NOTE 10. SUBSEQUENT EVENTS
On July 6, 2017, Mr. Rick Wilber agreed to convert his cumulative outstanding debt of $550,000 into 55,000 shares of Petrolia Series A Preferred Stock. The stated value of these shares is $10.00 per share. The outstanding debt included the following: a $350,000 Convertible Secured Note dated June 17, 2013, a $100,000 Convertible Secured Note dated September 30, 2013 and a $100,000 Convertible Secured Note dated December 31, 2013. Subsequent to this conversion, all of the Company’s debt with Mr. Wilber is deemed cancelled and it is no longer due and payable. Mr. Wilber retains both the warrants and shares that were previously issued by the Company related to the original sale of these notes (and their respective amendments).
As described in greater detail in Note 7 above, on July 19, 2017, Jovian converted $2 million of its remaining debt into 12,749,286 shares of the Company’s common stock and 21,510 shares of the Company’s preferred stock. The shares of common stock were priced at $0.14 however based on a market price of $0.104 the book value of the shares is $1,325,926. The Preferred Stock was priced at $10.00 per share with a value of $215,100. Refer to Note 7 for further explanation.
From July 17, 2017 to July 24, 2017 the Company sold an additional 76,510 shares of Preferred Stock valued at $765,100. These sales included 55,000 shares for the conversion of Mr. Wilber’s debt and 21,510 shares for the conversion of the Jovian debt.
FORWARD LOOKING STATEMENTS
This report contains statements which, to the extent that they do not recite historical fact, constitute forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include the words ”may,” ”will,” ”could,” ”should,” ”would,” ”believe,” ”expect,” ”anticipate,” ”estimate,” ”intend,” ”plan” or other words or expressions of similar meaning. We have based these forward-looking statements on our current expectations about future events. The forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations, anticipations and intentions with respect to our financial condition, results of operations, future performance and business, including statements relating to our business strategy and our current and future development plans.
The potential risks and uncertainties that could cause our actual financial condition, results of operations and future performance to differ materially from those expressed or implied in this report include:
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The sale prices of crude oil;
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The amount of production from oil wells in which we have an interest;
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Lease operating expenses;
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International conflict or acts of terrorism;
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General economic conditions; and
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Other factors disclosed in this report.
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Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Many factors discussed in this report, some of which are beyond our control, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from the forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this report as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should read the matters described in “Risk Factors” and the other cautionary statements made in, and incorporated by reference in, this report as being applicable to all related forward-looking statements wherever they appear in this report. We cannot assure you that the forward-looking statements in this report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
Please see the “Glossary of Oil and Gas Terms” on page 11 of our most recent Form 10-K, for a list of abbreviations and definitions used throughout this report.
This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the unaudited financial statements and notes thereto and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “Annual Report”).
Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our consolidated financial statements included above under “Part I - Financial Information” - “Item 1. Financial Statements”.
Unless the context requires otherwise, references to the “
Company,
” “
we,
” “
us,
” “
our,
” “
Petrolia
” and “
Petrolia Energy Corp.
” refer specifically to Petrolia Energy Corp. and its wholly-owned subsidiary.
In addition, unless the context otherwise requires and for the purposes of this report only:
● “
Exchange Act
” refers to the Securities Exchange Act of 1934, as amended;
● “
SEC
” or the “
Commission
” refers to the United States Securities and Exchange Commission; and
● “
Securities Act
” refers to the Securities Act of 1933, as amended.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Background
We were incorporated in Colorado on January 16, 2002.
In February 2012 we decided it would be in the best interests of our shareholders to no longer pursue our original business plan and, in April 2012 we became active in the exploration and development of oil and gas properties.
Effective September 2, 2016, we formally changed our name to Petrolia Energy Corporation, pursuant to the filing of a Statement of Conversion with the Secretary of State of Colorado and a Certificate of Conversion with the Secretary of State of Texas, authorized by the Plan of Conversion which was approved by our stockholders at our April 14, 2016, annual meeting of stockholders, each of which are described in greater detail in the Definitive Proxy Statement on Schedule 14A, which was filed with the Securities and Exchange Commission on March 23, 2016. In addition to the Certificate of Conversion filing, we filed a Certificate of Correction filing with the Secretary of State of Texas (correcting certain errors in our originally filed Certificate of Formation) on August 24, 2016.
As previously reported, although the stockholders approved the Plan of Conversion at the annual meeting, pursuant to which our corporate jurisdiction was to be changed from the State of Colorado to the State of Texas by means of a process called a “Conversion” and our name was to be changed to “Petrolia Energy Corporation”, those filings were not immediately made and the Conversion did not become legally effective until September 2, 2016. Specifically, on June 15, 2016, the Company filed a Certificate of Conversion with the Texas Secretary of State, affecting the Conversion and the name change, and including a Certificate of Formation as a converted Texas corporation; however, the Statement of Conversion was not filed with the State of Colorado until a later date. As a result, and because FINRA and the Depository Trust Company (DTC) had advised us that they would not recognize the Conversion or name change, or update such related information in the marketplace, until we became current in our periodic filings with the Securities and Exchange Commission and they had a chance to review and approve such transactions, we took the position that the Conversion and name change were not legally effective until September 2, 2016.
As a result of the filings described above, and FINRA and the Depository Trust Company (DTC) formally recognizing and reflecting the events described above in the marketplace, the Company has formally converted from a Colorado corporation to a Texas corporation, and has formally changed its name to “Petrolia Energy Corporation”.
Two significant acquisitions were made in 2015 and additional working interests in the same properties were acquired in 2016 and 2017, as described in greater detail in the “Plan of Operation” section below.
Plan of Operation
Since 2015, we have established a clearly defined strategy to acquire, enhance and redevelop high-quality, resource in place assets. We are focused on acquisitions in the southwest United States while actively pursuing our strategy to offer low-cost operational solutions in established Oil and Gas regions. We believe our mix of assets-oil-in-place conventional plays, low-risk resource plays and the redevelopment of our late-stage plays is a solid foundation for continued growth and future revenue growth.
Our strategy is to acquire low risk, conventionally producing oil fields. This strategy allows us to incorporate new technology to minimize risk and maximize the recoverability of existing reservoirs. This approach allows us to minimize the environmental impact caused by exploratory development.
Our activities will primarily be dependent upon available financing.
Oil and gas leases are considered real property. Title to properties which we may acquire will be subject to landowner’s royalties, overriding royalties, carried working and other similar interests and contractual arrangements customary in the oil and gas industry, to liens for current taxes not yet due, liens for amounts owing to persons operating wells, and other encumbrances. As is customary in the industry, in the case of undeveloped properties little investigation of record title will be made at the time of acquisition (other than a preliminary review of local records). However, drilling title opinions may be obtained before commencement of drilling operations.
Minerva-Rockdale Field
The Minerva-Rockdale Field, which is located approximately 30 miles Northeast of Austin, Texas, was first discovered in 1921 and is approximately 50 square miles in size. The main producing formation for this field is the Upper Cretaceous Navarro Group of sands and shale’s. The Navarro is typically subdivided into several producing zones from the uppermost “A” and “B” sands to the lower “C” and “D” sands. The “B” sand is the primary producing zone. These sands are commonly fine grained and poorly sorted and were deposited close to a shoreline during a cycle of marine regression.
In April 2013, the Company entered into a lease pertaining to a 423 acre tract in Milam County, Texas, which is adjacent to the Company’s original 200 acre lease. The Company issued 500,000 shares of its common stock as consideration for a 100% working interest (75% net revenue interest) in such lease.
In August 2013, we became an oil and gas operator and took over the operation of 100% of our wells. As such, we terminated our relationship with RTO Operating, LLC for the day-to-day operations and monitoring of our wells. During 2014, the Company continued to operate its own lease. During the fourth quarter of 2014, the Company hired Jovian Petroleum Corporation (Jovian) to survey the operations and well performance at the Noack field. Their report identified paraffin buildup problems in the well bores and gathering lines as the main production issue for the Company to overcome. In December 2014, the Company signed an operating agreement with Jovian to assume full operational responsibility for the Noack field under a fixed fee agreement of $10,000 per month for full operating field services. On March 1, 2015, the Company hired Zel C. Khan, our current CEO and director, who is the largest stockholder of Jovian, as well as several former employees of Jovian Petroleum. This allowed for the fixed fee agreement with Jovian to end.
During the period from our inception to December 31, 2011, we did not drill any oil or gas wells. During the year-ended December 31, 2012 we drilled and completed six (6) oil wells and during 2013 the Company drilled and completed three (3) wells of which one (1) was converted to an injection well. During 2014 the Company drilled seven (7) new wells. In 2015, six (6) of the wells were completed, five (5) wells produced, one (1) did not produce and one (1) well was not completed. During 2016 and through second quarter end, the Company had thirteen (8) wells producing, (5) wells to workover, with one (1) injection well and one (1) did not produce/one (1) well not completed.
Slick Unit Dutcher Sands (“SUDS”) Field
The SUDS oilfield consists of 2,600 acres located in Creek County, Oklahoma and carries a 7.8% net revenue interest (NRI). The first oil producer was completed in 1918 by Standard Oil of Ohio (“Sohio”), which at that time was owned by John D. Rockefeller. By 1959, approximately 14,000,000 barrels of oil had been recovered at an average well depth of 3,100 feet and over 100 wells in production. Through a series of events, the infrastructure had deteriorated and the field suffered a lot of neglect. Since 2011, Jovian has invested an estimated $1.6 million into the restoration of the field; rebuilding the infrastructure and putting wells back in production. To date, 18 wells have been worked over and 8 are fully operational with considerable reserves remaining.
The Company has approved SUDS well #1, a new infill drill well, to be drilled during the third quarter of 2017, funding permitting.
SUDS 10% Acquisition
The Company acquired a 10% working interest in the SUDS field located in Creek County Oklahoma on September 23, 2015, in exchange for 10,586,805 shares of restricted common stock. Based on the then current market value of our common stock, $0.068 per share, the price paid was $719,903 or $4.77 dollars per barrel of oil (Bbl). Through this transaction, the Company increased its reserve base by approximately 151,000 Bbls of (1P) proven reserves. Concurrently with the purchase, Jovian agreed to assign to the Company the right to be the operator of record of the SUDS field, governed by an American Association of Professional Landmen (AAPL) standard Joint Operating Agreement (JOA).
SUDS 90% Acquisition
On the effective date of September 28 2016, the Company acquired a 90% net working interest in the SUDS field as a result of two separate agreements, Purchase and Sale Agreement and the Share Exchange Agreement, both between the Company and Jovian.
The Company issued two notes for a combined value of $4,000,000 in exchange for a cumulative 50% working interest in SUDS. A Promissory Note to Jovian for $1,000,000 was executed bearing interest at 5% and due on December 31, 2016 related to the acquisition of a 50% working interest in the SUDS field. The Promissory Note is secured by a 12.5% undivided working interest in the SUDS field. In addition, a Production Payment Note was executed for the same 50% working interest in the SUDS field. This note was for $3,000,000, paid out of twenty percent (20%) of the 50% undivided interest of net revenues received by the Purchaser that is attributable to the SUDS field assets. The Production Payment Note is secured by a 12.5% undivided working interest in the SUDS field.
The Company issued 24,308,985 shares of its restricted common stock to Jovian to acquire an additional 40% working interest ownership of SUDS. The purchase price of the shares equates to a $4,373,186 value, based on the $0.1799/share market price of our common stock on September 28, 2016 (the effective date of the transaction).
Jovian Petroleum Corporation converted their outstanding $4,000,000 of debt in two tranches, a $2,000,000 first tranche on May 30, 2017 and a $2,000,000 second tranche on July 19, 2017. Although the two transactions occurred in different reporting periods, the two transactions were contemplated together, and they were accounted for as one extinguishment that was accomplished in two tranches, the first in May 2017 and the second in July 2017.
Tranche 1
- On May 30, 2017, Jovian Petroleum Corporation converted $2 million of their $4 million debt into 10 million shares of the Company’s common stock. The $2 million debt included a $1 million Promissory Note and $1 million of the $3 million Production Payment Note as well as interest payable of $33,151.
Tranche 2
- On July 19, 2017, Jovian Petroleum Corporation converted $2 million of their remaining debt (outstanding under a Production Payment Note) into 12,749,286 shares of the Company’s common stock and 21,510 shares of the Company’s Preferred Stock.
The consideration for the debt extinguished consisted of the following:
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10 million shares of common stock were valued using the market price on the date of issuance of $0.14 per share ($1,400,000)
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Warrants to purchase 6 million shares of common stock with an exercise price of $0.20 per share based on a $0.12 valuation, volatility of 293%, a discount rate of 1.09% and warrants to purchase 4 million shares of common stock with an exercise price of $0.35 per share based on a $0.12 valuation, volatility of 293%, and a discount rate of 1.09%. All warrants expire in 3 years. The 6 million warrants were valued at $709,776 while the 4 million warrants were valued at $471,104, totaling $1,180,880.
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12,749,286 shares of common stock were valued using the market price on the date of issuance of $0.104 per share ($1,325,926).
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The Preferred Stock was valued at $10.00 per share, the cash price paid by third party investors for the same stock with an aggregate value of $215,100.
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The combination of the two transactions resulted in an $88,755 loss which is recognized in the second quarter of 2017. The extinguishment of tranche 2 will be recognized in the third quarter, with no impact on the statement of operations.
Twin Lakes San Andres Unit (“TLSAU”) Field
TLSAU is located 45 miles from Roswell, Chavez County, New Mexico and consists of 4,864 acres with 130 wells. The last independent reserve report prepared by MKM Engineering on December 31, 2016, reflects approximately 2.7 million barrels of proven oil reserves remaining for the 100% working interest (of which we hold a 40% working interest). During 2016 and through second quarter end, the field had ninety (90) total wells, five (5) were producing, as allowed by permit with thirty-two (32) requiring workovers and an additional fifty (50) will serve as injection wells as needed and permits are acquired. As of December 31, 2016 Petrolia was the operator of the TLSAU field (through an agreement with BSNM described below). As of the date of this report, Petrolia owns a 100% working interest in the field.
TLSAU 15% Acquisition
On November 4, 2015, the Company acquired a 15% net working interest in the TLSAU field located in Chavez County, New Mexico (the “Net Working Interest”) and all operating equipment on the field. Through this transaction, the Company increased its reserve base by approximately 384,800 Bbls of (1P) proven reserves. The Company was also assigned all rights to be the operator of the TLSAU unit under a standard operating agreement.
The total purchase price for the acquisition of the net working interest and equipment rights was $196,875 or $0.52 per barrel of oil (Bbl) and was paid to Blue Sky NM, Inc. (“BSNM”). The Company paid $50,000 in cash and gave a promissory note in the amount of $146,875. The $50,000 was paid by the CEO of the Company for the benefit of the Company and recorded as a shareholder advance. Subsequently, the $50,000 advance was converted into 800,000 shares of common stock at $0.06 per share and warrants to purchase 800,000 shares of common stock that expire in three (3) years. In addition, a $1.3 million face value note payable to BSNM was purchased for $316,800 [the “BSNM Note”] (6,000,000 shares of common stock at $0.0528 per share). With the inclusion of the note receivable, the price per barrel would be $1.33 dollars per barrel oil (Bbl).
TLSAU 25% Acquisition
On September 1, 2016 the Company acquired an additional 25% working interest ownership in the TLSAU field through the issuance of 3,500,000 shares of its restricted common stock to an unrelated party. The purchase price of the shares equates to a $350,000 value, based on the $0.10 per share market price of Petrolia’s shares on September 1, 2016. After the purchase, the Company owns a total working interest ownership of 40%. Included in the purchase price was the write off of $32,288 in outstanding accounts receivable to Petrolia. The final purchase price allocation of the transaction is as follows: oil and gas properties acquired $424,540, asset retirement obligations assumed of $42,252.
TLSAU 60% Acquisition
Effective February 12, 2017, the Company acquired an additional 60% net working interest in the TLSAU in connection with the execution of a Settlement Agreement on February 12, 2017. The agreement assigned Dead Aim Investments’ (“Dead Aim”) 60% ownership interests to the Company. As a result of this transaction, Petrolia now owns 100% working interest in TLSAU. Consideration of $433,500 was given in exchange for Dead Aim’s working interest. The consideration includes the forgiveness of the BSNM Note of $316,800 (with a $1.3million face value) and the write off of $116,700 of Dead Aim’s outstanding accounts receivable to Petrolia. Dead Aim assumed liability (prior to the acquisition) for the OPBE note that Petrolia purchased.
Askarii Resources, LLC
Effective February 1, 2016, the Company acquired 100% of the issued and outstanding interests in Askarii Resources LLC (“Askarii”), a private Texas based oil & gas service company. The Company acquired Askarii by issuing one (1) million restricted shares of common stock. Based on the then market value of the Company’s common stock at $0.05 per share, the aggregate value of the transaction is $50,000.
Askarii, while dormant for the last few years, has a significant history with major oil companies providing services both onshore and offshore- Gulf of Mexico. Using Askarii, the Company plans to engage in the oil field service business as well as the leasing of field related heavy equipment. It is also contemplated that Askarii will research various enhanced oil recovery (EOR) technologies and methods which it can use for the benefit of the Company’s oil fields.
Results of Operations/Liquidity and Capital Resources
Revenues & Costs – Three months ended June 30, 2017 compared to the three months ended June 30, 2016
Our oil and gas revenue reported for the quarter ended June 30, 2017 was $41,831, an increase of $7,537 from the prior year’s quarter of $34,294. Our increased revenue for the quarter ended June 30, 2017 as compared with the prior year’s quarter is due to increased production at the Noack field. Our equipment sales for the quarter ended June 30, 2017 were $0, compared to the prior year’s quarter of $18,000. This was because 2016 was the first year for the Company to have equipment sales and the Company has not had any additional equipment sales since 2016.
Operating Expenses
Operating expenses increased to $1,028,326 for the quarter ended June 30, 2017 from $384,504 for the quarter ended June 30, 2016. Our major expenses for the quarter ended June 30, 2017 were professional services of $55,891 and stock based compensation (directors) of $604,670, all included in general and administrative expenses. In comparison, major operating expenses for the quarter ended June 30, 2016 were professional services of $117,432, stock based compensation (directors) of $34,342 and salaries and wages of $77,209, all included in general and administrative expenses. Additionally, lease operating expenses increased $60,217 to $123,119 for the quarter ended June 30, 2017, compared to $62,902 for the quarter ended June 30, 2016, due to numerous workovers at SUDS and TLSAU and additional labor hired and contracted to maintain the TLSAU and SUDS fields.
Other Expenses
Total other expense was $275,651 for the quarter ended June 30, 2017 compared to total other expense of $70,648 for the quarter ended June 30, 2016. The increase was due to increased interest expense and loss on conversion of Jovian debt. Interest expense increased to $187,557 due to the conversion of ORRI (as described in Note 5 to the financial statements included herein) and interest related to the Jovian Promissory note (as described above). Loss on conversion increased to $88,755 and is attributable to the Jovian debt conversion.
Net Loss
Net loss for the quarter ended June 30, 2017 was $1,262,146 compared to a net loss of $402,859 for the quarter ended June 30, 2016 due to the factors described above.
Revenues & Costs – Six months ended June 30, 2017 compared to the six months ended June 30, 2016
Revenues
Our oil and gas revenue reported for the six months ended June 30, 2017 was $75,391, an increase of $18,098 from the prior year’s six months ended June 30, 2016, revenue of $57,293. Our increased revenue for the six months ended June, 30, 2017 as compared to the prior year’s period is due to increased production at the Noack field and the acquisition of working interests in the SUDS and TLSAU fields during the end of 2016 and 2017. Our equipment sales for the six months ended June 30, 2017 were $0, a decrease of $198,000 from the prior six month’s revenue of $198,000. This was because 2016 was the first year for the Company to have equipment sales and it has not had any additional equipment sales in 2017.
Operating Expenses
Operating expenses increased to $1,452,189 for the six months ended June 30, 2017 from $823,241 for the six months ended June 30, 2016. Our major expenses for the six months ended June 30, 2017 were professional services of $90,769, stock based compensation (directors) of $673,949 and deferred salaries of $89,954, all included in general and administrative expenses. In comparison, major operating expenses for the six months ended June 30, 2016 were professional services of $196,097, stock based compensation (directors) of $134,467, and salaries and wages of $158,523, all included in general and administrative expenses.
Our lease operating expenses increased from $107,803 for the six months ended June 30, 2016 to $240,672 for the six months ended June 30, 2017, due to numerous workovers at SUDS and TLSAU and additional labor hired and contracted to maintain the TLSAU and SUDS fields.
Other Expenses
Total other expense was $348,618 for the six months ended June 30, 2017 compared to total other expense of $136,853 for the six months ended June 30, 2016. The increase was due to increased interest expense and loss on conversion of Jovian debt. Interest expense increased to $260,669 due to the conversion of ORRI and interest related to the Jovian Promissory note as described in greater detail in Note 7 to the financial statements included herein. Loss on conversion of debt increased to $88,755 for the six months ended June 30, 2017 compared to $14,336 for the six months ended June 30, 2016 and was attributable to the Jovian debt conversion for the six months ended June 30, 2017.
Net Loss
Net loss for the six months ended June 30, 2017 was $1,725,416 compared to a net loss of $704,801 for the six months ended June 30, 2016 due to the factors described above.
Liquidity and Capital Resources
Our sources and (uses) of funds for the six months ended June 30, 2017 were:
Cash provided (used) in operations
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$
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(529,466
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)
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Purchase of fixed asset
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(9,256
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)
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Proceeds from shareholder advances
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206,500
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Proceeds from issuance of common and preferred stock
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289,000
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Payments of shareholder advances
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$
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(14,000
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)
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Overview of Cash Flow Activities:
Net cash used by operating activities was $529,466 for the six months ended June 30, 2017 and net cash used in operating activities was $81,971 for the six months ended June 30, 2016. The increase was due primarily to the increase in net loss, an increase in working capital requirements and newly acquired fields with higher cumulative lease operating expenses. This was partially offset by a delay in the accounts payable cycle (increased days outstanding) and deferred interest on short term debt.
Net cash used by investing activities for the six months ended June 30, 2017 was $9,256 compared to net cash provided by investing activities of $16,998 for the six months ended June 30, 2016. The decrease was primarily due to proceeds received from the sale of equipment in the previous period.
Net cash provided by financing activities was $475,786 and $83,390 for the six months ended June 30, 2017 and 2016, respectively. The increase from 2016 to 2017 was due to a year-over-year increase in advances from affiliates and proceeds from the sale of Preferred Stock as described in greater detail below.
As of June 30, 2017, we had total current assets of $26,249 and total assets in the amount of $13,498,274. Our total current liabilities as of June 30, 2017 were $1,802,192. We had negative working capital of $1,775,943 as of June 30, 2017. Our material asset balances are made up of oil & gas properties and related equipment. Our most significant liabilities include related party notes, ARO and accruals for professional services. One note totaling $2,000,000 which was outstanding with Jovian was converted into Preferred Stock as described in greater detail below under Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and another related party note in the amount of $550,000 was outstanding with Rick Wilber, however, on July 6, 2017, Mr. Rick Wilber agreed to convert his cumulative outstanding debt of $550,000 into 55,000 shares of Preferred Stock. Additionally, there is $117,000 of shareholder advances outstanding and other short term debts that are temporarily funding working capital shortfalls. See “Note 6 – Notes Payable” to our audited financials included in our Annual Report, for further details regarding our outstanding notes payable.
The Company continues to operate at a negative cash flow of approximately $50,000 per month and our Auditors have raised a going concern issue in their latest audit report. Management is pursuing several initiatives to secure funding to increase production at both the SUDS and Twin Lakes fields which together with anticipated increases in the price of crude oil may reduce Company’s monthly cash shortfall. The total amount required by the Company to accomplish this objective is approximately $250,000, which funding may not be available on favorable terms, if at all.
The Company has suffered recurring losses from operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. We plan to increase revenues by drilling productive oil or gas wells. However, we will need to raise additional funds to drill new wells through the sale of our securities, through loans from third parties or from third parties willing to pay our share of drilling and completing the wells. We do not have any commitments or arrangements from any person to provide us with any additional capital. If additional financing is not available when needed, we may need to cease operations. There can be no assurance that we will be successful in raising the capital needed to drill oil or gas wells nor that any such additional financing will be available to us on acceptable terms or at all. Any wells which we may drill may not be productive of oil or gas. Management believes that actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern; no adjustments to the financial statements have been made to account for this uncertainty.
Effective April 11, 2017, the Company initiated a $2,000,000 Series A Convertible Preferred Stock (“Preferred Stock”) offering at a price of $10.00 per share (the “Offering”), as described in greater detail in Note 5 to the financial statements included herein. During the second quarter of 2017, 120,590 shares of Preferred Stock or $1,205,900 of the offering amount has been sold to accredited investors. As of July 19, 2017, all $2,000,000 of Preferred Stock subject to the Offering had been sold with 24,100 shares of Preferred Stock being sold for $241,000, 132,500 shares of Preferred Stock being issued in connection with Debt Conversion Agreements discussed below in the aggregate amount of $1,325,000 and 43,400 shares of Preferred Stock being issued in connection with the conversion of SUDS ORRI working interests in the amount of $434,000 (as discussed below).
Critical Accounting Policies and New Accounting Pronouncements
See Note 2 to the financial statements included as part of our Annual Report on Form 10-K, for the year ended December 31, 2016, filed with the Securities and Exchange Commission on April 17, 2017 for a description of our critical accounting policies and the potential impact of the adoption of any new accounting pronouncements.