Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at March 31, 2016, and for all periods presented herein, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s December 31, 2015 audited consolidated financial statements. The results of operations for the periods ended March 31, 2016 and 2015 are not necessarily indicative of the operating results for the full year.

Nature of Operations and Organization

Cardinal Energy Group, Inc. (the “Company”) was incorporated in the state of Nevada on June 19, 2007 under the name Koko, Ltd. for the purpose of developing, manufacturing and selling of a steak timer. 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 acquiring, exploring, 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 & gas production. Its operations were focused in the states of California, Ohio and Texas during 2012 and 2013. In 2014, 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. On February 12, 2016 the Company sold its regional operating complex located in Albany, Texas to a local oil and gas well plugging and abandonment services company for a total consideration of $130,000. In connection with the sale the Company took back a $30,000 note which draws interest at 5% per annum and which matures on February 12, 2019 from the buyer.

The recoverability of the capitalized exploration and development costs for these properties is dependent upon the existence of economically recoverable reserves, the Company’s ability to obtain the necessary financing to complete exploration and development, future positive cash flows from production activities and/or proceeds from the disposition of one or more of such properties.

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.

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 capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized to income.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 March 31, 2016 and December 31, 2015 there were no proved reserves.

In light of the precipitous fall in crude oil prices during the last two years 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 a charge to impairment expense on the income statement for the year ended December 31, 2015.

In December of 2015 the Company employed the services of Bullet Development, a respected oil and gas development firm headquartered in Abilene, Texas, to assess the value and potential development options for its remaining oil and gas properties in north-central Texas, namely the Company-operated Powers-Sanders and Dawson-Conway leases and our non-operating working interest in the Fortune Prospect. Based on the results of the study and the recommendations from Bullet Development we have determined that the best course of action would be to sell our interests in the leases to interested local parties. Accordingly, the Company has held discussions with multiple parties who are interested in acquiring the properties. In the case of the Powers-Sanders leases at least one oil and gas firm has expressed an interest in acquiring the leases in order to exploit some shallow oil reservoirs believed to be present under the properties. In the case of the Dawson-Conway leases initial discussions have occurred between the Company and two interested parties. One of the parties is the operator of adjoining leases and is interested in acquiring one or more of the leases in order to include the Dawson-Conway leases into a “master water flood project” for all of the surrounding leases. Negotiations amongst the various parties are ongoing.

Principles of Consolidation

Our unaudited condensed 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.

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 recorded 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 abandonment liability is accreted with the passage of time to its expected settlement fair value. Revisions to such estimates are recorded as adjustments to ARO 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 was $96,680 and $96,063 as of March 31, 2016 and December 31, 2015, respectively. The Company accreted $3,414 and $3,000 to ARO during the quarters ended March 31, 2016 and 2015, respectively.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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.

Revenue and Cost Recognition

The Company uses the sales method to account for sales of crude oil and natural gas. Under this method, revenues are recognized based on 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 periods ending March 31, 2016 and December 31, 2015 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 oil leases in Texas. 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 agreement, effectively recognizing income on the percentage of completion.

Costs associated with the production of oil and gas (sometimes referred to as “lifting costs”) are expensed in the period incurred.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Accounts Receivable

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 March 31, 2016 and December 31, 2015, no reserve for doubtful accounts was required.

Reclassification of Prior Year Presentation

Certain reclassifications have been made to conform the prior period data to the current presentations. These reclassifications had no effect on the reported results.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU 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 ASU. The amendments are effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments are to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. The Company reclassified debt issuance cost of $9,942 and $26,275 from assets to liabilities and netted off with the related loans in the liabilities as of March 31, 2016 and December 31, 2015, respectively.

New Accounting Pronouncements

Management has considered all recent accounting pronouncements issued since the last audit of our consolidated financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s unaudited condensed consolidated financial statements.

NOTE 2 - GOING CONCERN

The Company’s unaudited condensed 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. As reflected in the unaudited condensed consolidated financial statements, the Company had an accumulated deficit of $21,317,701 at March 31, 2016, a net loss of $7,362,627 and net cash used in operating activities of $112,719 for the three months ended March 31, 2016. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company has historically utilized production revenues and the proceeds from the private sales of common stock and convertible debt instruments to fund its operating expenses. The Company’s negative cash flows from operations, working capital deficit, and its projected costs of capital improvements for 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 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 operations.

In order to continue as a going concern, develop a reliable source of revenues, and achieve a profitable level of operations the Company will need, among other things, additional capital resources. 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. 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. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. These unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

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 March 31, 2016 and December 31, 2015. 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 for the periods reported herein.

The carrying amounts reported in the balance sheets for cash, accounts receivable, loans payable, and accounts payable and accrued expenses, approximate their fair market value based on the short-term maturity of these instruments. The following table presents assets and liabilities that are measured and recognized at fair value as of March 31, 2016 and December 31, 2015, on a recurring basis:

Assets and liabilities at fair value on a recurring basis at March 31, 2016:

Assets and liabilities at fair value on a recurring basis at December 31, 2015:

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of March 31, 2016:

The carrying value of short term financial instruments including cash, 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.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

Depreciation expense for the three months ended March 31, 2016 and 2015 amounted to $10,845 and $16,955, respectively.

During 2016, the Company sold its regional operations facility in Albany, Texas with a net book value worth approximately $123,000 to a third party for a sales price of approximately $130,000. During 2016, the Company also sold various pieces of transportation equipment with a net book value worth approximately $16,000 to a third party for a sales price of approximately $16,000. The depreciation expense related to the sold facility and transportation equipment amounted to approximately $1,200 which is included in the $10,845 above. As a result, the Company realized a gain, net of recording, legal and other transaction costs, on sale of property and equipment of $4,546 during the three months ended March 31, 2016.

NOTE 5 - RELATED PARTY TRANSACTIONS

The Company, through its wholly owned subsidiary, CEGX of Texas, LLC has entered into Contract Operating Agreements with Bradford JV and Keystone Energy, LLC. Under the terms of these agreements, the Company has agreed to perform routine and major operations, marketing services, accounting services, reporting services and other administrative services on behalf of the Bradford JV as necessary to operate Bradford JV’s oil and gas operations on the Bradford “A” and Bradford “B” leases located in Shackelford County, Texas.

The Company has determined that the agreements and the Company’s participation in the Bradford Joint Venture created a related party relationship and as such has reported the billed revenues of $18,591 and $17,500 during the three months ended March 31, 2016 and 2015, respectively and the related accounts receivable of $190,012 and $180,712 at March 31, 2016 and December 31, 2015, respectively as related party transactions in the unaudited condensed consolidated financial statements. Related party payables are nil at March 31, 2016 and December 31, 2015.

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.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 6 - SENIOR SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)

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.

As of March 31, 2016 and December 31, 2015, accrued interest amounted to $675,000 and $540,000 respectively and was included in accounts payable and accrued expenses as reflected in the condensed consolidated balance sheet.

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.

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 workover 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).

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. 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. The Company recorded default interest charges of $7,500 during the three months ended March 31, 2016. As of the date of the filing of this report there has been no further developments.

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.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)

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:

Convertible notes payable

Convertible notes payable outstanding are summarized in the following table:

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. During April 2015, the Company completed an agreement to extend the repayment date to May 10, 2015 and issued 250,000 shares of common stock valued at $55,000 during year 2015 as interest expense. On May 10, 2015, the noteholder agreed to extend the due date for another 45 days and the Company issued 250,000 shares of common stock valued at $52,500 as consideration during the year 2015 as interest expense.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

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 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 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 was 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. This note is currently past due.

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 on 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. This note is currently past due.

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 on 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. This note was fully paid in year 2015.

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.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)

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 on 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 on 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. This note was fully paid in year 2015.

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. 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.

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 on 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. This note is currently past due.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)

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. This note was fully paid in year 2015.

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. This note is currently past due. 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. The prepaid debt issuance costs will be amortized over the term of the note. This note is currently past due. 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 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.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)

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 note 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 the three months ended March 31, 2016, 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.

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 three months ended March 31, 2016 and 2015 the Company recognized $152,860 and $292,258, respectively of amortization of debt discount and prepaid debt issuance cost.

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 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 during year 2015. 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 loss resulting from the increase in fair value of these convertible instruments was $6,874,342 and $260,951 for the three months ended March 31, 2016 and 2015, respectively. During the three months ended March 31, 2016 and 2015, the Company reclassified $16,180 and $0, respectively, to paid-in capital due to the conversion of convertible notes into common stock. At March 31, 2016 and December 31, 2015, the Company recorded derivative liabilities of $9,213,742 and $2,355,580, respectively.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 9 - STOCKHOLDERS’ DEFICIT

Common Stock

At December 31, 2015 the Company had 81,274,961 shares of common stock outstanding.

During the three months ended March 31, 2016, the Company issued 2,104,596 shares of common stock for the conversion of convertible notes payable and accrued interest thereon at a value of $6,924 pursuant to the conversion terms of the notes.

As of March 31, 2016 the Company reported 83,379,557 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 March 31, 2016 and 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 Promissory Notes discussed in Note 6 above.

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. 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 Senior Secured Convertible Promissory Notes. This right will expire, if not terminated earlier in accordance with the provisions of the agreement, on December 31, 2019.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Litigation

Borets USA, Inc. f/k/a Borets-Weatherford US, Inc. v. Cardinal Energy Group, Inc. (Case No. 2015-028, 259th 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 91st 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 259th 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.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)

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, 259 ^th 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 was 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.

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;

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)

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 was originally scheduled for April 24, 2016. The parties have held settlement discussions in this matter but thus far have failed to reach a satisfactory agreement. The Company recorded $5,500 in accrued expenses during the fourth quarter of 2015 which represents the amount most likely the Company would pay to settle this lawsuit. The original trial date of April 26, 2016 has been officially continued, and a new date has not yet been set. Counsel for the Company is scheduling depositions of Mr. Mitchell and Cardinal personnel in July and August, and we expect the trial date to be rescheduled for some time in the fall of 2016. As of the date of this report discovery is continuing.

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.

Iconic Holdings, LLC v. Cardinal Energy Group, Inc. (Case No. 37-2016-00006021-CU-BC-CTL San Diego County Superior Court)

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. The Company has retained counsel to answer the claims. The suit will be stayed pursuant to an arbitration provision in the operative Note Purchase Agreement. The stay has been agreed to between counsel for Iconic and Cardinal and is expected to be signed by the Judge before the end of May 2016.

Tonaquint Arbitration

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.

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

March 31, 2016

NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)

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.

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 requires accrual or disclosure as of March 31, 2016.