UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_ __________________________________________________________________________________________

Form 10-Q

___________________________________________________________________________________________

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-54639

CITADEL EXPLORATION, INC.

(Exact name of registrant as specified in its charter)
     
Nevada   27-1550482
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
417 31 st Street, Unit A, Newport Beach, CA   92663
(Address of principal executive offices)   (Zip Code)
     
(949) 612-8040
(Registrant's telephone number, including area code)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ☐ Accelerated filer   ☐
Non-accelerated filer company   ☐   Smaller reporting company   ☒
(Do not check if a smaller reporting company)      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

The number of shares of Common Stock, $0.001 par value, outstanding on May 20, 2019 was 48,956,151    shares.

 

 
 
 

CITADEL EXPLORATION, INC.

QUARTERLY PERIOD ENDED MARCH 31, 2018

 

Index to Report on Form 10-Q

 

      Page No.  
    PART I - FINANCIAL INFORMATION  
       
Item 1.   Consolidated Financial Statements (Unaudited) 1
       
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations 14
       
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 18
       
Item 4T.   Controls and Procedures 19
       
    PART II - OTHER INFORMATION  
       
Item 1.   Legal Proceedings 20
       
Item1A.   Risk Factors 20
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 20
       
Item 3.   Defaults Upon Senior Securities 21
       
Item 4.   Mine Safety Disclosures 21
       
Item 5.   Other Information 21
       
Item 6.   Exhibits 22
       
    Signature 22

 

 
 

PART I – FINANCIAL INFORMATION

 

Item 1. Unaudited Consolidated Financial Statements

 

- 1 -

CITADEL EXPLORATION, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

    March 31,   December 31,
    2019   2018
ASSETS                
Current assets:                
Cash   $ 94,322     $ 86,441  
Accounts receivable        39,269       135,824  
Prepaid expenses     11,158       32,633  
Total current assets     144,749       254,898  
                 
Long term assets
Right-of-use asset 		    69,173       —    
Deposits     35,100       35,100  
Restricted cash     200,000       200,000  
Oil and gas properties (successful efforts basis)
Proved, net 		    5,612,675       5,685,535  
     Unproved     1,172,034       1,172,034  
Fixed asset, net     63,415       67,326  
                 
Total assets   $ 7,297,146     $ 7,414,893  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
Accounts payable and accrued liabilities   $ 2,723,515     $ 2,657,590  
Accrued interest payable     478,350       390,224  
Drilling obligation, net of discount of $21,000 and $42,000 as of March 31, 2019 and December 31, 2018 respectively     686,082       676,060  
Notes payable, net of unamortized discount     2,398,628       2,353,003  
    Operating lease liability     69,173       —    
    Production payment liability - related party     300,000       300,000  
Total current liabilities     6,655,748       6,376,877  
                 
Asset retirement obligation     253,880       250,358  
                 
                 
Total liabilities     6,909,628       6,627,235  
                 
Stockholders' equity:                
Common stock, $0.001 par value, 300,000,000 shares authorized, 48,956,151   and 45,000,004   shares issued and outstanding as of March 31, 2019 and December 31, 2018 respectively     48,957       45,000  
Series A Preferred stock, $20.00 par value, 500,000 shares authorized, 400,615 and 395,615 shares issued and outstanding as of March 31, 2019 and December 31, 2018 respectively     8,012,300       7,912,300  
Additional paid-in capital     6,146,914       6,150,871  
Accumulated deficit     (13,820,653 )     (13,320,513 )
Total stockholders' equity     387,518       787,658  
                 
Total liabilities and stockholders' equity   $ 7,297,146     $ 7,414,893  

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

- 2 -

CITADEL EXPLORATION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    For the three months
    ended
    March 31,
    2019   2018
         
Revenue   $ 175,592     $ 212,554  
Operating expenses:                
Lease operating expense     169,020       285,796  
General and administrative     56,806       73,126  
Depreciation, amortization     75,024       133,426  
Professional fees     21,973       80,645  
Executive compensation     180,000       180,000  
Total operating expenses     502,823       752,993  
                 
Other expenses:                
Interest expense     (172,909 )     (11,476 )
Total other expenses     (172,909 )     (11,476 )
Loss before income taxes     (500,140 )     (551,915 )
(Provision) benefit for income taxes     —         —    
Net loss   $ (500,140 )   $ (551,915 )
                 
                 
Series A preferred stock dividends     (195,755 )     (194,789 )
Net loss available to common stockholders   $ (695,895 )   $ (746,704 )
                 
Weighted average number of common shares outstanding - basic and diluted     48,164,922       44,718,759  
Net loss per share – basic and diluted   $ (0.01 )     $ (0.02 )

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

- 3 -

CITADEL EXPLORATION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

                    Additional        
    Common Stock   Preferred Stock   Paid-In   Accumulated   Total
    Shares   Amount   Shares   Amount   Amount   Deficit   Equity
Balance at December 31, 2017     44,449,742     $ 44,450       394,365     $ 7,887,300     $ 5,691,239     $ (10,788,489 )   $ 2,834,500  
Common shares issued for services rendered     450,262       450       —         —         89,602       —         90,052  
Common shares issued to settle bonus payable     100,000       100       —         —         19,900       —         20,000  
Preferred shares issued for cash     —         —         1,250       25,000       —         —         25,000  
Debt discount on warrants issued     —         —         —         —         158,666       —         158,666  
Net loss     —         —         —         —         —         (551,915 )     (551,915 )
Balance at March 31, 2018     45,000,004     $ 45,000       395,615     $ 7,912,300     $ 5,959,407     $ (11,340,404 )   $ 2,576,303  
                                                         
                                                         
Balance at December 31, 2018     45,000,004     $ 45,000       395,615     $ 7,912,300     $ 6,150,871     $ (13,320,513 )   $ 787,   658  
Common shares issued for special preferred stock dividends     3,956,147       3,957       —         —         (3,957 )     —         —    
Preferred shares issued for cash     —         —         5,000       100,000       —         —         100,000  
Net loss     —         —         —         —         —       $ (500,140 )   $ (500,140 )
Balance at March 31, 2019     48,956,151     $ 48,957     $ 400,615     $ 8,012,300     $ 6,146,914     $ (13,820,653 )   $ 387,518  

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

- 4 -

CITADEL EXPLORATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)   

 

    For the three months
    Ended
    March 31,
    2019   2018
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (500,140 )   $ (551,915 )
Adjustments to reconcile net loss to net cash used in
operating activities 		               
      Depreciation, depletion and amortization     75,024       133,426  
      Stock based compensation expense     —         90,051  
      Amortization of debt discount     83,918       —    
Changes in operating assets and liabilities:                
Decrease (increase) in other receivable     96,555       (82,420 )
Decrease (increase) in prepaid expenses     21,475       23,984  
Increase (decrease) in accrued interest payable     88,126       10,349  
Increase (decrease) in accounts payable and accrued payables     80,412       (131,492 )
Net cash used in operating activities     (54,630 )     (508,017 )
CASH FLOWS FROM INVESTING ACTIVITIES                  
    Exploration and development of oil and gas properties     (9,218 )     (1,039,413 )
    Cash received from disposal of O&G asset     —         100,215  
    Net cash used in investing activities     (9,218 )     (939,198 )
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from sale of preferred stock     100,000       25,000  
Proceeds from notes payable     —         920,612  
    Proceeds (payments) from (to) drilling liability     (10,978 )     —    
    Repayments of notes payable     (17,293 )     (19,229 )
Net cash provided by financing activities     71,729       926,383  
Net increase in cash and restricted cash     7,881       (520,832 )
Cash and restricted cash at beginning of year     286,441       972,103  
   Cash and restricted cash at end of the period   $ 294,322     $ 451,271  
                 
Supplemental disclosures of cash flow information:                
    Income taxes paid   $ —       $ —    
    Interest paid     —         —    
                 
Non-cash investing and financing activities:                
    ROU asset and operating lease obligation recognized upon adoption of Topic 842 in 2019     92,231       —    
                 
   Shares issued to pay off bonus payable     —         20,000  
   Common shares issued for preferred dividends in 2019     3,957       —    
   Debt discount from senior secured credit facility     —         158,667  
   Asset retirement obligation     —         12,128  
  O&G property purchased still in AP     14,487       26,248  
   Non-cash addition of senior loan facility for payment of San Benito litigation     —         100,000  
Accrued interest payable rolled over to senior loan facility     —         229,388  

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

- 5 -

CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

The interim consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

 

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim consolidated financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2018 and notes thereto included in the Company’s 10-K annual report and all amendments. The Company follows the same accounting policies in the preparation of interim reports.

 

Results of operations for the interim period are not indicative of annual results.

 

Principles of consolidation

The consolidated financial statements include the accounts of Citadel Exploration, Inc., Citadel Exploration, LLC and Citadel Kern Bluff, LLC, the Company’s wholly owned subsidiaries.  All significant intercompany balances and transactions have been eliminated. Citadel Exploration, Inc., Citadel Exploration, LLC and Citadel Kern Bluff, LLC will be collectively referred herein to as “we”, “our or the “Company”.

 

Nature of operations

Currently, the Company is focused on the acquisition and development of oil and gas properties in California.  

 

Impairment

The Company evaluates the impairment of its proved oil and natural gas properties on a field-by-field basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying values of proved properties are reduced to fair value when the expected undiscounted future cash flows are less than net book value. The fair values of proved properties are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of proved properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. As of March 31, 2019, management believes that no impairment indicators exist.

 

- 6 -

CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Use of estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.

 

Fair value of financial instruments

The carrying value of the Company’s financial instruments, including cash, due to shareholders/related parties, accounts and other payables and notes payable approximate their fair values due to the immediate or short-term maturity of these instruments. It is management’s opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial instruments.

 

Cash and cash equivalents

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. The Company had no cash equivalents as of March 31, 2019 and December 31, 2018.

 

Earnings per share

The Company follows ASC Topic 260 to account for earnings per share. Basic earnings per common share (“EPS”) calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.

 

- 7 -

CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenue Recognition Policy

On   January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, and the series of related ASU’s that followed under ASC Topic 606 (collectively, “Topic 606”). Under Topic 606, revenue will generally be recognized upon delivery of our produced oil volumes to our customers. Our customer sales contract is only for oil as we do not produce any natural gas volumes for sale. Under Topic 606, each unit (barrel) of commodity product represents a performance obligation which is sold at variable prices, determinable on a daily basis. The pricing provisions of our contracts are primarily tied to market index with certain adjustments based on factors such as delivery, product quality and prevailing supply and demand conditions in geographic areas in which we operate. We will allocate the transaction price to the performance obligation and recognize revenue upon delivery of the commodity product when the customer obtains control. Control of our produced oil volumes passes to our customers when the oil is measured by a trucking oil ticket. The Company has no control over the commodities after that point and the measurement at those points dictates the amount on which the customer’s payment is based. Our oil revenue stream includes volumes burdened by royalty and other joint owner working interests. Our revenues are recorded and presented on our financial statements net of the royalty and other joint owner working interests. Our revenue stream does not include any payments for services or ancillary items other than the sale of oil. We record revenue in the month our production is delivered to the purchaser. However, settlement statements and payments for our oil sales may not be received for up to 60 days after the date production is delivered, and as a result, we are required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. We record any differences, which historically have not been significant, between the actual amounts ultimately received and the original estimates in the period they become finalized. Topic 606 will not change our pattern of timing of revenue recognition. We utilized the modified retrospective method for adoption of Topic 606, and in accordance with this method our consolidated financial statements for periods prior to January 1, 2018 were not materially affected or revised. The Company does not disaggregate revenue, as all revenue is generated from oil at one property located in California.

 

Recent pronouncements  

In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) to increase the transparency and comparability about leases among entities. Additional ASUs have been issued subsequent to ASU 2016-02 to provide supplementary clarification and implementation guidance for leases related to, among other things, the application of certain practical expedients, the rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments. ASU 2016-02 and these additional ASUs are now codified as Accounting Standards Codification Standard 842 - “Leases” (“ASC 842”). ASC 842 supersedes the lease accounting guidance in Accounting Standards Codification 840 “Leases” (“ASC 840”) and requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. The Company elected to utilize the “package” of three expedients, as defined in ASC 842, which retain the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. The Company’s consolidated financial statements for the periods prior to the adoption of ASC 842 are not adjusted and are reported in accordance with the Company’s historical accounting policy. As of the date of implementation on January 1, 2019, the impact of the adoption of ASC 842 resulted in the recognition of a right of use asset and lease payable obligation on the Company’s consolidated balance sheet of approximately $92,231. As the right of use asset and the lease payable obligation were the same upon adoption of ASC 842, there was no cumulative effect impact on the Company’s retained earnings.

 

- 8 -

CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

 

NOTE 2 – GOING CONCERN

 

The accompanying unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Since its inception, the Company has been engaged substantially in financing activities and developing its business plan and incurring startup costs and expenses. As a result, the Company has experienced recurring losses resulting in an accumulated deficit and a working capital deficit as of March 31, 2019 of $13,820,653 and $6,510,999, respectively. In addition, the Company’s development activities since inception have been financially sustained through debt and equity financing. These factors raised substantial doubt as to the Company’s ability to continue as a going concern.

 

There can be no assurance that the Company will be successful to raise sufficient cash to operate over the 12 months immediately following the issuance of its financial reports.

 

The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital from the sale of common stock and, ultimately, the achievement of significant operating revenues. These unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.

 

NOTE 3 – OIL AND GAS PROPERTIES

 

Oil and natural gas properties, buildings and equipment consist of the following:

 

    March 31, 2019   December
31, 2018
Oil and Natural Gas:                
    Proved properties   $ 4,116,671     $ 4,121,940  
    Unproved properties     1,172,034       1,172,034  
    Facilities     2,231,561       2,231,561  
      7,520,266       7,525,535  
                 
Less - accumulated depreciation, depletion, and amortization     (735,557 )     (667,966 )
    $ 6,784,709     $ 6,857,569  

 

For the three months ended March 31, 2019 and March 31, 2018 total depreciation and depletion expense amounted to $75,024 and $133,426, respectively.

 

- 9 -

CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

 

NOTE 4 – CASH AND RESTRICTED CASH

 

Amounts in consolidated balance sheets included as cash and restricted cash on the Company’s consolidated statements of cash flows are as follows:  

 

    March 31, 2019   December 31, 2018
         
Cash   $ 94,322       86,441  
Restricted cash – long term     200,000       200,000  
Total cash and restricted cash   $ 294,322     $ 286,441  

 

Restricted cash consists of one bond totaling $200,000 as of March 31, 2019. This bond was required in the normal course of business in the oil and gas industry. The bond totaling $200,000 was purchased in August 2015 following the acquisition of the Kern Bluff Oil Field. This was a blanket bond, which will cover 50 wells.

 

NOTE 5 – DEPOSITS

 

The Company had deposits of $35,100 for March 31, 2019 and December 31, 2018.

 

NOTE 6 – NOTES PAYABLE

 

Notes payable consists of the following:

 

    March
31, 2019
(unaudited) 		  December
31, 2018
Note payable to an entity for the financing of insurance
premiums, unsecured; 7.75% interest, due March 2018 		  $ —       $ 13,939  
              —    
Senior Secured Facility Loan 10% interest; due March 31, 2019.     2,350,000       2,350,000  
Unamortized debt discount     —         (62,924 )
                 
Note payable to an entity for the financing of a company vehicle, secured; 4.95% interest, due October 2022     23,928       25,598  
 Note payable to an entity for the financing of a company vehicle, secured; 4.95% interest, due November 2022     24,700       26,390  
Total – Notes Payable   $ 2,398,628     $ 2,353,003  

 

- 10 -

CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

 

NOTE 6 – NOTES PAYABLE (CONTINUED)

 

In March of 2018, the Company closed on a $3,000,000 senior secured credit facility. The facility bears 10% interest and has a one-year term. For every two dollars drawn on the facility, the investor receives one five-year warrant to purchase common stock at a price of $0.10. The Company has drawn down $2,350,000 on the facility and issued 1,175,000 warrants. The warrants were valued using the relative fair value and the amount recorded as a debt discount amortized over the life of the line of credit using effective interest method. Future drawdowns are at the discretion of the lender. The senior secured facility is secured by a deed of trust on the Kern Bluff Oil Field. Proceeds from the first draw where used to retire the previous bridge loan and accrued interest. Subsequent draws were used for general corporate purposes. The facility required the Company to achieve $1,000,000 in EBITDA as of December 31, 2018, which it did not attain. As such, the Company was in default of the facility’s covenants as of January 1, 2019 requiring the Company to pay a default interest rate of 15%. As of March 31, 2019 the Company was in default on its loan. The lender granted the Company a 45-day extension to refinance the loan. At this time, the Company has not been able to refinance the loan and remains in default.  

 

NOTE 7 – STOCKHOLDERS’ EQUITY

 

The Company is authorized to issue 300,000,000 shares of its $0.001 par value common stock. 

 

The Company is authorized to issue 500,000 shares of Series A Convertible Participating Preferred Stock.

 

In January of 2019, we issued 3,956,147 shares of our common stock valued at $0.20 as dividend payment on our Series A Preferred Stock.  

 

In March of 2019, we sold an additional 5,000 shares of Series A Convertible Participating Preferred Stock for cash proceeds of $100,000.

 

NOTE 8 – STOCK OPTION PLAN

 

The following is a summary of the status of all of the Company’s stock options as of March 31, 2019 and changes during the three months ended March 31, 2019:

 

    Number
of Options 		  Weighted-Average
Exercise Price 		  Aggregate
Intrinsic
Value 		  Weighted-Average
Remaining Life (Years)
  Outstanding at December 31, 2018       10,000,000     $ 0.20     $ —         2.48  
  Exercisable at December 31, 2018       10,000,000     $ 0.20     $ —         2.48  
  Outstanding at March 31, 2019       10,000,000     $ 0.20     $ —         2.23  
  Exercisable at March 31, 2019       10,000,000     $ 0.20     $ —         2.23  

 

- 11 -

CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

 

NOTE 9 – WARRANTS

 

The Company did not issue any new warrants during the three months ended March 31, 2019. Warrant activity for the three months ended March 31, 2019 is as follows:

 

    Number
of Warrants 		  Weighted-Average
Exercise Price 		  Weighted-Average
Remaining Life (Years)
  Outstanding at December 31, 2018       1,175,000     $ 0.10       4.34  
    Granted       —       $ 0.00       —    
    Exercised       —       $ 0.00       —    
  Outstanding at March 31, 2019       1,175,000     $ 0.10       4.10  

 

 

NOTE 10 – RELATED PARTY TRANSACTIONS

 

During the period the Company did not have any purchases of equipment from related parties; historically the Company had purchased oil field equipment from one of its board members. As of March 31, 2019 and December 31, 2018, the Company had a production payment liability of $300,000 outstanding to a related party.   The Company also has accrued interest related to a loan of $233,085 due to a related party.    

 

NOTE 11 – DRILLING OBLIGATION

 

The Company entered into a joint venture agreement with investors to drill two wells in the fourth quarter of 2017. The $700,000 liability has an 18% rate of return. The Company originally booked a debt discount of $126,000 on this obligation which is amortized over a period of 18 months. Amortization of debt discount for each of the three months ended March 31, 2019 and 2018 amounted to $21,000.

 

NOTE 12 – SUBSEQUENT EVENTS

 

On April 15, 2019 the Company executed an extension agreement with its Senior Secured lender which extended the maturity date of the loan to May 15, 2019. The Company was not able to settle the loan on the extended maturity date and is currently in default of its obligation. We continue to work with our lender to refinance the loan. The loan is secured by a deed of trust on the Kern Bluff Oil Field.

 

On May 1, 2019 Armen Nahabedian tendered his resignation as Director, CEO & President of the Company.

 

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FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements and involves risks and uncertainties that could materially affect expected results of operations, liquidity, cash flows, and business prospects. These statements include, among other things, statements regarding:

 

  o exploration risks such as drilling unsuccessful wells;

 

  o our ability to operate profitably;

 

  o our ability to efficiently and effectively finance our operations;

 

  o inability to achieve future sales levels or other operating results;

 

  o inability to raise additional financing for working capital;

 

  o inability to efficiently manage our operations;

 

  o inability to hire or retain sufficient qualified operating field personnel;

 

  o the inability of management to effectively implement our strategies and business plans;

 

  o the unavailability of funds for capital expenditures and/or general working capital;

 

  o deterioration in general or regional economic conditions;

 

  o the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain;

 

  o changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate;

 

  o adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;

 

As well as other statements regarding our future operations, financial condition and prospects, and business strategies. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A and those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

References in the following discussion and throughout this quarterly report to “we”, “our”, “us”, “Citadel”, “the Company”, and similar terms refer to Citadel Exploration, Inc. and its subsidiary, unless otherwise expressly stated or the context otherwise requires.

 

AVAILABLE INFORMATION

 

We file annual, quarterly and other reports and other information with the SEC. You can read these SEC filings and reports over the Internet at the SEC's website at www.sec.gov or on our website at www.citadelexploration.com . You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, NE, Washington, DC 20549 on official business days between the hours of 10:00 am and 3:00 pm. Please call the SEC at (800) SEC-0330 for further information on the operations of the public reference facilities. We will provide a copy of our annual report to security holders, including audited financial statements, at no charge upon receipt to of a written request to us at Citadel Exploration, Inc., 417 31 st Street, Unit A, Newport Beach, California 92663.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Overview

 

Citadel is an energy company engaged in the exploration and development of oil and natural gas properties. Our properties are located in the San Joaquin Basin of California. Subject to availability of capital, we strive to implement an accelerated development program utilizing capital resources, a regional operating focus, an experienced management and technical team, and enhanced recovery technologies to attempt to increase production and increase returns for our stockholders. Our corporate strategy is to build value in the Company through the acquisition of oil and gas leases with significant upside potential, successful exploration and exploitation and the efficient development of these assets.

 

Our revenues, profitability and future growth depend substantially on prevailing prices for oil and natural gas and our ability to find, develop and acquire oil and gas reserves that are economically recoverable.

 

Our Operations

Our principal strategy is to focus on the acquisition of oil and natural gas mineral leases that have known hydrocarbons or are in close proximity to known hydrocarbons that have been underdeveloped. Once acquired, we strive to implement an accelerated development program utilizing capital resources, a regional operating focus, an experienced management and technical team, and enhanced recovery technologies to attempt to increase production and increase returns for our stockholders. Our oil and natural gas acquisition and development activities are currently focused in the State of California.  

 

On July 31, 2015 Citadel acquired approximately 1,100 acres of leases, production facilities and equipment that encompassed the Kern Bluff Oil Field. As consideration for this acquisition Citadel issued 6,000,000 shares of common stock and paid $2,000,000 in cash. The transaction was financed via a $3,500,000 one-year term loan from Cibolo Creek Partners, of Midland Texas. In March of 2016, Cibolo Creek Partners converted the $3,500,000 term loan into Series A Convertible Participating Preferred Stock.

 

In December of 2015, Citadel shifted its CAPEX focus to remediation of the existing acquired facilities. At the time of purchase, the oil at Kern Bluff was being processed by temporary facilities installed by the previous owner. As production increased in September, it quickly became apparent that these facilities were not capable of processing the additional volumes of oil and water being produced. The existing permanent facilities were built in the 1970’s by Gulf Oil and require extensive remediation including new pipe, valves, flanges and tank repair.

 

In July of 2016, Citadel completed its facility upgrades. The new facilities have production capacity of 500 BOPD. Citadel drilled three wells in June of 2016 and returned to production 9 idle wells.

 

  In December of 2017, Citadel completed the installation of a 25MM BTU steam generator. The oil at Kern Bluff is characterized as heavy oil, therefore requiring stimulation via steam injection. This steam generator has capacity of over 1,400 barrels of steam per day (BOSPD) which will allow the Company to steam approximately 50 wells per year.

 

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In February of 2018, Citadel completed the drilling of three new wells. The company currently has approximately 14 wells on production and has seen field wide production increase from approximately 20 barrels per day to approximately 100 barrels per day.

 

In the first quarter of 2019, California experienced a spike in natural gas prices due to cold weather, and pipeline outages. As such the Company did not perform any cyclic steam injection during the quarter, this resulted in field wide production dropping to approximately 30-50 barrels of oil per day. The Company anticipates steaming up to 6 wells during the second quarter with a goal of exiting the second quarter at 80-100 barrels of oil per day.

 

On May 1, 2019 the Company’s CEO & President tendered his resignation.

 

Going Concern

 

The consolidated financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate the continuance of the Company as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As shown on the accompanying consolidated financial statements, the Company has incurred an accumulated deficit and working capital deficit in the amount of $13,820,653 and $6,510,999, respectively, as of March 31, 2019. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

The future of the Company is dependent upon its ability to obtain financing and upon future profitable operations from the development of its oil and gas business opportunities.

 

RESULTS OF OPERATIONS

 

Results of Operations for the Three Months Ended March 31, 2019 and March 31, 2018

 

During the three-month period ended March 31, 2019 we generated $175,592 from the sale of oil. During the three-month period ended March 31, 2018 we generated $212,554 from the sale of oil.

 

Operating expenses totaled $502,823 during the three-month period ended March 31, 2019 which was a decrease of $250,170 over the period ended March 31, 2018. Operating expenses consisted of lease operating expense, general and administrative costs, amortization and depreciation, professional fees, and executive compensation. The decrease in revenue arose from the Company’s decision to not cyclic steam wells during a period of higher than normal natural gas prices.

 

General and administrative fees decreased from $73,126 to $56,806 from the three-month period ended March 31, 2018 to the three-month period ended March 31, 2019. This decrease was primarily due less marketing, meals and entertainment expenses.

 

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Professional fees decreased from $80,645 to $21,973 from the three-month period ended March 31, 2018 to the three-month period ended March 31, 2019. The decrease was primarily due to a reduction in legal costs, engineering services, and accounting services provided to the Company.

 

Executive compensation remained the same at $180,000 from the three-month period ended March 31, 2018 to the three-month period ended March 31, 2019.

 

Liquidity and Capital Resources

 

The Company has established a capital budget for 2019 of $3,000,000 to drill up to 10 wells. The Company’s ability to complete this capital budget will be highly dependent on oil prices and access to capital.

 

As of March 31, 2019, the Company had $144,749   of current assets; of this amount $94,322 was cash. The following table provides detailed information about the net cash flow for the quarters ended March 31, 2019 and March 31, 2018 as presented in this quarterly report. To date, we have financed our operations through the issuance of stock and borrowings from related parties and an unrelated third party.

 

The following table sets forth a summary of our cash flows for the three months ended March 31, 2019 and 2018:

   

Three Months Ended

March 31,

    2019   2018
Net cash used in operating activities   $ (54,630 )   $ (508,017 )
Net cash used    in investing activities     (9,218 )     (939,198 )
Net cash provided by financing activities     71,729       926,383  
Net change in cash and restricted cash     7,881       (520,832 )
Cash and restricted cash, beginning of period     286,441       972,103  
Cash and restricted cash, end of period   $ 294,322     $ 451,271  

 

Operating activities

 

The net loss in the period was greater than the non-cash adjustments to reconcile the changes in the balance sheet and statement of operations, which is the reason cash used in operating activities was negative.

 

Investing activities

 

The net cash used in      investing activities consisted of drilling expenses and facility upgrades on oil and gas properties of $9,218 on the Company’s properties.

 

Financing activities

 

The net cash provided by financing activities consisted of proceeds from the preferred stock offering, totaling $100,000.  

 

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The Company made payments of $17,293 in the period ending March 31, 2019 to auto loans and the financing of insurance premiums.  

 

As of March 31, 2019, we continue to use traditional and/or debt financing as well as through the issuance of stock to provide the capital we need to run our business.

 

Without cash flow from operations we will require additional cash resources, including the sale of equity or debt securities, to meet our planned capital expenditures and working capital requirements for the next 12 months. We will require additional cash resources due to changed business conditions, implementation of our strategy to successfully develop our Kern Bluff Oil Field, and or acquisitions we may decide to pursue. If our own financial resources and then current cash-flows from operations are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities will result in dilution to our stockholders. The incurrence of indebtedness will result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations or modify our plans to grow the business. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, will limit our ability to expand our business operations and could harm our overall business prospects.

 

Our ability to obtain additional capital through additional equity and/or debt financing, and Joint Venture or Working Interest partnerships will also be important to our expansion plans. In the event we experience any significant problems assimilating acquired assets into our operations or cannot obtain the necessary capital to pursue our strategic plan, we may have to reduce the growth of our operations. This may materially impact our ability to increase revenue and develop our assets. 

 

Contractual Obligations

 

An operating lease for rental office space was entered into beginning March 1, 2013 for two years at $2,150 per month. The original lease was amended to include additional space at a price of $1,100 per month for the same term.  The original term of the lease expired on March 1, 2015. As such our office lease is now on a month to month basis at a rate of $3,000 per month.

 

Off-Balance Sheet Arrangements

 

As of the date of this report, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

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Operation Plan

 

Our plan is to focus on the acquisition and drilling of prospective oil and natural gas mineral leases. Once we have tested a prospect as productive, subject to availability of capital, we will implement a development program with a regional operating focus in order to increase production and increase returns for our stockholders. Exploration, acquisition and development activities are currently focused in California. Depending on availability of capital, and other constraints, our goal is to increase stockholder value by finding and developing oil and natural gas reserves at costs that provide an attractive rate of return on our investments.

 

We expect to achieve these results by:

 

  • Investing capital in exploration and development drilling and in secondary and tertiary recovery of oil as well as natural gas;

 

  • Using the latest technologies available to the oil and natural gas industry in our operations;

 

  • Finding additional oil and natural gas reserves on the properties we acquire.

 

In addition to raising additional capital we plan to take on Joint Venture (JV) or Working Interest (WI) partners who may contribute to the capital costs of drilling and completion and then share in revenues derived from production. This economic strategy may allow us to utilize our own financial assets toward the growth of our leased acreage holdings, pursue the acquisition of strategic oil and gas producing properties or companies and generally expand our existing operations.

 

Our future financial results will depend primarily on: (i) the ability to continue to source and screen potential projects; (ii) the ability to discover commercial quantities of natural gas and oil; (iii) the market price for oil and natural gas; and (iv) the ability to fully implement our exploration and development program, which is dependent on the availability of capital resources. There can be no assurance that we will be successful in any of these respects, that the prices of oil and gas prevailing at the time of production will be at a level allowing for profitable production, or that we will be able to obtain additional funding to increase our currently limited capital resources.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

This item in not applicable as we are currently considered a smaller reporting company.

 

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Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

 

Our Chief Financial Officer, Philip McPherson evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based on that evaluation and assessment, Mr. Philip McPherson concluded that our disclosure controls and procedures are not designed at a reasonable assurance level and are not effective to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

 Various lawsuits, claims and other contingencies arise in the ordinary course of the Company’s business activities. While the ultimate outcome of the aforementioned contingencies are not determinable at this time, management believes that any liability or loss resulting therefrom will not materially affect the financial position, results of operations or cash flows of the Company.

 

Item 1A. Risk Factors.

 

Our significant business risks are described in Item 1A. to Part I of Form 10-K for the year ended December 31, 2018 (filed April 16, 2019) to which reference is made herein.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Stock Issuances pursuant to Subscription Agreements  

 

In March of 2017, the Company filed the appropriate paperwork with the State of Nevada, authorizing the issuance of up to 500,000 shares of Series A Preferred Stock, 500,000 shares of Series B Preferred Stock and 500,000 shares of Series C Preferred Stock. The Company also increased the authorized amount of common shares from 100,000,000 to 300,000,000. As of March 31 st, 2019, we have issued 400,615 of Series A Preferred Shares, and zero shares of Series B or C.

 

We believe that the issuance and sale of the above securities were exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2), Regulation D and/or Regulation S. The securities were issued directly by us and did not involve a public offering or general solicitation. The recipient of the securities was afforded an opportunity for effective access to files and records of our company that contained the relevant information needed to make her investment decision, including our financial statements and 34 Act reports. We reasonably believed that the recipient, immediately prior to issuing the securities, had such knowledge and experience in our financial and business matters that she was capable of evaluating the merits and risks of its investment. The recipient had the opportunity to speak with our management on several occasions prior to her investment decision. There were no commissions paid on the issuance and sale of the shares.

 

Option Grants

 

Our option grants are described in Form 10-K for the year ended December 31, 2018 (filed April 16, 2019) to which reference is made herein.

 

Subsequent Stock Issuances

 

None.

 

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Issuer Purchases of Equity Securities

 

We did not repurchase any of our equity securities from the time of our inception on November 6, 2006 through the period ended March 31, 2019.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

2012 Stock Incentive Plan

 

On September 1, 2012, we adopted the 2012 Stock Incentive Plan. We have reserved for issuance an aggregate of 10,000,000 shares of common stock under our 2012 Stock Incentive Plan. To date 10,000,000 options and no shares of common stock have been granted under this plan.

 

Our employment agreements with executive officers are described in Form 10-K for the year ended December 31, 2018 (filed April 16, 2019) to which reference is made herein.

 

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Item 6. Exhibits.

 

Exhibit No.   Description
10.4   2012 Stock Incentive Plan
     
31.1   Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase

 

*        XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    CITADEL EXPLORATION, INC.
       
       
Date: May 20, 2019   By: /S/ Philip McPherson
      Philip McPherson
      Chief Financial Officer
      (Principal Executive Officer and duly authorized signatory)

 

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