ITEM
1.
|
FINANCIAL
STATEMENTS.
|
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
CONSOLIDATED
BALANCE SHEETS (Unaudited)
|
|
|
October 31,
|
|
|
July 31,
|
|
|
|
2019
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
35,807
|
|
|
$
|
177,227
|
|
Receivable from working interest owners
|
|
|
91,679
|
|
|
|
93,708
|
|
Production revenue receivable
|
|
|
114,874
|
|
|
|
38,575
|
|
Other current assets
|
|
|
53,573
|
|
|
|
70,221
|
|
Total current assets
|
|
|
295,933
|
|
|
|
379,731
|
|
|
|
|
|
|
|
|
|
|
Oil and gas properties - proved, net
|
|
|
6,243,003
|
|
|
|
6,243,003
|
|
Oil and gas properties - unproved
|
|
|
3,833,526
|
|
|
|
3,765,501
|
|
Property and equipment, net
|
|
|
267,828
|
|
|
|
297,112
|
|
Right of use asset
|
|
|
241,005
|
|
|
|
-
|
|
Other assets
|
|
|
151,362
|
|
|
|
126,362
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
11,032,657
|
|
|
$
|
10,811,709
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
2,241,134
|
|
|
$
|
1,987,826
|
|
Payable to related parties
|
|
|
140,038
|
|
|
|
85,038
|
|
Notes payable, related parties
|
|
|
528,502
|
|
|
|
528,502
|
|
Note payable, acquisition
|
|
|
1,900,000
|
|
|
|
1,900,000
|
|
Convertible notes payable, net of debt discount
|
|
|
310,255
|
|
|
|
-
|
|
Promissory note payable, net of debt discount
|
|
|
261,150
|
|
|
|
200,560
|
|
Operating lease liability
|
|
|
62,815
|
|
|
|
-
|
|
Equipment note payable
|
|
|
11,928
|
|
|
|
11,928
|
|
Due to working interest owners
|
|
|
470,802
|
|
|
|
414,122
|
|
Accrued interest payable
|
|
|
123,403
|
|
|
|
-
|
|
Accrued interest payable, related parties
|
|
|
228,118
|
|
|
|
152,858
|
|
Total current liabilities
|
|
|
6,278,145
|
|
|
|
5,280,834
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
Notes payable, related party
|
|
|
3,452,668
|
|
|
|
3,452,668
|
|
Equipment note payable
|
|
|
6,058
|
|
|
|
9,090
|
|
Operating lease liability
|
|
|
178,883
|
|
|
|
-
|
|
Stock subscriptions
|
|
|
-
|
|
|
|
330,000
|
|
Asset retirement obligation
|
|
|
676,787
|
|
|
|
636,205
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,592,541
|
|
|
|
9,708,797
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies, (Notes 10 and 12)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value, 10,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
Series A, par value $0.01, none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Series B, par value $0.01, 50,000 shares issued and outstanding
|
|
|
500
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001 per share; 3,000,000,000 shares authorized;
|
|
|
97,805
|
|
|
|
94,430
|
|
103,426,232 issued and 97,801,232 outstanding at October 31, 2019
|
|
|
|
|
|
|
|
|
94,426,232 issued and outstanding at July 31, 2019
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
43,462,514
|
|
|
|
41,602,711
|
|
Accumulated deficit
|
|
|
(43,120,703
|
)
|
|
|
(40,594,729
|
)
|
Total stockholders equity
|
|
|
440,116
|
|
|
|
1,102,912
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
11,032,657
|
|
|
$
|
10,811,709
|
|
The
accompanying notes are an integral part of these financial statements
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
|
|
|
Three Months Ended October 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
|
$
|
201,741
|
|
|
$
|
130,025
|
|
Salt water disposal income
|
|
|
26,902
|
|
|
|
-
|
|
Total revenue
|
|
|
228,643
|
|
|
|
130,025
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Production costs
|
|
|
256,468
|
|
|
|
87,280
|
|
Depreciation, depletion and amortization
|
|
|
100,921
|
|
|
|
79,869
|
|
General and administrative expense
|
|
|
1,153,940
|
|
|
|
986,659
|
|
Accretion
|
|
|
12,734
|
|
|
|
3,479
|
|
Impairment of oil and gas properties
|
|
|
605,937
|
|
|
|
-
|
|
Total operating expenses
|
|
|
2,130,000
|
|
|
|
1,157,287
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,901,357
|
)
|
|
|
(1,027,262
|
)
|
|
|
|
|
|
|
|
|
|
Other (income) expense
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
(129
|
)
|
|
|
(322
|
)
|
Interest expense
|
|
|
431,986
|
|
|
|
2,231
|
|
Financing costs
|
|
|
117,500
|
|
|
|
-
|
|
Financing costs, related parties
|
|
|
-
|
|
|
|
60,000
|
|
Interest expense, related parties
|
|
|
75,260
|
|
|
|
298,671
|
|
Total other (income) expense
|
|
|
624,617
|
|
|
|
360,580
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes
|
|
|
(2,525,974
|
)
|
|
|
(1,387,842
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,525,974
|
)
|
|
$
|
(1,387,842
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Net loss per share of common stock, basic and diluted
|
|
$
|
(0.026
|
)
|
|
$
|
(0.016
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding, basic and diluted
|
|
|
96,904,900
|
|
|
|
84,310,449
|
|
The
accompanying notes are an integral part of these financial statements
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CASH FLOW (Unaudited)
|
|
|
Three Months Ended October 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,525,974
|
)
|
|
$
|
(1,387,842
|
)
|
Adjustments to reconcile net loss to net cash from operations:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
445,956
|
|
|
|
614,193
|
|
Financing costs, related parties
|
|
|
-
|
|
|
|
60,000
|
|
Accretion expense
|
|
|
12,734
|
|
|
|
3,479
|
|
Depreciation, depletion and amortization
|
|
|
100,921
|
|
|
|
79,869
|
|
Impairment of oil and gas properties
|
|
|
605,937
|
|
|
|
-
|
|
Amortization of note discount
|
|
|
368,067
|
|
|
|
253,536
|
|
Financing fee paid with common stock
|
|
|
117,500
|
|
|
|
-
|
|
Change in:
|
|
|
|
|
|
|
|
|
Receivable from working interest owners
|
|
|
2,029
|
|
|
|
(32,560
|
)
|
Production revenue receivable
|
|
|
(76,299
|
)
|
|
|
17,061
|
|
Other current assets
|
|
|
16,648
|
|
|
|
10,500
|
|
Other assets
|
|
|
693
|
|
|
|
-
|
|
Accounts payable and accrued liabilities
|
|
|
265,808
|
|
|
|
387,488
|
|
Payable to related party
|
|
|
55,000
|
|
|
|
15,000
|
|
Due to working interest owners
|
|
|
56,680
|
|
|
|
13,902
|
|
Accrued interest payable
|
|
|
123,403
|
|
|
|
-
|
|
Accrued interest payable, related parties
|
|
|
75,260
|
|
|
|
47,293
|
|
Net cash from (used in) operating activities
|
|
|
(355,637
|
)
|
|
|
81,919
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Investment in oil and gas properties
|
|
|
(717,751
|
)
|
|
|
(786,774
|
)
|
Deposit on property acquisition
|
|
|
-
|
|
|
|
(100,000
|
)
|
Proceeds from sale of oil and gas working interests
|
|
|
-
|
|
|
|
150,000
|
|
Net cash from (used in) investing activities
|
|
|
(717,751
|
)
|
|
|
(736,774
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock and warrants
|
|
|
150,000
|
|
|
|
100,000
|
|
Proceeds from notes payable, related parties
|
|
|
-
|
|
|
|
1,100,000
|
|
Proceeds from convertible notes payable, net
|
|
|
810,000
|
|
|
|
-
|
|
Payments on equipment note payable
|
|
|
(3,032
|
)
|
|
|
(1,988
|
)
|
Payments on note payable, related parties
|
|
|
-
|
|
|
|
(400,000
|
)
|
Net cash from financing activities
|
|
|
956,968
|
|
|
|
798,012
|
|
|
|
|
|
|
|
|
|
|
Net change in cash, cash equivalents, and restricted cash
|
|
|
(116,420
|
)
|
|
|
143,157
|
|
Cash and cash equivalents and restricted cash - beginning of period
|
|
|
297,227
|
|
|
|
573,695
|
|
Cash and cash equivalents and restricted cash - end of period
|
|
$
|
180,807
|
|
|
$
|
716,852
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Warrant modification with issuance of note payable
|
|
$
|
-
|
|
|
$
|
480,771
|
|
Note payable, related party settled with participation in oil and gas working interest
|
|
|
-
|
|
|
|
100,000
|
|
Accounts payable settled with shares of common stock
|
|
|
12,500
|
|
|
|
16,482
|
|
Warrants issued with notes payable, related parties
|
|
|
-
|
|
|
|
288,000
|
|
Beneficial conversion feature on convertible notes payable
|
|
|
807,222
|
|
|
|
-
|
|
The
accompanying notes are an integral part of these financial statements
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY (Unaudited)
|
|
|
Common
|
|
|
Common
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
stock
|
|
|
Stock
|
|
|
Stock
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
shares
|
|
|
amount
|
|
|
shares
|
|
|
amount
|
|
|
capital
|
|
|
deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
July 31, 2018
|
|
|
83,975,232
|
|
|
$
|
83,977
|
|
|
|
59,000
|
|
|
$
|
590
|
|
|
$
|
37,637,323
|
|
|
$
|
(32,543,703
|
)
|
|
$
|
5,178,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
for cash
|
|
|
400,000
|
|
|
|
400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
99,600
|
|
|
|
-
|
|
|
|
100,000
|
|
Issuance of common stock
for services
|
|
|
599,000
|
|
|
|
599
|
|
|
|
-
|
|
|
|
-
|
|
|
|
141,169
|
|
|
|
-
|
|
|
|
141,768
|
|
Warrants issued for
services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,449
|
|
|
|
-
|
|
|
|
23,449
|
|
Stock Options issued
for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
448,976
|
|
|
|
-
|
|
|
|
448,976
|
|
Accounts payable settled
with shares of common stock
|
|
|
66,000
|
|
|
|
66
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,416
|
|
|
|
-
|
|
|
|
16,482
|
|
Warrants issued with
notes payable, related party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
288,000
|
|
|
|
-
|
|
|
|
288,000
|
|
Warrant modification
with issuance of note payable, related party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
480,771
|
|
|
|
-
|
|
|
|
480,771
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,387,842
|
)
|
|
|
(1,387,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 31, 2018
|
|
|
85,040,232
|
|
|
$
|
85,042
|
|
|
|
59,000
|
|
|
$
|
590
|
|
|
$
|
39,135,704
|
|
|
$
|
(33,931,545
|
)
|
|
$
|
5,289,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
July 31, 2019
|
|
|
94,426,232
|
|
|
$
|
94,430
|
|
|
|
50,000
|
|
|
$
|
500
|
|
|
$
|
41,602,711
|
|
|
$
|
(40,594,729
|
)
|
|
$
|
1,102,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
for cash
|
|
|
600,000
|
|
|
|
600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
149,400
|
|
|
|
-
|
|
|
|
150,000
|
|
Issuance of common stock
for common stock payable
|
|
|
1,200,000
|
|
|
|
1,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
328,800
|
|
|
|
-
|
|
|
|
330,000
|
|
Issuance of common stock
for services
|
|
|
400,000
|
|
|
|
400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,600
|
|
|
|
-
|
|
|
|
46,000
|
|
Issuance of common stock
for accounts payable
|
|
|
50,000
|
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,450
|
|
|
|
-
|
|
|
|
12,500
|
|
Issuance of common stock
for financing costs
|
|
|
1,125,000
|
|
|
|
1,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
116,375
|
|
|
|
-
|
|
|
|
117,500
|
|
Beneficial conversion
feature on convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
807,222
|
|
|
|
-
|
|
|
|
807,222
|
|
Stock based compensation
- warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
106,919
|
|
|
|
-
|
|
|
|
106,919
|
|
Stock based compensation
- options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
293,037
|
|
|
|
-
|
|
|
|
293,037
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,525,974
|
)
|
|
|
(2,525,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 31, 2019
|
|
|
97,801,232
|
|
|
$
|
97,805
|
|
|
|
50,000
|
|
|
$
|
500
|
|
|
$
|
43,462,514
|
|
|
$
|
(43,120,703
|
)
|
|
$
|
440,116
|
|
The
accompanying notes are an integral part of these financial statements
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
NOTE
1 – NATURE OF OPERATIONS
Amazing
Energy Oil and Gas, Co. is incorporated in the State of Nevada. Through its primary subsidiary, Amazing Energy, Inc., also a Nevada
corporation, the Company operates its main business of exploration, development, and production of oil and gas in the Permian
Basin of West Texas.
Amazing
Energy, Inc. was formed in 2010 as a Texas corporation and then changed its domicile to Nevada in 2011. The Company owns interests
in oil and gas properties located in Texas. The Company is primarily engaged in the acquisition, exploration and development of
oil and gas properties and the production and sale of oil and natural gas. Amazing Energy, LLC was formed in December 2008 as
a Texas Limited Liability Company. In December of 2010, Amazing Energy, Inc. and Amazing Energy, LLC were combined as commonly
controlled entities.
During
the year ended July 31, 2019, an additional subsidiary was formed, Amazing Energy Holdings, LLC, a Texas limited liability company,
for the acquisition of the Lea County, New Mexico assets and the Pecos County, Texas assets that the Company acquired in a transaction
with Wyatt Energy, LLC.
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
This
summary of significant accounting policies is presented to assist in understanding the financial statements. The financial statements
and notes are representations of the Companys management, which is responsible for their integrity and objectivity. These
consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted
in the United States. (U.S. GAAP) for interim financial information, as well as the instructions to Form 10-Q. Accordingly, the
financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements contain all adjustments, consisting of only normal
recurring adjustments, necessary for a fair statement of its financial position as of October 31, 2019, and its results of operations,
cash flows, and statement of changes in stockholders equity for the three months ended October 31, 2019 and 2018. The balance
sheet at July 31, 2019 was derived from audited annual financial statements but does not contain all of the footnote disclosures
from the annual financial statements. All amounts presented are in U.S. dollars. For further information, refer to the financial
statements and footnotes thereto in the Companys Annual Report on Form 10-K for the year ended July 31, 2019.
The
financial statements are presented on a consolidated basis and include all of the accounts of Amazing Energy Oil and Gas, Co.
and its wholly owned subsidiaries, Amazing Energy, Inc., Amazing Energy LLC, Jilpetco, Inc., and Amazing Energy Holdings, LLC.
All significant intercompany balances and transactions have been eliminated.
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
Going
Concern
These
consolidated financial statements have been prepared in accordance with U.S. GAAP as a going concern, which assumes that the Company
will be able to meet its obligations and continue its operations for the next twelve months.
As
shown in the accompanying financial statements, the Company has incurred operating losses since inception. As of October 31, 2019,
the Company has limited financial resources with which to achieve its objectives to obtain profitability and positive cash flows.
At October 31, 2019, the Company has an accumulated deficit of $43,120,703 and a working capital deficit of $5,982,212. Achievement
of the Companys objectives will be dependent upon the Companys ability to obtain additional financing, to locate
profitable oil and gas properties and to generate revenue from current and planned business operations, and control costs. The
Company plans to fund its future operations by joint venturing, obtaining additional financing from investors, and/or lenders,
and attaining additional commercial production. However, there is no assurance that the Company will be able to achieve these
objectives, therefore substantial doubt as to its ability to continue as a going concern exists. Although management believes
that it will be able to obtain the necessary funding to allow the Company to remain a going concern through the methods discussed
above, there can be no assurances that such methods will prove successful. The financial statements do not include adjustments
relating to the recoverability of recorded assets nor the implications of associated bankruptcy costs should the Company be unable
to continue as a going concern.
Revenue
Recognition
The
Company recognizes revenues from the sales of oil and natural gas to its customers and presents them disaggregated on the Companys
Consolidated Statements of Operations. The Company enters into contracts with customers to sell its oil and natural gas production.
Revenue on these contracts is recognized in accordance with the five-step revenue recognition model prescribed in Accounting Standard
Codification (ASC) 606. Specifically, revenue is recognized when the Companys performance obligations under
these contracts are satisfied, which generally occurs with the transfer of control of the oil and natural gas to the purchaser.
Control is generally considered transferred when the following criteria are met: (i) transfer of physical custody, (ii) transfer
of title, (iii) transfer of risk of loss and (iv) relinquishment of any repurchase rights or other similar rights. Given the nature
of the products sold, revenue is recognized at a point in time based on the amount of consideration the Company expects to receive
in accordance with the price specified in the contract. Consideration under the oil and natural gas marketing contracts is typically
received from the purchaser one to two months after production.
During
the three months ended October 31, 2019, the Company started providing salt-water disposal services to a non-related oil and gas
well working interest owner. Revenue generated from salt-water disposal services is recognized in the period the services are
provided.
Receivables
Production
revenue receivable consist of oil and natural gas revenues due under normal trade terms. Receivables are carried at original amounts
on joint interest billings less an estimate for doubtful accounts. Management determines the allowance by regularly evaluating
individual working interest owner receivables and considering their financial condition, credit history and current economic conditions.
Due
to Working Interest Owners
The
Company provides oilfield services which includes interest owner accounting and subsequent disbursement of the interest owners
net pro-rata share of oil proceeds from a given lease. Generally, the pro-rata share of oil proceeds less any applicable pro-rata
share of operating expenses is distributed to the interest owner within two months of sale of oil and natural gas. The due to
working interest owners balances comprises those proceeds which have yet to be distributed to interest owners as a result
of the time required to process administrative functions and process payment and any revenue suspense.
Asset
Retirement Obligations
The
fair value of a liability for an assets retirement obligation (ARO) is recognized in the period in which
a contractual obligation is created and if a reasonable estimate of fair value can be made. A corresponding charge capitalized
as part of the carrying amount of the related long-lived asset. The liability is accreted to its then-present value each subsequent
period, and the capitalized cost is depleted over the useful life of the related asset. Abandonment costs incurred are recorded
as a reduction of the ARO liability.
Inherent
in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation
factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political
environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding
adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded
as a gain or loss upon settlement.
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and certain assumptions
that affect the amounts reported in these consolidated financial statements and accompanying notes. Managements estimates
include estimates of impairment in carrying value of assets and liabilities, and collectability of recorded oilfield services
receivables, stock-based compensation, deferred income taxes, asset retirement obligations, oil and gas property ceiling tests,
and depreciation, depletion and amortization. Actual results could differ from these estimates.
Risks
and Uncertainties
The
Companys operations are subject to significant risks and uncertainties, including financial, operational, technological,
and other risks associated with operating an emerging oil and gas business, including the potential risk of business failure.
Concentration
of Risks
The
Companys cash is placed with a highly rated financial institution, and the Company periodically reviews the credit worthiness
of the financial institutions with which it does business. At times, the Companys cash balances are in excess of amounts
guaranteed by the Federal Deposit Insurance Corporation.
The
Companys oil and gas revenue originates from production from its properties in Texas and New Mexico. Each revenue stream
in both Texas and New Mexico is sold to a single purchaser of minerals through month to month contracts. While this creates a
purchaser concentration, there are alternate buyers of the production in event the sole customer in each state is unable or unwilling
to purchase.
The
Company sells all of its production to only four purchasers; two in Texas and two in New Mexico. As a result, during the three
months ended October 31, 2019 and 2018, these purchasers represented 50% or more of its oil and gas revenue.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with a remaining maturity of three months or less when acquired to be
cash equivalents. Cash and cash equivalents and restricted cash on the Consolidated Statement of Cash Flows includes restricted
cash of $145,000 and $120,000 as of October 31, 2019 and July 31, 2019, respectively.
Restricted
Cash
As
of October 31, 2019 and July 31, 2019, the Company has a letter of credit in the amount of $50,000 in favor of the Texas Railroad
Commission as a bond for reclamation on its Texas based oil and gas properties and three reclamation bonds totaling $ 95,000 in
favor of the State of New Mexico, all of which are included in Other assets on the Consolidated Balance Sheet.
Income
Taxes
The
Company accounts for income taxes using the liability method. The liability method requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of (i) temporary differences between financial statement carrying amounts
of assets and liabilities and their basis for tax purposes and (ii) operating loss and tax credit carry-forwards for tax purposes.
Deferred tax assets are reduced by a valuation allowance when management concludes that it is more likely than not that a portion
of the deferred tax assets will not be realized in a future period. The Company recognizes a tax benefit from an uncertain position
when it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position
and will record the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing
authority. The Company classifies any interest and penalties associated with income taxes as income tax expense.
Fair
value of financial instruments
Financial
instruments consist of cash and various notes payable. The fair value of these financial instruments approximates the carrying
values at October 31, 2019 and July 31, 2019.
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
Property
and equipment
Property
and equipment are stated at cost. Improvements which significantly increase an assets value or significantly extend its
useful life are capitalized and depreciated over the assets remaining useful life. When property, plant or equipment is
sold at a price either higher or lower than its carrying amount, or un-depreciated cost at the date of disposal, the difference
between the sale proceeds over the carrying amount is recognized as gain, while a loss is recognized when the carrying amount
exceeds the sale proceeds. Property and equipment are depreciated on a straight-line basis over their useful lives, which are
typically five to seven years for equipment. Realization of the carrying value of other property and equipment is reviewed for
possible impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets
are determined to be impaired if a forecast of undiscounted estimated future net operating cash flows directly related to the
asset, including disposal value, if any, is less than the carrying amount of the asset. If any asset is determined to be impaired,
the loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. Repairs and maintenance costs
are expensed in the period incurred.
Oil
and gas properties
The
Company uses the full cost method of accounting for oil and gas properties. Under this method of accounting, all costs incurred
in the acquisition, exploration and development of oil and natural gas properties, including unproductive wells, are capitalized.
This includes any internal costs that are directly related to property acquisition, exploration and development activities but
does not include any costs related to production, general corporate overhead or similar activities. Gain or loss on the sale or
other disposition of oil and natural gas properties is not recognized, unless the gain or loss would significantly alter the relationship
between capitalized costs and proved reserves.
Oil
and natural gas properties include costs that are excluded from costs being depleted or amortized. Excluded costs represent investments
in unproved and unevaluated properties and include non-producing leasehold, geological and geophysical costs associated with leasehold
or drilling interests and exploration drilling costs. These costs are excluded until the project is evaluated and proved reserves
are established or impairment is determined. Excluded costs are reviewed periodically to determine if impairment has occurred.
The amount of any evaluated or impaired oil and gas properties is transferred to capitalized costs being amortized.
Depletion
and amortization
The
depletion base for oil and natural gas properties includes the sum of all capitalized costs net of accumulated depreciation, depletion,
and amortization (DD&A), estimated future development costs and asset retirement costs not included in oil and
natural gas properties, less costs excluded from amortization. The depletion base of oil and natural gas properties is amortized
on a units-of-production method.
Limitation
on Capitalized Costs
Under
the full-cost method of accounting, the Company is required, at the end of each fiscal quarter, to perform a test to determine
the limit on the book value of our oil and natural gas properties (the Ceiling Test). If the capitalized costs of
our oil and gas properties, net of accumulated amortization and related deferred income taxes, exceed the Ceiling,
this excess or impairment is charged to expense and reflected as additional accumulated depreciation, depletion and amortization
or as a credit to oil and natural gas properties. The expense may not be reversed in future periods, even though higher oil and
natural gas prices may subsequently increase the Ceiling. (See Note 5) The Ceiling is defined as the sum of: (a) the present value,
discounted at 10 percent, and assuming continuation of existing economic conditions, of 1) estimated future gross revenues from
proved reserves, which is computed using oil and natural gas prices determined as the unweighted arithmetic average of the first-day-of-the-month
price for each month within the 12-month period prior to the end of the reporting period (with consideration of price changes
only to the extent provided by contractual arrangements including hedging arrangements), less 2) estimated future expenditures
(based on current costs) to be incurred in developing and producing the proved reserves; plus (b) the cost of properties not being
amortized; plus (c) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; and
net of (d) the related tax effects related to the difference between the book and tax basis of our oil and natural gas properties.
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
The
determination of oil and gas reserves is a subjective process, and the accuracy of any reserve estimate depends on the quality
of available data and the application of engineering and geological interpretation and judgment. Estimates of economically recoverable
reserves and future net cash flows depend on several variable factors and assumptions that are difficult to predict and may vary
considerably from actual results. In particular, reserve estimates for wells with limited or no production history are less reliable
than those based on actual production. Subsequent re-evaluation of reserves and cost estimates related to future development of
proved oil and gas reserves could result in significant revisions to proved reserves. Other issues, such as changes in regulatory
requirements, technological advances, and other factors, which are difficult to predict, could also affect estimates of proved
reserves in the future.
Stock-based
compensation
Compensation
cost for equity awards is based on the fair value of the equity instrument on the date of grant. The Company estimates the fair
value of options and warrants to purchase common stock using the Black-Scholes model, which requires the input of some subjective
assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising
them (expected life), the estimated volatility of the Companys common stock price over the expected term
(volatility), employee forfeiture rate, the risk-free interest rate and the dividend yield. Changes in the subjective
assumptions can materially affect the estimate of fair value of stock-based compensation. Options granted have a ten-year maximum
term and varying vesting periods as determined by the Board of Directors.
For
options issued with service vesting conditions, compensation cost is recognized over the vesting period. For options issued with
performance conditions, compensation cost is recognized if and when the Company concludes that the performance condition will
be achieved, net of an estimate of pre-vesting forfeitures. For options issued with market conditions, compensation cost is recognized
over the requisite service period and discounted by the probability of the condition thereof being met.
Environmental
laws and regulations
The
Company is subject to extensive federal, state, and local environmental laws and regulations. Environmental expenditures are expensed
or capitalized depending on their future economic benefit. The Company believes that it is in compliance with existing laws and
regulations.
Fair
value measurements
When
required to measure assets or liabilities at fair value, the Company uses a fair value hierarchy based on the level of independent,
objective evidence surrounding the inputs used. The Company determines the level within the fair value hierarchy in which the
fair value measurements in their entirety fall. The categorization within the fair value hierarchy is based upon the lowest level
of input that is significant to the fair value measurement. Level 1 uses quoted prices in active markets for identical assets
or liabilities, Level 2 uses significant other observable inputs, and Level 3 uses significant unobservable inputs. The amount
of the total gains or losses for the period are included in earnings that are attributable to the change in unrealized gains or
losses relating to those assets and liabilities still held at the reporting date. At October 31, 2019 and July 31, 2019, the Company
had no assets or liabilities measured at fair value on a recurring basis.
Recent
accounting pronouncements
In
February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2016-02 Leases (ASC 842). The update modifies the classification criteria and requires lessees to recognize the assets and
liabilities on the balance sheet for most leases. The update is effective for fiscal years beginning after December 15, 2018,
with early adoption permitted. The Company adopted the update on August 1, 2019. Upon implementation of the new guidance, the
Company recognized a liability and right-of-use asset of $256,092 as of August 1, 2019 for its one operating lease. The Company
elected the transition option to apply the new guidance at the effective date without adjusting comparative periods presented.
(See Note 10). In addition, the Company elected the practical expedient on not separating lease components from non-lease components
contained in its one operating lease agreement.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation, Improvements to Nonemployee Share-Based Payment Accounting.
ASU No. 2018-07 expands the scope of the standard for stock-based compensation to include share-based payment transactions for
acquiring goods and services from nonemployees. Adoption of ASU No. 2018-07 on August 1, 2019 did not have a material impact on
the Companys consolidated financial statements.
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
In
August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement. The update removes, modifies and makes additions to certain disclosure requirements with
respect to fair value measurements. The update is effective for fiscal years beginning after December 15, 2019, with early adoption
permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements and related
disclosures.
Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements
that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or
disclosures.
NOTE
3 – EARNINGS PER SHARE
Basic
Earnings Per Share (EPS) is computed by dividing net income (loss) by the weighted-average number of shares outstanding
during the period and includes no dilution. Diluted EPS reflects the potential dilution of securities that could occur from common
shares issuable through convertible debt, convertible preferred stock and warrants.
The
outstanding securities at October 31, 2019 and 2018, that could have a dilutive effect are as follows:
|
|
October 31, 2019
|
|
|
October 31, 2018
|
|
Convertible preferred stock
|
|
|
5,500,000
|
|
|
|
6,490,000
|
|
Warrants
|
|
|
10,651,308
|
|
|
|
8,785,408
|
|
Stock options
|
|
|
32,085,000
|
|
|
|
30,085,000
|
|
Convertible notes payable
|
|
|
16,666,667
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total potential dilution
|
|
|
64,902,975
|
|
|
|
45,360,408
|
|
For
the three months ended October 31, 2019 and 2018, the effect of this potential dilution has not been recognized since it would
have been anti-dilutive due to net losses in those periods.
NOTE
4 – PROPERTY AND EQUIPMENT
As
of October 31, 2019 and July 31, 2019, property and equipment were composed of the following:
|
|
October 31, 2019
|
|
|
July 31, 2019
|
|
|
|
|
|
|
|
|
Drilling equipment
|
|
$
|
751,936
|
|
|
$
|
751,936
|
|
Other equipment
|
|
|
22,235
|
|
|
|
22,235
|
|
|
|
|
774,171
|
|
|
|
774,171
|
|
Less: Accumulated depreciation
|
|
|
(506,343
|
)
|
|
|
(477,059
|
)
|
Total property and equipment, net
|
|
$
|
267,828
|
|
|
$
|
297,112
|
|
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
NOTE
5 – OIL AND GAS PROPERTIES
The
Company is currently participating in oil and gas exploration activities in Texas and New Mexico. The Companys oil and
gas properties are located entirely in the United States.
The
Companys mineral lease interests are comprised of leased acreage within the Pecos County, Texas of an approximate 70,000
acre AMI and 5,385 acres under lease in New Mexico as of October 31, 2019. Through a series of agreements with representatives
of mineral owners, the Company has the right to acquire additional acreage for future development encompassing a large percentage
of the approximately 70,000 acre AMI in Pecos County, Texas not already under lease as of October 31, 2019. Under those agreements
the Company is required to make annual payments into trust accounts to hold the acquisition opportunity. As actual leases are
acquired, those trust funds are available to pay the lease cost per acre at predetermined amounts ranging from $200 to $300 per
acre.
The
Company is obligated to pay certain bonus lease payments related to certain of its lease properties in Pecos County, Texas. The
Company is required to pay $27,000 each year on the JT Walker lease on August 7th. The Company is also required to pay $200,000
every five years on August 7th to continue the JPMorgan lease. The most recent payment on this lease was made in July, 2017. The
next JPMorgan lease payment is due by August 7, 2022. The Company is current in its lease payments under these leases. The Companys
5,385 gross acre interest (4,682 net acres) in Lea County, New Mexico is currently being held by production. Moreover, as long
as the wells on each lease continues to produce oil and gas in commercial quantities, no additional lease payments will have to
be made to the mineral owners.
At
October 31, 2019, the Company has a working interest in twenty-eight (28) wells located on the leasehold premises in Pecos County,
Texas. The Company has drilled twenty-six (26) wells throughout the property, with sixteen wells (16) currently producing, eight
(8) wells being temporarily shut-in and awaiting further evaluation and with two (2) wells having been permanently shut-in and
awaiting either plugging or conversion to injector wells for a possible future water flood program.
At
October 31, 2019, the Company has a working interest in ten (10) wells located on the leasehold premises in Lea County, New Mexico.
Seven (7) wells are currently producing oil and/or gas and three (3) wells are being used to dispose of produced water from its
seven (7) producing wells.
The
oil and gas property balances at October 31, 2019 and July 31, 2019, are set forth in the table below:
|
|
October 31, 2019
|
|
|
July 31,2019
|
|
|
|
|
|
|
|
|
Unproved properties not subject to amortization
|
|
$
|
3,833,526
|
|
|
$
|
3,765,501
|
|
Property costs subject to amortization
|
|
|
10,160,300
|
|
|
|
9,510,574
|
|
Asset retirement obligation, asset
|
|
|
568,320
|
|
|
|
540,472
|
|
Total cost of oil and gas properties
|
|
|
14,562,146
|
|
|
|
13,816,547
|
|
Less: Accumulated depletion and impairment
|
|
|
(4,485,617
|
)
|
|
|
(3,808,043
|
)
|
Oil and gas properties, net full cost method
|
|
$
|
10,076,529
|
|
|
$
|
10,008,504
|
|
Ceiling
Test
At
October 31, 2019, the Company recorded a full cost ceiling impairment of $605,937. The ceiling is defined as the sum of: (a) the
present value, discounted at 10 percent, and assuming continuation of existing economic conditions, of 1) estimated future gross
revenues from proved reserves, which is computed using oil and natural gas prices determined as the unweighted arithmetic average
of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period less 2)
estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves plus (b)
the cost of properties not being amortized; plus (c) the lower of cost or estimated fair value of unproven properties included
in the costs being amortized; and net of (d) the related tax effects related to the difference between the book and tax basis
of our oil and natural gas properties
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 Unaudited)
|
NOTE
6 – RELATED PARTY TRANSACTIONS
Effective
June 1, 2018 the Company ceased to be the operator of record of properties in which it owns no working interest. The properties
principal working interest owner is Petro Pro, Ltd. (Petro Pro), an entity controlled by Jed Miesner, former Chairman
of the Board of Directors and current Director at October 31, 2019. In connection with the transfer of operations to US Petro,
LLC (an entity is controlled by related parties, Mr. Miesner and Mr. Alford, current Chairman of the Board), the Company agreed
to transfer $25,038 to US Petro which was the amount of suspended revenue attributable to owners in the transferred properties.
At
October 31, 2019 and July 31, 2019, the Company has a payable to the Thornhill Law Firm, A PLC for $115,000 and $60,000, respectively,
for legal services. The Company recognized $90,000 and nil in legal expense during the three months ended October 31, 2019
and 2018, respectively. The principal of the firm is Tommie Thornhill, who is also a Director of the Company.
NOTE
7 – REVENUE
The
Companys customer sales contracts include oil and natural gas sales. Each unit (thousand cubic feet or barrel) of commodity
product represents a separate performance obligation which is sold at variable prices, determinable on a monthly basis. The pricing
provisions of the Companys contracts are primarily tied to a market index with certain adjustments based on factors such
as delivery, product quality and prevailing supply and demand conditions in the geographic areas in which the Company operates.
The transaction price is allocated to each performance obligation and recognize revenue upon delivery of the commodity product
when the customer obtains control. Control of produced oil volumes passes to customers when the oil is measured either by a trucking
oil ticket or by a meter when entering an oil pipeline. Similarly, control of produced natural gas volumes passes to customers
at specific metered points indicated in our natural gas contracts. The Company has no control over the commodities after those
points and the measurement at those points dictates the amount on which the customers payment is based. The Companys
oil and natural gas revenue streams include volumes burdened by royalty and other joint owner working interests. Revenues are
recorded and presented on the consolidated financial statements net of the royalty and other joint owner working interests.
Revenue
is recorded in the month production is delivered to the purchaser. However, settlement statements and payments for oil and natural
gas sales may not be received for up to 60 days after the date production is delivered, and as a result, management
is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of
the product. The Company records any differences, which historically have not been significant, between the actual amounts ultimately
received and the original estimates in the period they become finalized.
Detailed
oil and gas revenue for the three months ended October 31, 2019 and 2018 is as follows:
|
|
For the three Months ended October 31,
|
|
|
|
2019
|
|
|
2018
|
|
Oil revenue
|
|
$
|
201,741
|
|
|
$
|
128,951
|
|
Gas revenue
|
|
|
-
|
|
|
|
1,074
|
|
|
|
$
|
201,741
|
|
|
$
|
130,025
|
|
|
|
|
|
|
|
|
|
|
In
August, 2019, the Company entered into a salt-water disposal agreement with a non-related oil and gas operator in Lea County,
New Mexico. Under the terms of the agreement, the Company will allow the oil and gas operator to dispose its produced water into
one of the Companys salt-water disposal wells. The Company will charge the oil and gas operator a monthly fee based on
the number of barrels of salt-water disposed. Revenue is recognized at the time the water is disposed in the Companys salt-water
disposal wells. Total income on this agreement was $26,902 during the three months ended October 31, 2019.
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
NOTE
8 – NOTES PAYABLE
Notes
payable, related parties
On
January 3, 2011, the Company formalized a loan agreement for $1,940,000 with Jed Miesner, the Companys CEO and Chairman
at the time of the agreement and currently a director. The loan is scheduled to mature on December 31, 2030, bear interest at
the rate of 8% per annum, and collateralized with a leasehold deed of trust covering certain leasehold interests in Pecos County,
Texas. Effective April 1, 2019 the Company redeemed all of the issued and outstanding shares of its Series A Preferred Stock.
The holder of 100% of the Series A was Jed Miesner. The Company redeemed all 9,000 shares of the Series A, which had the voting
power equivalent to 90,000,000 shares of the Companys common stock, for the consideration of $100.00 per share, or a total
payment of $900,000. The redemption price was effectuated through an increase in the principal balance of a promissory note issued
to Mr. Miesner by the Companys wholly owned subsidiary Amazing Energy, LLC. The principal balance of the Note was increased
from $1,940,000 to $2,840,000.
On
December 30, 2010, Amazing Energy, LLC, formalized loan agreements with Petro Pro Ltd., an entity controlled by Jed Miesner for
$1,100,000. The loan is scheduled to mature on December 31, 2030, bear interest at the rate of 8% per annum and is collateralized
with a leasehold deed of trust covering certain leasehold interests in Pecos County, Texas.
Terms
of the notes were modified effective February 1, 2017, pursuant to an agreement between Jed Miesner, Petro Pro, Ltd., JLM and
the Company. Beginning February 1, 2017, and continuing through February 1, 2019, the interest rate on the aforementioned notes
was reduced from 8% to 6% per annum. Starting February 1, 2019 and continuing through the maturity date of the two notes (December
31, 2030), the annual interest rate on the notes was set at a rate equal to the Happy State Bank prime rate of 5.25% plus 2% at
October 31, 2019.
On
December 30, 2010, Amazing Energy, LLC, (a wholly owned subsidiary of the Company) entered into a $2,000,000 line of credit facility
with JLM Strategic Investments LP, an entity controlled by Jed Miesner. Funds advanced on the line of bear interest at the rate
of 8% per annum and are collateralized with a leasehold deed of trust covering certain leasehold interests in Pecos County, Texas.
Principal
maturities for the two loan agreements and the credit facility outstanding at October 31, 2019 for the remaining terms are summarized
by year as follows:
|
|
Principal Maturities
|
|
Twelve months
ending October 31,
|
|
Jed Miesner
|
|
|
Petro Pro, Ltd.
|
|
|
JLM Strategic
Investments, LP
|
|
|
Total
|
|
2020
|
|
$
|
310,995
|
|
|
$
|
176,337
|
|
|
$
|
41,170
|
|
|
$
|
528,502
|
|
2021
|
|
|
67,272
|
|
|
|
38,144
|
|
|
|
-
|
|
|
|
105,416
|
|
2022
|
|
|
72,655
|
|
|
|
41,196
|
|
|
|
-
|
|
|
|
113,851
|
|
2023
|
|
|
78,467
|
|
|
|
44,492
|
|
|
|
-
|
|
|
|
122,959
|
|
2024
|
|
|
84,744
|
|
|
|
48,051
|
|
|
|
-
|
|
|
|
132,795
|
|
Subsequent years
|
|
|
2,225,867
|
|
|
|
751,780
|
|
|
|
-
|
|
|
|
2,977,647
|
|
|
|
$
|
2,840,000
|
|
|
$
|
1,100,000
|
|
|
$
|
41,170
|
|
|
$
|
3,981,170
|
|
Related
party interest expense on these notes for the three months ended October 31, 2019 and 2018 was $75,260 and $46,597, respectively.
Accrued interest payable – related parties as of October 31, 2019 and July 31, 2019 was $228,118 and $152,858, respectively.
At
October 31, 2019, the balance of the convertible debt and accrued interest was convertible into membership units of Amazing Energy,
LLC, a wholly owned subsidiary of the Company, at $.60 per unit.
See
Note 12 Subsequent events about negotiations with Mr. Miesner regarding these notes payable.
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
On
October 16, 2018, the Company entered into promissory notes with its Chairman of the Board and one of its Directors to fund the
acquisition of the Wyatt properties in Pecos County, Texas and to allow the Company to enter into an Option Agreement for acquisition
of several oil and gas producing properties in Lea County, New Mexico. The aggregate principal amount of the two new notes was
$600,000. The notes required a placement fee of $60,000 (equal to 10% of the principal amounts of the loans), which was expensed
as financing cost during year ended July 31, 2019. As additional consideration for the financing, the Company issued 2,400,000
warrants for the right to acquire its common stock at an exercise price of $0.25 per share for a term of six years. As a result,
the Company recorded a debt discount of $288,000 to account for the relative fair value of the warrants. The debt discount was
amortized as interest expense over the term of the note.
On
October 26, 2018, the Company paid $400,000 on the promissory notes. During the fiscal year ended July 31, 2019, an additional
$260,000 of the promissory notes were satisfied through the noteholders participation in the offering of working interest.
At
July 31, 2019, the notes have been paid in full and the related debt discount has been fully amortized. Related party financing
costs on these notes for the year ended July 31, 2019 was $77,000.
Promissory
note payable – October 2018
On
October 22, 2018, the Company entered into a promissory note with Bories Capital, LLC (Bories) for $500,000, the owner of which
is a holder of all of the outstanding shares of the Companys Preferred B stock. The note bears interest at the Hancock
Whitney Bank prime rate plus two percent (7.50% at October 31, 2019) and is due in full at maturity on October 24, 2020. Interest
is payable monthly beginning on November 30, 2018. As additional consideration for the note, the Company agreed to modify the
terms of 2,674,576 warrants to acquire common stock held by the owner of Bories. The warrants were amended to change the exercise
price from $0.60 to $0.40 per share and extend the expiration date from July 31, 2019 to April 1, 2024. These modifications resulted
in financing fee of $480,771 which represents the difference in the fair value of the warrants before and after the change in
terms. The amount was recognized as a discount on the note and is being amortized as interest expense over the term of the note.
Amortization of $60,590 and $1,536 was recognized as interest expense during the three months ended October 31, 2019 and 2018,
respectively. At October 31, 2019, the discount balance is $120,741.
In
addition, terms of the Series B Preferred Stock held by the owner of Bories were modified. The Company agreed to suspend its right
to call the preferred stock until from the original call date of April 1, 2019 to April 1, 2024. In exchange for this suspension,
the Series B Preferred stockholders right to convert the preferred shares into warrants to acquire the Companys
common stock was amended to extend the conversion period to April 1, 2024.
Note
payable, acquisition – October 2018
On
October 12, 2018, the Company entered into an agreement for the acquisition of oil and gas producing interest in New Mexico for
$2,000,000. As part of the agreement, the Company entered into a seller financed note payable of $1,900,000. The note bears interest
at the rate of 7% per year and the entire balance of principal and interest is due at maturity on December 31, 2019. At October
31, 2019, the Company and the Seller are in negotiations related to extending the maturity date of the note. The note is secured
by the assets of Amazing Energy, LLC.
Convertible
notes payable – August and September, 2019
On
August 20, 2019, September 2, 2019, and September 9, 2019, the Company entered into three convertible note agreements with face
values of $400,000, $250,000, and $250,000, respectively. The notes bear interest at the rate of 12% per year and are due six
months after the borrowing dates. The notes were issued with an original issue discount of 10%. The principal and unpaid interest
on the notes are convertible in whole or in part into shares of the Companys common stock by the lenders at any time prior
to maturity. The conversion rate is the lesser of (i) 50% of the lowest trading price during the previous 20 day trading period
ending on the latest completed trading date prior to the date of each note, or (ii) 50% of the lowest trading price during the
previous 20 day trading period ending on the latest completed trading date prior to the lender electing conversion. The Company
may pre-pay the notes, in full, at any time prior to the due date so long as Company is not in default under any terms of the
notes.
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
The
original issue discount of 10% resulted in a discount on the notes payable balance. In addition, the conversion terms of the notes
resulted in a beneficial conversion feature that also created a discount on the notes payable balance. For two of the three notes,
the 10% original issue discount and the beneficial conversion feature amounts were greater than the net proceeds received. Thus,
the notes were fully discounted on the date of issuance. The third note was discounted to all but $2,778 of the notes face
value. The discount is being recognized as interest expense over the term of the notes.
Each
lender received shares of the Companys common stock as a commitment fee in connection with the borrowings. The fair value
of these shares was recognized as a financing expense during the three months ended October 31, 2019.
A
summary of the convertible notes payable upon issuance is as follows:
Lender
|
|
Face
Value
|
|
|
Original
Interest
Discount
|
|
|
Net
Proceeds
|
|
|
Beneficial
Conversion
feature
|
|
|
Total
discount on
date of loan
|
|
|
Shares of
common
stock
issued
|
|
|
Fair value
of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labrys Fund, LP
|
|
$
|
400,000
|
|
|
$
|
(40,000
|
)
|
|
$
|
360,000
|
|
|
$
|
(360,000
|
)
|
|
$
|
(400,000
|
)
|
|
|
500,000
|
|
|
$
|
55,000
|
|
Morningview Financial, LLC.
|
|
|
250,000
|
|
|
|
(25,000
|
)
|
|
|
225,000
|
|
|
|
(225,000
|
)
|
|
|
(250,000
|
)
|
|
|
312,500
|
|
|
|
31,250
|
|
Firstfire Global Opportunities Fund, LLC.
|
|
|
250,000
|
|
|
|
(25,000
|
)
|
|
|
225,000
|
|
|
|
(222,222
|
)
|
|
|
(247,222
|
)
|
|
|
312,500
|
|
|
|
31,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
900,000
|
|
|
$
|
(90,000
|
)
|
|
$
|
810,000
|
|
|
$
|
(807,222
|
)
|
|
$
|
(897,222
|
)
|
|
|
1,125,000
|
|
|
$
|
117,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
the terms of the notes, the Company also issued shares of its common stock (the Returnable Shares). These shares
will be returned to the Company if the convertible notes are fully repaid and satisfied prior to their due dates. If the convertible
notes are not paid timely, the fair value of the shares will be recognized as a financing fee. At October 31, 2019, the Returnable
Shares total 5,625,000 shares and have a fair value of $421,875. At October 31, 2019, the Company intends to pay the notes on
or before the due dates.
The
note agreements contain a provision whereby the conversion rate will be adjusted in the event that the Company issues any common
stock at a per share price lower than the current conversion rate. The agreements also contain covenants whereby the Company will
be required to obtain consent from the lenders to acquire its own common stock, borrow, sell assets, and lend funds.
At
October 31, 2019, information about the convertible notes payable is as follows:
|
|
Face Value
|
|
|
Discount
|
|
|
Net Balance
|
|
|
Accrued
interest
payable
|
|
|
Number of
convertible
common
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labrys Fund, LP
|
|
$
|
400,000
|
|
|
$
|
(242,222
|
)
|
|
$
|
157,778
|
|
|
$
|
9,337
|
|
|
|
6,666,667
|
|
Morningview Financial, LLC.
|
|
|
250,000
|
|
|
|
(169,355
|
)
|
|
|
80,645
|
|
|
|
4,849
|
|
|
|
5,000,000
|
|
Firstfire Global Opportunities Fund, LLC.
|
|
|
250,000
|
|
|
|
(178,168
|
)
|
|
|
71,832
|
|
|
|
4,274
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
900,000
|
|
|
$
|
(589,745
|
)
|
|
$
|
310,255
|
|
|
$
|
18,460
|
|
|
|
16,666,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of the discount of $307,477 was recognized as interest expense during the three months ended October 31, 2019.
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
Equipment
note payable
On
September 13, 2016, the Company entered into a retail installment sale contract and security agreement (the equipment note)
for the purchase of equipment. The equipment note is collateralized by a tractor loader backhoe. The equipment note requires 60
monthly installment payments of $994 through September 13, 2021. At October 31, 2019 and July 31, 2019, the balance of the
note was $17,986 and $21,018, respectively. Future principal payments for the twelve months ending October 31, 2020 and 2021 total $11,928
and $6,058, respectively.
NOTE
9 – ASSET RETIREMENT OBLIGATIONS
The
information below reconciles the value of the asset retirement obligation for three months ended October 31, 2019 and 2018 respectively:
|
|
For the three months ended October 31,
|
|
|
|
2019
|
|
|
2018
|
|
Beginning balance
|
|
$
|
636,205
|
|
|
$
|
258,575
|
|
Asset retirement obligation incurred
|
|
|
27,848
|
|
|
|
7,845
|
|
Accretion expense
|
|
|
12,734
|
|
|
|
3,479
|
|
Ending balance
|
|
$
|
676,787
|
|
|
$
|
269,899
|
|
During the three months ended October 31, 2019, the Company drilled and completed one well and recompleted
a second well. The Company estimated future costs to retire these wells and recorded asset retirement obligations. The estimated
future costs were discounted using a credit adjusted, risk-free interest rate of 6.0% and adjusted for inflation rate of 2.6%.
As a result, the Company increased its asset retirement obligation by $27,848 to reflect the increased ownership in additional
wells that were added during the three months ended October 31, 2019.
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
NOTE
10 – COMMITMENTS AND CONTINGENCIES
The
Company is subject to contingencies because of environmental laws and regulations. Present and future environmental laws and regulations
applicable to the Companys operations could require substantial capital expenditures or could adversely affect its operations
in other ways that cannot be predicted at this time.
Legal
contingency
On
September 7, 2017, Amazing Energy LLC and Jilpetco Inc. were served with a summons and complaint in Cause No. P-7600-83-CV in
the 83rd District Court in Pecos County, Texas. The nature of the litigation is that Amazing Energy & Jilpetco were joined
as defendants in a case in Pecos County, Texas, between Fredrick Bartlett Wulff, Sr. et al plaintiffs and Benedum & Trees,
LLC et al defendants. The suit alleges breach of lease, breach of implied duty to explore and develop, and requests a declaratory
judgment that the leases are terminated, and the suit requests an accounting of lease production. The plaintiffs seek a release
of the oil and gas leases except as to Section 91. The Companys counsel handling this case failed to comply with discovery
and the court awarded sanctions and legal costs against the Company in July 2019. At October 31, 2019 and July 31, 2019, the Company
has accrued $65,492 due to working interest owners related to the Wulff claims, said amount being paid subsequent to October 31,
2019. In addition, at October 31, 2019 and July 31, 2019, the Company has accrued an additional $98,291 in accounts payable for
the sanctions and legal costs, said amount being paid subsequent to October 31, 2019. The plaintiffs still contend that a breach
of contract remains as to Section 91 leases. In the opinion of the Companys management, the pending litigation claims against
it, if decided adversely, will not have a material adverse effect on the Companys financial condition, cash flows or results
of operations.
On
December 11, 2017, Amazing Energy LLC and Jilpetco Inc. were each served with a summons and complaint in Cause No. P-7813-83-CV
in the 83rd District Court in Pecos County, Texas. Amazing Energy and Jilpetco were named as defendants in a case by Rumson Royalty
Company as the plaintiff. The suit alleges Amazing Energy and Jilpetco have suspended certain royalty and/or overriding interest
payments owed to the plaintiff, and requests a declaratory judgment seeking the plaintiffs share of production proceeds
and reasonable attorneys fees. Management will vigorously defend the case. It is too early in the litigation to evaluate
the likely outcome or to evaluate the financial impact of the lawsuit, if any. In the opinion of the Companys Management,
none of the pending litigation, disputes or claims against it, if decided adversely, will have a material adverse effect on the
Companys financial condition, cash flows or results of operations.
On
October 24, 2018 AAPIM, LLC (AAPIM) filed a lawsuit in the District Court of Pecos County, Texas, 112th Judicial
District (Cause No. P-12363-112-CV) against Amazing Energy, LLC, a wholly-owned subsidiary of the Company. The Petition alleged
Amazing Energy, LLC failed to pay plaintiff its proportionate share of the proceeds from oil and gas production from minerals
in Pecos County, Texas. The Company retained counsel to represent Amazing Energy, LLC in the lawsuit. However, counsel for Amazing
Energy, LLC failed to answer AAPIMs Petition in a timely manner. AAPIM, on January 7, 2019 filed a Motion for Default Judgment
against Amazing Energy, LLC. Amazing Energy, LLC was not notified, by its counsel or its registered agent, of the Motion for Default
Judgment and as a result the Motion for Default Judgment was unopposed and on January 9, 2019, AAPIM obtained a Default Judgment
against Amazing Energy, LLC. The Company has been in negotiations with AAPIM to settle the amount owed by Amazing Energy, LLC
pursuant to the Default Judgment and management believes a settlement of the outstanding amount will occur. For the fiscal year
ending July 31, 2019, the Company has recognized an expense for the potential litigation settlement of $340,972 representing the
amount of the judgment, and interest expense of $50,303 incurred through October 31, 2019 as an accounts payable.
On
May 30, 2019 the Company received a request from a Company investor requesting arbitration for allegations of misrepresentation
by the Company, and/or its wholly-owned subsidiary Jilpetco, Inc., dating from the period of approximately 2011-2014. The arbitration
request stated that unless the matter was resolved by July 5, 2019 the investor would turn to the Texas Attorney Generals
office for relief. The Company entered into settlement negotiations with the investor, but those negotiations were not concluded
by the stated deadline. The investor thereafter sent the Company a copy of a letter from the Texas Attorney Generals office,
dated July 24, 2019, acknowledging the investors correspondence with the Texas Attorney Generals office and alleged
violations of Texas consumer protection laws and deceptive business practices. The Company has not directly received any
communications from the Texas Attorney Generals office, and the investor has informed the Company he has withdrawn his
complaint with the Attorney Generals office.
On
August 28, 2019, TCI Business Capital, Inc. (TCI) filed a petition, in the 416th District Court of Colin County,
Texas (Case No. 416-04883-2019), against the Company and its wholly-owned subsidiary Jilpetco, Inc. TCI is a commercial factoring
company that purchased certain accounts receivable from Diligent Well Site Services, LLC (Diligent). Diligent had
previously performed services to Jilpetco. On October 10, 2019, the Company and Jilpetco entered into a settlement agreement with
TCI whereby the Company/Jilpetco agreed to pay TCI the total amount of $66,085 in two installments. The first installment of $33,085
was paid on October 16, 2019. The second installment, in the amount of $33,000 was due on or before October 30, 2019. The Company
failed to make the second installment and on November 11, 2019, the Company was served, by TCI, with an amended petition. The
total amount of $66,085 was accrued as an accounts payable at July 31, 2019. The Company paid the second installment ($ 33,000)
to TCI on November 22, 2019, and on November 25, 2019, paid TCI an additional $ 2,500 for legal fees that were incurred in connection
with the case. This matter was resolved in full on November 22, 2019.
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
Lease
commitments
The
Companys principal offices are located at 5700 West Plano Parkway, Suite 3600 in Plano, Texas. Prior to May 1, 2019, the
Company subleased office space from a tenant under an approved sublease agreement. On May 1, 2019, the Company agreed to assume
the remaining lease obligations (through November 30, 2019) of the former tenant and became the new lessee under a new agreement
that extended the lease term to February 28, 2023. Terms of the new lease agreement require monthly lease payments of $6,892,
with periodic increases, plus additional amounts for reimbursement of certain operating costs. The lease does not include any
provision that would allow the lessor or lessee to elect to extend or terminate the lease or buy the building at the end of the
lease term. At October 31, 2019, the remaining lease term is 3.3 years.
Upon
implementation of ASC 842 on August 1, 2019, the Company recognized an operating lease liability and right-of-use asset of $256,092
for its one operating lease for its principal offices in Plano, Texas. To calculate the operating lease liability and right to
use asset, the Company utilized a 10.0% incremental borrowing rate to discount the future rent payments over the remaining lease
term of 3.58 years. The incremental borrowing rate was estimated based on the interest rate the Company would expect to incur
if it borrowed the funds to purchase the office on a collateralized basis with similar terms.
The
Company subleases a small portion of the office space to multiple tenants on a non-binding month-to-month basis. The Company has
no leases or subleases with any related parties.
As
of October 31, 2019, total future lease payments are as follows:
For the 12 months ended October 31,
|
2020
|
|
$
|
84,163
|
|
2021
|
|
|
85,357
|
|
2022
|
|
|
86,947
|
|
2023
|
|
|
29,159
|
|
Total
|
|
|
285,626
|
|
Less imputed interest
|
|
|
(43,928
|
)
|
Net lease liability
|
|
|
241,698
|
|
Current portion
|
|
|
(62,815
|
)
|
Long-term portion
|
|
$
|
178,883
|
|
For
the quarter ended October 31, 2019, costs relating to the operating lease were recognized as lease expense in the Consolidated Statements of Operations as follows:
Base rent pursuant to lease agreement
|
|
$
|
21,730
|
|
Variable lease operating costs
|
|
|
5,587
|
|
Sublease income
|
|
|
(12,501
|
)
|
Total lease costs
|
|
$
|
14,816
|
|
Oil
and gas lease commitments
Royalties:
The Company is obligated to pay royalties to holders of oil and natural gas interests in its operations.
Working
Interest Holders: The Company is obligated to pay working interest holders a pro-rata portion of revenue in oil operations net
of shared operating expenses. The amounts are based on monthly oil and gas sales and are charged monthly net of oil and gas revenue
and recognized as Due to working interest owners on the Companys Consolidated Balance Sheet.
The
typical oil and natural gas lease agreement covering our acreage positions in Pecos County, Texas and Lea County, New Mexico.
provides for the payment of royalties to the mineral owners for all oil and natural gas produced form any wells drilled on the
leased premises. The lessor royalties and other leasehold burdens on our properties generally range from 20% to 25%, resulting
in a net revenue interest to the Company working interest generally ranging from 75% to 80%.
NOTE
11 – STOCKHOLDERS EQUITY
Common
stock
The
Company is authorized to issue 3,000,000,000 shares of its common stock. All shares of common stock are equal to each other with
respect to voting, liquidation, dividend, and other rights. Owners of shares are entitled to one vote for each share owned at
any Shareholders meeting. The common stock of the Company does not have cumulative voting rights, which means that the
holders of more than fifty percent (50%) of the shares voting in an election of directors may elect all of the directors if they
choose to do so.
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
Preferred
stock
The
Company is authorized to issue 10,000,000 shares of its preferred stock with a no-par value per share.
Series
A convertible preferred stock:
As
of October 31, 2019 and July 31, 2019, the Company has no shares of Series A preferred stock outstanding. These shares were originally
issued from the designated 10,000,000 shares of preferred stock, no par value.
Effective
April 1, 2019, the Company redeemed all of the issued and outstanding shares of its Series A preferred stock. The holder of 100%
of the Series A was Jed Miesner, a member of the Companys Board of Directors. The Company redeemed 9,000 shares of the
Series A, which had the voting power equivalent to 90,000,000 shares of the Companys common stock, for the consideration
of $100.00 per share, or a total payment of $900,000. The redemption price was effectuated through an increase in the principal
balance of a promissory note issued to Mr. Miesner by the Companys wholly owned subsidiary Amazing Energy, LLC. The principal
balance of the Note was increased from $1,940,000 to $2,840,000.
Series
B convertible preferred stock:
The
Company has 50,000 shares of Series B preferred stock outstanding at October 31, 2019. These Series B shares were issued from
the designated 10,000,000 shares of preferred stock, no par value, with the following rights and preferences:
|
●
|
Liquidation
preference: Upon a liquidation event, an amount in cash equal to $100 per share, for a total of $5,000,000 computed as of October
31, 2019, shall be paid prior to liquidation payments to holders of Company securities junior to the Series B preferred stock.
|
|
●
|
Dividends:
Holders of the Series B preferred stock are not entitled to receive a dividend.
|
|
●
|
Voting:
The Series B preferred stock has no voting rights other than to be voted when required by the laws of the State of Nevada.
|
|
●
|
Non-transferrable:
The shares of Series B preferred stock are not transferable except under a plan for wealth transfer and estate planning or upon
conversion or redemption as set forth below.
|
|
●
|
Conversion:
Beginning July 31, 2024 (as amended), any shares of the Series B preferred stock outstanding will be convertible, at the discretion
of the shareholder, for a period of three years, into common stock purchase warrants of the Company with an conversion price of
$1.00 per share on the basis of 110 shares of common stock for each one share of Series B preferred stock outstanding.
|
As
additional consideration for a new promissory note dated October 22, 2018 (see Note 8), the terms of the right to convert preferred
shares into warrants to acquire common stock attached to the Companys Series B Preferred Stock, were amended
to extend the conversion period to April 1, 2024 and to reduce the underlying warrant exercise price from $0.60 per share to $0.40
per share. The Company further agreed to suspend its right to call the Series B Preferred Stock until April 1, 2024.
Common
Stock:
During
the three months ended October 31, 2019 and 2018, the Company issued the following:
|
●
|
600,000
and 400,000 shares of common stock, respectively, for cash of $150,000 and $100,000.
|
|
●
|
1,200,000
and -0- shares of common stock with a value of $330,000 for common stock payable at July 31, 2019.
|
|
●
|
400,000
and 599,000 shares of common stock with total fair values of $46,000 and $141,768, respectively, as compensation for services.
|
|
●
|
1,125,000
and -0- shares of common stock with total fair values of $117,500 and $-0- for financing costs related to the issuance of convertible
notes payable (Note 8).
|
|
●
|
5,625,000
and -0- shares of common stock issued in connection with convertible notes payable (Note 8). These shares are not outstanding
and will be returned to and retired by the Company once terms of the convertible notes payable are satisfied.
|
|
●
|
50,000
and 66,000 shares of common stock with total fair values of $12,500 and $16,482, respectively, in settlement of accounts payable.
|
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
Warrants:
During
the three months ended October 31, 2019, the Company issued no warrants to purchase common stock and recognized compensation of
$106,919 for the vesting of warrants issued in prior periods.
During
the three months ended October 31, 2018, the Company issued 104,775 warrants to purchase common stock valued at $23,449 for professional
services. Additionally, during the three months ended October, 31, 2018, the Company issued 2,400,000 warrants to purchase common
stock in connection with promissory notes with a fair value of $288,000 and changed the terms of 2,674,576 existing warrants with
an incremental fair value due to the modification of $480,771. See Note 8.
Warrant
transactions for the three months ended October 31, 2019 and 2018 are summarized as follows:
|
|
Three Months Ended October 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Outstanding warrants - beginning of period
|
|
|
10,651,308
|
|
|
|
6,280,633
|
|
Issued
|
|
|
-
|
|
|
|
2,504,775
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding warrants - end of period
|
|
|
10,651,308
|
|
|
|
8,785,408
|
|
The
Companys outstanding warrants at October 31, 2019 are as follows:
|
|
Number
|
|
|
|
Expiration Year
|
|
of Warrants
|
|
|
Exercise Price
|
|
|
|
|
|
|
2020
|
|
|
1,200,000
|
|
|
$0.50
|
2021
|
|
|
1,858,332
|
|
|
$0.40 to $1.00
|
2022
|
|
|
785,200
|
|
|
$0.25 to $0.60
|
2023
|
|
|
721,625
|
|
|
$0.23 to $0.74
|
2024
|
|
|
6,086,151
|
|
|
$0.31 to $0.40
|
|
|
|
|
|
|
|
|
|
|
10,651,308
|
|
|
|
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
Stock
Options:
For
the three months ended October 31, 2019 and 2018, the Company recognized stock based compensation of $293,037 and $216,276, respectively,
related to vesting of options granted in prior periods.
During
the three months ended October 31, 2019, the Company did not issue any additional stock options.
On
October 23, 2018, the Board of Directors authorized the grant of 1,000,000 options to purchase shares of common stock of the Company
to its Chief Financial Officer. The options have an exercise price of $0.30 and expire five years from the date of grant. 100,000
of the options vested immediately on the grant date and the remainder vest 25% annually upon each anniversary of the grant date.
For the three months ended October 31, 2018, the Company recognized stock based compensation of $17,974 for these options.
On
October 10, 2018, the Board of Directors also authorized the grant of 1,000,000 options to purchase shares of common stock of
the Company to certain directors. The options vested immediately at the date of grant. These options have an exercise price of
$0.30 and expire on October 23, 2023. The fair value of the grant was $214,726 which the Company recognized as stock-based compensation
for the three month period ended October 31, 2018.
At
October 31, 2019, unrecognized compensation related to all option grants is $1,208,677 which will be recognized over the next
2.25 years.
The
following is a summary of the Companys option activity for the three months ended October 31, 2019 and 2018:
|
|
For the three months ended October 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options - beginning of period
|
|
|
32,085,000
|
|
|
$
|
0.31
|
|
|
|
28,085,000
|
|
|
$
|
0.31
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Forfeited or rescinded
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Outstanding options - end of period
|
|
|
32,085,000
|
|
|
$
|
0.31
|
|
|
|
30,085,000
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the period, vested
|
|
|
12,495,833
|
|
|
$
|
0.31
|
|
|
|
9,475,000
|
|
|
$
|
0.31
|
|
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019 (Unaudited)
|
The
Companys outstanding options at October 31, 2019 are as follows:
|
|
Number
|
|
|
|
Expiration Year
|
|
of Options
|
|
|
Exercise Price
|
|
|
|
|
|
|
2021
|
|
|
2,600,000
|
|
|
$0.30 to $0.40
|
2022
|
|
|
27,885,000
|
|
|
$0.25 to $0.40
|
2023
|
|
|
1,300,000
|
|
|
$0.30
|
2024
|
|
|
300,000
|
|
|
$0.30
|
|
|
|
|
|
|
|
|
|
|
32,085,000
|
|
|
|
At
October 31, 2019, the vested options had no intrinsic value.
NOTE
12 – SUBSEQUENT EVENTS
In
November 2019, the Company came to terms on a proposed agreement with Jed and Lesa Miesner (the Miesners), and their
affiliated companies JLM Strategic Investments, LP (JLM), Petro Pro, Ltd. (PPL), US Petro, LLC (US
Petro). Pursuant to the agreement, the Company will pay the total sum of $1,750,000 to the Miesners and/or their affiliated
entities.
The
proposed agreement provides that the Company will acquire all right, title and interest in and to three notes and mortgages/deeds
of trust, with a value of approximately $4,200,000 held by the Miesners, JLM, and PPL, respectively. Furthermore, the parties
have agreed that the Miesners, and their related affiliates, will surrender all of the shares of the Companys common stock
held by them, forgo any claims to all options to acquire shares of the Companys common stock, all warrants to purchase
the Companys common stock, and any claims for compensation and wrongful termination pursuant to Jed Miesners former
employment agreement with the Company, as well as a release of any and all other claims the Miesners, and/or any of their affiliated
companies, may have against the Company and/or any of its subsidiaries. In exchange, the Company will forgo any claims it may
have against Jed Miesner pursuant to his former employment agreement with the Company and any other additional claims the Company,
and/or any of its subsidiaries, may have against the Miesners and/or any of their affiliated companies. As a part of the proposed
agreement, Jed Miesner will also resign from the Companys board of directors.
On
November 22, 2019, the Company closed on the acquisition of assets consisting of certain oil and gas leases encompassing
approximately nine hundred (900) acres, nine (9) oil wells and three (3) saltwater disposal wells (one which is currently
being used), all located in Mississippi and generally known as the Denver Mint Project. The Company acquired the
Denver Mint Project from multiple parties for approximately $3,050,000. Also, in connection with the closing of the purchase
of the Denver Mint Project, on November 22, 2019, the Company closed on a financing transaction whereby the Company sold an
overriding royalty interest, in and to the Denver Mint Project (the Denver Mint ORRI) for $4,500,000. The proceeds of
the sale of the Denver Mint Project OORI were allocated approximately $3,050,000 toward the acquisition of the Denver Mint
Project and the balance of approximately $1,450,000 towards working capital for the Company.
Pursuant
to the Denver Mint ORRI, the Company will deliver total aggregate production of 146,470 barrels of oil (the Total Production)
to the Denver Mint ORRI recipient over a period of 48 months (the Production Schedule). The Production Schedule
also provides for monthly production requirements, beginning in February 2020, which range from 280 barrels per month to 4,560
barrels per month (the Monthly Production). Once the monthly Production Schedule is met, the Company is entitled
to retain one hundred percent (100%) of seventy- five percent (75%) of the remaining monthly production. Once the Total Production
amount has been delivered to the Denver Mint OORI recipient, the Denver Mint OORI will terminate and the Company will be entitled
to the revenue from one hundred percent (100%) of seventy-five percent (75%) of all future production.
ITEM
2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
|
|
The
following discussion should be read in conjunction with our audited financial statements and notes thereto date July 31, 2019.
In connection with, and because we desire to take advantage of, the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, we caution readers regarding certain forward-looking statements in the following discussion and
elsewhere in this report and in any other statement made by us, or on our behalf, whether or not in future filings with the Securities
and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future
operations, strategies, financial results or other developments. Forward-looking statements are necessarily based upon estimates
and assumptions that are inherently subject to significant business economic and competitive uncertainties and contingencies,
many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These
uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed
in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements.
The
independent registered public accounting firms report on the Companys financial statements as of July 31,2019, and
for each of the fiscal years in the two-year period then ended, includes a going concern explanatory paragraph that
describes substantial doubt about the Companys ability to continue as a going concern.
Safe
Harbor Provision
This
Managements Discussion and Analysis includes a number of forward-looking statements that reflect our current views with
respect to future events and financial performance. Forward-looking statements are often identified by words like: believe,
expect, plan, estimate, anticipate, intend, project,
will, predicts, seeks, may, would, could,
potential, continue, ongoing, should, and similar expressions, or words
which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which
apply only as of the date of this Form 10-Q. These forward-looking statements are subject to certain risks or uncertainties that
could cause actual results to differ materially from historical results or from our predictions. We undertake no obligation to
update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
Overview
We
are in the business of exploration, development, and production of oil and gas in the Permian Basin of West Texas and in southeastern
New Mexico. This basin, which is one of the major producing basins in the United States,
is characterized by an extensive production history, a favorable operating environment, mature infrastructure, long reserve life,
multiple producing horizons, enhanced recovery potential and a large number of operators. The Permian Basin is characterized by
high oil and liquids rich natural gas, multiple vertical and horizontal target horizons, extensive production history, long-lived
reserves and high drilling success rates. As of October 31, 2019, the Company has leasehold rights located within approximately
70,000 acres in Pecos County, Texas and 5,385 gross acres (4,682 net acres) in Lea County, New Mexico. We believe that our concentrated
acreage positions provides us with an opportunity to achieve cost, operating and recovery efficiencies in the development of our
drilling inventory. Historically, our activities have been primarily focused on vertical development of the Queen formation over
the Central Basin platform, which separates the Midland Basin from the Delaware Basin, all of which are part of the Permian Basin
in West Texas. Recently, however, the Company has had several successful completions in the deeper San Andres zone of its Pecos
County, Texas and Lea County, New Mexico properties. Future drilling targets could include the Grayburg, Clear Fork, Glorietta,
and Devonian zones in Pecos County, Texas and the Devonian, Pennsylvanian and Wolfcamp/Wolfbone zones in Lea County, New Mexico.
Our
near-term success depends primarily on attracting developmental capital to continue to drill, develop reserves and increase production
within the leased acreage that we currently control. We are also open to acquiring oil and gas producing properties that would
be accretive to our shareholders. We are the operator of 100% of our Permian Basin acreage. This operating control allows us to
better execute on our strategies of enhancing returns through operational and cost efficiencies and increasing ultimate hydrocarbon
recovery by seeking to continually improve our drilling techniques, completion methodologies and reservoir evaluation processes.
Additionally, as the operator of all of our acreage, we retain the ability to increase or decrease our capital expenditure program
based on commodity price outlooks. This operating control also enables us to obtain data needed for efficient exploration of our
prospects. The Company owns a small drilling rig (2,500), completion rig, pulling unit and various equipment to operate
the property.
We
have been operating at a net loss situation. Given the current oil prices, and the inherent expenses of running a public company
in the oil and gas industry, it is uncertain if and when we may achieve profitable operations as a small company.
Commodity
Prices.
Our
results of operations are heavily influenced by commodity prices. Factors that may impact future commodity prices, including the
price of oil and natural gas, include: (1) weather conditions in the United States and where the Companys property interests
are located; (2) economic conditions, including demand for petroleum-based products, in the United States and the rest of the
world; (3) actions by OPEC, the Organization of Petroleum Exporting Countries; (4) political instability in the Middle East and
other major oil and natural gas producing regions; (5) governmental regulations; (6) domestic tax policy; (7) the price of foreign
imports of oil and natural gas; (8) the cost of exploring for, producing and delivering oil and natural gas; (9) the discovery
rate of new oil and natural gas reserves; (9) the rate of decline of existing and new oil and natural gas reserves; (10) available
pipeline and other oil and natural gas transportation capacity; (11) the ability of oil and natural gas companies to raise capital;
(12) the overall supply and demand for oil and natural gas; and (13) the availability of alternate fuel sources.
The
Company cannot predict the occurrence of events that may affect future commodity prices or the degree to which these prices will
be affected, the prices for any commodity that we produce will generally approximate current market prices in the geographic region
of the production. Furthermore, the Company has not entered into any derivative contracts, including swap agreements for oil and
gas.
Fiscal
Year 2018 Activity
Our
fiscal year ended July 31, 2018 activity focused on conventional drilling in the Queen formation in Pecos County, Texas. We spudded
two conventional wells and completed two wells in fiscal 2018, compared to spudding one conventional well and completion of one
well in fiscal 2017. We continued to develop the Queen formation in Pecos County, Texas during fiscal 2018. The rate of drilling
wells depends on raising capital to fund drilling and completion.
Fiscal
Year 2019 Activity
During
the fiscal year ended July 31, 2019, the Company continued to raise funds to drill oil and gas wells located within the approximately
70,000 acres, in Pecos County, Texas and the approximate 5,385 acres in Lea County, New Mexico, where our leasehold rights currently
exist. Our fund raising activities were primarily through joint venture working interest holder participations, whereby the Company
retained a carried working interest. In order to keep the leasehold in good standing, we adhered to the Continuous Drilling Clause
for each respective lease and strictly adhered to the requirements within said Drilling Clauses.
Additionally,
the WWJD #30 well was drilled to a total depth of 1,768 feet and Amazing encountered approximately fourteen feet of pay zone thickness
based on comparison to a southern offset well. The Company completed the well utilizing a technique known as an open hole
completion. Once the well quit flowing on its own, a pump jack system was installed to restart oil production. The well
is currently producing an average of 5-7 BOPD.
On
October 17, 2018 the Company closed on the acquisition of the deep rights in 26,000 mostly contiguous acres in the Permian Basin
in Pecos County, Texas. Post-closing the Company now controls all rights to all depths within the 61,000 acres with undivided
mineral interest and rights to the depth of 3,000 feet to surface on its additional ~9,000 acres. The purchased acreage is subject
to the same option terms that are applicable to the other Pecos County, Texas acreage controlled by the Company. Jilpetco, Inc.
will be the operator of record on all current and future wells, if any, on the acquired acreage. The cost of the acquisition was
$500,000.
During
the fiscal quarter ended October 31, 2019, the Company drilled and completed the Wilson 498 well and recompleted the Wilson 49-2
well on the Pecos County, Texas leasehold that was acquired in the transaction with Wyatt Energy, LLC. Management is still in
the process of evaluating the results of both wells as the just entered the initial production stage. At October 31, 2019, the
Company has a 100% working interest in twenty-seven (27) wells and a 37% working interest in the WWJD #31-H well located in the
Pecos County, Texas leasehold premises. The Company has drilled 27 wells throughout the property, and recompleted one well that
was drilled by a previous operator. Twenty-six of the wells either current producers or subjects of a scheduled workover/recompletion
plan. Two wells are currently shut-in and will probably be converted to injection wells associated with a future water-flood plan.
The level of capital expenditures for the remainder of the fiscal year will significantly depend on the future market prices for
oil and the Companys ability to source the necessary capital to fund the drilling of any wells in the future.
Fiscal
Year 2020 Activity
Effective
January 1, 2019 the Company acquired several oil and gas producing leaseholds in Lea County, New Mexico. At October 31, 2019,
the Company has seven producing wells and three saltwater disposal wells in the Lea County project.
Amazing
will leverage the extensive geological work done on the Pecos County, Texas acreage to select new well drilling locations. Identified
and prolific pay zone horizons proven on the acreage include the Queen, Grayburg, Clear- Fork, Wolfcamp, Pennsylvanian, Devonian
and Ellenberger. Modern 3-D seismic covers most of the leasehold, where 17 deep exploratory wells were drilled in the early 2000s
targeting Devonian and Ellenberger pay at depths of 8,000-9,000 foot Measured Depth. The Seismic data set primarily targeted Devonian
wells which have produced 4 BCFG and 150,000 barrels of oil in the area. Additionally, the data has identified prospects that
have yet to be drilled on the acreage and a recent new field discovery by an offset operator in 2017 which will provide additional
detailed geological insight as to rock properties, reserves, and production potentials. Amazing plans to shoot a larger 3-D survey
which has the potential to uncover additional new target areas.
Over
the past years Amazing has focused on shallower plays available under our existing options to incrementally increase production.
Our strategy is getting a tremendous boost with the addition of these deep rights and associated well-known pay zones. We expect
this acquisition to add several hundred potential new well locations to our current drilling inventory. The potential of our acreage
is now on par with many of our much larger peers and in the same well-known plays where they are experiencing marked success.
The
Companys Expansion Strategy includes the following:
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Capital
Expenditure Strategy for Pecos County, Texas and Lea County, New Mexico assets :
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Pecos
County, Texas and Lea County, New Mexico acreage represent the main revenue drivers for Amazing Energy.
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Management
plans to implement a monthly capital budget to drill additional wells and workover/recomplete existing wells Within both assets.
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Seek
to Acquire Additional Assets :
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Potential
pipeline acquisition with current positive cash flow.
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The
Company is geographically agnostic within the U.S. and is comfortable participating in both operated and non-operated transactions
in most geological basins located in the lower 48 states, but on a more practical basis prefers locations proximate to our current
operations in Texas and New Mexico.
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Seek
to acquire oil and gas leases in Mississippi that are currently producing, but subject to increased production resulting from
successful recompletion/workover activities in the future.
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Growth
through JV/ Farm Out
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The
Company intends to initiate discussions with other operators and investors for the purpose of forming joint-ventures on acreage
that we currently hold as well as any acreage that we may acquire in the future.
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Any
such joint-ventures would allow Amazing to leverage the financial resources and knowledge of leading operators in an effort to
enhance Amazings shareholders value.
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Overview
of Current Operations
Through
October 31, 2019, the Company has drilled twenty-seven wells and recompleted one well on its leasehold in Pecos County, Texas.
Twenty-six of the twenty-eight wells are either currently producing or awaiting workover/recompletion and two wells are currently
shut in. During the quarter ended October 31, 2019, the Company drilled and completed one vertical well in the Queen Sand formation
(Wilson 498) and recompleted one well in the Wolfcamp formation (Wilson 49-2) in Pecos County, Texas. While it is too early to
evaluate the results of the new wells, the Company believes that the wells will be commercially productive. As a result of the
recent Lea County, New Mexico acquisition (effective January 1, 2019), the Company now has seven additional wells that are currently
producing oil and gas. The Company also acquired three salt-water disposal wells in the Lea County, New Mexico asset acquisition
transaction. In August, 2019, the Company began disposing salt-water in one of its Lea County, New Mexico salt-water disposal
wells for another unrelated local operator. The Company will be paid an amount each month based on the total number of barrels
of salt-water disposed.
Compliance
with Government Regulations
The
oil and gas industry in the United States is subject to extensive regulation by federal, state and local authorities. At the federal
level, various federal rules, regulations and procedures apply, including those issued by the U.S. Department of Interior, the
U.S. Department of Transportation Office of Pipeline Safety (the DOT) and the U.S. Environmental Protection Agency
(the EPA). At the state and local level, various agencies and commissions regulate drilling, production and midstream
activities. For the state of Texas, the regulatory agency is the Texas Railroad Commission. These federal, state and local authorities
have various permitting, licensing and bonding requirements. Various remedies are available for enforcement of these federal,
state and local rules, regulations and procedures, including fines, penalties, revocation of permits and licenses, actions affecting
the value of leases, wells or other assets, suspension of production, and, in certain cases, criminal prosecution. As a result,
there can be no assurance that we will not incur liability for fines, penalties or other remedies that are available to these
federal, state and local authorities. However, we believe that we are currently in material compliance with federal, state and
local rules, regulations and procedures, and that continued substantial compliance with existing requirements will not have a
material adverse effect on our financial position, cash flows or results of operations.
Transportation
and Sale of Oil
Historically,
the Companys oil and gas revenues originated from production from its properties in Texas. Beginning February 1, 2019,
the Company will also begin generating oil and gas from its newly acquired properties in New Mexico. Each revenue stream is sold
to a single customer through month to month contracts. While this creates a customer concentration, there are alternate buyers
of the production in event the sole customer is unable or unwilling to purchase.
During
the three months ended October 31, 2019, the Company sold its oil and gas production to only four customers. Oil production was
sold to Rio Energy International, Inc. (Pecos County, Texas) and to Plains Marketing L.P. (Lea County, New Mexico), and natural
gas production was sold to Trans-Pecos Natural Gas Company, LLC (Pecos County, Texas) and Targa Resources (Lea County, New Mexico).
During the three months ended October 31, 2018, oil and gas production in Pecos County, Texas was sold to Sunoco, LP and Trans-Pecos
Natural Gas Company, LLC, respectively.
Regulation
of Production
Oil
and gas production is regulated under a wide range of federal and state statutes, rules, orders and regulations. State and federal
statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. The states
in which we operate, Texas and New Mexico, have regulations governing conservation matters, including provisions for the unitization
or pooling of oil and gas properties, the establishment of maximum rates of production from oil and gas wells, the regulation
of spacing, and requirements for plugging and abandonment of wells. Also, Texas and New Mexico impose a severance tax on production
and sales of oil, and gas within its jurisdiction. The failure to comply with these rules and regulations can result in substantial
penalties. Our competitors in the oil and gas industry are subject to the same regulatory requirements and restrictions that affect
our operations.
Environmental
Matters and Regulation
Our
oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing
the discharge of materials into the environment or otherwise relating to environmental protection. Numerous federal, state and
local governmental agencies, such as the EPA, issue regulations that often require difficult and costly compliance measures that
carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These
laws and regulations may require the acquisition of a permit before drilling commences; restrict the types, quantities and concentrations
of various substances that can be released into the environment in connection with drilling and production activities; limit or
prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive
and other protected areas; require action to prevent or remediate pollution (from current or former operations), such as plugging
abandoned wells or closing pits; take action resulting in the suspension or revocation of necessary permits, licenses and authorizations;
and/or require that additional pollution controls be installed and impose substantial liabilities for pollution resulting from
our operations or related to our owned or operated facilities. Liability under such laws and regulations is often strict (i.e.,
no showing of fault is required) and can be joint and several. Moreover, it is not uncommon for neighboring landowners
and other third-parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances,
hydrocarbons or other waste products into the environment. Changes in environmental laws and regulations occur frequently, and
any changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup
requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry
in general. Our management believes that we are in substantial compliance with applicable environmental laws and regulations and
we have not experienced any material adverse effect from compliance with these environmental requirements. This trend, however,
may not continue in the future.
Waste
Handling. The Resource Conservation and Recovery Act, as amended, and comparable state statutes and regulations promulgated
thereunder, affect oil and natural gas exploration, development and production activities by imposing requirements regarding the
generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval,
the individual states administer some or all the provisions of the Resource Conservation and Recovery Act, sometimes in conjunction
with their own, more stringent requirements. Although most wastes associated with the exploration, development and production
of crude oil and natural gas are exempt from regulation as hazardous wastes under the Resource Conservation and Recovery Act,
such wastes may constitute solid wastes that are subject to the less stringent non-hazardous waste requirements.
Moreover, the EPA or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes
or categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to
time in Congress to re-categorize certain oil and natural gas exploration, development and production wastes as hazardous
wastes. Also, in December 2016, the EPA agreed in a consent decree to review its regulation of oil and gas waste by March,
2019 to determine whether any revisions are necessary. Any such changes in the laws and regulations could have a material adverse
effect on our capital expenditures and operating expenses.
Administrative,
civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in
substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits,
registrations and other authorizations to the extent that our operations require them under such laws and regulations. Although
we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory
reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such
wastes.
Remediation
of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act, as amended, which we
refer to as CERCLA or the Superfund law, and analogous state laws, generally impose liability, without regard to
fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a hazardous
substance into the environment. These persons include the current owner or operator of a contaminated facility, a former
owner or operator of the facility at the time of contamination, and those persons that disposed or arranged for the disposal of
the hazardous substance at the facility. Under CERCLA and comparable state statutes, persons deemed responsible parties
are subject to strict liability that, in some circumstances, may be joint and several for the costs of removing or remediating
previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including
groundwater contamination), for damages to natural resources and for the costs of certain health studies. In addition, it is not
uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused
by the hazardous substances released into the environment. During our operations, we use materials that, if released, would be
subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold us responsible
under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such hazardous substances
have been released.
Water
Discharges. The Federal Water Pollution Control Act of 1972, as amended, also known as the Clean Water Act,
the Safe Drinking Water Act, the Oil Pollution Act and analogous state laws and regulations promulgated thereunder impose restrictions
and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes,
into navigable waters of the United States, as well as state waters. The discharge of pollutants into regulated waters is prohibited,
except in accordance with the terms of a permit issued by the EPA or the state. Spill prevention, control and countermeasure plan
requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination
of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. The Clean Water Act and regulations implemented
thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless
authorized by an appropriately issued permit. The EPA has also adopted regulations requiring certain oil and natural gas exploration
and production facilities to obtain individual permits or coverage under general permits for storm water discharges. In addition,
on June 28, 2016, the EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas
extraction facilities to publicly owned wastewater treatment plants, which regulations are discussed in more detail below under
the caption –Regulation of Hydraulic Fracturing. Costs may be associated with the treatment of wastewater
or developing and implementing storm water pollution prevention plans, as well as for monitoring and sampling the storm water
runoff from certain of our facilities. Some states also maintain groundwater protection programs that require permits for discharges
or operations that may impact groundwater conditions.
The
Oil Pollution Act is the primary federal law for oil spill liability. The Oil Pollution Act contains numerous requirements relating
to the prevention of and response to petroleum releases into waters of the United States, including the requirement that operators
of offshore facilities and certain onshore facilities near or crossing waterways must develop and maintain facility response contingency
plans and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration
costs. The Oil Pollution Act subjects owners of facilities to strict liability that, in some circumstances, may be joint and several
for all containment and cleanup costs and certain other damages arising from a release, including, but not limited to, the costs
of responding to a release of oil to surface waters.
Non-compliance
with the Clean Water Act or the Oil Pollution Act may result in substantial administrative, civil and criminal penalties, as well
as injunctive obligations. We believe we are in material compliance with the requirements of each of these laws.
Air
Emissions. The federal Clean Air Act, as amended, and comparable state laws and regulations, regulate emissions of various
air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues
to develop, stringent regulations governing emissions of air pollutants at specified sources. New facilities may be required to
obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs
to remain in compliance. For example, on August 16, 2012, the EPA published final regulations under the federal Clean Air Act
that establish new emission controls for oil and natural gas production and processing operations, which regulations are discussed
in more detail below in Regulation of Hydraulic Fracturing. Also, on May 12, 2016, the EPA issued a final rule regarding
the criteria for aggregating multiple small surface sites into a single source for air-quality permitting purposes applicable
to the oil and gas industry. This rule could cause small facilities, on an aggregate basis, to be deemed a major source, thereby
triggering more stringent air permitting processes and requirements. These laws and regulations may increase the costs of compliance
for some facilities we own or operate, and federal and state regulatory agencies can impose administrative, civil and criminal
penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and
regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and that we hold all
necessary and valid construction and operating permits for our operations. Obtaining or renewing permits has the potential to
delay the development of oil and natural gas projects.
Climate
Change. In December 2009, the EPA issued an Endangerment Finding that determined that emissions of carbon dioxide, methane
and other greenhouse gases present an endangerment to public health and the environment because, according to the EPA, emissions
of such gases contribute to warming of the earths atmosphere and other climatic changes. In May 2010, the EPA adopted regulations
establishing new greenhouse gas emissions thresholds that determine when stationary sources must obtain permits under the Prevention
of Significant Deterioration, or PSD, and Title V programs of the Clean Air Act. On June 23, 2014, in Utility Air Regulatory
Group v. EPA, the U.S. Supreme Court held that stationary sources could not become subject to PSD or Title V permitting solely
because of their greenhouse gas emissions. The Court ruled, however, that the EPA may require installation of best available control
technology for greenhouse gas emissions at sources otherwise subject to the PSD and Title V programs. On August 26, 2016, the
EPA proposed changes needed to bring the EPAs air permitting regulations in line with the Supreme Courts decision
on greenhouse gas permitting. The proposed rule was published in the Federal Register on October 3, 2016 and the public comment
period closed on December 2, 2016.
Additionally,
in September 2009, the EPA issued a final rule requiring the reporting of greenhouse gas emissions from specified large greenhouse
gas emission sources in the U.S., including natural gas liquids fractionators and local natural gas distribution companies, beginning
in 2011 for emissions occurring in 2010. In November 2010, the EPA expanded the greenhouse gas reporting rule to include onshore
and offshore oil and natural gas production and onshore processing, transmission, storage and distribution facilities, which may
include certain of our facilities, beginning in 2012 for emissions occurring in 2011. In October 2015, the EPA amended the greenhouse
gas reporting rule to add the reporting of greenhouse gas emissions from gathering and boosting systems, completions and workovers
of oil wells using hydraulic fracturing, and blowdowns of natural gas transmission pipelines.
The
EPA has continued to adopt greenhouse gas regulations applicable to other industries, such as its August 2015 adoption of three
separate, but related, actions to address carbon dioxide pollution from power plants, including final Carbon Pollution Standards
for new, modified and reconstructed power plants, a final Clean Power Plan to cut carbon dioxide pollution from existing power
plants, and a proposed federal plan to implement the Clean Power Plan emission guidelines. Upon publication of the Clean Power
Plan on October 23, 2015, more than two dozen states as well as industry and labor groups challenged the Clean Power Plan in the
D.C. Circuit Court of Appeals. On February 9, 2016, the Supreme Court stayed the implementation of the Clean Power Plan while
legal challenges to the rule proceed. Because of this continued regulatory focus, future greenhouse gas regulations of the oil
and gas industry remain a possibility. In addition, the U.S. Congress has from time to time considered adopting legislation to
reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of
greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas
cap and trade programs. Although the U.S. Congress has not adopted such legislation at this time, it may do so in the future and
many states continue to pursue regulations to reduce greenhouse gas emissions. Most of these cap and trade programs work by requiring
major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and gas processing
plants, to acquire and surrender emission allowances corresponding with their annual emissions of greenhouse gases. The number
of allowances available for purchase is reduced each year until the overall greenhouse gas emission reduction goal is achieved.
As the number of greenhouse gas emission allowances declines each year, the cost or value of allowances is expected to escalate
significantly.
In
December 2015, the United States participated in the 21st Conference of the Parties of the United Nations Framework Convention
on Climate Change in Paris, France (the Paris Accords). The Paris Accords call for the parties to undertake ambitious
efforts to limit the average global temperature, and to conserve and enhance sinks and reservoirs of greenhouse gases.
The Agreement went into effect on November 4, 2016. On June 1, 2017, President Trump announced the United States would withdraw
from the Paris Accords. The Agreement establishes a framework for the parties to cooperate and report actions to reduce greenhouse
gas emissions. Also, on June 29, 2016, the leaders of the United States, Canada and Mexico announced an Action Plan to, among
other things, boost clean energy, improve energy efficiency, and reduce greenhouse gas emissions. The Action Plan specifically
calls for a reduction in methane emissions from the oil and gas sector by 40% to 45% by 2025.
Restrictions
on emissions of methane or carbon dioxide that may be imposed could adversely affect the oil and natural gas industry. At this
time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would
impact our business.
In
addition, claims have been made against certain energy companies alleging that greenhouse gas emissions from oil and natural gas
operations constitute a public nuisance under federal and/or state common law. As a result, private individuals may seek to enforce
environmental laws and regulations against us and could allege personal injury or property damages. While our business is not
a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case
could significantly impact our operations and could have an adverse impact on our financial condition.
Moreover,
there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes,
thunderstorms, tornadoes and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change
is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience
temperatures substantially colder than their historical averages. Extreme weather conditions can interfere with our production
and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable
to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations.
Regulation
of Hydraulic Fracturing
Hydraulic
fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from
tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into
formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions.
However, legislation has been proposed in recent sessions of Congress to amend the Safe Drinking Water Act to repeal the exemption
for hydraulic fracturing from the definition of underground injection, to require federal permitting and regulatory
control of hydraulic fracturing, and to require disclosure of the chemical constituents of the fluids used in the fracturing process.
Furthermore, several federal agencies have asserted regulatory authority over certain aspects of the process. For example, the
EPA has recently taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under
the Underground Injection Control program, specifically as Class II Underground Injection Control wells under the
Safe Drinking Water Act.
In
addition, the EPA plans to develop a Notice of Proposed Rulemaking by June 2018, which would describe a proposed mechanism - regulatory,
voluntary, or a combination of both - to collect data on hydraulic fracturing chemical substances and mixtures. Also, on June
28, 2016, the EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction
facilities to publicly owned wastewater treatment plants. The EPA is also conducting a study of private wastewater treatment facilities
(also known as centralized waste treatment, or CWT, facilities) accepting oil and gas extraction wastewater. The EPA is collecting
data and information related to the extent to which CWT facilities accept such wastewater, available treatment technologies (and
their associated costs), discharge characteristics, financial characteristics of CWT facilities, and the environmental impacts
of discharges from CWT facilities.
On
August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new air emission controls
for oil and natural gas production and natural gas processing operations. Specifically, the EPAs rule package includes
New Source Performance standards to address emissions of sulfur dioxide and volatile organic compounds and a separate set of emission
standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities.
The final rule seeks to achieve a 95% reduction in volatile organic compounds emitted by requiring the use of reduced emission
completions or green completions on all hydraulically-fractured wells constructed or refractured after January 1,
2015. The rules also establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage
tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry
and the environmental community, and court challenges to the rules were also filed. In response, the EPA has issued, and will
likely continue to issue, revised rules responsive to some of the requests for reconsideration. On May 12, 2016, the EPA
amended its regulations to impose new standards for methane and volatile organic compounds emissions for certain new, modified,
and reconstructed equipment, processes, and activities across the oil and natural gas sector. On the same day, the EPA finalized
a plan to implement its minor new source review program in Indian country for oil and natural gas production, and it issued for
public comment an information request that will require companies to provide extensive information instrumental for the development
of regulations to reduce methane emissions from existing oil and gas sources. These standards, as well as any future laws and
their implementing regulations, may require us to obtain pre-approval for the expansion or modification of existing facilities
or the construction of new facilities expected to produce air emissions, impose stringent air permit requirements, or mandate
the use of specific equipment or technologies to control emissions.
Furthermore,
there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing
practices. The EPA is currently evaluating the potential impacts of hydraulic fracturing on drinking water resources. On December
13, 2016, the EPA released a study examining the potential for hydraulic fracturing activities to impact drinking water resources,
finding that, under some circumstances, the use of water in hydraulic fracturing activities can impact drinking water resources.
Also, on February 6, 2015, the EPA released a report with findings and recommendations related to public concern about induced
seismic activity from disposal wells. The report recommends strategies for managing and minimizing the potential for significant
injection-induced seismic events. Other governmental agencies, including the U.S. Department of Energy, the U.S. Geological Survey,
and the U.S. Government Accountability Office, have evaluated or are evaluating various other aspects of hydraulic fracturing.
These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing and could ultimately make it
more difficult or costly for us to perform fracturing and increase our costs of compliance and doing business.
Several
states, including Texas, and local jurisdictions, have adopted, or are considering adopting, regulations that could restrict or
prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure
of the composition of hydraulic fracturing fluids. The Texas Legislature adopted legislation, effective September 1, 2011, requiring
oil and gas operators to publicly disclose the chemicals used in the hydraulic fracturing process. The Texas Railroad Commission
adopted rules and regulations implementing this legislation that apply to all wells for which the Texas Railroad Commission issues
an initial drilling permit after February 1, 2012. The law requires that the well operator disclose the list of chemical ingredients
subject to the requirements of OSHA for disclosure on an internet website and file the list of chemicals with the Texas Railroad
Commission with the well completion report. The total volume of water used to hydraulically fracture a well must also be disclosed
to the public and filed with the Texas Railroad Commission. Also, in May 2013, the Texas Railroad Commission adopted rules governing
well casing, cementing and other standards for ensuring that hydraulic fracturing operations do not contaminate nearby water resources.
The rules took effect in January 2014. Additionally, on October 28, 2014, the Texas Railroad Commission adopted disposal well
rule amendments designed, among other things, to require applicants for new disposal wells that will receive non-hazardous produced
water and hydraulic fracturing flow-back fluid to conduct seismic activity searches utilizing the U.S. Geological Survey. The
searches are intended to determine the potential for earthquakes within a circular area of 100 square miles around a proposed
new disposal well. The disposal well rule amendments, which became effective on November 17, 2014, also clarify the Texas Railroad
Commissions authority to modify, suspend or terminate a disposal well permit if scientific data indicates a disposal well
is likely to contribute to seismic activity. The Texas Railroad Commission has used this authority to deny permits for waste disposal
wells.
There
has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic
activity, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the
environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic
fracturing practices. If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such laws could
make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it
easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific
chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated
at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance
requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging
and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes
could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could
have a material adverse effect on our financial condition and results of operations. Currently, it is not possible to estimate
the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing.
Other
Regulation of the Oil and Natural Gas Industry
The
oil and natural gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting
the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden.
Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations that
are binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure
to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently,
affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they
affect other companies in the industry with similar types, quantities and locations of production.
The
availability, terms and cost of transportation significantly affect sales of oil and natural gas. The interstate transportation
and sale for resale of oil and natural gas is subject to federal regulation, including regulation of the terms, conditions and
rates for interstate transportation, storage and various other matters, primarily by FERC. Federal and state regulations govern
the price and terms for access to oil and natural gas pipeline transportation. FERCs regulations for interstate oil and
natural gas transmission in some circumstances may also affect the intrastate transportation of oil and natural gas.
Although
oil and natural gas prices are currently unregulated, Congress historically has been active in oil and natural gas regulation.
We cannot predict whether new legislation to regulate oil and natural gas might be proposed, what proposals, if any, might actually
be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on our operations.
Sales of condensate and oil and natural gas liquids are not currently regulated and are made at market prices.
Drilling
and Production. Our operations are subject to various types of regulation at the federal, state and local level. These
types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. The
state, and some counties and municipalities, in which we operate also regulate one or more of the following:
the
locations of wells;
the method of drilling and casing wells;
the timing of constructions or drilling activities, including seasonal wildlife closures;
the rates of productions or allowables;
the surface use and restoration of properties upon which wells are drilled;
the plugging and abandoning of wells; and
notice to, and consultation with, surface owners and other third-parties
State
laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas
properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary
pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce
our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and
natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of
production. These laws and regulations may limit the amount of oil and natural gas we can produce from our wells or limit the
number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with
respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction. States do not regulate
wellhead prices or engage in other similar direct regulation, but we cannot assure you that they will not do so in the future.
The effect of such future regulations may be to limit the amounts of oil and natural gas that may be produced from our wells,
negatively affect the economics of production from these wells or to limit the number of locations we can drill.
Federal,
state and local regulations provide detailed requirements for the abandonment of wells, closure or decommissioning of production
facilities and pipelines and for site restoration in areas where we operate. The U.S. Army Corps of Engineers and many other state
and local authorities also have regulations for plugging and abandonment, decommissioning and site restoration. Although the U.S.
Army Corps of Engineers does not require bonds or other financial assurances, some state agencies and municipalities do have such
requirements.
Natural
Gas Sales and Transportation. Historically, federal legislation and regulatory controls have affected the price of the
natural gas we produce and the manner in which we market our production. FERC has jurisdiction over the transportation and sale
for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas
Policy Act of 1978. Since 1978, various federal laws have been enacted which have resulted in the complete removal of all price
and non-price controls for sales of domestic natural gas sold in first sales, which include all of our sales of
our own production. Under the Energy Policy Act of 2005, FERC has substantial enforcement authority to prohibit the manipulation
of natural gas markets and enforce its rules and orders, including the ability to assess substantial civil penalties.
FERC
also regulates interstate natural gas transportation rates and service conditions and establishes the terms under which we may
use interstate natural gas pipeline capacity, which affects the marketing of natural gas that we produce, as well as the revenues
we receive for sales of our natural gas and release of our natural gas pipeline capacity. Commencing in 1985, FERC promulgated
a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing
gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers
and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERCs initiatives
have led to the development of a competitive, open access market for natural gas purchases and sales that permits all purchasers
of natural gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically
has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach currently pursued
by FERC and Congress will continue indefinitely into the future nor can we determine what effect, if any, future regulatory changes
might have on our natural gas related activities.
Under
FERCs current regulatory regime, transmission services are provided on an open-access, non-discriminatory basis at cost-based
rates or negotiated rates. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the
states onshore and in state waters. Although its policy is still in flux, FERC has in the past reclassified certain jurisdictional
transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of transporting
gas to point-of-sale locations.
Oil
Sales and Transportation. Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made
at negotiated prices. Nevertheless, Congress could reenact price controls in the future.
Our
crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier
pipelines is also subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate
Commerce Act and intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis
for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates,
varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers,
we believe that the regulation of oil transportation rates will not affect our operations in any materially different way than
such regulation will affect the operations of our competitors.
Further,
interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open-access
standard, common carriers must offer service to all shippers requesting service on the same terms and under the same rates. When
oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines published
tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the
same extent as to our competitors.
State
Regulation. Texas and New Mexico regulate the drilling for, and the production, gathering and sale of, oil and natural
gas, including imposing severance taxes and requirements for obtaining drilling permits. Texas currently imposes a 4.6% severance
tax on oil production and a 7.5% severance tax on natural gas production, while New Mexico currently imposes a 3.75% severance
tax on oil and gas production as well as an additional emergency school tax (3.15%), a conservation tax (1.9%) and a production
ad-valorem tax (2.2886%). States also regulate the method of developing new fields, the spacing and operation of wells and the
prevention of waste of oil and natural gas resources. States may regulate rates of production and may establish maximum daily
production allowable from oil and natural gas wells based on market demand or resource conservation, or both. States do not regulate
wellhead prices or engage in other similar direct economic regulation, but we cannot assure you that they will not do so in the
future. The effect of these regulations may be to limit the amount of oil and natural gas that may be produced from our wells
and to limit the number of wells or locations we can drill.
The
petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those
laws relate to resource conservation and equal employment opportunity. We do not believe that compliance with these laws will
have a material adverse effect on us.
OSHA
and Other Laws and Regulations
We
are subject to the requirements of the federal Occupational Safety and Health Act (OSHA) and comparable state statutes.
The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of CERCLA and similar state
statutes require that we organize and/or disclose information about hazardous materials used or produced in our operations. These
laws also require the development of risk management plans for certain facilities to prevent accidental releases of pollutants.
We believe that we are in substantial compliance with these applicable requirements and with other OSHA and comparable requirements.
Competition
The
oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of
these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and
market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for productive
oil and natural gas properties and exploratory prospects or to define, evaluate, bid for and purchase a greater number of properties
and prospects than our financial or human resources permit. In addition, these companies may have a greater ability to continue
exploration activities during periods of low oil and natural gas market prices. Our larger or more integrated competitors may
be able to absorb the burden of existing, and any changes to, federal, state and local laws and regulations more easily than we
can, which would adversely affect our competitive position. Our ability to acquire additional properties and to discover reserves
in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in
a highly competitive environment. In addition, because we have fewer financial and human resources than many companies in our
industry, we may be at a disadvantage in bidding for exploratory prospects and producing oil and natural gas properties. Further,
oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms
of energy include electricity, coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms
of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels
and other forms of energy may affect the demand for oil and natural gas.
Office
and Other Facilities
The
Company leases its corporate headquarters in Plano, Texas.
Employees
As
of October 31, 2019, the Company had five full-time employees. We regularly use independent contractors and consultants to perform
various field-level tasks as well as other required services. None of our employees are represented by a labor union or covered
by any collective bargaining agreement.
Research
and Development Expenditures
None.
Reports
to Security Holders
We
file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, proxy statements and other documents
with the SEC under the Exchange Act. The SEC maintains an Internet website that contains reports, proxy and information statements,
and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any
document we file with the SEC at www.sec.gov.
PLAN
OF OPERATION
Title
to Properties
As
is customary in the oil and natural gas industry, we initially conduct only a cursory review of the title to our properties. When
we determine that we will conduct drilling operations on any properties, we conduct a thorough title examination and perform curative
work with respect to significant defects prior to commencement of drilling operations. To the extent title opinions or other investigations
reflect title defects on those properties, we are typically responsible for curing any title defects at our expense. We generally
will not commence drilling operations on a property until we have cured any material title defects on such property. We have obtained
title opinions on substantially all of our producing properties and believe that we have satisfactory title to our producing properties
in accordance with standards generally accepted in the oil and natural gas industry. Prior to completing an acquisition of producing
oil and natural gas leases, we perform title reviews on the most significant leases and, depending on the materiality of properties,
we may obtain a title opinion, obtain an updated title review or opinion or review previously obtained title opinions. Our oil
and natural gas properties are subject to customary royalty and other interests, liens for current taxes and other burdens which
we believe do not materially interfere with the use of or affect our carrying value of the properties.
Oil
and Gas Leases
The
typical oil and natural gas lease agreement covering our acreage positions in Pecos County, Texas and Lea County, New Mexico provide
for the payment of royalties to the mineral owners for all oil and natural gas produced from any wells drilled on the leased premises.
The lessor royalties and other leasehold burdens on our properties generally range from 20% to 25%, resulting in a net revenue
interest to the working interest owners generally ranging from 75% to 80%.
RESULTS
OF OPERATIONS
The
following table presents selected financial and operational data for the three months ended October 31, 2019 and 2018, respectively.
|
|
Three months ended October 31,
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
% Change
|
|
Revenue, oil and gas sales
|
|
$
|
201,741
|
|
|
$
|
130,025
|
|
|
$
|
71,716
|
|
|
|
55.16
|
%
|
Number of BOE sold
|
|
|
3,922
|
|
|
|
3,309
|
|
|
|
613
|
|
|
|
18.53
|
%
|
Average price per BOE
|
|
$
|
50.86
|
|
|
$
|
53.55
|
|
|
$
|
(2.69
|
)
|
|
|
-5.02
|
%
|
Net production (BOE)
|
|
|
4,525
|
|
|
|
2,487
|
|
|
|
2,038
|
|
|
|
81.95
|
%
|
Average daily net production (BOE)
|
|
|
49.18
|
|
|
|
28.00
|
|
|
|
21.18
|
|
|
|
75.66
|
%
|
Oil
and Gas Production and Revenue
Production
Costs
Production
costs increased $169,188 from $87,280 for the three months ended October 31, 2018 to $256,468 for the three months ended October
31, 2019. This increase for the comparable three-month period was attributable primarily to increased reasonable and customary
lease operating expenses.
Depletion,
depreciation and amortization of asset retirement obligation liability accretion (DD&A)
Depletion
of oil and gas properties is calculated under the units of production method, following the full cost method of accounting. For
the three month period ended October 31, 2019, DD&A was $100,921 as compared to $79,869 for the three month period ended October
31, 2018. The increase in DD&A of $21,052 for the three-month comparable period was primarily due to the change in increased
production for the current period relative to the prior year.
General
and Administrative Expenses
For
the three months ended October 31, 2019, the Companys general and administrative expenses were $1,153,940 compared to $986,659
for the comparative quarter ended October 31, 2018, an increase of $167,281.
Detail
of the changes in general and administrative expense is as follows:
Increase(decrease) in non cash stock and warrant compensation
|
|
$
|
(168,237
|
)
|
Increase(decrease) in consulting
|
|
|
87,063
|
|
Increase(decrease) in contract labor
|
|
|
(27,959
|
)
|
Increase(decrease) in investor relations expense
|
|
|
(5,919
|
)
|
Increase(decrease) in travel expense
|
|
|
15,501
|
|
Increase(decrease) in salaries, employee benefits and payroll taxes
|
|
|
99,316
|
|
Increase(decrease) in professional fees
|
|
|
116,901
|
|
Increase(decrease) in general corporate expenses
|
|
|
50,615
|
|
|
|
|
|
|
Total Increase in General and Administrative Expenses
|
|
$
|
167,281
|
|
Liquidity
and Capital Resources
The
Company had a working capital deficit of $5,982,212 as of October 31, 2019, compared to a working capital deficit of $4,901,103
as of July 31, 2019. The increase in the working capital deficit was primarily due to the net increase in accounts payable, issuance
of convertible notes payable, and the financing of $1,900,000 related to the New Mexico asset acquisition moving from long-term
to current liabilities.
Detail
of changes in cash flows for the three months ended October 31, 2019 and 2018 are as follows:
|
|
October 31, 2019
|
|
|
October 31, 2018
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$
|
(355,637
|
)
|
|
$
|
81,919
|
|
|
$
|
(437,556
|
)
|
Net cash (used in) investing activities
|
|
$
|
(717,751
|
)
|
|
$
|
(736,774
|
)
|
|
$
|
19,023
|
|
Net cash provided by financing activities
|
|
$
|
956,968
|
|
|
$
|
798,012
|
|
|
$
|
158,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company continues to seek sufficient capital to expand its drilling program. The most cost-effective source of capital would be
joint-ventured working interest participation funds. A typical joint venture would involve 100% of the drilling and completion
funds being provided by such working interest participants who would receive a negotiated working interest in the applicable wells.
The
Companys operating cash flow is dependent upon many factors, including production levels, sales volume, oil and gas prices
and other factors that may be beyond its control.
Critical
Accounting Policies and Recent Accounting Pronouncements
The
Company has identified the policies below as critical to business operations and the understanding of the Companys financial
statements. The impact of these policies and associated risks is discussed throughout Managements Discussion and Analysis
where such policies affect the Companys reported and expected financial results.
Principles
of Consolidation
The
Companys consolidated financial statements include all its subsidiaries.
The
following table shows the wholly-owned subsidiaries of Amazing Energy Oil and Gas, Co. which are engaged in the oil and gas business:
Name of Subsidiary
|
|
State of
Incorporation
|
|
Ownership Interest
|
|
Principal Activity
|
Amazing Energy, Inc.
|
|
Nevada
|
|
100%
|
|
Oil and gas exploration, development, and products
|
|
|
|
|
|
|
|
Amazing Energy, LLC
|
|
Texas
|
|
100%
|
|
Ownership of oil and gas leases
|
|
|
|
|
|
|
|
Jilpetco, Inc.
|
|
Texas
|
|
100%
|
|
Operating company
|
|
|
|
|
|
|
|
Amazing Energy Holdings, LLC
|
|
Texas
|
|
100%
|
|
Ownership of oil and gas leases
|