UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20172018
OR
¨ TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to __________._______.
Commission file number: 000-29219
VIKING ENERGY GROUP, INC. |
(Formerly Viking Investments Group, Inc.) (Exact name of registrant as specified in its charter) |
Nevada |
| 98-0199508 |
(State or other jurisdiction of incorporation or organization) |
| (IRS Employer Identification No.) |
1330 Avenue of the Americas,15915 Katy Freeway, Suite 23 A,450
New York, NY 10019Houston, TX 77094
(Address of principal executive offices)
(212) 653 0946(281) 404 4387
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has 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 x 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 x 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 the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated | ¨ |
| ¨ |
Non-Accelerated Filer | ¨ | Smaller Reporting Company | x |
Emerging Growth Company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS
As of NovemberAugust 14, 2017,2018, the registrant had 66,220,52483,847,729 shares of common stock outstanding.
2 |
|
Consolidated Balance Sheets (Amounts expressed in US dollars) |
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| September 30, |
| December 31, |
|
| June 30, |
| December 31, |
| ||||||
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| ||||||
|
| (unaudited) |
| (audited) |
|
| (unaudited) |
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| ||||||
ASSETS |
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| ||||||
Current assets: |
|
|
|
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|
|
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| ||||||
Cash |
| $ | 568,222 |
| $ | 18,605 |
|
| $ | 5,806,479 |
| $ | 536,156 |
| ||
Restricted cash |
| - |
| 5,199,103 |
| |||||||||||
Accounts receivable – oil and gas |
| 63,257 |
| 66,176 |
|
| 559,682 |
| 573,296 |
| ||||||
Other receivable – related party |
| 76,939 |
| 76,939 |
|
| - |
| 548,714 |
| ||||||
Prepaid expenses |
|
| 6,549 |
|
|
| 87,532 |
|
|
| 65,761 |
|
|
| - |
|
Total current assets |
| 714,967 |
| 249,252 |
|
| 6,431,922 |
| 6,857,269 |
| ||||||
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Oil and gas properties, full cost method |
|
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| ||||||
Proved developed producing oil and gas properties, net |
| 2,254,925 |
| 1,765,373 |
|
| 11,577,814 |
| 12,301,141 |
| ||||||
Undeveloped and non-producing oil and gas properties, net |
|
| 1,166,383 |
|
|
| 1,237,489 |
|
|
| 28,001,852 |
|
|
| 26,859,634 |
|
Total oil and gas properties, net |
| 3,421,308 |
| 3,002,862 |
|
| 39,579,666 |
| 39,160,775 |
| ||||||
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Long term investment |
| - |
| 106,930 |
| |||||||||||
Derivative asset |
|
| 683 |
|
|
| - |
| ||||||||
Fixed assets, net |
| 267,576 |
| 166,741 |
| |||||||||||
Other assets |
|
| 32,083 |
|
|
| 9,396 |
| ||||||||
TOTAL ASSETS |
| $ | 4,136,958 |
|
| $ | 3,359,044 |
|
| $ | 46,311,247 |
|
| $ | 46,194,181 |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current liabilities: |
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Accrued expenses and other current liabilities |
| $ | 253,491 |
| $ | 179,421 |
|
| $ | 819,287 |
| $ | 397,070 |
| ||
Accounts payable |
| 115,885 |
| 121,365 |
|
| 622,808 |
| 2,555,869 |
| ||||||
Undistributed revenues and royalties |
| 1,253,934 |
| 1,175,200 |
| |||||||||||
Derivative liability |
| 606,878 |
| 1,136,894 |
|
| 1,232,810 |
| 1,052,788 |
| ||||||
Amount due to directors |
| 1,056,147 |
| 1,072,576 |
|
| 509,007 |
| 1,192,970 |
| ||||||
Current portion of long term debt – net of debt discount |
|
| 1,518,464 |
|
|
| 1,302,476 |
|
|
| 4,732,565 |
|
|
| 3,562,051 |
|
Total current liabilities |
| 3,550,865 |
| 3,812,732 |
|
| 9,170,411 |
| 9,935,948 |
| ||||||
Long term debt - net of current portion and debt discount |
| 2,568,568 |
| 1,579,469 |
|
| 13,149,005 |
| 9,742,830 |
| ||||||
Deferred tax liability |
| 33,548 |
| 910,827 |
| |||||||||||
Asset retirement obligation |
|
| 1,067,232 |
|
|
| 833,017 |
|
|
| 3,367,052 |
|
|
| 3,096,263 |
|
TOTAL LIABILITIES |
|
| 7,186,665 |
|
|
| 6,225,218 |
|
|
| 25,720,016 |
|
|
| 23,685,868 |
|
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Commitments and contingencies (Note 7) |
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Commitments and contingencies (Note 8) |
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STOCKHOLDERS’ DEFICIT |
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STOCKHOLDERS’ EQUITY |
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Capital Stock |
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Preferred stock, $0.001 par value, 5,000,000 shares authorized, 28,092 shares issued and outstanding as of September 30, 2017 and December 31, 2016 |
| 28 |
| 28 |
| |||||||||||
Common stock, $0.001 par value, 100,000,000 shares authorized, 66,220,524 and 53,093,192 shares issued, issuable and outstanding as of September 30, 2017 and December 31, 2016 respectively. |
| 66,221 |
| 53,093 |
| |||||||||||
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 28,092 shares issued and outstanding as of June 30, 2018 and December 31, 2017 |
| 28 |
| 28 |
| |||||||||||
Common stock, $0.001 par value, 100,000,000 shares authorized,with 83,464,906 and 72,347,991 shares issued and outstanding as of June 30, 2018 and December 31, 2017 respectively. |
| 83,465 |
| 72,348 |
| |||||||||||
Additional Paid-In Capital |
| 14,011,458 |
| 11,526,847 |
|
| 21,790,203 |
| 19,029,892 |
| ||||||
Prepaid equity-based compensation |
| (50,072 | ) |
| (35,068 | ) |
| - |
| (11,827 | ) | |||||
Accumulated other comprehensive loss |
| - |
| (1,446 | ) | |||||||||||
Accumulated deficit |
|
| (17,077,342 | ) |
|
| (14,409,628 | ) | ||||||||
TOTAL STOCKHOLDERS’ DEFICIT |
|
| (3,049,707 | ) |
|
| (2,866,174 | ) | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT |
| $ | 4,136,958 |
|
| $ | 3,359,044 |
| ||||||||
Retained earnings (accumulated deficit) |
|
| (1,282,465 | ) |
|
| 3,417,872 |
| ||||||||
TOTAL STOCKHOLDERS’ EQUITY |
|
| 20,591,231 |
|
|
| 22,508,313 |
| ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 46,311,247 |
|
| $ | 46,194,181 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3 |
Table of Contents |
|
Consolidated Statements of Operations and Comprehensive Loss (Unaudited) (Amounts expressed in US dollars) |
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| Three months ended, |
| Nine months ended, |
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| Three months ended |
| Six months ended |
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| September 30, |
| September 30, |
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| June 30, |
| June 30, |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
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Revenue |
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Oil and gas sales |
| $ | 221,329 |
| $ | 105,427 |
| $ | 588,622 |
| $ | 232,013 |
|
| $ | 2,318,622 |
| $ | 160,430 |
| $ | 4,480,569 |
| $ | 367,293 |
| ||||||
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Operating expenses |
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| ||||||||||||||
Lease operating costs |
| 172,893 |
| 66,456 |
| 437,477 |
| 165,773 |
|
| 1,035,474 |
| 104,066 |
| 2,043,742 |
| 264,584 |
| ||||||||||||||
General and administrative |
| 180,400 |
| 186,508 |
| 666,323 |
| 439,604 |
|
| 1,125,936 |
| 215,582 |
| 2,026,461 |
| 485,923 |
| ||||||||||||||
Stock based compensation |
| 153,155 |
| 172,219 |
| 1,304,175 |
| 578,363 |
|
| 1,044,612 |
| 803,616 |
| 1,218,099 |
| 1,151,020 |
| ||||||||||||||
Accretion - ARO |
| 10,526 |
| 5,234 |
| 29,167 |
| 15,513 |
|
| 49,346 |
| 9,804 |
| 97,777 |
| 18,641 |
| ||||||||||||||
Depreciation, depletion and amortization |
|
| 59,711 |
|
|
| 29,009 |
|
|
| 146,602 |
|
|
| 77,625 |
|
|
| 459,951 |
|
|
| 35,609 |
|
|
| 949,637 |
|
|
| 86,891 |
|
Total operating expenses |
|
| 576,685 |
|
|
| 459,426 |
|
|
| 2,583,744 |
|
|
| 1,276,878 |
|
|
| 3,715,319 |
|
|
| 1,168,677 |
|
|
| 6,335,716 |
|
|
| 2,007,059 |
|
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| ||||||||||||||
Loss from operations |
|
| (355,356 | ) |
|
| (353,999 | ) |
|
| (1,995,122 | ) |
|
| (1,044,865 | ) |
|
| (1,396,697 | ) |
|
| (1,008,247 | ) |
|
| (1,855,147 | ) |
|
| (1,639,766 | ) |
|
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Other income (expense) |
|
|
|
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|
|
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|
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|
|
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| ||||||||||||||
Interest expense |
| (470,614 | ) |
| (542,107 | ) |
| (1,160,875 | ) |
| (1,966,015 | ) |
| (2,531,178 | ) |
| (433,551 | ) |
| (3,600,488 | ) |
| (690,261 | ) | ||||||||
Change in fair value of derivatives |
| 40,370 |
| 2,765,013 |
| 495,468 |
| 833,418 |
|
| (632,831 | ) |
| 119,085 |
| (987,784 | ) |
| 455,098 |
| ||||||||||||
Loss on sale of investments |
| - |
| - |
| (7,185 | ) |
| - |
|
| - |
| - |
| - |
| (7,185 | ) | |||||||||||||
Gain on settlement of debt |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 75,000 |
| ||||||||||||||||
Gain on ARO settlement |
|
| - |
|
|
| - |
|
|
| 58,041 |
|
|
| -- |
| ||||||||||||||||
Total other income (expense) |
|
| (430,244 | ) |
|
| 2,222,906 |
|
|
| (672,592 | ) |
|
| (1,057,597 | ) |
|
| (3,164,009 | ) |
|
| (314,466 | ) |
|
| (4,530,231 | ) |
|
| (242,348 | ) |
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Net income (loss) before income taxes |
| (785,600 | ) |
| 1,868,907 |
| (2,667,714 | ) |
| (2,102,462 | ) | |||||||||||||||||||||
Income tax provision |
| - |
| (635,428 | ) |
| - |
| - |
| ||||||||||||||||||||||
Benefit from utilization of net operating loss |
|
| - |
|
|
| 635,428 |
|
|
| - |
|
|
| - |
| ||||||||||||||||
Net loss before income taxes |
| (4,560,706 | ) |
| (1,322,713 | ) |
| (6,385,378 | ) |
| (1,882,114 | ) | ||||||||||||||||||||
Income tax benefit (expense) |
|
| 605,490 |
|
|
|
|
|
|
| 877,279 |
|
|
| - |
| ||||||||||||||||
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| ||||||||||||||
Net income (loss) |
| $ | (785,600 | ) |
| $ | 1,868,907 |
| $ | (2,667,714 | ) |
| $ | (2,102,462 | ) | |||||||||||||||||
Net loss |
| $ | (3,955,216 | ) |
| $ | (1,322,713 | ) |
| $ | (5,508,099 | ) |
| $ | (1,882,114 | ) | ||||||||||||||||
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Other comprehensive income (loss) |
|
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| ||||||||||||||
Unrealized gain (loss) on securities available-for-sale |
|
| - |
|
|
| (3,394 | ) |
|
| 1,446 |
|
|
| 148,663 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,446 |
|
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| ||||||||||||||
Net Comprehensive income (loss) |
| $ | (785,600 | ) |
| $ | 1,865,513 |
|
| $ | (2,666,268 | ) |
| $ | (1,953,798 | ) | ||||||||||||||||
Net Comprehensive income loss |
| $ | (3,955,216 | ) |
| $ | (1,322,713 | ) |
| $ | (5,508,099 | ) |
| $ | (1,880,668 | ) | ||||||||||||||||
Earnings (loss) per common share |
|
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Basic |
| $ | (0.01 | ) |
| $ | 0.04 |
|
| $ | (0.04 | ) |
| $ | (0.05 | ) |
| $ | (0.05 | ) |
| $ | (0.02 | ) |
| $ | (0.07 | ) |
| $ | (0.03 | ) |
Diluted |
| $ | (0.01 | ) |
| $ | 0.04 |
|
| $ | (0.04 | ) |
| $ | (0.05 | ) | ||||||||||||||||
Weighted average number of common shares outstanding |
|
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|
| ||||||||||||||
Basic |
|
| 64,051,015 |
|
|
| 45,837,636 |
|
|
| 60,723,535 |
|
|
| 43,584,699 |
|
|
| 80,957,111 |
|
|
| 61,272,870 |
|
|
| 77,650,012 |
|
|
| 59,032,220 |
|
Diluted |
|
| 64,051,015 |
|
|
| 54,004,303 |
|
|
| 60,723,535 |
|
|
| 43,584,699 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4 |
Table of Contents |
|
|
| Nine Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
|
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| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net loss |
| $ | (2,667,714 | ) |
| $ | (2,102,462 | ) |
Adjustments to reconcile net loss to cash used in operating activities: |
|
|
|
|
|
|
|
|
Derivative gain |
|
| (495,468 | ) |
|
| (833,418 | ) |
Amortization of prepaid expenses |
|
| 180,983 |
|
|
| - |
|
Stock based compensation |
|
| 1,304,175 |
|
|
| 578,363 |
|
Stock based interest payment |
|
|
|
|
|
| 52,500 |
|
Loss on sale of investments |
|
| 7,185 |
|
|
| - |
|
Depreciation, depletion and amortization |
|
| 146,602 |
|
|
| 77,625 |
|
Accretion – Asset retirement obligation |
|
| 29,167 |
|
|
| 15,513 |
|
Amortization of debt discount |
|
| 817,431 |
|
|
| 1,626,062 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 2,919 |
|
|
| (11,947 | ) |
Accounts payable |
|
| (5,480 | ) |
|
| (89,282 | ) |
Accrued expenses and other current liabilities |
|
| 90,975 |
|
|
| 151,862 |
|
Amounts due to directors |
|
| 121,755 |
|
|
| 197,280 |
|
Net cash used in operating activities |
|
| (467,470 | ) |
|
| (337,904 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of oil and gas properties |
|
| (360,000 | ) |
|
| (1,350,000 | ) |
Proceeds from sale of investments |
|
| 101,191 |
|
|
| - |
|
Net cash used in investing activities |
|
| (258,809 | ) |
|
| (1,350,000 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from amount due to directors |
|
| 5,350 |
|
|
| - |
|
Repayment of amount due to directors |
|
| (348,438 | ) |
|
| (56,056 | ) |
Proceeds from sale of common stock |
|
| 331,667 |
|
|
| 388,125 |
|
Common stock issuance costs |
|
| - |
|
|
| (37,500 | ) |
Proceeds from long term debt |
|
| 3,288,650 |
|
|
| 2,021,875 |
|
Debt issuance costs |
|
| (216,000 | ) |
|
| - |
|
Repayment of long term debt |
|
| (1,785,333 | ) |
|
| (570,500 | ) |
Net cash provided by financing activities |
|
| 1,275,896 |
|
|
| 1,745,944 |
|
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
| 549,617 |
|
|
| 58,040 |
|
Cash, beginning of period |
|
| 18,605 |
|
|
| 30,585 |
|
|
|
|
|
|
|
|
|
|
Cash, end of period |
| $ | 568,222 |
|
| $ | 88,625 |
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
Interest |
| $ | 209,307 |
|
| $ | 125,431 |
|
Income taxes |
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of Non-Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
Conversion of convertible note payable |
| $ | - |
|
| $ | 6,778 |
|
Issuance of shares for oil and gas property acquisition |
| $ | - |
|
| $ | 820,250 |
|
Issuance of warrants for 4,062,500 common shares as debt discount |
| $ | - |
|
| $ | 416,315 |
|
Loan from director to pay convertible debt |
| $ | - |
|
| $ | 100,000 |
|
Issuance of shares as deposit for oil and gas property acquisition |
| $ | - |
|
| $ | 288,000 |
|
Prepayment of contract through amounts due directors |
| $ | 100,000 |
|
| $ | - |
|
Long term debt paid through amounts due directors |
| $ | 104,904 |
|
| $ | - |
|
Issuance of shares for contract services |
| $ | 700,920 |
|
| $ | - |
|
Sale of shares through satisfaction of unrelated notes payable |
| $ | 127,215 |
|
| $ | - |
|
Accrued expenses exchanged for long term debt |
| $ | 9,500 |
|
| $ | - |
|
Increase in oil and gas properties due to asset retirement obligation |
| $ | 205,048 |
|
| $ | - |
|
Issuance of shares and warrants as discount on debt |
| $ | 684,411 |
|
| $ | - |
|
Consolidated Statements of Cash Flows (Unaudited) (Amounts expressed in US dollars) |
|
|
| |||||
|
|
|
| |||||
|
| Six Months Ended |
| |||||
|
| June 30, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
|
|
|
|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net loss |
| $ | (5,508,099 | ) |
| $ | (1,882,114 | ) |
Adjustments to reconcile net loss to cash used in operating activities: |
|
|
|
|
|
|
|
|
Derivative gain (loss) |
|
| 987,784 |
|
|
| (455,098 | ) |
Amortization of prepaid expenses |
|
| - |
|
|
| 162,914 |
|
Stock based compensation |
|
| 1,218,099 |
|
|
| 1,151,020 |
|
Loss on sale of investments |
|
| - |
|
|
| 7,185 |
|
Depreciation, depletion and amortization |
|
| 949,637 |
|
|
| 86,891 |
|
Gain on ARO settlement |
|
| (58,041 | ) |
|
| - |
|
Accretion – Asset retirement obligation |
|
| 97,777 |
|
|
| 18,641 |
|
Amortization of debt discount |
|
| 2,639,104 |
|
|
| 514,540 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 13,614 |
|
|
| (4,328 | ) |
Prepaid expenses and other assets |
|
| (88,448 | ) |
|
| - |
|
Other receivable |
|
| 548,714 |
|
|
| - |
|
Accounts payable |
|
| (1,933,061 | ) |
|
| (48,898 | ) |
Accrued expenses and other current liabilities |
|
| 446,928 |
|
|
| 88,429 |
|
Deferred tax liability |
|
| (877,279 | ) |
|
| - |
|
Undistributed revenues and royalties |
|
| 78,734 |
|
|
| - |
|
Amounts due to directors |
|
| 39,993 |
|
|
| 94,871 |
|
Net cash used in operating activities |
|
| (1,444,544 | ) |
|
| (265,947 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Investment in, and acquisition of oil and gas properties |
|
| (2,088,262 | ) |
|
| - |
|
Acquisition of fixed assets |
|
| (130,000 | ) |
|
| - |
|
Proceeds from sale of oil and gas interests |
|
| 1,144,953 |
|
|
| - |
|
Proceeds from sale of investments |
|
| - |
|
|
| 101,191 |
|
Net cash (used in) provided by investing activities |
|
| (1,073,309 | ) |
|
| 101,191 |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from amount due to directors |
|
| 583,000 |
|
|
| 5,350 |
|
Repayment of amount due to directors |
|
| (1,306,956 | ) |
|
| (300,024 | ) |
Proceeds from sale of common stock |
|
| - |
|
|
| 331,667 |
|
Proceeds from long term debt |
|
| 10,078,018 |
|
|
| 331,667 |
|
Repayment of long term debt |
|
| (6,764,989 | ) |
|
| (222,500 | ) |
Net cash provided by financing activities |
|
| 2,589,073 |
|
|
| 146,160 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
| 71,220 |
|
|
| (18,596 | ) |
Cash, beginning of period |
|
| 5,735,259 |
|
|
| 18,605 |
|
|
|
|
|
|
|
|
|
|
Cash, end of period |
| $ | 5,806,479 |
|
| $ | 9 |
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
Interest |
| $ | 866,380 |
|
| $ | 99,909 |
|
Income taxes |
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of Non-Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
Recognition of asset retirement obligation |
| $ | 231,053 |
|
| $ | - |
|
Issuance of shares as discount on debt |
| $ | 1,237,416 |
|
| $ | - |
|
Issuance of warrants as discount on debt |
| $ | 327,740 |
|
| $ | - |
|
1st Global debt discount and loan fees |
| $ | 324,000 |
|
| $ | - |
|
Payment in kind interest added to debt |
| $ | 140,757 |
|
| $ | - |
|
Prepayment of contract through amounts due directors |
| $ | - |
|
| $ | 100,000 |
|
Debt refinanced through new credit facility |
| $ | 7,633,389 |
|
| $ | - |
|
Private placement debt exchanged for new private placement |
| $ | 2,085,000 |
|
| $ | - |
|
Purchase of working interest through new debt |
| $ | 165,000 |
|
| $ | - |
|
Long term debt paid through amounts due directors |
| $ | - |
|
| $ | 104,904 |
|
Issuance of shares for contract services |
| $ | 55,000 |
|
| $ | 700,920 |
|
Cashless exercise of warrants |
| $ | 60 |
|
| $ | - |
|
Sale of shares through satisfaction of unrelated notes payable |
| $ | - |
|
| $ | 127,215 |
|
Accrued expenses exchanged for long term debt |
| $ | 24,712 |
|
| $ | 9,500 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5 |
Table of Contents |
|
Accumulated Additional Prepaid Other Total Common Stock Shares to be Issued Preferred Stock Paid-in Equity-Based Comprehensive Accumulated Stockholders' Number Amount Number Amount Number Amount Capital Compensation Loss Deficit Deficit Balances at December 31, 2015 Shares issued in satisfaction of debt Derivative liability adjustments - satisfaction of convertible debt Shares issued for consulting services Shares issued in acquisition of oil and gas properties Shares issued as prepaid equity-based compensation Cancellation of shares issued as prepaid equity-based compensation Sale of stock Capital issuance costs Shares issued as payment for interest expense Shares issued as additional discount on debt Warrants issued for services Amortization of prepaid equity-based compensation Unrealized gain (loss) on securities held for sale Net loss for the year ended December 31, 2016 Balances at December 31, 2016 Shares issued for consulting services Shares issued as prepaid equity-based compensation Sale of stock Derivative liability adjustments - satisfaction of convertible debt Amortization of prepaid equity-based compensation Unrealized gain (loss) on securities held for sale Shares and warrants issued as discount on new debt Net loss for the nine months ended September 30, 2017 Balances at September 30, 2017 Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) (Amounts expressed in US dollars) Prepaid Retained Additional Equity- Earnings Total Common Stock Preferred Stock Paid-in Number Amount Number Amount Capital Compensation Deficit) Equity Balances at December 31, 2017 Accounting principle change relative to certain derivative liabilities - Note 2. Shares issued as debt discount Shares issued as prepaid equity-based compensation Amortization of prepaid equity-based compensation Shares issued for services Warrants issued for services Shares issued in cashless exercise of warrants Warrants issued as debt discount Net loss for the six months ended June 30, 2018 Balances at June 30, 2018 30,333,993 $ 30,334 - $ - 28,092 $ 28 $ 7,960,372 $ (145,562 ) $ (158,424 ) $ (8,964,441 ) $ (1,277,693 ) 300,926 301 9,810 10,111 685,668 685,668 1,315,000 1,315 164,185 165,500 14,862,021 14,862 1,430,829 1,445,691 5,000,000 5,000 795,000 (800,000 ) - (4,000,000 ) (4,000 ) (636,000 ) 640,000 - 2,841,667 2,842 423,408 426,250 (37,500 ) (37,500 ) 1,931,250 1,931 324,444 326,375 508,335 508 75,742 76,250 330,889 330,889 270,494 270,494 156,978 156,978 (5,445,187 ) (5,445,187 ) 53,093,192 $ 53,093 - $ - 28,092 $ 28 $ 11,526,847 $ (35,068 ) $ (1,446 ) $ (14,409,628 ) $ (2,866,174 ) 2,892,889 2,894 478,739 481,633 4,135,000 4,135 833,411 (837,546 ) - 3,059,442 3,059 455,858 458,917 35,232 35,232 822,542 822,542 1,446 1,446 3,040,000 3,040 681,371 684,411 (2,667,714 ) (2,667,714 ) 66,220,523 $ 66,221 - $ - 28,092 $ 28 $ 14,011,458 $ (50,072 ) $ - $ (17,077,342 ) $ (3,049,707 ) Based (Accumulated Stockholders' 72,347,990 $ 72,348 28,092 $ 28 $ 19,029,892 $ (11,827 ) $ 3,417,872 $ 22,508,313 807,762 807,762 7,774,856 7,775 1,229,641 1,237,416 250,000 250 54,750 (55,000 ) - 66,827 66,827 3,031,748 3,032 548,887 551,919 599,353 599,353 60,312 60 (60 ) - 327,740 327,740 (5,508,099 ) (5,508,099 ) 83,464,906 $ 83,465 28,092 $ 28 $ 21,790,203 $ - $ (1,282,465 ) $ 20,591,231
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6 |
Table of Contents |
Notes to Consolidated Financial Statements (Unaudited) (Amounts expressed in US dollars) |
Note 1Nature of Business and Going Concern
Viking Energy Group, Inc. (“Viking” or the “Company”) was incorporated under the laws of the State of Florida on May 3, 1989, as Sparta Ventures Corp. and remained inactive until June 27, 1998. After several name changes, the Company merged with and into a wholly-owned subsidiary, SinoCubate, Inc., which remained the surviving entity of the merger. SinoCubate, Inc. was formed in the State of Nevada on September 11, 2008. The merger resulted in a change of name of the Company from Synthenol Inc. to SinoCubate, Inc., and a change in the state of incorporation of the Company from Florida to Nevada. On June 13, 2012, the Company changed its name to Viking Investments Group, Inc., and the Company’s ticker symbol was changed to “VKIN.” On March 17, 2017, the Company changed its name to Viking Energy Group, Inc.
The Company's business plan is to engage in the acquisition, exploration, development and production of oil and natural gas properties, both individually and through collaborative partnerships with other companies in this field of endeavor. In November of 2014, the Company entered into its first contract relative to oil and gas activities involving jointly controlled assets and related liabilities by purchasing an undivided 50% interest in the Joffre project located in Alberta, Canada. On March 8, 2016, the Company incorporated a wholly owned subsidiary, Viking Oil & Gas (Canada) ULC, in Alberta, Canada, to hold its Canadian oil and gas interests. On February 23, 2016, the Company closed on the acquisition of working interests in four leases with access to the mineral rights (oil and gas) concerning approximately 281 acres of property in Miami and Franklin Counties in eastern Kansas. On August 30, 2016, the Company incorporated an additional wholly owned subsidiary, Mid-Con Petroleum, LLC, in the State of Kansas to hold certain of its acquisitions in the central United States. On October 4, 2016, the Company, through Mid-Con Petroleum, completed an acquisition whereby the Company (i) increased its working interest in three existing oil and gas leases in Miami and Franklin Counties in Eastern Kansas, and (ii) acquired a working interest in four new oil and gas leases in the same region, comprising approximately 660 acres of property. On August 25, 2017, the Company created an additional wholly owned subsidiary, Mid-Con Drilling, LLC. (“Mid-Con Drilling”), in the State of Kansas to hold additional acquisitions in the central United States. On September 11, 2017, the Company through Mid-Con Drilling, completed an acquisition of a 90% working interest in four new oil and gas leases in Anderson County in Eastern Kansas, comprising approximately 980 acres of property. On October 2, 2017, the Company, through Mid-Con Drilling, closed on an acquisition, effective October 1, 2017, of a 100% working interest in six new oil and gas leases in Miami and Franklin Counties in Eastern Kansas. Existing production from the acquired interests is approximately twenty-two barrels of oil per day. The purchase includes an undivided interest in all oil and gas wells, equipment, fixtures and other personal property located upon the leased properties and used in connection with oil and gas operations upon the leases attributable to the working interests purchased by Viking, through Mid-Con Drilling. On October 4, 2017, the Company, through Mid-Con Drilling, closed on an acquisition of an 80% working interest in six new oil and gas leases in Riley, Geary and Wabaunsee Counties in Kansas. Existing production from the acquired interests is approximately thirteen barrels of oil per day. The purchase includes an undivided interest in all oil and gas wells, equipment, fixtures and other personal property located upon the leased properties. On December 22, 2017, the Company completed an acquisition of 100% of the issued and outstanding membership interests of Petrodome Energy LLC, a privately-owned company, with working interests in multiple oil and gas fields across Texas, Louisiana and Mississippi, comprising approximately 11,700 acres. On December 27, 2017, the Company created an additional wholly owned subsidiary, Mid-Con Development, LLC (“Mid-Con Development”) in the State of Kansas to hold additional acquisition in the central United States. On December 29, 2017, the Company through Mid-Con Development completed an acquisition of working interests in approximately 41 oil leases in Ellis and Rooks Counties in Kansas, comprising several thousand acres. On January 12, 2018, the Company, through Mid-Con Drilling, completed an acquisition of a 100% working interest in seven new oil and gas leases in Woodson and Allen Counties in Eastern Kansas. Effective February 1, 2018, the Company, through Mid-Con Drilling, closed on the acquisition of a working interest in a lease with access to the mineral rights (oil and gas) concerning approximately 80 acres of property in Douglas County in eastern Kansas. The acquisition price was $50,000.
7 |
Table of Contents |
These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company had a net comprehensive loss of $5,508,099 and $1,880,668 for the six months ended June 30, 2018 and 2017, respectively. The Company has accumulated a stockholders’ equity of $20,591,231 as of June 30, 2018. The Company has generated losses from operations and has a significant working capital deficit. These conditions raise substantial doubt regarding the Company's business plan is to engage in the acquisition, exploration, development and production of oil and natural gas properties, both individually and through collaborative partnerships with other companies in this field of endeavor. On March 8, 2016, the Company incorporated a wholly owned subsidiary, Viking Oil & Gas (Canada) ULC, in Alberta, Canada, to hold its Canadian oil and gas interests. In November of 2014, the Company entered into its first contract relative to oil and gas activities involving jointly controlled assets and related liabilities by purchasing an undivided 50% interest in the Joffre project located in Alberta, Canada. On February 23, 2016, the Company closed on the acquisition of working interests in four leases with access to the mineral rights (oil and gas) concerning approximately 281 acres of property in Miami and Franklin Counties in eastern Kansas. On August 30, 2016, the Company created an additional wholly owned subsidiary, Mid-Con Petroleum, LLC (“Mid-Con”), in the State of Kansas to hold its current acquisitions in the central United States. On October 4, 2016, the Company, through Mid-Con, completed an acquisition whereby the Company (i) increased its working interest in three existing oil and gas leases in Miami and Franklin Counties in Eastern Kansas, and (ii) acquired a working interest in four new oil and gas leases in the same region, comprising approximately 660 acres of property. On August 25, 2017, the Company created an additional wholly owned subsidiary, Mid-Con Drilling, LLC. (“Mid-Con Drilling”), in the State of Kansas to hold additional acquisitions in the central United States. On September 11, 2017, the Company through Mid-Con Drilling, completed an acquisition of a 90% working interest in four new oil and gas leases in Anderson County in Eastern Kansas, comprising approximately 980 acres of property.
These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company had a net comprehensive loss of $2,666,268, and $1,953,798 for the nine months ended September 30, 2017 and 2016, respectively. The Company has accumulated a stockholders’ deficit of $3,049,707 as of September 30, 2017. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management has no formal plan in place to address this concern but considers that the Company will be able to obtain additional funds by equity financing and/or related party advances; however, there is no assurance of additional funding being available. These consolidated financial statements do not include any adjustments to the recorded assets or liabilities that might be necessary should the Company have to curtail operations or be unable to continue in existence.
Note 2Summary of Significant Accounting Policies
a) Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in Viking’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments (unless otherwise indicated), necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
b) Basis of Consolidation
The financial statements presented herein reflect the consolidated financial results of the Company and its wholly owned subsidiaries, Viking Oil & Gas (Canada) ULC, a Canadian corporation formed on March 8, 2016, to provide a base of operations for properties in Canada, Mid-Con Petroleum, LLC, formed on August 30, 2016, and Mid-Con Drilling, LLC, formed on August 25, 2017, both to provide a base of operations for properties in the Central United States.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in Viking’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments (unless otherwise indicated), necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
b) Basis of Consolidation
The financial statements presented herein reflect the consolidated financial results of the Company and its wholly owned subsidiaries, Viking Oil & Gas (Canada) ULC, a Canadian corporation formed on March 8, 2016, to provide a base of operations for properties in Canada, Mid-Con Petroleum, LLC, formed on August 30, 2016, Mid-Con Drilling, LLC, formed on August 25, 2017, and Mid-Con Development, LLC, formed on December 27, 2017, all to provide a base of operations for properties in the Central United States, and Petrodome Energy, LLC, based in Houston, Texas to provide a base of operations to facilitate property acquisitions in Texas, Louisiana and Mississippi, as well as Petrodome Energy, LLC’s subsidiaries in Texas, Louisiana and Mississippi. All significant intercompany transactions and balances have been eliminated upon consolidation.
c) Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts and timing of revenues and expenses, the reported amounts and classification of assets and liabilities, and disclosure of contingent assets and liabilities. The Company's actual results could vary materially from management's estimates and assumptions. Significant areas requiring the use of management estimates relate to the determination of expected tax rates for future income tax recoveries, stock-based compensation, embedded derivative liabilities, asset retirement obligations and impairment of long-lived assets.
8 |
Table of Contents |
The estimates of proved, probable and possible oil and gas reserves are used as significant inputs in determining the depletion of oil and gas properties and the impairment of proved and unproved oil and gas properties. There are numerous uncertainties inherent in the estimation of quantities of proved, probable and possible reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves and commodity price outlooks.
Actual results could differ from the estimates and assumptions utilized.
d) Financial Instruments
Cash and cash equivalents include cash in banks and highly liquid investment securities that have original maturities of three months or less. At June 30, 2018 and December 31, 2017, the Company has cash deposits in excess of FDIC insured limits in the amounts of $4,559,541 and $5,372,818, respectively. Restricted cash in the amount of $0 and $5,199,103 as of June 30, 2018 and December 31, 2017, respectively, represents cash provided through funding for the Petrodome acquisition, restricted for drilling and exploration.
f) Accounts Receivable Accounts receivable consist of oil and gas receivables. The Company has classified these as short-term assets in the balance sheet because the Company expects repayment or recovery within the next 12 months. The Company evaluates these accounts receivable for collectability and, when necessary, records allowances for expected unrecoverable amounts. The Company has recorded an allowance for doubtful accounts of $87,957 at June 30, 2018. g) Prepaid Equity-Based Compensation Prepaid equity-based expenses represent amounts paid in advance through the issuance of restricted shares of stock, for future contractual benefits to be received. These expenses paid in advance are recorded as prepaid equity-based compensation as a component of “Stockholders’ Equity” and then amortized to the statements of operations and comprehensive loss over the life of the contract using the straight-line method. At June 30, 2018 and December 31, 2017, the balances of the prepaid equity-based compensation were comprised of the following:
h) Oil and Gas Properties
The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under this method of accounting, all costs associated with acquisition, exploration and development of oil and gas reserves, including directly related overhead costs, are capitalized. General and administrative costs related to production and general overhead are expensed as incurred.
All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit of production method using estimates of proved reserves. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in operations. Unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is included in loss from continuing operations before income taxes and the adjusted carrying amount of the unproved properties is amortized on the unit-of-production method.
Depreciation, depletion and amortization expense utilizing the unit-of-production method for the Company’s oil and gas properties for the three and six months ended June 30, 2018 and 2017, were as follows:
i) Limitation on Capitalized Costs Under the full-cost method of accounting, the Company is required, at the end of each reporting date, 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 its oil and natural gas properties, net of accumulated amortization and related deferred income taxes, exceed the Ceiling, this excess or impairment is charged to expense. The expense may not be reversed in future periods, even though higher oil and natural gas prices may subsequently increase the Ceiling. 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 hedging arrangements pursuant to SAB 103, 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; net of (d) the related tax effects related to the difference between the book and tax basis of our oil and natural gas properties. j) Oil and Gas Reserves Reserve engineering is a subjective process that is dependent upon the quality of available data and the interpretation thereof, including evaluations and extrapolations of well flow rates and reservoir pressure. Estimates by different engineers often vary sometimes significantly. In addition, physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices, may justify revision of such estimates. Because proved reserves are required to be estimated using recent prices of the evaluation, estimated reserve quantities can be significantly impacted by changes in product prices. k) Loss Per Share Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and, adjusted by any effects of warrants and options outstanding, if dilutive, that may add to the number of common shares during the period. At June 30, 2018 and 2017, there were approximately 34,912,910 and 6,582,259 common stock equivalents respectively, that were anti-dilutive.
l) Revenue Recognition On January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (ASC 606),” using the modified retrospective method. Adoption of the new revenue standard had no impact on the Company’s consolidated balance sheet, results of operations, equity or cash flows as of the adoption date, and the Company does not expect any further material impact to its consolidated financial statements on an ongoing basis as a result of adopting the new revenue standard. Sales of crude oil, natural gas, and natural gas liquids (NGLs) are included in revenue when production is sold to a customer in fulfillment of performance obligations under the terms of agreed contracts. Performance obligations primarily comprise delivery of oil, gas, or NGLs at a delivery point, as negotiated within each contract. Each barrel of oil, million BTU (MMBtu) of natural gas, or other unit of measure is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated. Performance obligations are satisfied at a point in time once control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to: whether the purchaser can direct the use of the hydrocarbons, the transfer of significant risks and rewards, the Company’s right to payment, and transfer of legal title. In each case, the term between delivery and when payments are due is not significant. The following table disaggregates the Company’s revenue by source for the three and six-month periods ended June 30, 2018 and 2017: Three Months Ended June 30, Six Months Ended June 30, 2018 2017 2018 2017
ASC Topic 220, “Comprehensive Income,” establishes standards for the reporting and presentation of comprehensive income and its components in the consolidated financial statements. For the six months ended June 30, 2018 and 2017, comprehensive income (loss) was $0 and $1,446 respectively and consisted primarily of unrealized gains and (losses) on available for sale securities. n) Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the consolidated financial statements and the tax basis of assets and liabilities by using estimated tax rates for the year in which the differences are expected to reverse. The Company recognizes deferred tax assets and liabilities to the extent that we believe that these assets and/or liabilities are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. If we determine that the Company would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
In assessing the realizability of its deferred tax assets and liabilities, management evaluated whether it is more likely than not that some portion, or all of its deferred tax assets and liabilities, will be realized. As of December 31, 2017, based on all the available evidence, management determined that it is more likely than not its deferred tax assets will be fully realized. Accordingly, the Company recorded a deferred tax liability of $910,827. During the six months ended June 30, 2018, the Company incurred a net loss, which created a decrease in its deferred tax liability with a corresponding income tax benefit in the amount of $877,279.
The Company may issue stock options to employees and stock options or warrants to non-employees in non-capital raising transactions for services and for financing costs. In accordance with guidance in ASC Topic 718, the cost of stock options and warrants issued to employees and non-employees is measured on the grant date based on the fair value. The fair value is determined using the Black-Scholes option pricing model. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. The fair value of stock warrants was determined at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option model requires management to make various estimates and assumptions, including expected term, expected volatility, risk-free rate, and dividend yield. The expected term represents the period of time that stock-based compensation awards granted are expected to be outstanding and is estimated based on considerations including the vesting period, contractual term and anticipated employee exercise patterns. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based on the U.S. Treasury yield curve in relation to the contractual life of stock-based compensation instrument. The dividend yield assumption is based on historical patterns and future expectations for the Company dividends. During the quarter ended June 30, 2018, the Company granted 7,472,284 warrants with the option to purchase common stock, of which 4,972,284,000 options vested immediately. The Company used the following Black-Scholes assumptions in arriving at the fair value of 3,000,000 warrants recorded as stock-based compensation expense of $599,353 and 1,972,284 warrants recorded as debt discount of $327,740 for the three months ended June 30, 2018.
At June 30, 2018, there was approximately $499,500 of unrecognized compensation cost related to share-based payments which is expected to be recognized in the future. The following table represents stock warrant activity as of and for the six months ended June 30, 2018:
In accordance with ASC 360, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company is required to review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally determined by using the asset's expected future discounted cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such as budgets, internal projections, and other available information as considered necessary. There is no impairment of long-lived assets during the six months ended June 30, 2018 and 2017.
An entity's functional currency is the currency of the primary economic environment in which it operates, normally that is the currency of the environment in which the entity primarily generates and expends cash. Management's judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions and arrangements. The functional currency of the parent company is the U.S. Dollar. The reporting currency of the Company is the U.S. Dollar. The Company has oil and gas operations in Alberta, Canada in which the Canadian Dollar (“CAD” or “CS” herein) is the primary economic environment. The reporting currency of these consolidated financial statements is the U.S. Dollar.
For financial reporting purposes, the operational results of the Company's oil and gas operations in Canada are prepared using the CAD, and are translated into the Company's reporting currency, the U.S. Dollar. Revenue and expenses applicable to the oil and gas operations in Alberta, Canada are translated using average rates prevailing during each reporting period. Gains or losses resulting from the settlement of foreign currency transactions are recorded as a separate component of accumulated other comprehensive loss in stockholders' deficit when realized. There have been no settlement transactions that resulted in the recognition of a foreign currency exchange gain or loss during the six months ended June 30, 2018 and 2017.
r)
The Company accounts for conversion options embedded in convertible notes in accordance with ASC 815. ASC 815 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free standing derivative financial instruments.
The Company has evaluated the terms and conditions of its convertible notes under the guidance of ASC 815. The conversion feature did not meet the definition of “indexed to a company’s own stock” provided for in ASC 815 due to the down round protection feature. Therefore, the conversion feature requires bifurcation and liability classification. Additionally, the default put requires bifurcation because it is indexed to risks that are not associated with credit or interest risk. As a result, the compound embedded derivative comprises of (i) the embedded conversion feature and (i) the default put. Rather than bifurcating and recording the compound embedded derivative as a derivative liability, the Company elected to initially and subsequently measure the convertible note in its entirety at fair value, with changes in fair value recognized in earnings in accordance with ASC 815-15-25-4. On January 1, 2018, the Company adopted ASU 2017-11, Derivatives and Hedging (Topic 815), and increased beginning retained earnings in the amount of $807,762. s) Derivative Liability We review the terms of convertible debt issues to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value. The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense.
t) Accounting for Asset Retirement Obligations Asset retirement obligations (“ARO”) primarily represent the estimated present value of the amount the Company will incur to plug, abandon and remediate its producing properties at the projected end of their productive lives, in accordance with applicable federal, state and local laws. The Company determined its ARO by calculating the present value of estimated cash flows related to the obligation. The retirement obligation is recorded as a liability at its estimated present value as of the obligation’s inception, with an offsetting increase to proved properties. The following table describes the changes in the Company’s asset retirement obligations for the six months ended June 30, 2018, and the year ended December 31, 2017:
u) Undistributed Revenues and Royalties The Company records a liability for cash collected from oil and gas sales that have not been distributed. The amounts get distributed in accordance with the working interests of the respective owners. v) Recent Accounting Pronouncements As of June 30, 2018, and through the date of this filing, there were several new accounting pronouncements issued by the Financial Accounting Standards Board. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements. The Company will monitor these emerging issues to assess any potential future impact on its financial statements.
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