
|
|
$
|
94,631
|
|
Less:
current portion – equipment purchase contract payable
|
|
|
(13,721
|
)
|
|
|
(17,023
|
)
|
Long
term portion – equipment purchase contract payable
|
|
$
|
42,505
|
|
|
$
|
77,608
|
|
Note
payable outstanding at December 31, 2015 and 2014 consisted the following:
|
|
December
31, 2015
|
|
|
December
31,
2014
|
|
|
|
|
|
|
|
|
|
|
Promissory
note of $340,000 bearing 6% interest per annum
|
|
$
|
-
|
|
|
$
|
340,000
|
|
Note
issued in July 2013:
In
July 2013, the Company purchased an 85% working interest and 75% net revenue interest in certain oil and gas leases covering 618
acres of land located in Shackelford County, Texas (the “Dawson-Conway Leases”) for a purchase price of $400,000.
The Company issued a promissory note in the amount of $400,000 to finance the purchase (the “HLA Note”). The promissory
note accrues interest at 6% per annum, is due two years from issuance and is secured by the Dawson-Conway Leases. During March
of 2014, pursuant to property title related issues, the note was reduced to $340,000. All of other terms of the note agreement
remain unchanged. The Company has treated the reduction as an adjustment to the purchase price of the properties.
At
December 31, 2014, the $340,000 balance of the HLA Note remained outstanding. Pursuant to a partial default judgement awarded
in favor of the Company on August 5, 2015, the Company was relieved of any responsibility for repayment of the HLA Note. Accordingly,
the Company has removed the HLA Note from the liability section of the balance sheet and has treated the previously outstanding
balance of $340,000 as a reduction to the carrying value of the properties as of December 31, 2015 (see Note 13).
Note
issued on September 11, 2014:
On
September 11, 2014, the Company issued a 90 day promissory note to an unrelated entity in the amount of $120,000. The Company
received $120,000 in cash. Under the terms of the note, the Company issued 50,000 shares of restricted common stock as a prepayment
of interest and agreed to pay an additional $15,000 of interest on maturity of the note. The stock that was issued was valued
at $0.70 per share based upon the trading value of the stock when issued resulting in a credit to common stock of $35,000 which
was amortized over the 90 days to maturity of the note. During December 2014 the Company repaid the note principal in cash and
during January 2015 the Company paid the interest by issuing 30,000 shares of common stock valued at $12,000.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)
Convertible
notes payable
Convertible
notes payable outstanding at December 31, 2015 and 2014 are summarized in the following table:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
|
|
|
|
|
|
|
|
|
Amount
of principal and interest under the various 8% convertible promissory notes net of debt discount of $0 and $14,353 at December
31, 2015 and 2014, respectively, issued during fiscal 2013
|
|
$
|
-
|
|
|
$
|
168,647
|
|
Amount of principal
and interest including default interest and penalties under the 6% convertible promissory notes net of debt discount of $0
and $181,465 at December 31, 2015 and 2014, respectively, issued during fiscal 2014
|
|
|
431,092
|
|
|
|
158,535
|
|
|
|
|
|
|
|
|
|
|
Amount of principal
and interest including default interest and penalties under the various 8% convertible promissory notes net of debt discount
of $0 and $107,288 at December 31, 2015 and 2014, respectively, issued during fiscal 2014
|
|
|
4,521
|
|
|
|
2,712
|
|
|
|
|
|
|
|
|
|
|
Amount of principal
and interest including default interest and penalties under the various 8% convertible promissory notes net of debt discount
of $39,340 and $0 at December 31, 2015 and 2014, respectively, issued during fiscal 2015
|
|
|
20,295
|
|
|
|
-
|
|
Amount of principal
and interest including default interest and penalties under the various 10% convertible promissory notes net of debt discount
of $2,610 and $0 at December 31, 2015 and 2014, respectively, issued during fiscal 2015
|
|
|
95,869
|
|
|
|
-
|
|
Amount
of principal and interest including default interest and penalties under the various 12% convertible promissory notes net
of debt discount of $138,214 and $0 at December 31, 2015 and 2014, respectively, issued during fiscal 2015
|
|
|
597,766
|
|
|
|
-
|
|
Total principal and interest
including default interest and penalties
|
|
|
1,149,543
|
|
|
|
329,894
|
|
Less
: Current portion of convertible notes
|
|
|
(1,061,725
|
)
|
|
|
(329,894
|
)
|
Total
long-term portion of convertible notes
|
|
$
|
87,818
|
|
|
$
|
-
|
|
Convertible
Note issued during fiscal 2013:
As
of December 31, 2015 and 2014, there was a total remaining balance of $0 and $183,000, respectively, pursuant to convertible debentures
offering issued during fiscal 2013. The convertible notes bore interest at 8% per annum, with principal and interest due two years
from issuance. The notes carried a default interest rate of 12% per annum. The notes were convertible for two years from the issue
date into shares of the Company’s common stock at a price of $1.00 per share. The Company analyzed the convertible debts
for derivative accounting consideration under ASC 815 “Derivatives and Hedging” and determined that derivative accounting
is not applicable. During the year ended December 31, 2015, the Company repaid by cash $15,000 of these convertible notes payable
and issued 69,697 shares of common stock to convert $23,000 principal convertible notes issued in 2013. During the year ended
December 31, 2015, noteholders of the remaining balance of these $145,000 principal convertible notes payable entered into an
assignment agreement and assigned their debts to another note holder. The Company issued a 10 month 12% convertible note payable
of $145,000 on May 8, 2015 - see below.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)
Convertible
Note issued on September 22, 2014:
On
September 22, 2014, the Company issued a 6% short term convertible promissory note payable of $340,000 to an unrelated entity.
Under the terms of the note, the Company received $250,000. The Company paid $10,000 as a commission related to this credit facility.
The repayment of the note is due 180 days after the funds were received. The repayment is subject to the convertible features
of the note. The creditor has a conversion option allowing it to choose to receive repayment of the stated principal either in
cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash, the Company is required
to pay principal of $340,000.
At
the option of the note holder, the Company may repay the note by issuing restricted common stock based upon a valuation formula,
which includes a calculation based upon 75% of an average of the lowest 3-day closing price during the immediate 20 days prior
to the date of the conversion notice. The note was issued with an original issue discount of $90,000 and the Company recorded
it as prepaid debt issuance cost which was amortized over the term of the note. In conjunction with the issuance of this convertible
promissory note, the Company issued an aggregate of 250,000 Class C detachable warrants exercisable three years from the date
of issuance with an initial exercise price of $1.00 per share.
During
the year ended December 31, 2015, the Company extended the repayment date on three occasions and issued common stock to the note
holder as consideration for the extension concessions. The Company issued 250,000 shares on May 5, 2015 and an additional 250,000
shares on May 28, 2015. The shares were valued based upon an agreed formula consistent with the conversion terms applied to the
embedded derivative. The 500,000 shares of common stock was valued at $107,500 which was charged to interest during the year ended
December 31, 2015. The Company has completed a third extension, for which it paid $5,000 for legal fees incurred by the note holder.
The note is currently in default and the Company and the note holder have agreed to arbitration in 2016.
Convertible
Note issued on December 23, 2014:
On
December 23, 2014, the Company issued an 8% short term convertible promissory note payable of $110,000 to an unrelated entity.
Under the terms of the note, the Company received $95,000. The Company paid $5,000 as a legal fees related to this credit facility.
The repayment of the note is due one year after the funds were received. The repayment is subject to the convertible features
of the note. The creditor has a conversion option allowing it to choose to receive repayment of the stated principal either in
cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash, the Company is required
to pay principal of $120,000 on or before 180 days from the execution of the agreement. At the option of the note holder, the
Company may repay the note by issuing restricted common stock based upon the conversion term, which includes a calculation based
upon a 40% discount to the lowest closing price during the immediate 20 days prior to the date of the conversion notice.
Convertible
Note issued on January 12, 2015:
On
January 12, 2015, the Company issued a 10% one year promissory note payable of $100,000, due January 12, 2016, with an unrelated
entity. Under the terms of the note, the Company received $90,000 and was charged an original issue discount of $5,000. The Company
was also charged $5,000 as legal fees related to this credit facility. The repayment, if not completed within 180 days may, at
the option of the note holder, be repaid in common stock of the Company. After 180 days, the creditor will have a conversion option
allowing it to choose to receive repayment of the stated principal and interest either in cash or, at the creditor’s option,
in the Company’s restricted common stock. If paid in cash, during the 180 day prepayment period, the repayment will be $120%
of the principal and any accrued interest. At the option of the note holder, the Company may repay the note by issuing restricted
common stock based upon the conversion term, which includes a calculation based upon a 35% discount to the lowest closing price
during the immediate 15 days prior to the date of the conversion notice.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)
Convertible
Note issued on January 16, 2015:
On
January 16, 2015, the Company issued an 8% short-term promissory note payable of $114,000, due October 13, 2015, with an unrelated
entity. Under the terms of the note, the Company received $110,000 and was charged an original issue discount of $4,000. The repayment,
if not completed within 180 days may, at the option of the note holder, be repaid in common stock of the Company. After 180 days,
the creditor will have a conversion option allowing it to choose to receive repayment of the stated principal and interest either
in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash, during the 180 day
prepayment period, the repayment will be 130% of the principal and any accrued interest. At the option of the note holder, the
Company may repay the note by issuing restricted common stock based upon the conversion term, which includes a calculation based
upon a 35% discount of the average of the lowest three trading price during the 10 days prior to the date of the conversion notice.
Convertible
Note issued on January 22, 2015:
On
January 22, 2015, the Company issued a two-year 12% convertible promissory note payable of $55,000 with an unrelated entity. Under
the terms of the note, the Company received $50,000. The repayment of the note is due on or before January 28, 2017, 2 years after
the funds were received. The repayment is subject to the convertible features of the note. The creditor has a conversion option
allowing it to choose to receive repayment of the stated principal either in cash or, at the creditor’s option, in the Company’s
restricted common stock. At the option of the note holder, the Company may repay the note by issuing restricted common stock based
upon a conversion term, which includes a calculation based upon 60% of the lowest closing price during the immediate 25 days prior
to the calculation of the conversion notice. The note was issued with an original issue discount of $5,000 and the Company recorded
it as prepaid debt issuance cost which is amortized over the term of the note. Conversion price of this convertible note shall
equal to the lesser of (a) $0.50 or (b) 60% of the lowest trade occurring during the 25 consecutive trading days immediately preceding
the applicable conversion date on which the holder elects to convert all or part of this note.
Convertible
Note issued on January 28, 2015:
On
January 28, 2015, the Company issued a two-year 12% convertible promissory note payable of $55,000, due January 28, 2017 with
an unrelated entity. Under the terms of the note, the Company received $50,000 and was charged an original issue discount of $5,000.
The repayment, if not completed within 180 days may, at the option of the note holder, be repaid in common stock of the Company.
After 180 days, the creditor will have a conversion option allowing it to choose to receive repayment of the stated principal
and interest either in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash,
during the initial 90 days, the repayment will be 120% of the principal and any accrued interest. During the succeeding 90 day
prepayment period, the repayment will be 130% of the principal and any accrued interest. Conversion price of this convertible
note shall equal the lesser of (a) $0.365 or (b) 60% of the lowest trade occurring during the 25 consecutive trading days immediately
preceding the applicable conversion date on which the note holder elects to convert all or part of this note.
Convertible
Note issued on March 18, 2015:
On
March 18, 2015, the Company issued a two-year 8% convertible promissory note payable of $60,000, due March 18, 2017 with an unrelated
entity. Under the terms of the note, the Company received $54,000 and was charged an original issue discount of $6,000. The repayment,
if not completed within 180 days may, at the option of the note holder, be repaid in common stock of the Company. After 180 days,
the creditor will have a conversion option allowing it to choose to receive repayment of the stated principal and interest either
in cash or, at the creditor’s option, in the Company’s common stock. If paid in cash, during the initial 90 days,
the repayment will be 115% of the principal and accrued interest. During the succeeding 90 day prepayment period, the repayment
will be $130% of the principal and any accrued interest. If the creditor elects to convert the note to common stock, the conversion
feature allows for a valuation of the stock based upon a 35% discount to the average of the lowest three trading prices during
the 10 days preceding the conversion date.
Convertible
Note issued on March 18, 2015 and August 27, 2015:
Between
March 18, 2015 and August 27, 2015, the Company issued two year 12% convertible promissory notes payable for a total of $85,000
with an unrelated entity. Under the terms of the note, the Company received $72,500. The repayment of the notes are both due on
or before March 18, 2017, two years after the funds were received. The repayment is subject to the convertible features of the
note. The creditor has a conversion option allowing it to choose to receive repayment of the stated principal with accrued interest.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)
At
the option of the note holder, the Company may repay the note by issuing restricted common stock based upon the conversion term,
which includes a calculation based upon the lesser of a) $0.30 or b) 60% of the lowest closing price during the immediate 25 days
prior to the date of the conversion notice. The note was issued with an original issue discount of $8,500 and a charge for legal
fees of $4,000. The Company recorded the costs as prepaid debt issuance cost which is amortized over the term of the note.
Convertible
Note issued on April 6, 2015:
On
April 6, 2015, the Company issued a nine-month 10% convertible promissory note payable of $60,000, due January 6, 2016 with an
unrelated entity. Under the terms of the note, the Company received $54,750 and was charged an original issue discount of $5,250.
The repayment, if not completed within 180 days may, at the option of the note holder, be repaid in common stock of the Company.
After 180 days, the creditor will have a conversion option allowing it to choose to receive repayment of the stated principal
and interest either in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash,
during the initial 180 days, the repayment will be calculated based upon the period paid, with prepayment terms requiring 125%
to 150% of the principal and any accrued interest. At the option of the note holder, the Company may repay the note by issuing
restricted common stock based upon the conversion term, which includes a calculation based upon 55% of the lowest two closing
price during the immediate 25 days prior to the date of the conversion notice.
Convertible
Note issued on May 1, 2015:
On
May 1, 2015, the Company issued a nine-month 8% convertible promissory note payable of $59,000, due February 6, 2016 with an unrelated
entity. Under the terms of the note, the Company received $55,000 and was charged prepaid loan costs of $4,000. The repayment,
if not completed within 180 days may, at the option of the note holder, be repaid in common stock of the Company. After 180 days,
the creditor will have a conversion option allowing it to choose to receive repayment of the stated principal and interest either
in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash, during the initial
180 days, the repayment will be calculated based upon the period paid, with prepayment terms requiring 115% to 130% of the principal
and any accrued interest. If the creditor elects to convert the note to common stock, the conversion feature allows for a valuation
of the stock based upon a 35% discount to the average of the lowest three trading prices during the 10 days preceding the conversion
date.
Convertible
Note issued on May 8, 2015:
On
May 8, 2015, the Company issued a ten-month 12 % convertible promissory note payable of $145,000 to an unrelated entity upon the
assignment of a total of $145,000 of 8% convertible notes issued in fiscal 2013 whereby the previous noteholders entered into
an assignment agreement and assigned their debts to this unrelated entity. The repayment of the note is due on or before March
8, 2016, ten months after the issue date of the note. The repayment is subject to the convertible features of the note. The creditor
has a conversion obligation allowing it to convert the notes during the pendency of the note, but repayment in cash is not expected.
At the option of the note holder, the Company may repay the note by issuing restricted common stock based upon a valuation formula,
which includes a calculation based upon lesser of a) $0.40 or b) 70% of the lowest volume weighted average price (“VWAP”)
during the immediate 10 days prior to the date of the conversion notice. On November 25, 2015, the conversion price was changed
to lesser of a) $0.40 or b) 60% of the lowest trading value during the 20 days immediately preceding the conversion.
Convertible
Note issued on May 21, 2015:
On
May 21, 2015, the Company issued a ten-month 12% convertible promissory note payable of $110,000 with an unrelated entity. Under
the terms of the note, the Company received $100,000. The repayment of the note is due on or before March 8, 2016, ten months
after the issue date of the note. The repayment is subject to the convertible features of the note. The creditor has a conversion
option allowing it to choose to receive repayment of the stated principal with accrued interest. The note is to be repaid either
in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash the principal repayment
is to be $110,000 (including an original issue discount of $10,000) and the interest after the initial 90 days is to be 12%. At
the option of the note holder, the Company may repay the note by issuing restricted common stock based upon the conversion terms,
which includes a calculation based upon lesser of a) $0.40 or b) 70% of the lowest volume weighted average price (“VWAP”)
during the immediate 10 days prior to the date of the conversion notice. The original issue discount of $10,000 has been recorded
as prepaid debt issuance cost along with legal and commission expenses of $11,350.
On November 25, 2015, the conversion
price was changed to lesser of a) $0.40 or b) 60% of the lowest trading value during the 20 days immediately preceding the conversion.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)
The
prepaid debt issuance costs will be amortized over the term of the note.
Convertible
Note issued on June 2, 2015:
On
June 2, 2015, the Company issued a twelve-month 12% convertible promissory note payable of $121,000 with an unrelated entity.
Under the terms of the note, the Company received $100,000. The repayment of the note is due on or before June 2, 2016, one year
after the issue date of the note. The repayment is subject to the convertible features of the note. The creditor has a conversion
option allowing it to choose to receive repayment of the stated principal with accrued interest (12%). The note is to be repaid
either in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash the principal
repayment is to be $121,000 (including an original issue discount of $10,000 and professional fees of $11,000) and the interest
after the initial 90 days is to be 12%. At the option of the note holder, the Company may repay the note by issuing common stock
based upon the conversion terms, which includes a calculation based upon 70% of the lowest trade price during the immediate 15
days prior to the date of the conversion notice. The original issue discount of $10,000 and the $11,000 legal fees have been recorded
as prepaid debt issuance cost which is amortized over the term of the note.
Convertible
Note issued on July 17, 2015
On
July 17, 2015, the Company issued a twelve-month an 8% convertible note to an unrelated party with a face amount of $57,500. The
note contains an original issue discount of $5,000 and bears interest on the face amount at the rate of 8% per annum. The loan
is due on July 17, 2016 and includes a convertible feature that allows the note holder to be paid in common stock of the Company.
Any shares converted by the note holder will be valued at 60% of the lowest trading value during the 20 days immediately preceding
the conversion. The note may be prepaid within 90 days of issuance at 110% of the principal amount plus accrued interest, and
at 120% of principal plus accrued interest if prepaid after 90 days from the date of issuance but before 180 days of such date.
The note may not be prepaid after 180 days. In the event of a default under the note, interest accrues at the rate of 24% per
annum. In the event the Company fails to deliver shares of its common stock upon conversion within the time frames provided for
in the note, the Company is subject to a $250 penalty per day increasing to $500 per day beginning on the 10th day after the prescribed
delivery date. Further, in the event the Company is no longer current in its SEC filings for a period of six months or more, the
conversion price shall be the lowest closing bid price during the delinquency period.
Common
stock issued to convert convertible notes payable
During
fiscal 2014, the Company issued an aggregate of 437,500 shares of common stock to various noteholders upon the conversion of a
total of principal and interest of $174,807.
During
fiscal 2015, the Company issued an aggregate of 45,489,374 shares of common stock to various noteholders upon the conversion of
a total of principal and interest of $620,607.
Debt
Discounts
In
connection with the convertible promissory notes issued in fiscal 2015, the convertible notes were considered to have an embedded
beneficial conversion feature (BCF) because the effective conversion price was less than the fair value of the Company’s
common stock in accordance with ASC 470-20-25. Therefore the portion of proceeds allocated to the convertible notes of $931,181
was determined to be the value of the beneficial conversion feature and was recorded as a debt discount and is being amortized
over the term of the notes.
For
the year ended December 31, 2015 and 2014 the Company recognized $1,007,573 and $177,734, respectively of amortization of debt
discount. For the year ended December 31, 2015 and 2014, the Company recognized $135,663 and $59,889 of amortization of prepaid
debt issuance cost, respectively, and were recorded in interest expense.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
8 – DERIVATIVE LIABILITIES
The
Company evaluated whether or not the convertible promissory notes contain embedded conversion features, which meet the definition
of derivatives under ASC 815 and related interpretations. The Company determined that the terms of the notes issued in fiscal
2014 and 2015 (see Note 7) include a variable conversion price based on the closing bid prices of the Company’s common stock
which cause the embedded conversion options to be accounted for as derivative liabilities. Additionally, the Company determined
that the terms of the warrants granted on September 22, 2014 in connection with the issuance of a convertible note and warrants
granted on February 25, 2015 to the note holder of the Senior Secured convertible note (see Note 9) include a down-round provision
under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company under
the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging - Contracts in an Entity’s Own Stock”,
the embedded conversion options and the warrants were accounted for as derivative liabilities at the date of issuance and adjusted
to fair value through earnings at each reporting date In accordance with ASC 815, the Company has bifurcated the conversion feature
of the convertible notes, along with the free-standing warrant derivative instruments and recorded derivative liabilities on their
issuance date. The Company uses the Black-Scholes option pricing model to value the derivative liabilities.
The
notes issued in fiscal 2015 were discounted in an aggregate amount of $931,181 based on the valuations and the Company recognized
an additional derivative expense included in interest expense of $2,577,683 upon initial recording of the derivative liabilities.
The total debt discount of $931,181 from the valuation of the derivatives are being amortized over the terms of the note. These
derivative liabilities are then revalued on each reporting date. The gain resulting from the decrease in fair value of these convertible
instruments was $709,219 for the year ended December 31, 2015. During the year ended December 31, 2015 and 2014, the Company
reclassified $826,901 and $22,068, respectively, to paid-in capital due to the conversion of convertible notes into common
stock. At December 31, 2015, the Company had recorded warrant derivative liability of $1,722 and note derivative liability of
$2,353,858.
The
following table summarizes the values of certain assumptions used by the Company’s custom model to estimate the fair value
of the derivative liabilities as of December 31:
|
|
2015
|
|
|
2014
|
|
Stock price
|
|
$
|
0.003
|
|
|
$
|
0.42
|
|
Strike price ranging from
|
|
|
0.001
to 0.50
|
|
|
|
0.24
to 0.33
|
|
Remaining contractual term (years)
|
|
|
0.25
to 4.00 years
|
|
|
|
0.95
to 0.98 years
|
|
Volatility
|
|
|
292
|
%
|
|
|
160
|
%
|
Risk-free rate
|
|
|
0.05%
to 1.76
|
%
|
|
|
0.04%
to 1.10
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The
following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of December
31:
|
|
2015
|
|
|
2014
|
|
Balance, beginning
of year
|
|
$
|
382,836
|
|
|
$
|
32,528
|
|
Excess of fair value over
debt discount
|
|
|
2,577,683
|
|
|
|
-
|
|
Debt discount in connection
with conversion option of Debentures and detachable warrants
|
|
|
931,181
|
|
|
|
693,630
|
|
Extinguished derivative
liability
|
|
|
(826,901
|
)
|
|
|
(22,068
|
)
|
Change
in fair value of derivative liabilities
|
|
|
(709,219
|
)
|
|
|
(321,254
|
)
|
Balance,
end of year
|
|
$
|
2,355,580
|
|
|
$
|
382,836
|
|
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
9 – STOCKHOLDERS’ DEFICIT
Common
Stock
As
of December 31, 2015, the Company has 100,000,000 shares of common stock authorized.
During
the year ended December 31, 2014, the Company:
Issued
699,929 shares for cash proceeds of $195,975;
Issued
922,867 shares to contractors and employees as payment for services. The stock was valued at its fair market value of $415,220;
Issued
100,000 shares valued at fair market as payment for accounts payable. The stock was valued at $30,000;
Issued
50,000 shares in exchange for oil and gas properties, valued at fair market value of $35,000;
Issued
437,500 shares to convert debt, valued at $196,875, the excess of $22,068 over the nominal amount of the note was credited to
additional paid in capital as the extinguishment of derivative liability;
Cancelled
150,000 shares at no value;
Received
3,000,000 shares of treasury stock of the Company in exchange for transferring oil and gas producing properties in Ohio and California
and 100,000 shares in settlement of litigation with Charles A. Koenig. The 3,000,000 shares associated with the asset sale were
valued at a fair market value of $2,010,000 and the 100,000 shares associated with the legal settlement were valued at original
cost of $3,380. The Company treated both of these transactions as the acquisition of Treasury Stock.;
Issued
50,000 shares of common stock to pay interest on a note payable valued at $35,000;
Cancelled
15,000 shares of common stock upon expiration of lease and was valued at $18,750.
As
of December 31, 2014, the Company reported 34,940,046 shares outstanding.
During
the year ended December 31, 2015, the Company:
Issued
an aggregate of 248,874 shares of common stock for services to various consultants valued at fair market value of $92,183. The
fair value of the shares of the common stock were based on the quoted trading price on the date of grant.
Issued
100,000 shares of common stock valued at $40,000 in connection with an employment agreement with an officer of the Company. The
fair value of the shares of the common stock were based on the quoted trading price on the date of grant.
Issued
30,000 shares of common stock valued at fair market value of $12,000 as payment for interest under a short-term note payable issued
in 2014. The fair value of the shares of the common stock were based on the quoted trading price on the date of grant.
Issued
an aggregate of 500,000 shares of common stock, valued at fair market value of $107,500 as consideration for the extension of
a convertible note and the interest payable thereon. The fair value of the shares of the common stock were based on the quoted
trading price on the date of grant (see Note 7 for additional details).
Cancelled
33,333 shares of common stock valued at $15,667. The fair value of the shares of the common stock were based on the quoted trading
price on the date of cancellation.
Issued
an aggregate of 45,489,374 shares of common stock, valued at $620,607 for the conversion of various convertible notes payable
and accrued interest pursuant to the conversion terms of the respective convertible notes. The Company reclassified $826,901 of
derivative liabilities in connection with the extinguishment of derivative liabilities upon conversion of the convertible notes
payable into common stock (see Note 8 for additional details).
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
9 – STOCKHOLDERS’ DEFICIT (continued)
As
of December 31, 2015 the Company had 81,274,961 shares of common stock outstanding.
Preferred
Stock
Effective
November 24, 2015, the Company filed with the Nevada Secretary of State a Certificate of Designation in which the Company authorized
the creation of 1,000,000 shares of Series A preferred Stock. Each shares of Series A preferred stock entitles the holder thereof
to 110 votes per share and otherwise has the same rights and privileges as the Company’s common stock. The holders of shares
of Series A preferred stock are not entitled to dividends or distributions. The holders of the Series A preferred stock do not
have any conversion rights and the shares are non-transferrable.
On
November 24, 2015, the Company issued to the Company’s CEO, Timothy Crawford, 1,000,000 shares of the Company’s restricted
Series A preferred stock, valued at approximately $100,000. In connection with the issuance of these Series A preferred shares,
the Company recorded stock based compensation of $100,000 for the year ended December 31, 2015.
The
issuance to Mr. Crawford of the 1,000,000 shares of the Series A Preferred Stock resulted in Mr. Crawford acquiring approximately
65% of the voting securities of the Company on the date of grant.
As
of December 31, 2015 the Company had 1,000,000 shares of Series A preferred stock outstanding.
Common
stock Warrants
On
September 22, 2014, the Company issued 250,000 Class C warrants in connection with a short term credit facility. Each of the 250,000
warrants is exercisable into one share of the Company’s common stock at $1.00 per share. The warrants were immediately exercisable.
The warrants will expire if not converted into stock by September 29, 2017. After September 29, 2015, the shares are callable
by the Company.
During
the year ended December 31, 2014, the Company issued common stock purchase warrants to purchase an aggregate of 1,800,000 shares
of the Company’s common stock at an exercise price of $1.00 per share in connection with the issuance of its Senior Secured
Convertible Notes (see Note 7). The warrants expire on December 31, 2019.
On
February 25, 2015, the Company entered into an agreement with Syndicated Capital, Inc. (the “Holder”) granting Syndicated
Capital, Inc. the right to subscribe for and purchase 450,000 shares of the Company’s common stock at an initial purchase
price of $1.00 per share. This right will expire, if not terminated earlier in accordance with the provisions of the agreement,
on December 31, 2019. The Warrant was issued as compensation to the Holder for services rendered as placement agent in connection
with the Company’s private offering of units of the Company’s securities which occurred in December 2014. The Company
identified embedded derivatives related to the warrants issued February 25, 2015. These embedded derivatives included certain
reset provisions (see Note 8 for additional details). The accounting treatment of derivative financial instruments requires that
the Company record the fair value of the derivatives as of the inception date and to adjust the fair value as of each subsequent
balance sheet date.
Changes
in stock purchase warrants during the periods ended December 31, 2015 and 2014 are as follows:
|
|
|
|
|
Weighted
Average
|
|
|
Aggregate
|
|
|
|
|
|
Weighted
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Value
|
|
|
Exercisable
|
|
|
Life
|
|
Outstanding, December 31, 2013
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercisable, December 31, 2013
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issued
|
|
|
2,050,000
|
|
|
|
1.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Outstanding, December 31, 2014
|
|
|
2,050,000
|
|
|
|
1.00
|
|
|
|
-
|
|
|
|
2,050,000
|
|
|
|
4.75
years
|
|
Issued
|
|
|
450,000
|
|
|
|
1.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2015
|
|
|
2,500,000
|
|
|
$
|
1.00
|
|
|
$
|
-
|
|
|
|
2,500,000
|
|
|
|
3.60
years
|
|
Exercisable, December 31, 2015
|
|
|
2,500,000
|
|
|
$
|
1.00
|
|
|
$
|
-
|
|
|
|
2,500,000
|
|
|
|
3.60
years
|
|
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
10 - RELATED PARTY TRANSACTIONS
Parties
are considered to be related to the Company if the parties directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal stockholders of the Company,
its management, members of the immediate families of principal stockholders of the Company and its management and other parties
with which the Company may deal where 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 discloses 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 compensation or distribution to related parties depending on the transaction.
On
June 1, 2014, the Company, through its wholly owned subsidiary, CEGX of Texas, LLC entered into a Contract Operating Agreement
with Bradford JV. Under the terms of this agreement, the Company agreed to perform routine and major operations, marketing services,
accounting services, reporting services and other administrative services on behalf of Bradford JV as necessary to operate Bradford
JV’s oil and gas lease operations on the Bradford oil and gas leases located in Shackelford County, Texas. Bradford JV agreed
to pay the Company an administrative and pumping fee of $500 per well per month, 93.7% of the actual cost of electricity, taxes
and ongoing maintenance and repairs to operate Bradford JV’s assets. The agreement is for a term of three years and automatically
renews for one year periods until one of the parties notifies the other party not later than 60 days prior to commencement of
a renewal term of its desire to not renew the agreement.
During
the last week of December, the Company obtained 20 units (out of 100 total units) in the Bradford Joint Venture exploration and
drilling program located in Shackelford County, Texas. The operation is accounted for as an investment included in Oil and Gas
Properties as of December 31, 2014. The Company purchased their interest for $25,000 per unit on December 31, 2014.
The
Company has determined that the agreement and the Company’s participation in the joint venture at December 31, 2014 created
a related party relationship and as such has reported the billed revenue of $621,508 and $1,716,771 during the year ended December
31, 2015 and 2014, respectively and the unpaid accounts receivable of $180,712 and $225,000 at December 31, 2015 and 2014, respectively
as related party transactions in the consolidated financial statements.
During
2014, the Company transferred the oil and gas producing properties located in Ohio and California to a third party in exchange
for 3,000,000 shares of common stock which have been designated “Treasury Stock”. Also, as part of the transaction,
the Company returned the $20,000 bond they had received earlier. The third party involved in this transaction was previously a
senior executive of the Company and was considered a related party when the properties in question were originally acquired by
the Company.
On
June 12, 2015, the Company, and each of the other beneficial owners of seventy-three (73) participation interests in the Bradford
JV entered into a Participation Interest Purchase Agreement with Keystone Energy, LLC (see Note 13). In June 2015, the Company
received $250,000 for the Company’s ten (10) Participation Interests for Keystone’s right to beneficial enjoyment
which is not subject to forfeiture by the Company under any circumstances. For financial reporting purposes the Company has recognized
this amount as a component of related party operating revenues during the year ended December 31, 2015.
NOTE
11 - ASSET RETIREMENT OBLIGATION
The
following table sets forth the principal sources of change of the asset retirement obligation for the years ended December 31,
2015 and 2014:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Asset retirement
obligations, beginning of period
|
|
$
|
162,321
|
|
|
$
|
8,639
|
|
Additions and changes
in estimated liabilities
|
|
|
(81,245
|
)
|
|
|
(8,639
|
)
|
Asset retirement obligations
assumed
|
|
|
-
|
|
|
|
142,336
|
|
Accretion
expense
|
|
|
14,987
|
|
|
|
19,985
|
|
Asset
retirement obligations, end of period
|
|
$
|
96,063
|
|
|
$
|
162,321
|
|
As
of December 31, 2015 the Company does not maintain an escrow agreement or performance bond to assure the administration of the
plugging and abandonment obligations assumed.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
12 - INCOME TAXES
The
Company’s provision for income taxes was $-0- for the years ended December 31, 2015 and 2014, respectively, since the Company
has accumulated taxable losses from operations. ASC 740 requires the reduction of deferred tax assets by a valuation allowance
if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not
be realized. In the Company’s opinion, it is uncertain whether they will generate sufficient taxable income in the future
to fully utilize the net deferred tax asset. Accordingly, a full valuation allowance equal to the deferred tax asset has been
recorded.
The
total deferred tax asset is calculated by multiplying a 39 percent marginal tax rate by the cumulative Net Operating Loss (“NOL”).
At December 31, 2015, the Company has available $5,737,631 of NOL’s which expire in various years beginning in 2031 and
carrying forward through 2035. The tax effects of significant items comprising the Company’s net deferred taxes as of December
31, 2015 and 2014 were as follows:
The
provision for income taxes differs from the amounts which would be provided by applying the statutory federal income tax rate
of 39 percent to net loss before provision for income taxes for the following reasons:
|
|
December
31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Cumulative
NOL
|
|
$
|
5,737,631
|
|
|
$
|
4,294,241
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
|
2,237,676
|
|
|
|
1,674,754
|
|
Valuation
allowance
|
|
|
(2,
237,676)
|
|
|
|
(1,674,754
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company files federal and Ohio income tax returns subject to statutes of limitations. The years ended December 31, 2015, 2014,
2013, 2012, 2011, and 2010 are subject to examination by federal and state tax authorities. After consideration of all the evidence,
both positive and negative, management has recorded a full valuation allowance at December 31, 2015, due to the uncertainty of
realizing the deferred income tax assets. The valuation allowance was increased by $562,922.
The
provisions of ASC 740 require companies to recognize in their financial statements the impact of a tax position if that position
is more likely than not to be sustained upon audit, based upon the technical merits of the position. ASC 740 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken on a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting
in interim periods and disclosure.
Management
does not believe that the Company has any material uncertain tax positions requiring recognition or measurement in accordance
with the provisions of ASC 740. Accordingly, the adoption of these provisions of ASC 740 did not have a material effect on the
Company’s financial statements. The Company’s policy is to record interest and penalties on uncertain tax positions,
if any, as income tax expense.
NOTE
13 - COMMITMENTS AND CONTINGENCIES
Contract
Operating Agreement
On
June 1, 2014, the Company, through its wholly owned subsidiary, CEGX of Texas, LLC entered into a Contract Operating Agreement
with Bradford JV. Under the terms of this agreement, the Company agreed to perform routine and major operations, marketing services,
accounting services, reporting services and other administrative services on behalf of Bradford JV as necessary to operate Bradford
JV’s oil and gas lease operations on the Bradford oil and gas leases located in Shackelford County, Texas. Bradford JV agreed
to pay the Company an administrative and pumping fee of $500 per well per month, 93.7% of the actual cost of electricity, taxes
and ongoing maintenance and repairs to operate Bradford JV’s assets. The agreement is for a term of three years and automatically
renews for one year periods until one of the parties notifies the other party not later than 60 days prior to commencement of
a renewal term of its desire to not renew the agreement.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
13 - COMMITMENTS AND CONTINGENCIES (continued)
Participation
Interest Purchase Agreement
On
June 12, 2015, the Company, and each of the other beneficial owners of seventy-three (73) participation interests (“Participation
Interests”) in the Bradford JV (collectively, the “Sellers”) entered into a Participation Interest Purchase
Agreement (“Purchase Agreement”) with Keystone Energy, LLC.
Pursuant
to the terms of the Purchase Agreement, Keystone Energy agreed to purchase, and the Sellers agreed to sell, all of the Participation
Interests representing 100% of the beneficial ownership of (i) those certain oil and gas leases, along with the associated contracts
and real property interests necessary and useful in the ownership and operation thereof, all situated in Shackelford County, Texas
(the “Oil and Gas Leasehold”), (ii) the oil and gas wells located on the Oil and Gas Leasehold, along with the associated
fixtures and personal property, including hydrocarbons produced therefrom (the “Wells”), and (iii) the rights in and
to that certain Farmout Agreement between CEGX and Bluff Creed Petroleum, LLC for a total consideration of $1,825,000.
As
payment in full for the Participation Interests and the Oil and Gas Properties, Keystone Energy agreed to, within 365 days following
execution of the Purchase Agreement, pay to the Sellers the aggregate cash amount of $1,575,000 (the “Cash Purchase Price”).
As to the Company’s twenty (20) Participation Interests, the Purchase Agreement additionally provided that Cardinal would
(i) be presently paid the amount of $250,000 included in the cash purchase amount in consideration of the Company’s assignment
thereunder to Keystone Energy of the beneficial interest in ten (10) of its twenty (20) Participation Interests and (ii) as to
the other ten (10) of the Company’s Participation Interests, exchange the Company’s rights therein to Keystone for
a five (5%) percent equity ownership interest in Keystone Energy. The Participation Interests of all Sellers acquired under the
Purchase Agreement were designated to be and are being held in escrow pending the acquisition of all of the Sellers Participation
Interests or the expiration of the 365 day period, whichever occurs first. As of December 31, 2015, the balance of the cash purchase
amount was $1,075,000 reflecting the balance of the 43 remaining Participation Interests which Keystone Energy remains obligated
to purchase under the terms of the Purchase Agreement.
The
$250,000 received by the Company for the Company’s ten (10) Participation Interests for Keystone’s right to beneficial
enjoyment thereof is not subject to forfeiture by the Company under any circumstances. For financial reporting purposes the Company
has recognized this amount as a component of related party operating revenues during the year ended December 31, 2015.
The
exchange of the other ten (10) Cardinal Participation Interests for a 5% equity interest in Keystone Energy has been reported
as an income tax neutral, tax-deferred, property for property exchange in accordance with applicable provisions of federal income
tax law and was initially recorded as an investment in oil and gas properties valued at it’s fair market value of $250,000.
The
Purchase Agreement further provided that Keystone would deliver to CEGX of Texas, as irrevocable consideration, an initial advance
in an amount of $250,000 for improvements to be made to the Oil and Gas Properties. The amount is not subject to refund or forfeiture
and has been included in related party operating revenues from contract operations during the year ended December 31, 2015.
Finally,
in accordance with the terms of the Purchase Agreement and as of the date thereof, Keystone Energy entered into a Master Loan
Agreement with Maximilian Bradford, LLC (“Maximilian”), a Keystone Energy related party, providing for the loan by
Maximilian to Keystone Energy of the amount of $2,600,000. The proceeds under this loan are to be used for the purchase of the
Participation Interests and the development of the underlying interests in the Bradford “A” and “B” leases.
Upon full repayment by Keystone Energy of the loan, the Company is granted an option to convert its 5% interest in Keystone Energy
into either (i) an undivided 50% of the working interest owned by Keystone Energy in the Oil and Gas Properties, or (ii) a 50%
equity interest in Keystone Energy.
Concurrent
with the Participation Interest Purchase Agreement, Keystone Energy entered into an Operating Agreement with the Company’s
wholly-owned subsidiary, CEGX of Texas, LLC authorizing CEGX of Texas to conduct the drilling operations and related activities
necessary to develop the properties.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
13 - COMMITMENTS AND CONTINGENCIES (continued)
Borets
USA, Inc. f/k/a Borets-Weatherford US, Inc. v. Cardinal Energy Group, Inc.(Case No. 2015-028, 259
th
Judicial District
Shackelford County, Texas)
.
On
March 2, 2015 Borets filed a lawsuit against the Company claiming damages totaling $90,615 in damages for unpaid invoices for
services rendered to the Company. On March 18th 2015, the Company filed an Original Answer and Counterclaim against Borets. The
original answer set forth a general denial, certain specific denials, a verified denial denying the account amount and affirmative
defenses of failure of consideration and offset. The counterclaim contains a cause of action for breach of contract and seeks
$150,000 in damages. Borets has filed a Motion for Summary Judgment seeking to dispose of the counterclaim on behalf of the Company.
No hearing has been set on the motion and the Company will prepare a response if in fact a hearing date is obtained. As of the
date of this report, discovery is ongoing.
CEGX
of Texas, LLC v. Scott Miller, Miller Energy Services, Inc. and US Fuels, Inc. (Case No. CV1543707 91
st
Judicial Court
Eastland County, Texas)
.
The
lawsuit was filed on May 22, 2015. The lawsuit alleges a cause of action against the above named defendants for breach of contract,
breach of fiduciary duty and fraud. This lawsuit concerns the sale of the Company’s property (the Stroebel-Broyles leases
in Eastland County, Texas) by Mr. Miller. Mr. Miller indicated that no one would pay anything for the property, and we agreed
to assign the property for no cash consideration. We subsequently determined that Mr. Miller sold the property for $30,000 and
pocketed all of the funds from the sale. Answers have been filed by each of the defendants. The Company is now in the process
of filing a Motion for Summary Judgment in favor of the Company.
CEGX
of Texas, LLC v. P.I.D. Drilling, Inc.(Case No. 2015-062 259
th
Judicial District Shackelford County, Texas)
.
This
lawsuit was filed by the Company on June 10, 2015 and contains causes of action for breach of contract and also requests an accounting.
The lawsuit is claiming damages for overcharges by PID and also asking that PID be removed as operator after a vote by the non-operating
working interest owners. As of the date of this report an answer has been filed on behalf of PID and the parties have entered
into settlement discussions. If the settlement discussions fail the Company is prepared to request a trial date.
Cardinal
Energy Group, Inc. v. HLA Interests, LLC, Phillip Allen, SEDCO Operating, LLC (“SEDCO”) , ERCO Holdings, Ltd (“ERCO”),
Caleb David Elks, and Michael Cies D/B/A Terlingua Oil Associates, Case No. 2015-059 (District Court of Shackelford County, Texas,
259th Judicial District)
.
The
Company filed this lawsuit against the corporate defendants and the individual members in their personal capacity on June 3, 2015.
The lawsuit stems from a Working Interest Purchase Agreement that the Company entered into on July 3, 2013 with Defendant HLA
Interests (an oil and gas management company that owns and controls existing oil fields in Texas), pursuant to which the Company
agreed to purchase from HLA Interests its 85% working interest in 5 oil and gas leases known as the Dawson-Conway Leases (the
“Leases”) in Shackelford County, Texas (the “Agreement”). The Company was fraudulently induced to enter
into the Agreement by the defendants, who knew that 3 of the 5 leases had expired prior to executing the Agreement.
The
Company agreed to pay $400,000 to HLA Interests for its complete working interest in the 5 Leases, which HLA Interests represented
to be 85%. The Company executed a Note for payment of the $400,000 purchase price, pursuant to which the entire principal balance
is to be paid within 24 months of the date that the Agreement was executed. HLA Interests acquired title to the 5 Leases by Assignment
of Oil and Gas Leases dated December 1, 2011 from Defendant ERCO, as Assignor, to HLA Interests recorded in Volume 552, Page 343
of the Official Records of Shackelford County, Texas (the “ERCO Assignment”). The ERCO Assignment purported to convey
to HLA Interests 85% of 75% net revenue interest on the 5 Leases. Defendant SEDCO was the operator of the 5 Leases.
Defendants
HLA, its Managing Member, Allen, SEDCO, ERCO and Elks all made false representations with the intent to fraudulently induce the
Company into entering into the Agreement. Specifically, prior to entering into the Agreement with the Company, Defendants HLA
Interests and Allen knew that at least 3 of the 5 Leases had expired and that the Company would only be purchasing 2 active Leases.
Defendants SEDCO, as the Operator of the 5 Leases, ERCO, as an assignor of the remaining 15% working interest in the 5 Leases,
and Elks (SEDCO’s Chief Operating Officer and the Managing Member of ERCO) also all knew that 3 of the Leases had expired
and that Defendant HLA did not own a working interest in them free and clear as represented to the Company. All of the Defendants
intentionally failed to disclose this material information to the Company so as to fraudulently induce the Company into entering
into the Agreement.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
13 - COMMITMENTS AND CONTINGENCIES (continued)
As
a direct result of relying upon Defendants HLA, Allen, SEDCO, ERCO and Elk’s intentional and material misrepresentations
and intentional failures to disclose the material facts, the Company suffered damages for which it seeks recovery in this lawsuit.
Further, the false, misleading, and deceptive acts of these Defendants in misrepresenting the true legal status of title to the
5 Leases and the actual working interests prior to the execution of the Agreement, the Operating Agreement, and the March 11,
2014 Assignment are violations of Texas’ Deceptive Trade Practices Act.
Finally,
Defendant Terlingua entered into a Master Land Services Contract with the Company in or about June 2013, whereby Terlingua agree
to provide due diligence services to the Company in furtherance of the Company entering into the Agreement with Defendants HLA
Interests, SEDCO, and ERCO. Pursuant to the Master Land Services Contract, Terlingua agreed to investigate titles and the oil
and gas records to determine the actual legal status of the ownership interests in the 5 Leases, and advise the Company of same.
Terlingua breached its obligations under the Master Land Services Agreement by failing to perform its due diligence investigation
of the titles and working interests in the 5 Leases in a good and workmanlike manner, and failing to discover that at least 3
of the 5 Leases had expired and that the Company would only be purchasing 2 active Leases.
As
a result of all of this, the Company filed a lawsuit asserting claims for breach of contract against Defendants HLA, SEDCO, ERCO,
and Cies/Terlingua; Money had and Received against Defendants HLA, SEDCO, and Cies/Terlingua; Fraud and Fraud by Non-Disclosure
against Defendants HLA, Allen, SEDCO, ERCO, and Elks; and Deceptive Trade Practices against Defendants HLA, SEDCO, and ERCO.
On
August 5, 2015, the Company was granted a Partial Default Judgment for the following:
HLA
Interests, LLC: Judgment on our causes of action for breach of contract, money had and received, fraud, fraud by non-disclosure
and deceptive trade practices;
Phillip
Allen: Judgment on our causes of action for fraud, and fraud by non-disclosure;
Sedco
Operating, LLC: Judgment on our causes of action for breach of contract, money had and received, fraud, fraud by non-disclosure
and deceptive trade practices; and
Judgment
against Erco Holdings, Ltd. for causes of action for breach of contract, fraud, fraud by non-disclosure and deceptive trade practices.
The
Company’s out-of-pocket damages as a result of the claims asserted in this lawsuit have been calculated at $1,735,765. Adding
the claims for attorneys’ fees, and other damages, including punitive damages as a result of the intentional fraudulent
conduct, the Company’s damages exceed $2,000,000.
The
Company was finally able to obtain service on Elks. As of now, Elks, Cies, Erco and Sedco have now filed answers. A hearing and/or
trial will be required to obtain damages against Sedco and Erco.
At
present, we are in the process of attempting to obtain a damages judgment as against Phillip Allen individually and as HLA Interests,
LLC.
The
Company has reached out to all of the parties involved requesting they contact us to enter into settlement discussions on this
matter. In addition, we have forwarded discovery to the various defendants and are awaiting responses to same. As of the date
of this report we have received no responses from any of the defendants in regards to settlement and the Company’s attorneys
are now working with the trial court’s coordinator to set a date for trial.
Edward
A. Mitchell v. Cardinal Energy Group, Inc. and Timothy W. Crawford (Case No. 15CV-04-3538, Franklin County Common Pleas Court)
Mr.
Mitchell filed suit on April 27, 2015, claiming to be owed 200,000 shares of stock that he earned during his brief tenure as Controller
of the Company, as well as additional compensation to which he claims he’s entitled. The Company denies the claims, and
filed a counterclaim to recover damages caused by Mitchell during his tenure for failure to perform his duties and to recover
unauthorized reimbursements he improperly issued. Trial is currently scheduled for April 24, 2016. The parties have held settlement
discussions in this matter but thus far have failed to reach a satisfactory agreement. As of the date of this report discovery
is continuing. The Company has recorded $5,500 in accrued expenses which represents the amount most likely the Company would pay
to settle this lawsuit.
Terrance J. Dunne v. Cardinal Energy
Group, Inc. (Case No. 14-02-04417-2, Spokane County Superior Court of Washington)
On November 10, 2014, Mr. Dunne filed a
suit in Spokane County Superior Court of Washington and alleged the Company owes him $6,000 for services rendered plus an additional
$27,480 for the difference in value of stock that was given to him as compensation. The Company filed an Answer and a Motion to
dismiss based on lack of jurisdiction and subsequently the hearing was cancelled. Management still intends to defend this matter
vigorously. There was no ongoing activity in connection with this case for almost a year. The Company believes that there is a
remote likelihood that this lawsuit will prevail.
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
13 - COMMITMENTS AND CONTINGENCIES (continued)
Other
On
September 11, 2015 Tonaquint, Inc. (“Tonaquint”) filed for arbitration under a Securities Purchase Agreement and Convertible
Promissory Note, claiming that the Company is in default for failing to deliver all earned shares, failing to satisfy the remaining
balance of the note and failing to maintain adequate stock reserves. The Company has answered, denying the claims and asserting
that Company has satisfied its obligations with respect to the Tonaquint Note. Arbitration was scheduled for February 2016 in
Salt Lake City, Utah.
General
The
Company believes that its claims and defenses in the above cases where it is a defendant are substantial for the reasons discussed
above. Litigation is, however, inherently unpredictable. The outcome of lawsuits is subject to significant uncertainties and,
therefore, determining the likelihood of a loss and/or the measurement of any loss is complex. Consequently, we are unable to
estimate the range of reasonably possible loss. Our assessments are based on estimates and assumptions that have been deemed reasonable
by management, but the assessment process relies heavily on estimates and assumptions that may prove to be incomplete or inaccurate,
and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.
The
Company has potential contingent liabilities arising in the ordinary course of business. Matters that are probable of unfavorable
outcomes to the Company and which can be reasonably estimated are accrued. Such accruals are based the Company’s estimates
of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. To date no litigation
has been filed in connection with any of these matters. The Company’s counsel believes that the claims against the Company
are groundless and any damages which may arise from these matters will not be material. Thus there are no contingencies or additional
litigation that require accrual or disclosure as of December 31, 2015.
NOTE
14 - SUBSEQUENT EVENTS
Tonaquint
Arbitration
After
conducting discovery, the parties agreed to settle the issues outstanding prior to the scheduled arbitration hearing. On February
4, 2016 the Company agreed to judgment in the amount of $432,674.41 plus interest at 22% per year (included in convertible
notes payable as of December 31, 2015) and agreed to the entry of summary judgment in Tonaquint’s favor as requested
in Tonaquint’s motion. Tonaquint agreed to accept payment from the Company in the amount of $250,000 as full and complete
satisfaction of the arbitration award but only so long as the Company paid the settlement amount on or before the settlement payment
due date of March 12, 2016. The Company failed to make the required scheduled payment and as of the date of the filing of this
report the parties are still holding discussions on the matter.
Asset
Sale
On
February 12, 2016, the Company sold its facility in Albany, Texas to an unrelated party for a sales price of $130,000. In connection
to this sale, the Company received net proceeds of approximately $98,000, net of closing costs, and additionally the buyer issued
a 5% secured promissory note of $30,000 to the Company. The principal amount is due on March 12, 2019 and accrued unpaid interest
is due monthly.
Litigation
On
March 1, 2016 Iconic Holdings filed suit in San Diego County Superior Court alleging that the Company was in default on a convertible
promissory note and claiming that the Company owes $167,478 in unpaid principal and interest. The Company believes that remaining
outstanding principal under the note is $35,000. As of the filing date of this report the Company has yet to retain counsel or
answer the claims.
Loan
Default
On
March 18, 2016 the Company received notice from counsel representing Power Up Lending Group, Ltd. that it was in default under
the terms of the November 12, 2015 Revenue Based Factoring Agreement. (Please refer to “Loan Payable” in Note 7 for
additional details.)
Cardinal
Energy Group, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE
14 - SUBSEQUENT EVENTS (continued)
Equity
Issued
Subsequent
to the year ended December 31, 2015 the Company issued 2,104,596 shares of common stock, valued at $6,924 for the conversion of
a convertible note payable and accrued interest pursuant to the conversion terms of the note payable.