Notes
to the Consolidated Financial Statements
December
31, 2016 and 2015
NOTE
1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations and Organization
Cardinal
Energy Group, Inc. (the “Company”) was incorporated in the State of Nevada on June 19, 2007 under the name Koko, Ltd.,
for the purpose of developing, manufacturing and selling 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 from Koko, Ltd. to Cardinal Energy Group, Inc. on October 10, 2012 in connection with this acquisition.
Following
the acquisition of the oil and gas operations on September 28, 2012, the Company engaged in the exploration, development, exploitation
and production of oil and natural gas in the states of Ohio, California and Texas. On November 11, 2013, the Company organized
a wholly owned subsidiary corporation, CEGX of Texas, LLC (“CEGX of Texas”) to conduct all oil and gas activities.
During 2014 management decided to focus oil and gas operations exclusively within the State of Texas and on June 10, 2015 the
Company moved its executive offices from Dublin, Ohio to Abilene, Texas. The Company has moved its headquarters to Dallas,
Texas.
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.” During the years ended December 31, 2016 and 2015 High Performance had no operations. The
corporation is currently inactive, and it is unable to be active until delinquent taxes have been filed. High Performance Energy
Fuel Corporation has been designated as “Void/delinquent” as of March 7, 2017.
The
Company closed Continental Energy, LLC, a Limited Liability Company organized in Ohio, on October 4, 2018. The LLC had no historical
operations
and filed no tax returns prior to being
closed
.
During
2015, the Company closed and liquidated Red Bird Social, LLC. The entity was organized in Florida on August 28, 2013. The LLC
never had any operations and was liquidated by the Company on April 8, 2015
.
In
2016 the Company was pursuing oil and gas acquisition and development operations primarily focusing on properties in which we
held an operating or non-operating leasehold interest. In February 2016, the Company closed its Abilene, Texas office and relocated
its executive offices to Upper Arlington, Ohio. In October 2017 new management determined that the Company could not continue
to pursue oil and gas operations based upon the financial results realized during the periods ending in 2014 through 2016.
Our
previous operations, undertaken during the period including the third quarter of 2014 to the second quarter of 2016, were focused
on growth via the development of shallow proven undeveloped reserves in or adjacent to currently producing fields, exploiting
untapped “behind the pipe” reserves by recompleting existing well bores in zones overlying currently producing formations
and by the selected application of water flood and other secondary recovery techniques to mature but marginally producing fields
throughout north-central Texas. The Company differentiated itself in the marketplace by focusing on smaller older oil and gas
properties that have been allowed to deplete because of multiple changes in ownership or due to a lack of capital required to
maintain production rates. These properties generally feature simple vertical well completions which typically produce from relatively
shallow (in most cases from 400 ft. to 2,000 ft. below the surface) reservoirs. Through the October of 2016 we sold our crude
oil through the efforts of CEGX of Texas.
Subsequent
to the October 2016 the Company initiated a major change in the planned operations. The change included a new management team.
The management has focused upon filing current and delinquent reports, required to allow the common stock to trade freely. Additionally,
management has refined the business strategy with a plan to move from developing and operating in the energy industry. Management
plans to focus on obtaining minerals in place and relying on other organizations to provide development and operating support.
Basis
of Presentation and Use of Estimates
These
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in United States
of America which requires 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.
Principles
of Consolidation
Our
consolidated financial statements include the accounts of Cardinal Energy Group, Inc. and our wholly owned subsidiaries, CEGX
of Texas, Inc. and High Performance Energy Fund Corporation. 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 Cardinal can 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 we do not have the ability to exert significant
influence.
Cash
and Cash Equivalents
Cash
and cash equivalents are all highly liquid investments with an original maturity of three months or less at the time of purchase
and are recorded at cost, which approximates fair value. The Company places its cash with a high credit quality financial institution.
The Company’s accounts at this institution are insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to $250,000. As of December 31, 2016, the Company had not reached bank balances exceeding the FDIC insurance limit. To reduce
its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the
financial institution in which it holds deposits.
Allowance
for Doubtful Accounts
Historically
the Company’s accounts receivable have been recorded using the direct write-off method. Generally accepted accounting principles
(GAAP) require that companies use the allowance method when preparing financial statements, therefore we have adopted the allowance
method as of December 31, 2016. Under the allowance method, open accounts receivable are analyzed by management to estimate
the likelihood that there are uncollectible accounts within the receivable balance. The estimate of what the uncollectible amount
would be is shown as a contra account offsetting gross accounts receivable. The changes in accounting policy had no effect
on the Company’s financial reporting, as no amounts were written off during the year ended December 31, 2016 and 2015 and
the allowance for doubtful accounts was $0 as of December 31, 2016 and 2015.
Oil
and Gas Properties
The
Company has elected to apply the full cost method of accounting for oil and natural gas properties, whereby all costs incurred
in connection with the acquisition, exploration for and development of petroleum and natural gas reserves were 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 plus asset retirement costs.
In applying the full cost method, the Company performs an impairment test (ceiling test) at each reporting date, whereby the carrying
value of oil and gas property and equipment is limited to the “estimated present value” of the future net revenues
from its proved reserves, discounted at a 10-percent interest rate and based on current economic and operating conditions, plus
the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs
being amortized, less the income tax effects related to any book and tax basis differences of the properties.
Disposition
of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment
would significantly alter the relationship between capital costs and proved reserves of oil and gas, in which case the gain or
loss is recognized to income.
Under
the full cost method of accounting for oil and natural gas, depletion and depreciation is applied to proven reserves as portion
of the cost of production.
Calculations
included in estimating the future value of oil and gas properties include the anticipated costs of developing any proved reserves.
Oil and gas reserves are converted to a common unit of measure based on the energy content of 6,000 cubic feet of gas to one barrel
of oil. Costs of unevaluated properties are not included in the costs subject to depletion. These costs are assessed periodically
for impairment. As of December 31, 2016, and 2015 there were no proved reserves.
Property
and Equipment
Property
and equipment are valued at cost and depreciated over their estimated useful lives, generally 3 to 5 years, using the straight-line
method. Additions are capitalized, and maintenance and repairs are charged to expense as incurred. When assets are sold, retired,
or disposed of, the cost and accumulated depreciation are removed, and any resulting gains or losses, after any proceeds, are
included in the consolidated statement of operations. As of December 31, 2016, the Company had disposed of or completely depreciated
all fixed assets, including furniture, equipment, leasehold improvements and building assets except for 2 pickup trucks on hand
at December 31, 2016 (see Note 5).
Valuation
of Long-Lived Assets
The
Company follows ASC 360 regarding the valuations and carrying values of its long-lived assets. Long-lived tangible assets and
definite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. The Company uses an estimate of undiscounted future net cash flows
of the assets over the remaining useful lives in determining whether the carrying value of the assets is recoverable. If the carrying
values of the assets exceed the expected future cash flows of the assets, the Company recognizes an impairment loss equal to the
difference between the carrying values of the assets and their estimated fair values. The Company recorded impairment losses in
the amounts of $372,513 and $2,654,824 during the years ended December 31, 2016 and 2015, respectively
Stock-based
Compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718, “Compensation —
Stock Compensation” (“ASC 718”), which requires recognition in the consolidated financial statements of the
cost of employee and director services received in exchange for an award of equity instruments over the period the employee or
director is required to perform the services in exchange for the award (presumptively, the vesting period). ASC 718 also requires
measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value
of the award.
Pursuant
to ASC Topic 505-50, “Equity Based Payments to Non-employees”, for share-based payments to consultants and other third-parties,
compensation expense is determined at the measurement date. The expense is recognized over the vesting period of the award. Until
the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation
expense based on the fair value of the award at the reporting date.
Earnings
(Loss) per Share
Basic
earnings (loss) per share (“EPS”) is calculated by dividing the Company’s net earnings (loss) applicable to
common stockholders by the weighted average number of common shares during the period. Diluted EPS assumes the exercise of stock
option and warrants and the conversion of convertible debt, provided the effect is not antidilutive. The effect of computing diluted
loss per share is anti-dilutive and, as such, basic and diluted loss per share is the same for the years ended December 31, 2016
and 2015.
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 record a corresponding increase in the carrying amount
of the related long-lived asset. The asset retirement obligation primarily relates to the abandonment of oil and gas properties.
The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of oil and gas properties
and is depleted over the useful life of the asset. The settlement date fair value is discounted at our credit adjusted risk-free
rate in determining the abandonment liability. The 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. 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. See
Notes 4 and 11.
Investments
– Short-term
The
Company’s available-for-sale securities consist of investments in marketable securities. The Company carries its investment
at fair value based upon quoted market prices. Unrealized holding gains (losses) on available-for-sale securities are excluded
from earnings and reported as accumulated other comprehensive gain (loss), a separate component of stockholders’ equity
(deficit), until realized. The Company recorded unrealized gains (losses) of $(12,320) and $(38,500) during the years ended December
31, 2016 and 2015, respectively. Accumulated Other Comprehensive Losses were $2,199,120 and $2,186,800, as of December 31, 2016
and 2015, respectively.
Equity
Investments
The
Company accounts for its investments in companies subject to significant influence using the equity method of accounting, under
which, the Company’s pro-rata share of the net income (loss) of the affiliate is recognized as income (loss) in the Company’s
income statement. The Company also records its share of the change in equity of the affiliate in the Company’s income statement
and is added to the investment on the balance sheet. Distributions received from the affiliate are treated as a return of
capital and are deducted from the carrying value of the investment.
During
the year ended March 31, 2016 the Company obtained a 20% interest in the Bradford Joint Venture in exchange for $100 and obtained
an additional 27% interest in the Bradford Joint Venture in exchange for the extinguishment of a $123,924 related party receivable
(see Note 4). Under the equity method, the Company recorded their pro-rata share of the Bradford Joint Venture net loss, resulting
in a loss from equity investment of $1,511 being recognized in the statement of operations for the year ended December 31, 2016.
Additionally, as of December 31, 2016 the Company determined they would not be able to recover the carrying amount of the investment,
therefore there was a decrease in value that was other than temporary. This loss in investment value of $122,513 was recorded
as impairment expense in the statement of operations for the year ended December 31, 2016.
Income
Taxes
The
Company accounts for income taxes pursuant to the provisions of ASC 740-10, “Income Taxes” which requires, among other
things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for
which management believes it is more likely than not that the net deferred asset will not be realized.
The
Company also follows the provisions of ASC 740-10 related to accounting for uncertain income tax positions. When tax returns are
filed, some positions taken may be sustained upon examination by the taxing authorities, while others may be subject to uncertainty
about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the
guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based
on all available evidence, management believes it is more likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other
positions. As of December 31, 2016, and 2015, the Company has had no uncertain tax positions. The Company recognizes interest
and penalties, if any, related to uncertain tax positions as general and administrative expenses. The Company currently has no
federal or state tax examinations nor has it had any federal or state examinations since its inception. The Company’s 2016,
2015, 2014, and 2013 tax years may still be subject to federal and state tax examination.
Concentration
During
the year ended December 31, 2016 sales to one customer represented 100% of the Company’s net revenues. During the year ended
December 31, 2015 sales to two customers represented approximately 92% of the Company’s net revenues. As of December
31, 2016, the Company had no accounts receivable balance and as of December 31, 2015, the Company had one customer representing
100% of the accounts receivable – related party balance.
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 the 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 ended December 31, 2016 and 2015 there were
no such differences.
CEGX
of Texas, LLC, the Company’s subsidiary, has agreed with the Bradford JV 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.
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. If 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.
Reclassifications
Certain
amounts from prior periods have been reclassified in these financial statements to conform the prior period data to the current
year classification and presentation.
During
the year ended December 31, 2016 the Company retroactively adopted the provisions of ASU 2015-03, “Interest – Imputation
of Interest” (Subtopic 835-30) which focuses on simplifying the presentation of debt issuance costs. The amendments in this
update required 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 were not affected by the amendments in this update. As a result of the Company’s adoption of ASU
2015-03, during the year ending December 31, 2016 the following prior period balances were retroactively adjusted:
|
|
|
As
of December 31, 2015
|
|
|
|
|
As
Originally Presented
|
|
|
Adjustment
|
|
|
As
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses - debt issuance costs,
net – current portion
|
|
$
|
20,774
|
|
|
$
|
(
20,774
|
)
|
|
$
|
-
|
|
|
Non-current
– prepaid debt issuance costs, net
|
|
$
|
5,501
|
|
|
$
|
(5,501
|
)
|
|
|
-
|
|
|
Convertible
notes, net – current portion
|
|
$
|
(1,061,725
|
)
|
|
$
|
20,774
|
|
|
$
|
(1,040,951
|
)
|
|
Convertible
notes,
net
|
|
$
|
(87,818
|
)
|
|
$
|
5,501
|
|
|
$
|
(82,317
|
)
|
Recent
Accounting Pronouncements
In
January, 2016, the FASB issued ASU 2016-01 which requires an entity to: (i) measure equity investments at fair value through net
income, with certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities
measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form
of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and;
(v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities in combination with
other deferred tax assets. The Update provides an election to subsequently measure certain nonmarketable equity investments at
cost less any impairment and adjusted for certain observable price changes. The Update also requires a qualitative impairment
assessment of such equity investments and amends certain fair value disclosure requirements. The new standard takes effect in
2018 for public companies. Early adoption is only permitted for the provision related to instrument-specific credit risk and the
fair value disclosure exemption provided to nonpublic entities.
The
Company is currently in the process of assessing the impact the adoption of this guidance will have on the Company’s consolidated
financial statements.
In
February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying
leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase by
the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on
a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability
for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less
will be accounted for similar to existing guidance for operating leases. The new guidance will be effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period and is applied retrospectively.
Early adoption is permitted. The Company is currently in the process of assessing the impact the adoption of this guidance will
have on the Company’s consolidated financial statements.
In
April, 2016, the FASB issued ASU 2016-09 to simplify accounting for stock compensation. It focuses on income tax accounting, award
classification, estimating forfeitures, and cash flow presentation. The ASU also provides certain accounting policy alternatives
to nonpublic entities. The ASU becomes effective in 2017 for public companies and in 2018 for all other entities. Early adoption
is permitted. Certain disclosures and detailed transition provisions apply. The Company is currently in the process of assessing
the impact the adoption of this guidance will have on the Company’s consolidated financial statements.
On
June 20, 2018, the FASB issued ASU 2018-07,
Improvements
to Nonemployee Share-Based Payment Accounting
, as part of its ongoing Simplification Initiative
to expand the scope of Topic 718 to include share-based payments issued to nonemployees. This ASU supersedes Subtopic 505-50 by
expanding the scope of Topic 718 to include nonemployee awards and generally aligning the accounting for nonemployee awards with
the accounting for employee awards. The effective date for public companies is for fiscal years beginning after December 15, 2018,
and interim periods within those fiscal years.
The Company is currently in the process of assessing the impact the adoption
of this guidance will have on the Company’s consolidated financial statements.
There
were no other new accounting pronouncements issued during the years ended December 31, 2016 and 2015, and through the date of
filing of this report that the Company believes are applicable to or would have a material impact on the consolidated financial
statements of the Company.
NOTE
2 - GOING CONCERN
The
Company’s consolidated financial statements are prepared using accounting principles generally accepted in the United States
of America applicable to a going concern, which contemplate the realization of assets and the liquidation of liabilities in the
normal course of business. The Company has historically utilized revenues from the sale of crude oil and natural gas, contract
drilling and operating services, the proceeds from the private sales of common stock and/or convertible debt instruments to fund
its operating expenses. Currently, with the decline in the price of oil since 2014, the loss through foreclosure of the Bradford
leaseholds and the disposition of fixed real and personal assets management is planning to reduce all unnecessary overhead expenses
while the Company attempts to recapitalize. To this end, management is seeking operating capital infusions through the sale of
preferred stock. Additionally, management is negotiating with major creditors with the hope of exchanging liabilities for equity
and in some cases seeking legal relief from contracts that the Company has alleged are usurious. The success of any of the undertakings
is not assured.
Management
is engaging legal counsel to advise them on approaches to the convertible obligations.
Currently,
the Company’s lack of cash flows from operations, the substantial working capital deficit and the projected cost of capital
investments in oil and gas exploration and development raise substantial doubt about its ability to continue as a going concern.
The Company has not yet established an adequate ongoing source of operating revenues sufficient to cover its operating costs and
to allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company
obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital,
it could be forced to cease operations.
The
Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which
contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the consolidated financial statements, the Company had an accumulated deficit of $39,817,131 at December 31, 2016,
a net loss of $25,862,057 and net cash used in operating activities of $241,547 for the year ended December 31, 2016. These
factors raise substantial doubt about the Company’s ability to continue as a going concern.
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, substantial additional capital resources.
Management’s
plans to continue as a going concern include the filing of financial documents required by government agencies and by public markets
where their stock will be traded, raising additional capital through the procuring of debt and the sale of equity securities (including
both common and preferred stock) in both public and private transactions. Management plans to utilize the expertise of more experienced
consultants to evaluate opportunities which the Company may consider regarding future operations. 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. Our audited financial
statements at December 31, 2016 do not include any adjustments that might be necessary should the Company be unable to continue
as a going concern.
NOTE
3 - FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC
820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market
participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs
to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company
classifies fair value balances based on the observability of those inputs.
U.S.
generally accepted accounting principles provide for a three-level hierarchy of inputs to valuation techniques used to measure
fair value, defined as follows:
|
|
Level
1:
|
Inputs
that are quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access.
|
|
|
|
|
|
|
Level
2:
|
Inputs
other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly,
for substantially the full term of the asset or liability, including:
|
|
|
-
|
quoted
prices for similar assets or liabilities in active markets;
|
|
|
-
|
quoted
prices for identical or similar assets or liabilities in markets that are not active;
|
|
|
-
|
inputs
other than quoted prices that are observable for the asset or liability; and
|
|
|
-
|
inputs
that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
Level
3:
|
Inputs
that are unobservable and reflect management’s own assumptions about the inputs market participants would use in pricing
the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions
surrounding the timing and amount of expected cash flows).
|
The
following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that
were accounted for at fair value as of December 31, 2016 and 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 an input, or even a particular input, to the fair value measurement requires judgment and may
affect the valuation of fair value assets, liabilities and their placement within the fair value hierarchy levels. There were
no transfers between fair value hierarchy levels as of December 31, 2016 and 2015.
The
Company has determined that financial instruments that are of a short-term nature (cash, accounts receivable, accounts payable,
notes payable, etc.) have a book value that approximates fair value. The following table presents assets and liabilities that
are measured and recognized at fair value as of December 31, 2016 and 2015, on a recurring basis:
Assets
and liabilities at fair value on a recurring basis at December 31, 2016:
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
$
|
18,480
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18,480
|
|
|
Total
|
|
$
|
18,480
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18,480
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
|
|
-
|
|
|
|
-
|
|
|
$
|
23,716,831
|
|
|
$
|
23,716,831
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,716,831
|
|
|
$
|
23,716,831
|
|
Assets
and liabilities at fair value on a recurring basis at December 31, 2015:
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
$
|
30,800
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30,800
|
|
|
Total
|
|
$
|
30,800
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30,800
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
|
|
-
|
|
|
|
-
|
|
|
$
|
2,355,580
|
|
|
$
|
2,355,580
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,355,580
|
|
|
$
|
2,355,580
|
|
The
following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of December
31:
|
|
|
2016
|
|
|
2015
|
|
|
Balance,
beginning of year
|
|
$
|
2,355,580
|
|
|
$
|
382,836
|
|
|
Excess
of fair value over debt discount
|
|
|
-
|
|
|
|
2,577,683
|
|
|
Debt
discount in connection with conversion option of debentures and detachable warrants
|
|
|
-
|
|
|
|
931,181
|
|
|
Extinguished
derivative liability
|
|
|
(16,542
|
)
|
|
|
(826,901
|
)
|
|
Change
in fair value of derivative liabilities
|
|
|
21,377,793
|
|
|
|
(709,219
|
)
|
|
Balance,
end of year
|
|
$
|
23,716,831
|
|
|
$
|
2,355,580
|
|
The
carrying value of short-term financial instruments including cash, accounts receivable, prepaid expense, loans payable, accounts
payable, accrued expenses and short-term borrowings approximate fair value due to the short period of maturity for these instruments.
The long-term debentures payable approximates fair value since the related rates of interest approximate current market rates.
NOTE
4 - OIL AND GAS PROPERTIES
The
Company has held and explored oil and gas leases in Texas. The oil and gas leases were classified as unproved properties at December
31, 2016 and 2015 due to the absence of sustained commercial levels of oil and gas production from the properties.
Dawson-Conway
& Powers-Sanders Leases
In
July 2013, the Company purchased an 85% working interest and 75% net revenue interest in the Dawson-Conway leases located in Shackelford
County, Texas, for a purchase price of $400,000. The Company initially issued a promissory note in the amount of $400,000 to finance
the purchase, that amount was initially reduced to $340,000 during March of 2014 and subsequently reduced to zero as the result
of litigation filed by the Company in 2015 (see Note 7 for additional details). The Company has reflected these actions as adjustments
(reductions) to the cost basis of the leases (Oil and gas properties). On March 11, 2014 the Company purchased the remaining 15%
working interest in Dawson Conway Leases property for a cash payment of $30,000. On June 30, 2015 the Company announced that it
had settled the dispute with Concho Oilfield Services (“Concho”) over services provided by Concho. As a part of the
settlement Concho agreed to re-enter the #5B well on the Dawson-Conway 195B lease to repair damage to the wellbore and production
string and to return the well to production. In July 2015 Concho did return to the #5B well and commenced jarring and fishing
operations in an attempt to repair the well. These operations did not result in success and the well remains shut-in at this time.
In June 2015 the Company filed suit in the District Court for Shackelford County against HLA Interests, LLC and SEDCO (a
former operator of the Dawson-Conway leases) alleging misrepresentation and fraud concerning title to the leases and non-compliance
regarding regulations and permitting requirements of the Texas Railroad Commission (the department tasked with administering and
regulating oil and gas development in the State of Texas).
On
March 5, 2014, the Company acquired a 100% working interest (80% net revenue interest) in the Powers-Sanders lease located in
Shackelford County, Texas for $600,000. The property consists of 385 acres and 5 producing oil wells. The property has been shut-in
since August of 2015 due to mechanical downhole issues. In December 2015, the Company assessed the potential development options
for the Powers-Sanders lease and decided to suspend operations at the Powers-Sanders leases pending the eventual sale of the property.
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 determined that the best course
of action would be to sell our interests in the leases to interested local parties. Accordingly, the Company held discussions
with multiple parties interested in acquiring the properties; however, no agreements were reached. The talks stalled and, to relieve
the Company of remediation responsibilities, the Powers-Sanders and Dawson-Conway leases were transferred to an operator in good
standing with the Railroad Commission of Texas in August 2017 (see Note 14).
Stroebel-Broyles
Leases
On
March 6, 2014, the Company acquired a 100% working interest in the Stroebel-Broyles leases located in Eastland County, Texas for
$75,000. We held a 76.0% net revenue interest in the Broyles lease and a 78.0% net revenue interest in the Stroebel lease. The
property consisted of 235 acres and 32 wells. The Company disposed of its working interests in the Stroebel-Broyles leases during
the first quarter of 2015. The Company assigned its interests in the leases to two local companies in exchange for the assumption
of the plugging and abandonment liability associated with the thirty-two wells located on the properties. The disposition was
in keeping with the Company’s decision to focus its drilling and development activities in other areas of north-central
Texas.
Bradford
Leases
On
June 16, 2014, we acquired a 93.75% working interest in the Bradford “A” and Bradford “B” leases (“Bradford
Leases”) located in Shackelford County, Texas for $225,000 pursuant to the terms of Purchase & Sale and Farmout agreements.
At the time of the acquisition the property consisted of 320 acres with 7 producing wells. Under the terms of the Farmout Agreement
our wholly-owned subsidiary, CEGX of Texas, LLC, was obligated to spud the initial “Earning Well” by September 15,
2014. The initial well was part of a “continuous drilling program” which afforded the Company the opportunity to earn
additional 2-acre producing units on the Bradford leases by drilling and completing injection and production wells. The property,
which heretofore had never been water flooded, had two tank batteries. On September 2, 2014 the Company sold its interests in
the Bradford “A” and Bradford “B” leases to the Bradford Joint Venture Partnership (“Bradford JV”)
for $325,000. At the time of the sale neither the parent company nor CEGX of Texas, LLC held any ownership in Bradford JV, however,
the Company’s wholly-owned subsidiary, CEGX of Texas, LLC, was engaged by Bradford JV as an operator under a Contract Operating
Agreement to provide turn-key drilling and production services.
In
late December 2014, the Company purchased 20 participation interests (“Equity Units”) in Bradford JV on the same terms
as offered to the public and initial investors, valued at $25,000 per Equity Unit, for a total of $500,000.
On
June 12, 2015, the Company
entered into a Participation Interest Purchase Agreement
with Keystone Energy, LLC (“Keystone”). In June 2015, the Company received $250,000 for the Company’s
ten (10) Equity Units providing for Keystone’s right to beneficial enjoyment which is not subject to forfeiture
by the Company under any circumstances. For financial reporting purposes the Company recognized this amount as a component of
related party operating revenues during the year ended December 31, 2015. The Company also transferred ten (10) Equity
Units for a 5% equity interest in Keystone.
Throughout
2015 and into the second quarter of 2016 the Company worked with representatives of the purchaser to design and install a pilot
water flood program on the Bradford “A” and Bradford “B” leases. Due to delays in receiving funding from
Keystone, work was sporadic and finally ground to a halt in the second half of 2016. On June 12, 2016 the Company re-acquired
its 20 Equity Units in the Bradford JV for $100 following the expiration of the 365-day “Escrow Period” per the terms
of the Participation Interest Purchase Agreement between Bradford JV participation interests and Keystone Energy, LLC and CEGX
of Texas, LLC. Additionally, during the third quarter of 2016, the balance of $123,924 in related party receivables
(representing un-reimbursed drilling, development and production costs incurred by the Company on behalf of the Bradford JV) was
extinguished in exchange for 27 Equity Units in the Bradford JV, representing the remaining un-sold interests of the Bradford
JV. (See Note 1).
In
February of 2017 the lessor of the Bradford Leases filed a lawsuit to have the leases returned for lack of production greater
than 90 days. As a result of a judgment the lessor was able to subdivide the Bradford Leases and thirteen were leased to another
operator. The Bradford JV remained responsible for seven Bradford Leases, which were not transferred until they were reassigned
to another operator in April 2018 (see Note 14).
Fortune
Prospect
On
September 2, 2014, we acquired a 43.75% working interest (32.375% net revenue interest) in the Fortune prospect located in Shackelford
County, Texas for a cash payment of $80,000. P.I.D. Drilling, Inc. (“PID”) served as the operator for the property.
The prospect consists of leasehold interests in five tracts of land aggregating just over 310 acres. During the fourth quarter
of 2014 a plugged well on the Fortune Prospect was re-drilled and completed in the Caddo limestone formation. Additionally, two
new wells were drilled in the Cooke sandstone formation. The remote location of the lease caused delays in getting electricity
to the location, obtaining approval for hook-up to a natural gas pipeline and the delivery and installation of tank batteries
and associated production equipment. The lease came on production in January 2015 and production peaked at just under 25 barrels
of oil equivalent (“BOE”) per day. Production from the three wells has steadily declined from its peak to approximately
3 BOE per day during the third quarter of 2015.
Following
the initial completion of the three producers, the Company asked for a full accounting of the drilling costs and requested a refund
for excess charges billed by the operator. In March 2015 the Company received refunds totaling $40,000 from the operator. The
refunds were treated as a reduction in our cost basis of the property. In June 2015 the Company filed suit against PID
in the District Court for Shackelford County seeking recovery of damages, however, a final judgment was awarded to PID
on November 8, 2017 and, on December 19, 2017, the Judge signed an Amended Order of Sale to satisfy the Judgment,
which resulted in the Company having to give up its working interest and rights to the Fortune prospect to settle amounts owed
(see Note 13 and 14).
Bradford
West Lease
On
December 31, 2014 the Company acquired a 100% working interest (77% net revenue interest) in the Bradford West lease for a cash
payment of $20,000. The prospect comprising 200 acres is located adjacent to and just to the west of the existing Bradford “A”
and “B” leases. During the second quarter of 2015, the Company drilled the initial well (Bradford West #1). The results
from this well were disappointing and the Company elected not to continue the drilling program. The well was suspended and the
lease and well were subsequently transferred to the previous owners during the fourth quarter of 2015.
Impairment
The
Company considered the fall in crude oil prices over time and the relatively small production volumes, if any, from the Company’s
leases and based on management’s review of the carrying value of oil and gas properties, management determined that there
was sufficient evidence that the cost of their acquired oil and gas properties would not be fully recovered as of December 31,
2016 and 2015. Accordingly, the Company determined that an adjustment to the carrying value of these properties was required and
recognized an impairment expense of $250,000 and $2,654,824 during the years ended December 31, 2016 and 2015, respectively. The
impairment expense equals the difference between the carrying values of the oil and gas properties and their estimated recoverable
fair values.
ARO
Asset
In
accordance with ASC 410, Asset Retirement and Environmental Obligations, the Company capitalizes an asset retirement cost (“ARO
Asset”) by increasing their oil and gas asset by the same amount as their asset retirement obligation (“ARO”)
upon the initial recognition of the ARO. The ARO asset is allocated to expense ratably over its estimated useful life. During
the years ended December 31, 2016 and 2015 the Company allocated $11,248 and $3,093 to expense.
The
Company regularly evaluates the retirement activities that are required to be performed to reclaim their oil and gas properties.
Management concluded, as of December 31, 2016, that no such requirements existed, therefore they reduced their ARO Asset and ARO
liability (see Note 11) to zero and recognized a loss of $48,978 in the Gain (Loss) on Retirement of Assets in their Statement
of Operations related to the ARO Asset.
Summary
Activity
for the Company’s oil and gas assets during the year ending December 31, 2016 can be summarized as follows:
|
|
|
Unproven
Properties
|
|
|
ARO
Asset
|
|
|
Total
Oil and Gas
Properties
|
|
|
Balance
December 31, 2015
|
|
$
|
250,000
|
|
|
$
|
60,226
|
|
|
$
|
310,226
|
|
|
Depreciation
|
|
|
-
|
|
|
|
(11,248
|
)
|
|
|
(11,248
|
)
|
|
Impairment
|
|
|
(250,000
|
)
|
|
|
-
|
|
|
|
(250,000
|
)
|
|
Loss
on derecognition
|
|
|
-
|
|
|
|
(48,978
|
)
|
|
|
(48,978
|
)
|
|
Balance
December 31, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE
5 - PROPERTY AND EQUIPMENT
The
following is a summary of property and equipment - at cost, less accumulated depreciation, as of December 31, 2016 and 2015:
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
Office
equipment
|
|
$
|
-
|
|
|
$
|
63,235
|
|
|
Computer
hardware and software
|
|
|
-
|
|
|
|
26,652
|
|
|
Leasehold
improvements
|
|
|
-
|
|
|
|
25,453
|
|
|
Transportation
equipment
|
|
|
90,018
|
|
|
|
132,622
|
|
|
Building
|
|
|
-
|
|
|
|
110,699
|
|
|
|
|
|
90,018
|
|
|
|
358,661
|
|
|
Less:
accumulated depreciation
|
|
|
(42,743
|
)
|
|
|
(114,583
|
)
|
|
|
|
$
|
47,275
|
|
|
$
|
244,078
|
|
Depreciation
expense for the years ended December 31, 2016 and 2015 amounted to $49,760 and $63,294, respectively.
During
2016, the Company sold its regional operations facility in Abilene, Texas with a net book value of $123,325 to a third party for
a sales price of $130,000. The Company sold various pieces of transportation equipment with a net book value of $5,026 to a third
party for a sales price of approximately $16,000. The Company also disposed of additional property and equipment with net book
values totaling $18,692. As a result, the Company realized a loss, net of recording, legal and other transaction costs, on the
sale of property and equipment of $1,043 in 2016.
During
2015, the Company sold a truck with a net book value worth approximately $35,000 to third parties for a sales price of approximately
$28,000 and settled the equipment purchase contract payable of $28,000, realizing a loss on sale of assets of approximately $7,000.
The depreciation expense related to the sold truck amounted to approximately $7,000 which is included in the $63,294 above.
NOTE
6 - SENIOR SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
12%
Senior Secured Convertible Promissory Notes Principal, in default, net of $0 debt discount
|
|
$
|
4,500,000
|
|
|
$
|
4,500,000
|
|
|
Accrued
Interest
|
|
|
1,080,000
|
|
|
|
540,000
|
|
|
|
|
$
|
5,580,000
|
|
|
$
|
5,040,000
|
|
During
the fiscal year ended December 31, 2014, the Company issued senior secured convertible promissory notes in an aggregate principal
amount of $4,500,000 (the “Senior Secured Convertible Notes”) together with common stock purchase warrants (the “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 as part
of a private placement offering. The Senior Secured Convertible Notes bear interest at a rate of 12.0% per annum until they matured
on December 15, 2015 or were converted. The note was secured by senior secured interest in the assets of the Company’s working
interests 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.
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.
In
connection with the issuance of the convertible promissory notes, the Company issued detachable warrants granting the holders
the right to acquire an aggregate of 1,800,000 shares of the Company’s common stock for $1.00 per share. The warrants expire
on December 31, 2019. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount
of $519,286 to additional paid-in capital and as a discount against the notes. The Company valued the warrants in accordance with
ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 2 years, an average risk-free
interest rate of 0.69%, a dividend yield of 0% and volatility of 238.45%. The debt discount attributed to the value of the warrants
issued was amortized over the notes’ maturity and recorded to amortization of debt discount.
During
the year ended December 31, 2016 and 2015 the Company amortized $0 and $295,128, respectively, to current operations as amortization
of debt discount under other expenses.
Through
the end of December 2014, the Company had prepaid $515,000 in commissions and fees related to the financing. During the years
ended December 31, 2016 and 2015, the Company amortized prepaid debt issuance cost of $0 and $294,163, respectively, to interest
expense.
The
Company failed to make the $270,000 semi-annual interest payments due to the noteholders for 2016 and 2015 and failed to pay off
the loan at the December 31, 2015 maturity date, as such the notes are in default. 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 notes 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 to be reported as a theoretical default of the Senior Secured Convertible
Promissory Notes. These embedded derivatives included conversion features. The accounting treatment of derivative financial instruments
requires the Company to record the fair value of the derivatives as of the inception date of the Senior Secured Convertible Promissory
Note and to adjust the fair value as of each subsequent balance sheet date (see Note 8).
NOTE
7 – LOAN PAYABLE, EQUIPMENT PURCHASE CONTRACTS PAYABLE, NOTES PAYABLE, AND CONVERTIBLE NOTES PAYABLE
Loan
Payable
Loan
payable outstanding at December 31, 2016 and 2015 consisted the following:
|
|
|
December
31,
2016
|
|
|
December
31,
2015
|
|
|
Principal
and interest due on loan payable obtained in November 2015 of $172,800, net of debt discount of $0 and $36,759, respectively,
payable over 273 days, beginning on November 18, 2015 with daily payments of $633 [1]
|
|
$
|
178,727
|
|
|
$
|
119,584
|
|
|
Principal
and interest due on loan payable, obtained on August 16, 2016 for $25,000, due on August 16, 2017, with simple interest accrual
of 8% [2]
|
|
|
25,751
|
|
|
|
-
|
|
|
Principal
and interest due on loan payable obtained on September 16, 2016 for $50,000; due on September 15, 2017, with simple interest
accrual of 8% [3]
|
|
|
51,173
|
|
|
|
|
|
|
Principal
and interest due on loan payable, obtained on December 15, 2016 for $25,000, due in 12 months (August 16, 2017), with simple
interest accrual of 8% [4]
|
|
|
16,056
|
|
|
|
-
|
|
|
Total
Loans Payable
|
|
$
|
271,707
|
|
|
$
|
119,584
|
|
[1]
The loan of $172,800 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. During the year ended December 31, 2016 the Company recorded $35,642 of
interest expense on this note and made payments of $13,257. In March 2016, the Company received a default notice from the lender,
Power Up Lending Group, and the lender filed a lawsuit against the Company (see Note 13).
[2]
During the year ended December 31, 2016 the Company received proceeds of $25,000 from this unsecured loan, recorded interest
of $751, and made no payments on the borrowing.
[3]
During the year ended December 31, 2016 the Company received proceeds of $50,000 from this unsecured loan, recorded interest
of $1,173, and made no payments on the borrowing.
[4]
During the year ended December 31, 2016 the Company received proceeds of $16,000 from this unsecured loan, recorded interest
of $56, and made no payments on the borrowing. The Company obtained the remaining proceeds of $9,000 from this unsecured loan
in April of 2017.
Equipment
Purchase Contracts Payable
Between
June 2014 and September 2014, the Company entered into equipment purchase contracts in the aggregate amount of $100,285 in connection
with the acquisition of three pieces of transportation equipment. The contracts bear interest ranging approximately from 9% to
10% per annum and are secured by a lien on the transportation equipment. Each of the contracts require 60 equal monthly payments.
During the year ended December 31, 2015, the Company sold one piece of transportation equipment and they used the sales proceeds
to pay off the remaining balance due of approximately $25,000. During the year ending December 31, 2016 the Company made payments
of $5,058 on their contracts payable.
Notes
payable — short and long term portion consisted of the following:
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
Total
equipment purchase contract payable
|
|
$
|
51,168
|
|
|
$
|
56,226
|
|
|
Less:
current portion – equipment purchase contract payable, in default
|
|
|
(51,168
|
)
|
|
|
(13,721
|
)
|
|
Long
term portion – equipment purchase contract payable
|
|
$
|
-
|
|
|
$
|
42,505
|
|
Notes
Payable
Note
issued in July 2013:
In
July 2013, the Company purchased an 85% working interest and 75% net revenue interest in certain oil and gas leases covering 618
acres of land located in Shackelford County, Texas (the “Dawson-Conway Leases”) for a purchase price of $400,000.
The Company issued a promissory note in the amount of $400,000 to finance the purchase (the “HLA Note”). The promissory
note interest at 6% per annum, was due two years from issuance and was secured by the Dawson-Conway Leases.
During
March of 2014, pursuant to property title related issues, the note was reduced to $340,000 but all other terms of the note agreement
remained unchanged. The reduction was treated as an adjustment to the purchase price of the properties.
On August 5, 2015, a partial default judgement was awarded in favor of the Company relieving the
Company of any responsibility for repayment of the HLA Note. Accordingly, the Company removed the HLA Note from the liability
section of the balance sheet and treated the outstanding balance of $340,000 as a reduction to the carrying value of the
properties as of December 31, 2015.
Note
issued on September 11, 2014:
On
September 11, 2014, the Company issued a 90-day promissory note to an unrelated entity in the amount of $120,000. The Company
received $120,000 in cash. Under the terms of the note, the Company issued 50,000 shares of restricted common stock as a prepayment
of interest and agreed to pay an additional $15,000 of interest on maturity of the note. The stock that was issued was valued
at $0.70 per share based upon the trading value of the stock
when issued, resulting in a credit to common stock of $35,000
which was amortized over the 90 days to maturity of the note. During January 2015, the Company paid the interest by issuing 30,000
shares of common stock valued at $12,000.
Convertible
Notes Payable
Convertible
notes payable outstanding at December 31, 2016 and 2015 are summarized in the following table:
|
|
|
December
31,
2016
|
|
|
December
31,
2015
|
|
|
Principal
and interest due on $145,000 convertible note, in default, net of debt discount of $0 and $24,031 at December 31, 2016
and 2015, respectively [1]
|
|
$
|
967,692
|
|
|
$
|
155,619
|
|
|
Principal
and interest due on $340,000 convertible note, in default, net of debt discount of $0 at December 31, 2016 and 2015 [2]
|
|
|
515,867
|
|
|
|
431,092
|
|
|
Principal
and interest due on $110,000 convertible note, in default, net of debt discount of $0 at December 31, 2016 and 2015 [3]
|
|
|
13,171
|
|
|
|
4,521
|
|
|
Principal
and interest due on $100,000 convertible note, in default, net of debt discount of $0 and $1,277 at December 31, 2016 and
2015, respectively [4]
|
|
|
60,000
|
|
|
|
38,190
|
|
|
Principal
and interest due on $55,000 convertible note, net of debt discount of $1,168 and $15,351 at December 31, 2016 and 2015, respectively
[5]
|
|
|
53,027
|
|
|
|
24,861
|
|
|
Principal
and interest due on $55,500 convertible note, net of debt discount of $1,240 and $16,279 at December 31, 2016 and 2015, respectively
[6]
|
|
|
58,361
|
|
|
|
36,954
|
|
|
Principal
and interest due on $85,000 convertible note, net of debt discount of $3,793 and $21,272 at December 31, 2016 and 2015, respectively
[7]
|
|
|
43,483
|
|
|
|
26,004
|
|
|
Principal
and interest due on $60,000 convertible note, in default, net of debt discount of $0 and $1,333 at December 31, 2016 and 2015,
respectively [8]
|
|
|
257,760
|
|
|
|
57,679
|
|
|
Principal
and interest due on $110,000 convertible note, in default, net of debt discount of $0 and $12,469 at December 31, 2016
and 2015, respectively [9]
|
|
|
546,447
|
|
|
|
279,057
|
|
|
Principal
and interest due on $121,000 convertible note, in default, net of debt discount of $0 and $48,812 at December 31, 2016 and
2015, respectively [10]
|
|
|
154,567
|
|
|
|
75,271
|
|
|
Principal
and interest due on $57,750 convertible note, in default, net of debt discount of $0 and $39,340 at December 31, 2016 and
2015, respectively [11]
|
|
|
102,059
|
|
|
|
20,295
|
|
|
Reclassification
adjustment for debt issuance costs (see Note 1)
|
|
|
-
|
|
|
|
(26,275
|
)
|
|
Total
principal and interest including default interest and penalties
|
|
|
2,772,434
|
|
|
|
1,123,268
|
|
|
Less:
Current portion of convertible notes
|
|
|
(2,772,434
|
)
|
|
|
(1,040,951
|
)
|
|
Total
long-term portion of convertible notes
|
|
$
|
-
|
|
|
$
|
82,317
|
|
[1]
Convertible Note originally issued during fiscal 2013 and replaced on May 8, 2015:
On
May 8, 2015, a convertible debenture offering issued during fiscal 2013 was converted into a 10-month, 12% convertible note payable
of $145,000. The Company analyzed the convertible debts for derivative accounting consideration under ASC 815 “Derivatives
and Hedging” and determined that derivative accounting was not applicable at inception. During the year ended December 31,
2015, the Company repaid by cash $15,000 of these convertible notes payable and issued 69,697 shares of common stock to convert
an additional $23,000 of principal
.
During
the year ended December 31, 2015, noteholders of the remaining balance of these convertible notes payable entered into an
assignment agreement and assigned their debts to another noteholder. On May 8, 2015, the Company issued a ten-month 12%
convertible promissory note payable of $145,000 to a new unrelated entity. The repayment of the note was due on or before
March 8, 2016, ten months after the issue date of the note. The repayment is subject to the convertible features of the note.
The creditor has a conversion obligation allowing it to convert the notes during the pendency of the note , but repayment in
cash is not expected. At the option of the note holder, the Company may repay the note by issuing restricted common stock,
based upon a valuation formula, which includes a calculation based upon lesser of a) $0.40; or, b) 70% of the lowest volume
weighted average price (“VWAP”) during the immediate 10 days prior to the date of the conversion notice. On
November 25, 2015, the conversion price was changed to lesser of a) $0.40 or b) 60% of the lowest trading value during the 20
days immediately preceding the conversion. Due to the variable conversion price, the embedded conversion feature was
accounted for as a derivative as of December 31, 2016. (See Note 8 ).
[2]
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 was due 180 days after the funds were received. The repayment was subject to the convertible features
of the note. The creditor had a conversion option allowing it to choose to receive repayment of the stated principal either in
cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash, the Company is required
to pay principal of $340,000.
At
the option of the note holder, the Company may repay the note by issuing restricted common stock based upon a valuation formula,
including a calculation based upon 75% of an average of the Company’s common stock, based upon 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 which the Company recorded as prepaid debt issuance cost. The prepaid debt issuance cost has been 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.
The warrants will expire on September 29, 2017.
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 were valued at $107,500 which was charged to interest during the year
ended December 31, 2015. The Company completed a third extension, for which it paid $5,000 for legal fees incurred by the note
holder. Because the note was in default the Company and the note holder agreed to arbitration in 2016. On February
16, 2016 the Company and the note-holder, following arbitration, agreed to binding award of $432,675 to be paid (with interest)
to the note-holder, Tonaquint, Inc. (see Note 13). As of December 31, 2016, the award is unpaid and the Company has accrued
interest based upon the interest rate included in the arbitration award of 22%.
[3]
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,
LG Capital Funding, LLC. Under the terms of the note, the Company received $95,000. The Company paid $5,000 as 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 was 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 could repay the note by issuing restricted common stock based upon the conversion terms,
including 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. In 2017 the note-holder filed a lawsuit against the Company and was awarded a judgment in December 2018.
The full amount of the judgment has been accrued here as of December 31, 2016 (see Note 14).
[4]
Convertible Note issued on January 12, 2015:
On
January 12, 2015, the Company issued a 10% one-year promissory note payable of $100,000, due January 12, 2016, to an unrelated
entity, Iconic Holdings, LLC (“Iconic”). 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 would have been 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 terms, including
a calculation based upon 35% discount to the lowest closing price during the immediate 15 days prior to the date of the conversion
notice. In February of 2016, as a result of the note going into default, the note holder filed a complaint against the Company.
Following arbitration in December of 2016 the parties entered into a Settlement Agreement wherein the Company agreed to pay Iconic
$60,000 (see Note 13). The liability was paid subsequent to December 31, 2016.
[5]
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 to 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, two years
after the funds were received. The repayment is subject to the convertible features of the note. The creditor has an option 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 convert the repayment of the note by issuing restricted
common. 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 is 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.
[6]
Convertible Note issued on January 28, 2015:
On
January 28, 2015, the Company issued a two-year 12% convertible promissory note payable of $55,500, due January 28, 2017 to an
unrelated entity. Under the terms of the note, the Company received $50,000 and was charged an original issue discount of $5,500.
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. If payment is made in common stock of
the Company, the conversion price assigned to the common stock is to be 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.
[7]
Convertible Note issued on March 18, 2015 and August 27, 2015:
On
March 18, 2015, the Company issued a two-year 12% convertible promissory note payable of up to $250,000 to an unrelated entity.
On March 18, 2015 and August 27, 2015, the Company received funding under the note of $60,000 and $25,000, respectively, for a
total of $85,000. The repayment of the notes are both due two years after the funds were received. Under the terms of the note,
the Company received $72,500 and the difference between the consideration received and the funded amount was made up of 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. 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.
[8]
Convertible Note issued on April 6, 2015:
On
April 6, 2015, the Company issued a nine-month 10% convertible promissory note payable of $60,000, due January 6, 2016 to an unrelated
entity. Under the terms of the note, the Company received $54,750 and was charged an original issue discount of $5,250. 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 date 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 of a discount based upon 55% of the lowest two closing price
during the immediate 25 days prior to the date of the conversion notice.
[9]
Convertible Note issued May 21, 2015:
On
May 21, 2015, the Company issued a ten-month 12% convertible promissory note payable of $110,000 to 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 calculated at 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 was amortized over the term of the note. 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.
[10]
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. 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.
[11]
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, LG Capital Funding, LLC,
with a face amount of $57,750. The note contains an original issue discount of $5,000 and bears interest on the face amount at
the rate of 8% per annum. The loan is due on July 17, 2016 and includes a convertible feature that allows the note holder to be
paid in common stock of the Company. Any shares converted by the note holder will be valued at 60% of the lowest trading value
during the 20 days immediately preceding the conversion. The note may be prepaid within 90 days of issuance at 110% of the principal
amount plus accrued interest, and at 120% of principal plus accrued interest if prepaid after 90 days from the date of issuance
but before 180 days of such date. The note may not be prepaid after 180 days. In the event of a default under the note, interest
accrues at the rate of 24% per annum. In the event the Company fails to deliver shares of its common stock upon conversion within
the time frames provided for in the note, the Company is subject to a $250 penalty per day increasing to $500 per day beginning
on the 10th day after the prescribed delivery date. Further, in the event the Company is no longer current in its SEC filings
for a period of six months or more, the conversion price shall be the lowest closing bid price during the delinquency period.
In 2017 the noteholder filed a lawsuit against the Company and was awarded a judgment in December 2018. The full amount of
the judgment has been accrued here as of December 31, 2016 (see Note 14).
Convertible
Notes Excluded from Table:
Convertible
Note issued January 16, 2015
:
On
January 16, 2015, the Company issued an 8% short-term promissory note payable of $114,000, due October 13, 2015, with an unrelated
entity. Under the terms of the note, the Company received $110,000 and was charged an original issue discount of $4,000. The repayment,
if not completed within 180 days may, at the option of the note holder, be repaid in common stock of the Company. After 180 days,
the creditor will have a conversion option allowing it to choose to receive repayment of the stated principal and interest either
in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash, during the 180-day
prepayment period, the repayment will be 130% of the principal and any accrued interest. At the option of the note holder, the
Company may repay the note by issuing restricted common stock based upon the conversion term, which includes a calculation based
upon a 35% discount of the average of the lowest three trading price during the 10 days prior to the date of the conversion notice.
During the year ended December 31, 2015, this note was fully converted into shares of the Company’s common stock, resulting
in a $-0- balance as of December 31, 2015.
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. During the year ended December 31, 2015, this note was partially converted into shares
of the Company’s common stock and the remainder of the balance was paid in cash, resulting in a $-0- balance as of December
31, 2015.
Common
stock issued to convert convertible notes payable
During
the year ended December 31, 2016, the Company issued an aggregate of 2,154,596 shares of common stock to various noteholders upon
the conversion of a total of principal and interest of $6,924. (See Note 9)
During
the year ended December 31, 2015, the Company issued an aggregate of 45,489,374 shares of common stock to various noteholders
upon the conversion of a total of principal and interest of $620,607. (See Note 9)
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 because the effective conversion price was less than the fair value of the Company’s common
stock in accordance with ASC 470-20-25. Therefore, the portion of proceeds allocated to the convertible notes of $931,181 was
determined to be the value of the beneficial conversion feature and was recorded as a debt discount and is being amortized over
the term of the notes.
For
the year ended December 31, 2016 and 2015 the Company recognized $207,052 and $1,007,573, respectively of amortization of debt
discount. For the year ended December 31, 2016 and 2015, the Company recognized $26,275 and $135,663 of amortization of prepaid
debt issuance cost, respectively, which was recorded in interest expense.
NOTE
8 – DERIVATIVE LIABILITIES
The
Company evaluated whether 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 convertible notes issued
in fiscal 2016 and earlier (see Note 7) include a variable conversion price based on the closing bid prices of the Company’s
common stock which cause the embedded conversion options to be accounted for as derivative liabilities. Additionally, the Company
determined that the terms of the warrants granted on September 22, 2014 in connection with the issuance of a convertible note
and warrants granted on February 25, 2015 to the note holder of the Senior Secured convertible note (see Note 6) include
a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken
by the Company under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging - Contracts in an Entity’s
Own Stock”, the embedded conversion options and the warrants were accounted for as derivative liabilities at the date of
issuance and adjusted to fair value through earnings at each reporting date. In accordance with ASC 815, the Company has bifurcated
the conversion feature of the convertible notes, along with the free-standing warrant derivative instruments and recorded derivative
liabilities on their issuance date. The Company uses the Black-Scholes option pricing model to value the derivative liabilities.
The
notes issued in fiscal 2015 were discounted in an aggregate amount of $931,181 based on the valuations and the Company recognized
an additional derivative expense included in interest expense of $2,577,683 upon initial recording of the derivative liabilities.
The total debt discount of $931,181 from the valuation of the derivatives are being amortized over the terms of the note. These
derivative liabilities are then revalued on each reporting date. The gain (loss) resulting from the decrease in fair value
of these convertible instruments was $(21,377,793) and $709,219 for the year ended December 31, 2016 and 2015, respectively.
During the year ended December 31, 2016 and 2015, the Company reclassified $16,542 and $826,901, respectively, to paid-in
capital due to the conversion of convertible notes into common stock. At December 31, 2016, the Company had recorded warrant derivative
liability of $6,577 and note derivative liability of $23,710,254. At December 31, 2015, the Company had recorded warrant derivative
liability of $1,722 and note derivative liability of $2,353,858.
The
following table summarizes the values of certain assumptions used by the Company’s custom model to estimate the fair value
of the derivative liabilities as of December 31:
|
|
|
2016
|
|
|
2015
|
|
|
Stock
price
|
|
$
|
0.003
|
|
|
$
|
0.003
|
|
|
Strike price
|
|
$
|
0.003
|
|
|
$
|
0.001
to 0.50
|
|
|
Remaining
contractual term
|
|
|
0.08
to 3 years
|
|
|
|
0.25
to 4 years
|
|
|
Volatility
|
|
|
254%
to 426
|
%
|
|
|
292
|
%
|
|
Risk-free
rate
|
|
|
0.44%
to 1.47
|
%
|
|
|
0.05%
to 1.76
|
%
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The
following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of December
31:
|
|
|
2016
|
|
|
2015
|
|
|
Balance,
beginning of year
|
|
$
|
2,355,580
|
|
|
$
|
382,836
|
|
|
Excess
of fair value over debt discount
|
|
|
-
|
|
|
|
2,577,683
|
|
|
Debt
discount in connection with conversion option of debentures and detachable warrants
|
|
|
-
|
|
|
|
931,181
|
|
|
Extinguished
derivative liability
|
|
|
(16,542
|
)
|
|
|
(826,901
|
)
|
|
Change
in fair value of derivative liabilities
|
|
|
21,377,793
|
|
|
|
(709,219
|
)
|
|
Balance,
end of year
|
|
$
|
23,716,831
|
|
|
$
|
2,355,580
|
|
NOTE
9 – STOCKHOLDERS- DEFECIT
Common
Stock
As
of December 31, 2016, the Company had 1,000,000,000 shares of common stock authorized
During
the year ended December 31, 2016, the Company:
Issued
2,154,596 shares of common stock valued at $11,365 for the conversion of convertible notes payable and accrued interest of $6,924
(see Note 7), reducing debt discount by $3,668, reducing derivative liability by $16,542, and recording a gain on conversion
of $8,433.
The fair value of the shares of common stock
were based on the quoted trading price on the date of conversion.
Issued
an aggregate of 254,508,000 shares of common stock valued at $1,119,835 to extinguish $123,980 of the Company’s payables,
resulting in a loss on debt extinguishment of $995,855. The fair value of the shares of common stock were based on the quoted
trading price on the date the payables were extinguished.
Issued
an aggregate of 50,000,000 shares of common stock, valued at $160,000 as payment for services. The fair value of the shares of
common stock was based on the quoted trading price on the date the shares were issued.
As
of December 31, 2016, the Company had 387,937,557 shares of common stock outstanding.
During
the year ended December 31, 2015, the Company:
Issued
an aggregate of 248,874 shares of common stock for services to various consultants valued at fair market value of $92,183. The
fair value of the shares of the common stock were based on the quoted trading price on the date of grant.
Issued
100,000 shares of common stock valued at $40,000 in connection with an employment agreement with an officer of the Company. The
fair value of the shares of the common stock were based on the quoted trading price on the date of grant.
Issued
30,000 shares of common stock valued at fair market value of $12,000 as payment for interest under a short-term note payable issued
in 2014. The fair value of the shares of the common stock were based on the quoted trading price on the date of grant.
Issued
an aggregate of 500,000 shares of common stock, valued at fair market value of $107,500 as consideration for the extension of
a convertible note and the interest payable thereon. The fair value of the shares of the common stock were based on the quoted
trading price on the date of grant (see Note 7 for additional details).
Cancelled
33,333 shares of common stock valued at $15,667. The fair value of the shares of the common stock were based on the quoted trading
price on the date of cancellation.
Issued
an aggregate of 45,489,374 shares of common stock, valued at $620,607 for the conversion of various convertible notes payable
and accrued interest pursuant to the conversion terms of the respective convertible notes. The Company reclassified $826,901 of
derivative liabilities in connection with the extinguishment of derivative liabilities upon conversion of the convertible notes
payable into common stock (see Note 7).
As
of December 31, 2015, the Company had 81,274,961 shares of common stock outstanding.
Preferred
Stock
Effective
November 24, 2015, the Company filed with the Nevada Secretary of State a Certificate of Designation in which the Company authorized
the creation of 1,000,000 shares of Series A preferred stock. Each share of Series A preferred stock entitles the holder thereof
to 110 votes per share and otherwise has the same rights and privileges as the Company’s common stock. The holders of shares
of Series A preferred stock are not entitled to dividends or distributions. The holders of the Series A preferred stock do not
have any conversion rights and the shares are non-transferrable.
On
November 24, 2015, the Company issued to the Company’s CEO, Timothy Crawford, 1,000,000 shares of the Company’s restricted
Series A preferred stock, valued at approximately $100,000. In connection with the issuance of these Series A preferred shares,
the Company recorded stock-based compensation of $100,000 for the year ended December 31, 2015.
The
issuance to Mr. Crawford of the 1,000,000 shares of the Series A Preferred Stock resulted in Mr. Crawford acquiring approximately
65% of the voting securities of the Company on the date of grant.
As
of December 31, 2016, the Company had 1,000,000 shares of Series A preferred stock outstanding.
On
March 7, 2017 the Company filed an Amended and Restated Certificate of Designation of Preferences, Rights and Limitations for
the Preferred Series A stock and the Company designated new classes of Preferred Stock, including Series B, Series C and Series
D (see Note 14).
Common
Stock Warrants
On
September 22, 2014, the Company issued 250,000 Class C warrants in connection with a short-term credit facility. Each of the 250,000
warrants is exercisable into one share of the Company’s common stock at $1.00 per share. The warrants were immediately exercisable.
The warrants will expire if not converted into stock by September 29, 2017. After September 29, 2015, the shares are callable
by the Company.
During
the year ended December 31, 2014, the Company issued common stock purchase warrants to purchase an aggregate of 1,800,000 shares
of the Company’s common stock at an exercise price of $1.00 per share in connection with the issuance of its Senior Secured
Convertible Notes (see Note 7). The warrants expire on December 31, 2019.
On
February 25, 2015, the Company entered into an agreement with Syndicated Capital, Inc. (the “Holder”) granting Syndicated
Capital, Inc. the right to subscribe for and purchase 450,000 shares of the Company’s common stock at an initial purchase
price of $1.00 per share. This right will expire, if not terminated earlier in accordance with the provisions of the agreement,
on December 31, 2019. The Warrant was issued as compensation to the Holder for services rendered as placement agent in connection
with the Company’s private offering of units of the Company’s securities which occurred in December 2014. The Company
identified embedded derivatives related to the warrants issued February 25, 2015. These embedded derivatives included certain
reset provisions (see Note 8 for additional details). The accounting treatment of derivative financial instruments requires that
the Company record the fair value of the derivatives as of the inception date and to adjust the fair value as of each subsequent
balance sheet date.
Changes
in stock purchase warrants during the periods ended December 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
Weighted
Average
|
|
|
Aggregate
|
|
|
Weighted
Average
|
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Remaining
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Value
|
|
|
Life
|
|
|
Outstanding,
December 31, 2014
|
|
|
2,050,000
|
|
|
$
|
1.00
|
|
|
$
|
-
|
|
|
|
4.75
years
|
|
|
Issued
|
|
|
450,000
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Outstanding,
December 31, 2015
|
|
|
2,500,000
|
|
|
$
|
1.00
|
|
|
$
|
-
|
|
|
|
3.60
years
|
|
|
Issued
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Outstanding,
December 31, 2016
|
|
|
2,500,000
|
|
|
$
|
1.00
|
|
|
$
|
-
|
|
|
|
2.60
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31, 2015
|
|
|
2,500,000
|
|
|
$
|
1.00
|
|
|
$
|
-
|
|
|
|
3.60
years
|
|
|
Exercisable,
December 31, 2016
|
|
|
2,500,000
|
|
|
$
|
1.00
|
|
|
$
|
-
|
|
|
|
2.60
years
|
|
NOTE
10 - RELATED PARTY TRANSACTIONS
Parties
are related to the Company if the parties directly or indirectly, through one or more intermediaries, control, are controlled
by, or are under common control with the Company. Related parties also include principal stockholders of the Company, its management,
members of the immediate families of principal stockholders of the Company and its management and other parties with which the
Company may deal where one party controls or can significantly influence the management or operating policies of the other to
an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses
all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged. Property
purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party
in excess of the cost is reflected as compensation or distribution to related parties depending on the transaction.
Management
On
occasion, members of Company management will advance funds or make payments on behalf of the Company, to be reimbursed as funds
become available. During the year ended December 31, 2016 the Company’s CEO at the time, Timothy Crawford, whom resigned
in July 2017, advanced funds to the Company of $4,400 and the Company made repayments on those advances of $3,400. As of December
31, 2016, the Company owed Mr. Crawford $1,000 for unreimbursed advances. During the year ended December 31, 2016 the Company
recorded $300,000 of salary expense for Mr. Crawford, paid him $119,800 for accrued salary amounts, and owed him $305,200 for
accrued payroll as of December 31, 2016. Both unreimbursed expenses and the accrued payroll are included in the Accounts Payable
and Accrued Expenses
in the Company’s financial statements
as of December 31, 2016.
Bradford
Joint Venture
On
June 1, 2014, the Company, through its wholly owned subsidiary, CEGX of Texas, LLC entered into a Contract Operating Agreement
with Bradford JV (see Note 13).
Effective
December 2014 the Company obtained 20 participation interests (out of 100 total interests) in the Bradford JV and in June 2015
the Company sold its 20 participation interests to Keystone Energy, LLC in exchange for $250,000 and
a
5% equity interest in Keystone.
In June 2016 the Company paid $100, returned the 5% interest in Keystone and reacquired
the 20 participation interests from Keystone Energy, LLC. In the third quarter of 2016 the Company exchanged a $123,924 receivable
balance for the final 27 unsold Bradford JV participation interests. As such, as of December 31, 2014, 2015, and 2016, the Company
held 20, 0, and 47 participation interest of the total 100 participation interests in the Bradford JV. (See Note 4)
The
Company has determined that the Contract Operating Agreement and the Company’s participation in the joint venture created
a related party relationship. Accordingly, during the year ended December 31, 2016 and 2015 the Company reported related party
revenue from contract development operations of $0 and $621,508, respectively, and reported related party operating income from
escrowed property of $0 and $250,000, respectively. Accounts receivable – related party from the Bradford JV was $0 and
$180,712 at December 31, 2016, and 2015, respectively.
NOTE
11 - ASSET RETIREMENT OBLIGATION
The
following table sets forth the principal sources of change of the asset retirement obligation (“ARO”) for the
years ended December 31, 2016 and 2015:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligations, beginning of period
|
|
$
|
96,063
|
|
|
$
|
162,321
|
|
|
Revisions
in estimated liabilities
|
|
|
-
|
|
|
|
(81,245
|
)
|
|
Asset
retirement obligations assumed
|
|
|
-
|
|
|
|
-
|
|
|
Accretion
expense
|
|
|
5,146
|
|
|
|
14,987
|
|
|
Gain
on derecognition
|
|
|
(101,209
|
)
|
|
|
-
|
|
|
Asset
retirement obligations, end of period
|
|
$
|
-
|
|
|
$
|
96,063
|
|
The
Company regularly evaluates the retirement activities that are required to be performed to reclaim their oil and gas properties.
Management concluded, as of December 31, 2016, that no such requirements existed due to the Company subsequently transferring
all of their oil and gas properties to other operating companies in exchange for relief from any remediation obligations (see
Note 14). As such, they reduced their ARO liability and ARO Asset (see Note 4) to zero and recorded a gain on derecognition
of $101,209 in the Gain (Loss) on Retirement of Assets in their Statement of Operations related to the ARO liability.
NOTE
12 - INCOME TAXES
The
Company’s provision for income taxes was $0 for the years ended December 31, 2016 and 2015, respectively, since the Company
has accumulated taxable losses from operations. ASC 740 requires the reduction of deferred tax assets by a valuation allowance
if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not
be realized. In the Company’s opinion, it is uncertain whether they will generate sufficient taxable income in the future
to fully utilize the net deferred tax asset. Accordingly, a full valuation allowance equal to the deferred tax asset has been
recorded.
The
total deferred tax asset is calculated by multiplying a 40 percent marginal tax rate by the cumulative Net Operating Loss (“NOL”).
At December 31, 2016, the Company has available approximately $11,455,000 of NOL’s which expire in various years beginning
in 2028 and carrying forward through 2036.
The
tax effects of significant items comprising the Company’s net deferred taxes as of December 31, 2016 and 2015 were as follows:
|
|
|
December
31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
NOL
Carryover
|
|
$
|
4,582,000
|
|
|
$
|
2,237,676
|
|
|
Related
party accrual
|
|
|
122,100
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(4,704,100
|
)
|
|
|
(2,237,676
|
)
|
|
Net
deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
provision for income taxes differs from the amounts which would be provided by applying the statutory federal income tax rate
of 40 percent to net loss before provision for income taxes for the following reasons:
|
|
|
December
31,
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
Book
loss
|
|
$
|
(10,344,800
|
)
|
|
Related
party accrual
|
|
|
72,100
|
|
|
Amortization
of debt discount
|
|
|
82,800
|
|
|
(Gain)
loss on fair value of derivative liability
|
|
|
8,551,100
|
|
|
(Gain)
loss on debt extinguishment
|
|
|
395,000
|
|
|
Non-cash
interest expense for derivative obligation liabilities
|
|
|
-
|
|
|
Non-cash
interest expense included in principal amount of notes
|
|
|
-
|
|
|
Stock
issued for compensation and interest expense
|
|
|
-
|
|
|
Accretion
expense
|
|
|
-
|
|
|
Valuation
allowance
|
|
|
1,243,800
|
|
|
|
|
$
|
-
|
|
The
Company files federal and Ohio income tax returns subject to statutes of limitations. The years ended December 31, 2016, 2015,
2014, and 2013 are subject to examination by federal and state tax authorities. After consideration of all the evidence, both
positive and negative, management has recorded a full valuation allowance at December 31, 2016, due to the uncertainty of realizing
the deferred income tax assets. The valuation allowance was increased by $563,100.
The
provisions of ASC 740 require companies to recognize in their financial statements the impact of a tax position if that position
is more likely than not to be sustained upon audit, based upon the technical merits of the position. ASC 740 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken on a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting
in interim periods and disclosure.
Management
does not believe that the Company has any material uncertain tax positions requiring recognition or measurement in accordance
with the provisions of ASC 740. Accordingly, the adoption of these provisions of ASC 740 did not have a material effect on the
Company’s financial statements. The Company’s policy is to record interest and penalties on uncertain tax positions,
if any, as income tax expense.
NOTE
13 - COMMITMENTS AND CONTINGENCIES
Contract
Operating Agreement
On
June 1, 2014, the Company, through its wholly owned subsidiary, CEGX of Texas, LLC entered into a Contract Operating Agreement
with Bradford JV. Under the terms of this agreement, the Company agreed to perform routine and major operations, marketing services,
accounting services, reporting services and other administrative services on behalf of Bradford JV as necessary to operate Bradford
JV’s oil and gas lease operations on the Bradford oil and gas leases located in Shackelford County, Texas. Bradford JV agreed
to pay the Company an administrative and pumping fee of $500 per well per month, 93.7% of the actual cost of electricity, taxes
and ongoing maintenance and repairs to operate Bradford JV’s assets. The agreement is for a term of three years and automatically
renews for one-year periods until one of the parties notifies the other party not later than 60 days prior to commencement of
a renewal term of its desire to not renew the agreement. (See Note 7).
Participation
Interest Purchase Agreement
On
June 12, 2015, the Company, and each of the other beneficial owners of seventy-three (73) participation interests (“Participation
Interests”) in the Bradford JV (collectively, the “Sellers”) entered into a Participation Interest Purchase
Agreement (“Purchase Agreement”) with Keystone Energy, LLC.
Pursuant
to the terms of the Purchase Agreement, Keystone Energy agreed to purchase, and the Sellers agreed to sell, all of the Participation
Interests representing 100% of the beneficial ownership of (i) those certain oil and gas leases, along with the associated contracts
and real property interests necessary and useful in the ownership and operation thereof, all situated in Shackelford County, Texas
(the “Oil and Gas Leasehold”), (ii) the oil and gas wells located on the Oil and Gas Leasehold, along with the associated
fixtures and personal property, including hydrocarbons produced therefrom (the “Wells”), and (iii) the rights in and
to that certain Farmout Agreement between CEGX and Bluff Creed Petroleum, LLC for a total consideration of $1,825,000.
As
payment in full for the Participation Interests and the Oil and Gas Properties, Keystone Energy agreed to, within 365 days following
execution of the Purchase Agreement, pay to the Sellers the aggregate cash amount of $1,575,000 (the “Cash Purchase Price”).
As to the Company’s twenty (20) Participation Interests, the Purchase Agreement additionally provided that Cardinal would
(i) be presently paid the amount of $250,000 included in the cash purchase amount in consideration of the Company’s assignment
thereunder to Keystone Energy of the beneficial interest in ten (10) of its twenty (20) Participation Interests and (ii) as to
the other ten (10) of the Company’s Participation Interests, exchange the Company’s rights therein to Keystone for
a five (5%) percent equity ownership interest in Keystone Energy. The Participation Interests of all Sellers acquired under the
Purchase Agreement were designated to be and are being held in escrow pending the acquisition of all of the Sellers Participation
Interests or the expiration of the 365 day period, whichever occurs first. As of December 31, 2015, the balance of the cash purchase
amount was $1,075,000 reflecting the balance of the 43 remaining Participation Interests which Keystone Energy remains obligated
to purchase under the terms of the Purchase Agreement.
The
$250,000 received by the Company for the Company’s ten (10) Participation Interests for Keystone’s right to beneficial
enjoyment thereof is not subject to forfeiture by the Company under any circumstances. For financial reporting purposes the Company
has recognized this amount as a component of related party operating revenues during the year ended December 31, 2015.
The
exchange of the other ten (10) Cardinal Participation Interests for a 5% equity interest in Keystone Energy has been reported
as an income tax neutral, tax-deferred, property for property exchange in accordance with applicable provisions of federal income
tax law and was initially recorded as an investment in oil and gas properties valued
at it’s fair market value of $250,000.
The
Purchase Agreement further provided that Keystone would deliver to CEGX of Texas, as irrevocable consideration, an initial advance
in an amount of $250,000 for improvements to be made to the Oil and Gas Properties. The amount is not subject to refund or forfeiture
and has been included in related party operating revenues from contract operations during the year ended December 31, 2015.
Finally,
in accordance with the terms of the Purchase Agreement and as of the date thereof, Keystone Energy entered into a Master Loan
Agreement with Maximilian Bradford, LLC (“Maximilian”), a Keystone Energy related party, providing for the loan by
Maximilian to Keystone Energy of the amount of $2,600,000. The proceeds under this loan are to be used for the purchase of the
Participation Interests and the development of the underlying interests in the Bradford “A” and “B” leases.
Upon full repayment by Keystone Energy of the loan, the Company is granted an option to convert its 5% interest in Keystone Energy
into either (i) an undivided 50% of the working interest owned by Keystone Energy in the Oil and Gas Properties, or (ii) a 50%
equity interest in Keystone Energy.
Concurrent
with the Participation Interest Purchase Agreement, Keystone Energy entered into an Operating Agreement with the Company’s
wholly owned subsidiary, CEGX of Texas, LLC authorizing CEGX of Texas to conduct the drilling operations and related activities
necessary to develop the properties.
Throughout
2015 and into the second quarter of 2016 the Company worked with representatives of the purchaser to design and install a pilot
water flood program on the Bradford “A” and Bradford “B” leases. Due to delays in receiving funding from
Keystone, work was sporadic and finally ground to a halt in the second half of 2016, effectively terminating the Purchase Agreement.
On June 12, 2016 the Company re-acquired its 20 Equity Units in the Bradford JV for $100 following the expiration of the 365-day
“Escrow Period” per the terms of the Participation Interest Purchase Agreement between Bradford JV participation interests
and Keystone Energy, LLC and CEGX of Texas, LLC. Additionally, during the third quarter of 2016, the balance of $123,924 in related
party receivables (representing un-reimbursed drilling, development and production costs incurred by the Company on behalf of
the Bradford JV) was extinguished in exchange for 27 Equity Units in the Bradford JV, representing the remaining un-sold interests
of the Bradford JV. (See Note 1)
Litigation
Power
Up Lending Group, Ltd. v. Cardinal Energy Group, Inc. (Civil Action No.: 16-cv-1545-DRH, United States District Court Eastern,
District Of New York).
On
March 30, 2016 Power Up Lending Group, Ltd. Filed a lawsuit against the Company claiming damages totaling in excess of $152,000
exclusive of attorney’s fees, pre-judgment interest and costs. On June 4, 2018 the Company filed Defendants Memorandum of
Law in Opposition to Plaintiff’s Motion Seeking Summary Judgement. On April 3, 2019 the Court opined the Plaintiff’s
motion for summary judgment pursuant to Rule 56 against the Company was granted as to the breach of contract claim regarding the
outstanding debt of $152,211. As of December 31, 2016, the Company has recorded an outstanding loan payable to Power Up in the
amount of $178,727. (See Note 7).
John
Robinson v. CEGX of Texas LLC, Cardinal Energy Group, Inc. Et al (Case No. 16 CV 008923 Franklin County Common Pleas Court)
John
Robinson, a
participant
in the Bradford Joint Venture, filed litigation in Franklin County, Columbus, Ohio against CEGX of Texas and seven others
on September 20, 2016, claiming he was fraudulently induced to enter into a transaction, amongst other claims. The Company filed
an answer on October 24, 2016, asserting a right to arbitration as a defense, and moved for stay of proceedings on November 29,
2016. The court granted a motion and the case was stayed for arbitration on January 26, 2017. The Franklin County Clerk
of Courts records show the case remains closed.
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 18, 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. On February 12, 2016 Borets 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, therefore, while the Company planned to prepare a response when
the hearing date was obtained, because no further action was taken no response was prepared. As of the date of this report the
Company has not been in contact with Borets. Should the Company be contacted regarding this issue they plan to work diligently
to resolve the issue.
CEGX
of Texas, LLC v. Scott Miller, Miller Energy Services, Inc. and US Fuels, Inc. (Case No. CV1543707 91st Judicial Court Eastland
County, Texas).
On
May 22, 2015 the Company filed a lawsuit alleging 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 considering filing a motion for
summary judgment.
CEGX
of Texas, LLC v. P.I.D. Drilling, Inc. (Case No. 2015-062 259th Judicial District Shackelford County, Texas)
.
On
June 10, 2015 the Company filed a lawsuit against P.I.D. Drilling, Inc. The lawsuit
contains causes of action for breach of contract and also requests an accounting. The lawsuit was 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. A Final Judgment
was awarded to PID on November 8, 2017 and, on December 19, 2017, the Judge signed an Amended Order of Sale to satisfy the Judgment,
which resulted in the Company having to give up its working interest and rights to specific properties to settle amounts owed.
The value of the working interests and rights sold were in excess of the judgment amount therefore no cash payments had to be
made by the Company. Further, such working interests and rights were had no value assigned to them in the Company’s financial
statements, therefore the judgment and order had no financial reporting impact.
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.
As
of August 5, 2015, The Company obtained service on Elks, Cies, Erco and SEDCO with all having filed answers. A hearing
and/or trial will be required to obtain damages against SEDCO and Erco.
On
August 5, 2015 the Company was awarded a Partial Default Judgement against HLA Interests, LLC on our causes of action for breach
of contract, money had and received, fraud, fraud by non-disclosure and deceptive trade practices.
The
Company plans to also obtain a damages judgment against Phillip Allen individually and as HLA Interests, LLC.
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.
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 claimed he was entitled. The Company denied 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 held settlement
discussions in this matter but did not reach a satisfactory agreement. The Company recorded $5,500 in accrued expenses
during the fourth quarter of 2015 which represented the amount most likely the Company would pay to settle this lawsuit.
The original trial date of April 26, 2016 was officially continued, and a new date was set for late June 2017. Counsel
for the Company scheduled depositions of Mr. Mitchell and Cardinal personnel in July and August of 2016. In June 2017 the
parties agreed in principle to enter into a settlement agreement under which the Company would pay Mr. Mitchell and his
attorney $20,000 to settle all outstanding claims. The Final Settlement Agreement and Release were executed by both parties and
filed with the Court in July 2017. As of December 31, 2016 the Company had recorded the $20,000 obligation in
accounts payable and accrued expenses on the balance sheet, which was paid in full during 2017.
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 owed 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. Thereafter
plaintiff’s counsel did nothing to move this matter forward and a month before the original trial date indicated that if
the Company agreed to a continuance plaintiff would agree to arbitrate. A continuance was entered and a new trial date established
for March 27, 2017. Plaintiff’s counsel did not move the matter to arbitration and, yet again, did nothing to forward Mr.
Dunne’s case and in the process missed several key dates in the Court’s scheduling order.
On
January 26, 2017 the Company moved for an order to show cause as to why plaintiff’s case should not be dismissed. On February
17, 2017 the Court granted the Company’s motion and issued an order to show cause. The Court also ordered plaintiff and
his counsel to pay Cardinal for the costs associated with the show cause motion. On March 10, 2017 the Court heard countervailing
arguments regarding dismissal. The Court determined that dismissal was too harsh, ordered the parties to arbitrate and awarded
monetary sanctions against plaintiff and his counsel in the Company’s favor. On May 17, 2017 the Court dismissed the case
with prejudice and ordered the plaintiff to pay the Company an additional $5,000 in attorney’s fees and costs no later than
June 1, 2017 plus $1,780 in additional attorney’s fees if the Company was not paid by June 1, 2017. As of the date
of this filing the amount remains unpaid, however, no receivable has been recorded by the Company due to the uncertainty of
collecting the amount. Because the Company has no record of any payments they are researching this ruling for
possible other income and are considering starting collection efforts.
Iconic
Holdings, LLC v. Cardinal Energy Group, Inc. (Case No. 37-2016-00006021-CU-BC-CTL San Diego County Superior Court)
On
February 23, 2016 Iconic Holdings, LLC filed
a complaint
in San Diego County Superior Court alleging that the Company was in default on a convertible promissory note. The matter
was stayed in May of 2016 pursuant to an arbitration provision in the operative Note Purchase Agreement. Following arbitration
in December of 2016 the parties entered into a Settlement Agreement wherein the Company agreed to pay Iconic $60,000.
As of December 31, 2016, the $60,000 liability was recorded as a convertible note on the balance sheet (see Note 7) and subsequent
to December 31, 2016 the liability was paid in conjunction with a debt arrangement with Rockwell Capital (see Note 14). On
April 17, 2017 a request for dismissal was filed with the Court by the Plaintiff’s attorneys and subsequently granted
by the Court.
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 was 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 answered, denying the claims and asserting that
the Company had satisfied its obligations with respect to the Tonaquint Note. Arbitration was scheduled for February 2016 in Salt
Lake City, Utah.
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 plus interest at 22% per year 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 on March 24, 2016 the Third Judicial District Court of Salt Lake County, Utah issued judgment in favor of Tonaquint,
Inc. in the aforementioned $432,674 amount. During the year ended December 31, 2016 the Company accrued interest at 22%,
recording interest expense of $84,775, resulting in a total liability of $515,867 as of December 31, 2016 (see Note 7). On February
15, 2017 the parties entered into a Settlement Agreement to extinguish the outstanding liability on that date of $528,673 in exchange
for shares of common stock of the Company. As of the date of this report no shares have been issued and the Company continues
to accrue default interest on the liability.
General
Disclosure
Litigation
is 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, when they 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. The Company
has attempted to estimate the potential damages which may arise from these matters and to the extent they could be estimated they
are included in our financial statements.
NOTE
14 - SUBSEQUENT EVENTS
Legal
Matters
LG
Capital Funding, LLC. v. Cardinal Energy Group, Inc. (Case 1:17-cv-09181-AKH, United States District Court Southern District Of
New York)
On
November 22, 2017 LG Capital Funding, LLC (“LG”) filed a lawsuit against the Company claiming
the Company
had defaulted
under two convertible notes
payable agreements, requesting the Company pay amounts in excess of $600,000. On September 14, 2018 the Company
filed a Declaration of the CEO, in Opposition. On December 10, 2019 the Court granted LG’s motion for summary
judgment in the amount of $115,230.
On
January 3, 2019 the Company filed a Notice of Appeal with the Court for the Southern District of New York. The Company requested
the lower Court of Appeals to forward a question of law to the upper court of appeals. On January 31, 2019 the Company filed a
Motion to Certify Questions of unsettled usury law. That motion was opposed by LG on February 11, 2019. To date, the Court has
not issued any order with regards to the remaining claims or with regard to the Motion to Certify.
Guy
McCain. v. CEGX of Texas, LLC, Stephen Hannan and Bradford Joint Venture Partnership (Case No. 2017-015, District Court of Shackelford
County Texas) and Bluff Creek Petroleum, LLC v. EOI Eagle Operating Inc. and CEGX of Texas, LLC (Case No. 2017-018, District Court
of Shackelford County, Texas)
In
February of 2017 Guy McCain, the owner and lessor of the Bradford “A” and Bradford “B” leases, located
in Shackelford County, Texas, filed a petition against CEGX of Texas, LLC, Stephen Hannan and Bradford Joint Venture Partnership
for lack of production requesting that the defendants would have no future interest in the leases. A judgment was filed on June
15, 2017 confirming the expiration and termination of the lease and awarding the plaintiff $10,000 plus post judgment interest
at a rate of 5% per annum and all costs of court.
In
March of 2017 Bluff Creek Petroleum, LLC, a contractor engaged by CEGX of Texas, LLC, to work on the Bradford “A”
and Bradford “B” leases, filed a petition against CEGX for amounts not paid. In August of 2017 a Default Judgment
was awarded to the plaintiff in the amount of $43,637.
In
conjunction with the above, in August of 2017, a Request to Subdivide the Bradford A & B leases were submitted to the Railroad
Commission of Texas and was approved on February 13, 2018. This left Bradford Joint Venture with 7 wells on the Bradford A &
B leases combined. The Bradford Joint Venture was not able to raise additional capital to place these wells into production. To
eliminate the plugging liabilities, these wells were transferred to another operator in good standing with the Railroad Commission
of Texas in April of 2018. As of the date of this filing no judgment amounts have been paid by the Company.
Ally
Bank v. Cardinal Energy Group, Inc. and Timothy W. Crawford (Case No. 17CV-02-001370, Franklin County, Ohio Court of Common Pleas)
On
November 29, 2017 Ally Bank filed a case against the Company to enforce a Retail Installment Sale Contract regarding the lease
of a truck. The bank received possession of the truck and Ally Bank received a judgment for the deficiency resulting from the
sale of the vehicle in the amount of $11,531. To date, the judgment amount has not been paid by the Company.
SEC
Complaint (No. 2:19-CV-1022)
On
March 19, 2019, United States Securities and Exchange Commission (“SEC”) filed a complaint against Timothy Crawford,
former CEO, and Cardinal Energy Group, Inc. The SEC alleged that the Company and Crawford filed two inaccurate quarterly reports,
made false and misleading representations about the Company’s ownership interest in certain leases and the future revenue
the Company expected to receive from the leases, failed to disclose known
litigation,
concealed business setbacks while raising money from investors, misreported Crawford’s stock ownership and failed to make
the required disclosures that he sold millions of shares of the Company’s common stock. In related proceedings the SEC also
instituted administrative proceedings against the Company based on the Company’s failure to file its latest six quarterly
reports and latest two annual reports. The SEC has requested the Company file a response to their allegations and the SEC will
conduct a prehearing event within 14 days of Service of the answer.
Additional
Legal Settlements
During
2017 the Company was able to settle and resolve the legal issues relating to Edward Mitchell, Terrance Dunne, Iconic Holdings,
LLC, and Tonaquint, Inc. (see Note 13).
Debt
Arrangements
On
January 24, 2017, the Company entered into a Second Settlement Agreement and Stipulation (“Second Settlement Agreement”)
with Rockwell Capital Partners (“Rockwell”). Under the Second Settlement Agreement, Rockwell acquired outstanding
liabilities of the Company in the principal amount of $158,419. The Company issued shares of the Company’s common stock
in one or more tranches subject to adjustment and ownership limitations as defined in the Second Settlement Agreement, sufficient
to satisfy the claim amount at a 50% discount of the lowest trading price during the 45 consecutive days starting on the day of
the share request. Between January 2017 and February 2017, in connection with the Second Settlement Agreement, the Company issued
an aggregate of 326,838,920 shares of the Company’s common stock to Rockwell for the payment of the $158,419 claim amount.
On
February 21, 2017, the Company entered into a Third Settlement Agreement and Stipulation (“Third Settlement Agreement”)
with Rockwell. Under the Third Settlement Agreement, Rockwell acquired outstanding liabilities of the Company in the principal
amount of $125,938. The Company issued shares of the Company’s common stock in one or more tranches subject to adjustment
and ownership limitations as defined in the Third Settlement Agreement, sufficient to satisfy the claim amount at a 50% discount
of the lowest trading price during the 60 consecutive days starting on the day of the share request. Between February 2017 and
March 2017, in connection with the Third Settlement Agreement, the Company issued an aggregate of 268,600,000 shares of the Company’s
common stock to Rockwell for the payment of the $125,938 claim amount.
As
of February 21, 2017, following the completion of the third of three settlement tranches financed by Rockwell, the Company has
issued a majority of the total issued common shares to Rockwell Capital having issued 849,946,920 shares or 86% of outstanding
common shares.
Transfer
of Property
In
August of 2017 the Company transferred the Power-Sanders and Dawson-Conway leases to an operator in good standing with the Railroad
Commission of Texas. On December 19, 2017 the Company transferred its rights to the Fortune prospect in conjunction with a judgment
granted in favor of P.I.D. Drilling, Inc. During 2018 the Company transferred the Bradford Leases to operators in good standing
with the Railroad Commission of Texas in accordance with a judgment granted in favor of Guy McCain and to eliminate plugging liabilities.
Return
of Performance Bond
During
November 2018, the Company received cash of $50,000 arising from the cancelation of a performance bond that had been posted with
the Texas Railroad Commission [“RRC”]. The bond was posted, as a RRC requirement by CEGX, to allow
CEGX to be registered as an operating company. The bond had been held as collateral to assure that CEGX had the resources to provide
any necessary remediation to wells that they operated. Because all leases and wells had been transferred in accordance with
judgments or to relieve plugging obligations, which was the case with the Bradford Wells on Lease A and B which were the only
operating properties held at the end of 2016, the transfers resulted in other operating companies assuming the remediation obligations
in conjunction with the properties. When all transfers were complete,
the
Texas Railroad Commission returned the CEGX performance bond and recorded the future obligation against the transferee
of the operating bond.
Series
A Preferred Stock
On
March 30, 2017, the Company filed, with the Nevada Secretary of State, an Amendment to the Certificate of Designation for the
Company’s Series A Preferred Stock (the “Amendment”) pursuant to which (i) the number of shares of authorized
Series A Preferred Stock was increased from 1,000,000 shares to 10,000,000 shares, (ii) the capital raise required by the Company
prior to the Series A Preferred Stock being automatically converted was increased from $5,000,000 to $10,000,000; (iii) the percentage
of common stock of the Company into which the Series A Preferred Stock is convertible was reduced from 15% to 10% and (iv) the
time in which the Series A Preferred Stock can be converted was changed from being at any time during the three years after issuance
to any time from the date that is six months after issuance until three years after issuance.
On
October 31, 2017 10,000,000 shares of Preferred A shares were issued to Timothy Crawford, a former officer of the Corporation.
in exchange for the 1,000,000 Preferred A shares that had been issued to Mr. Crawford during November 2015.
Series
B Preferred Stock
On
March 30, 2017, the Company filed a Certificate of Designation with the Nevada Secretary of State to designate and define the
rights and preferences of the Series B Preferred Stock, of which 1,000,000 was designated as Series B. On August 1, 2017
the Company filed an amendment to increase the Series B Preferred Stock authorized to 5,000,000 shares. All terms and conditions
remained.
There
are 5,000,000 shares of Series B Preferred Stock authorized. No dividends are payable on the shares of Series B Preferred Stock.
The Series B Preferred Stock has no right to vote on any matter submitted to the shareholders of the Company for a vote, provided,
however, that as long as any shares of Series B Preferred Stock are outstanding, the vote of at least 51% of the then-outstanding
shares of the Series B Preferred Stock is required to (a) alter or change adversely the powers, preferences or rights given to
the Series B Preferred Stock or to amend the Certificate of Designation for the Series B Preferred Stock, (b) amend the Articles
of Incorporation of the Company (the “Articles”) or other charter documents in any manner that adversely affects any
rights of the holders of the Series B Preferred Stock, (c) increase the number of authorized shares of Series B Preferred Stock,
or (d) enter into any agreement with respect to any of the foregoing.
All
of the shares of Series B Preferred Stock issued and outstanding at any time are convertible from time to time at the option of
each holder thereof, at any time from six months after the date of issuance of the applicable shares of Series B Preferred Stock
until the three year anniversary thereof, for no consideration to be paid, into shares of Common Stock equal to 15% of the issued
and outstanding shares of Common Stock as of the date of conversion, with any debt or equity of the Company that is convertible
into shares of Common Stock being included in such calculation on an as-converted basis, with any other any debt or equity of
the Corporation which is convertible into a percentage of the Common Stock being deemed converted immediately prior to the conversion
of the Series B Preferred Stock, with each share of Series B Preferred Stock being convertible into a pro-rata portion of the
total 10% of Common Stock.
All
shares of Series B Preferred Stock will be automatically converted into Common Stock on the date that is six months after the
Company has completed one or more raises of capital following the date that the Certificate of Designation was filed with the
Secretary of State of the State of Nevada (through the issuance of any equity securities of the Company) which collectively result
in total capital raised and received by the Company of at least $10,000,000.
The
conversion of the Series B Preferred Stock is subject to a limitation that the holder does not have the right to convert any portion
of the Series B Preferred Stock to the extent that after giving effect to such conversion, the holder (together with the holder’s
affiliates and any persons acting as a group together with such parties) would beneficially own in excess of the 4.99% of the
Common Stock, provided, however, that this limitation may be waived by the holder.
Series
C Preferred Stock
On
March 30, 2017, the Company filed a Certificate of Designation with the Nevada Secretary of State to designate and define the
rights and preferences of the Series C Preferred Stock.
There
are 4,500,000 shares of Series C Preferred Stock authorized. The Series C Preferred Stock has a “Stated Value” of
$1.00 per share. Each share of Series C Preferred Stock is entitled to receive an annual dividend, payable semi-annually in arrears,
in an amount equal to 10% of the Stated Value, prior and in preference to any declaration or payment of any dividend on the Common
Stock (the “Series C Dividend”). The Series C Dividend is cumulative and may be paid or accrued by the Company, in
its sole discretion. Any holder of the Series C Preferred Stock may elect to have all accrued but unpaid Series C Dividends be
paid to them in cash prior to any conversion of the applicable shares of Series C Preferred Stock, as discussed below. At the
option of the Company, the Series C Dividend may be deferred until the expiration of the 36-month period commencing on the issuance
date of the applicable share(s) of Series C Preferred Stock, at which time all accrued but unpaid Dividends on such shares will
be paid on a cumulative basis.
The
Series C Preferred Stock has no right to vote on any matter submitted to the shareholders of the Company for a vote, provided,
however, that as long as any shares of Series C Preferred Stock are outstanding, the vote of at least 51% of the then-outstanding
shares of the Series C Preferred Stock is required to (a) alter or change adversely the powers, preferences or rights given to
the Series C Preferred Stock or to amend the Certificate of Designation for the Series C Preferred Stock, (b) amend the Articles
or other charter documents in any manner that adversely affects any rights of the holders of the Series C Preferred Stock, (c)
increase the number of authorized shares of Series C Preferred Stock, or (d) enter into any agreement with respect to any of the
foregoing.
All
of the shares of Series C Preferred Stock issued and outstanding at any time are convertible from time to time at the option of
each holder thereof, at any time from six months after the date of issuance of the applicable shares of Series C Preferred Stock
until the three year anniversary thereof, for no consideration to be paid, into shares of Common Stock equal to 10% of the issued
and outstanding shares of Common Stock as of the date of conversion, with any debt or equity of the Company that is convertible
into shares of Common Stock being included in such calculation on an as-converted basis, with any other any debt or equity of
the Corporation which is convertible into a percentage of the Common Stock being deemed converted immediately prior to the conversion
of the Series C Preferred Stock, with each share of Series C Preferred Stock being convertible into a pro-rata portion of the
total 10% of Common Stock.
The
conversion of the Series C Preferred Stock is subject to a limitation that the holder does not have the right to convert any portion
of the Series C Preferred Stock to the extent that after giving effect to such conversion, the holder (together with the holder’s
affiliates and any persons acting as a group together with such parties) would beneficially own in excess of the 4.99% of the
Common Stock, provided, however, that this limitation may be waived by the holder.
At
any time that is six months following the earlier of (i) the date that the Company has completed one or more raises of capital
following the date of issuance of the applicable shares of Series C Preferred Stock (through the issuance of any equity securities
of the Company) which collectively result in total capital raised and received by the Company of at least $10,000,000 and (ii)
the date that the Company’s securities have been listed for trading on the New York Stock Exchange or the NASDAQ exchange,
the Company has the right to require the holders of the Series C Preferred Stock to elect to either (A) convert their shares of
Series C Preferred Stock into shares of Common Stock, or (B) cause the Company to redeem such holder’s shares of Series
C Preferred Stock (and if the holder does not make an election then option (A) is deemed to be elected). The redemption price
per share is the Stated Value increased by 10% for each full year from the issuance date to the date of redemption (and a proportionate
amount of 10% for any partial years).
Series
D Preferred Stock
On
March 30, 2017, the Company filed a Certificate of Designation with the Nevada Secretary of State to designate and define the
rights and preferences of the Series D Preferred Stock. In August 2017 the Company filed an amendment to the Series D Preferred
Stock. The amended terms are described below.
There
are 7,000,000 shares of Series D Preferred Stock authorized. The Series D Preferred Stock has a “Stated Value” of
$1.00 per share. Each share of Series D Preferred Stock was initially entitled to receive an annual dividend, payable semi-annually
in arrears, in an amount equal to 5% of the Stated Value, prior and in preference to any declaration or payment of any dividend
on the Common Stock (the “Series D Dividend”). In September 2018 this policy was modified, and the Company agreed
to issue all the Series D investors who invested prior to September 30, 2018 additional Series D Units equal to 33% of your subscribed
Units purchased as compensation for the proposed dividend.
The
Series D Preferred Stock has no right to vote on any matter submitted to the shareholders of the Company for a vote, provided,
however, that as long as any shares of Series D Preferred Stock are outstanding, the vote of at least 51% of the then-outstanding
shares of the Series D Preferred Stock is required to (a) alter or change adversely the powers, preferences or rights given to
the Series D Preferred Stock or to amend the Certificate of Designation for the Series D Preferred Stock, (b) amend the Articles
or other charter documents in any manner that adversely affects any rights of the holders of the Series D Preferred Stock, (c)
increase the number of authorized shares of Series D Preferred Stock, or (d) enter into any agreement with respect to any of the
foregoing.
All
of the shares of Series D Preferred Stock issued and outstanding at any time are convertible from time to time at the option of
each holder thereof, at any time from six months after the date of issuance of the applicable shares of Series D Preferred Stock
until the three year anniversary thereof, for no consideration to be paid, into shares of Common Stock equal to 50% of the issued
and outstanding shares of Common Stock as of the date of conversion, with any debt or equity of the Company that is convertible
into shares of Common Stock being included in such calculation on an as-converted basis, with any other any debt or equity of
the Corporation which is convertible into a percentage of the Common Stock being deemed converted immediately prior to the conversion
of the Series D Preferred Stock, with each share of Series D Preferred Stock being convertible into a pro-rata portion of the
total 50% of Common Stock.
The
conversion of the Series D Preferred Stock is subject to a limitation that the holder does not have the right to convert any portion
of the Series D Preferred Stock to the extent that after giving effect to such conversion, the holder (together with the holder’s
affiliates and any persons acting as a group together with such parties) would beneficially own in excess of the 4.99% of the
Common Stock, provided, however, that this limitation may be waived by the holder.
Additionally,
for any unit holders that have not converted their units to Series D Preferred shares, at
any time that is six months following the earlier of (i) the date that the Company has completed one or more raises of capital
following the date of issuance of the applicable shares of Series D Preferred Stock (through the issuance of any equity securities
of the Company) which collectively result in total capital raised and received by the Company of at least $10,000,000 and (ii)
the date that the Company’s securities have been listed for trading on the New York Stock Exchange or the NASDAQ exchange,
the Company has the right to require the holders of the Series D Preferred Stock to elect to either (A) convert their shares of
Series D Preferred Stock into shares of Common Stock, or (B) cause the Company to redeem such holder’s shares of Series
D Preferred Stock (and if the holder does not make an election then option (A) is deemed to be elected). The redemption price
per share is the Stated Value plus any accrued and unpaid Series D Dividends. To date the Preferred Series D Units have not converted
into Series D shares.
During
2017 and 2018, the Company sold 4.26 Preferred Series D units to investors and raised a total of $1,04,150. Each unit is comprised
of (i) 250,000 shares of Series D Preferred Stock, par value $0.00001 per share; and (ii) 0.8925% of the Net Revenue Interest
received by the Company per Unit on certain oil and gas fractional ownership interest along with other oil and gas assets to be
acquired with a portion of the proceeds from the Offering
.
Material
Agreements
On
April 18, 2017, the Company and EOI Eagle Operating, Inc. (“Eagle”) executed an agreement to acquire the assets of
Eagle. The Company issued 2,000,000 shares of Series B preferred stock and a note for $250,000 to acquire the assets which include
two service rigs, leasehold interests in several oil and gas leases in central Texas, miscellaneous oil field equipment and an
operating yard and facility located in Graham, Texas.
On
May 18, 2018 the Company and Eagle terminated the agreement due to the inability of Cardinal to pay the note payable of $250,000.
The Series B preferred stock was not returned.
On
July 24, 2017, the Company entered into an agreement with Rig Services Corporation (“Rig”) of Dallas, Texas to acquire
five oil and gas leases and the related wells and production facilities located in Archer County, Texas. The Company agreed to
issue 2,000,000 shares of Series B preferred stock and a note for $250,000 to acquire the assets.
On
May 18, 2018 the Company and Rig terminated the agreement due to the inability of Cardinal to pay the note payable of $250,000.
The Series B preferred stock was not returned.
Management
Changes and Employment Agreements
Subsequent
to December 31, 2016, the Company made several changes in management and director positions. On July 31, 2017, Timothy W. Crawford
resigned as the Chief Executive Officer, President and Director and was replaced by Stanley Ford. On January 17, 2017 John Jordan
resigned as Chief Financial Officer and Director. On August 1, 2017, Paul Carlisle was appointed as Chief Operating Officer and
Director. Mr. Carlisle subsequently resigned on May 18, 2018. On September 22, 2017, Dayton Royce was appointed as a Director.
On May 16, 2018, Daniel Hardwick was appointed as Chief Operating Officer, Secretary and Director. On January 17, 2018, Richard
Iler was appointed as Chief Operating Officer. Mr. Iler subsequently resigned on July 31, 2018.
In
connection with the above changes in management, we entered into employment and or consulting agreements, all of which terminated
on the date of resignation, as applicable. Effective August 1, 2017, we entered into a consulting agreement with Stanley Ford
to pay him a monthly retainer fee of $8,000 plus an additional $240 per month for maintaining and supplying an office for each
month that he serves as the Company’s Chief Executive Officer. Mr. Ford was to receive a one-time signing bonus consisting
of 50,000 shares of the Company’s Series B Preferred Stock from the past CEO; however, to date that has not happened. Effective
August 1, 2017, we signed an employment agreement with Daniel Hardwick to serve as the Company’s Executive Vice President.
The agreement is month to month and pays $2,000 per month. On January 17, 2018, we signed a consulting agreement with Richard
Iler to serve as Chief Financial Officer for a monthly retainer of $2,500.