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 JUNE 30, 20182019
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.) |
15915 Katy Freeway, Suite 450 Houston, TX 77094 (Address of principal executive offices) | ||
(281) 404 4387 (Registrant’s telephone number, including area code) |
(Former name, former address and former fiscal year, if changed since last report)
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Not applicable. | Note applicable. | Not applicable. |
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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”,company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ¨ |
| ¨ |
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 complycomplying 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 August 14, 2018,July 31, 2019, the registrant had 83,847,72991,199,954 shares of common stock outstanding.
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| Consolidated Balance Sheets as of June 30, |
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2 |
Consolidated Balance Sheets (Amounts expressed in US dollars) |
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| June 30, |
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| December 31, |
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| 2018 |
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| 2017 |
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| (unaudited) |
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ASSETS |
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Current assets: |
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Cash |
| $ | 5,806,479 |
|
| $ | 536,156 |
|
Restricted cash |
|
| - |
|
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| 5,199,103 |
|
Accounts receivable – oil and gas |
|
| 559,682 |
|
|
| 573,296 |
|
Other receivable – related party |
|
| - |
|
|
| 548,714 |
|
Prepaid expenses |
|
| 65,761 |
|
|
| - |
|
Total current assets |
|
| 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 |
|
| 11,577,814 |
|
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| 12,301,141 |
|
Undeveloped and non-producing oil and gas properties, net |
|
| 28,001,852 |
|
|
| 26,859,634 |
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Total oil and gas properties, net |
|
| 39,579,666 |
|
|
| 39,160,775 |
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Fixed assets, net |
|
| 267,576 |
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| 166,741 |
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Other assets |
|
| 32,083 |
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| 9,396 |
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TOTAL ASSETS |
| $ | 46,311,247 |
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| $ | 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 |
| $ | 819,287 |
|
| $ | 397,070 |
|
Accounts payable |
|
| 622,808 |
|
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| 2,555,869 |
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Undistributed revenues and royalties |
|
| 1,253,934 |
|
|
| 1,175,200 |
|
Derivative liability |
|
| 1,232,810 |
|
|
| 1,052,788 |
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Amount due to directors |
|
| 509,007 |
|
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| 1,192,970 |
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Current portion of long term debt – net of debt discount |
|
| 4,732,565 |
|
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| 3,562,051 |
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Total current liabilities |
|
| 9,170,411 |
|
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| 9,935,948 |
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Long term debt - net of current portion and debt discount |
|
| 13,149,005 |
|
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| 9,742,830 |
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Deferred tax liability |
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| 33,548 |
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| 910,827 |
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Asset retirement obligation |
|
| 3,367,052 |
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| 3,096,263 |
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TOTAL LIABILITIES |
|
| 25,720,016 |
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| 23,685,868 |
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Commitments and contingencies (Note 8) |
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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 June 30, 2018 and December 31, 2017 |
|
| 28 |
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| 28 |
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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 |
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| 72,348 |
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Additional Paid-In Capital |
|
| 21,790,203 |
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| 19,029,892 |
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Prepaid equity-based compensation |
|
| - |
|
|
| (11,827 | ) |
Retained earnings (accumulated deficit) |
|
| (1,282,465 | ) |
|
| 3,417,872 |
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TOTAL STOCKHOLDERS’ EQUITY |
|
| 20,591,231 |
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| 22,508,313 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 46,311,247 |
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| $ | 46,194,181 |
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VIKING ENERGY GROUP, INC. |
Consolidated Balance Sheets |
|
| June 30, |
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| December 31, |
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| 2019 |
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| 2018 |
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| (unaudited) |
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ASSETS |
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Current assets: |
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Cash |
| $ | 361,392 |
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| $ | 4,009,892 |
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Restricted cash |
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| 4,683,129 |
|
|
| - |
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Accounts receivable – oil and gas - net |
|
| 2,709,059 |
|
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| 258,300 |
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Prepaid expenses |
|
| 90,569 |
|
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| 124,443 |
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Total current assets |
|
| 7,844,149 |
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| 4,392,635 |
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Oil and gas properties, full cost method |
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Proved developed producing oil and gas properties, net |
|
| 76,502,105 |
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| 81,331,986 |
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Proved undeveloped and non-producing oil and gas properties, net |
|
| 49,190,612 |
|
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| 50,492,906 |
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Total oil and gas properties, net |
|
| 125,692,717 |
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| 131,824,892 |
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Fixed assets, net |
|
| 562,923 |
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| 200,243 |
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Derivative asset |
|
| - |
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| 681,776 |
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Other assets |
|
| 110,194 |
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| 110,194 |
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TOTAL ASSETS |
| $ | 134,209,983 |
|
| $ | 137,209,740 |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current liabilities: |
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Accounts payable |
| $ | 1,630,603 |
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| $ | 2,549,280 |
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Accrued expenses and other current liabilities |
|
| 2,741,986 |
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| 1,014,661 |
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Undistributed revenues and royalties |
|
| 1,308,021 |
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| 1,207,605 |
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Derivative liability |
|
| 7,121,509 |
|
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| 2,531,718 |
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Amount due to director |
|
| 590,555 |
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| 395,555 |
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Current portion of long-term debt – net of debt discount |
|
| 40,231,789 |
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| 11,805,582 |
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Total current liabilities |
|
| 53,624,463 |
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| 19,504,401 |
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Long term debt - net of current portion and debt discount |
|
| 65,760,237 |
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| 92,076,857 |
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Operating lease liability |
|
| 338,627 |
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| - |
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Asset retirement obligation |
|
| 3,868,692 |
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| 4,413,465 |
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TOTAL LIABILITIES |
|
| 123,592,019 |
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| 115,994,723 |
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Commitments and contingencies (Note 8) |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, $0.001 par value, 5,000,000 shares authorized, |
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28,092 shares issued and outstanding as of June 30, 2019 and December 31, 2018 |
|
| 28 |
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| 28 |
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Common stock, $0.001 par value, 500,000,000 shares authorized, |
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91,199,954 and 90,989,025 shares issued and outstanding as of June 30, 2019 and December 31, 2018 respectively. |
|
| 91,200 |
|
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| 90,989 |
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Additional paid-in capital |
|
| 32,057,784 |
|
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| 32,015,913 |
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Accumulated deficit |
|
| (21,531,048 | ) |
|
| (10,891,913 | ) |
TOTAL STOCKHOLDERS’ EQUITY |
|
| 10,617,964 |
|
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| 21,215,017 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 134,209,983 |
|
| $ | 137,209,740 |
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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 |
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| Six months ended |
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| June 30, |
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| June 30, |
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| 2018 |
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| 2017 |
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| 2018 |
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| 2017 |
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Revenue |
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Oil and gas sales |
| $ | 2,318,622 |
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| $ | 160,430 |
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| $ | 4,480,569 |
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| $ | 367,293 |
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Operating expenses |
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Lease operating costs |
|
| 1,035,474 |
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|
| 104,066 |
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| 2,043,742 |
|
|
| 264,584 |
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General and administrative |
|
| 1,125,936 |
|
|
| 215,582 |
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| 2,026,461 |
|
|
| 485,923 |
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Stock based compensation |
|
| 1,044,612 |
|
|
| 803,616 |
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|
| 1,218,099 |
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|
| 1,151,020 |
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Accretion - ARO |
|
| 49,346 |
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| 9,804 |
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| 97,777 |
|
|
| 18,641 |
|
Depreciation, depletion and amortization |
|
| 459,951 |
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|
| 35,609 |
|
|
| 949,637 |
|
|
| 86,891 |
|
Total operating expenses |
|
| 3,715,319 |
|
|
| 1,168,677 |
|
|
| 6,335,716 |
|
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| 2,007,059 |
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Loss from operations |
|
| (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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Interest expense |
|
| (2,531,178 | ) |
|
| (433,551 | ) |
|
| (3,600,488 | ) |
|
| (690,261 | ) |
Change in fair value of derivatives |
|
| (632,831 | ) |
|
| 119,085 |
|
|
| (987,784 | ) |
|
| 455,098 |
|
Loss on sale of investments |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (7,185 | ) |
Gain on ARO settlement |
|
| - |
|
|
| - |
|
|
| 58,041 |
|
|
| -- |
|
Total other income (expense) |
|
| (3,164,009 | ) |
|
| (314,466 | ) |
|
| (4,530,231 | ) |
|
| (242,348 | ) |
|
|
|
|
|
|
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|
|
|
|
|
|
|
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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 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 |
|
| - |
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|
| - |
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| - |
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| 1,446 |
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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 |
| $ | (0.05 | ) |
| $ | (0.02 | ) |
| $ | (0.07 | ) |
| $ | (0.03 | ) |
Weighted average number of common shares outstanding |
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Basic |
|
| 80,957,111 |
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| 61,272,870 |
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|
| 77,650,012 |
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|
| 59,032,220 |
|
VIKING ENERGY GROUP, INC. |
|
| Three months ended |
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| Six months ended |
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| June 30, |
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| June 30, |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Revenue |
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Oil and gas sales |
|
| 8,734,323 |
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| $ | 2,318,622 |
|
| $ | 18,080,915 |
|
| $ | 4,480,569 |
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Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Lease operating costs |
|
| 2,857,278 |
|
|
| 1,035,474 |
|
|
| 5,456,672 |
|
|
| 2,043,742 |
|
General and administrative |
|
| 1,257,959 |
|
|
| 1,125,936 |
|
|
| 2,291,304 |
|
|
| 2,026,461 |
|
Stock based compensation |
|
| 2,500 |
|
|
| 1,044,612 |
|
|
| 42,082 |
|
|
| 1,218,099 |
|
Depreciation, depletion and amortization |
|
| 2,228,191 |
|
|
| 459,951 |
|
|
| 4,598,879 |
|
|
| 949,637 |
|
Accretion - ARO |
|
| 75,681 |
|
|
| 49,346 |
|
|
| 158,227 |
|
|
| 97,777 |
|
Total operating expenses |
|
| 6,421,609 |
|
|
| 3,715319 |
|
|
| 12,547,164 |
|
|
| 6,335,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
| 2,312,714 |
|
|
| (1,396,697 | ) |
|
| 5,533,751 |
|
|
| (1,855,147 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (3,192,574 | ) |
|
| (600,181 | ) |
|
| (6,323,967 | ) |
|
| (961,384 | ) |
Amortization of debt discount |
|
| (2,304,291 | ) |
|
| (1,930,997 | ) |
|
| (4,583,250 | ) |
|
| (2,639,104 | ) |
Change in fair value of derivatives |
|
| 4,474,016 |
|
|
| (632,831 | ) |
|
| (5,271,567 | ) |
|
| (987,784 | ) |
Gain on ARO settlement |
|
|
|
|
|
| - |
|
|
| - |
|
|
| 58,041 |
|
Interest and other income |
|
| 2,481 |
|
|
| - |
|
|
| 5,898 |
|
|
| - |
|
Total other income (expense) |
|
| (1,020,368 | ) |
|
| (3,164,009 | ) |
|
| (16,172,886 | ) |
|
| (4,530,231 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes |
|
| 1,292,346 |
|
|
| (4,560,706 | ) |
|
| (10,639,135 | ) |
|
| (6,385,378 | ) |
Income tax benefit (expense) |
|
| - |
|
|
| 605,490 |
|
|
| - |
|
|
| 877,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
| $ | 1,292,346 |
|
| $ | (3,955,216 | ) |
| $ | (10,639,135 | ) |
| $ | (5,508,099 | ) |
Earnings (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.01 |
|
| $ | (0.05 | ) |
| $ | (0.12 | ) |
| $ | (0.07 | ) |
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 91,192,033 |
|
|
| 80,957,111 |
|
|
| 91,147,958 |
|
|
| 77,650,012 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4 |
Table of Contents |
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 |
|
VIKING ENERGY GROUP, INC. |
|
| Six Months Ended |
| |||||
|
| June 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
|
|
|
|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net loss |
| $ | (10,639,135 | ) |
| $ | (5,508,099 | ) |
Adjustments to reconcile net loss to cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Change in fair value of derivative liability |
|
| 5,271,567 |
|
|
| 987,784 |
|
Stock based compensation |
|
| 42,082 |
|
|
| 1,218,099 |
|
Depreciation, depletion and amortization |
|
| 4,598,879 |
|
|
| 949,637 |
|
Amortization of operational right-of-use assets |
|
| 2,228 |
|
|
| - |
|
Gain on ARO settlement |
|
| - |
|
|
| (58,041 | ) |
Accretion – Asset retirement obligation |
|
| 158,227 |
|
|
| 97,777 |
|
Amortization of debt discount |
|
| 4,583,250 |
|
|
| 2,639,104 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (2,362,672 | ) |
|
| 13,614 |
|
Prepaid expenses and other assets |
|
| 33,874 |
|
|
| (88,448 | ) |
Other receivable |
|
| - |
|
|
| 548,714 |
|
Accounts payable |
|
| (1,607,849 | ) |
|
| (1,933,061 | ) |
Accrued expenses and other current liabilities |
|
| 1,727,325 |
|
|
| 446,928 |
|
Deferred tax liability |
|
| - |
|
|
| (877,279 | ) |
Undistributed revenues and royalties |
|
| 100,416 |
|
|
| 78,734 |
|
Amounts due to directors |
|
| - |
|
|
| 39,993 |
|
Net cash provided by (used) in operating activities |
|
| 1,908,192 |
|
|
| (1,444,544 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Investment in and acquisition of oil and gas properties |
|
| (3,319,812 | ) |
|
| (2,088,262 | ) |
Acquisition of fixed assets |
|
| - |
|
|
| (130,000 | ) |
Proceeds from sale of oil and gas interests |
|
| 287,966 |
|
|
| 1,144,953 |
|
Net cash used in investing activities |
|
| (3,031,846 | ) |
|
| (1,073,309 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from amount due to director |
|
| 195,000 |
|
|
| 583,000 |
|
Repayment of amount due to director |
|
| - |
|
|
| (1,306,956 | ) |
Proceeds from long term debt |
|
| 2,734,143 |
|
|
| 10,078,018 |
|
Short term advance |
|
| 693,706 |
|
|
| - |
|
Repayment of long-term debt |
|
| (1,464,566 | ) |
|
| (6,764,989 | ) |
Net cash provided by financing activities |
|
| 2,158,283 |
|
|
| 2,589,073 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
| 1,034,629 |
|
|
| 71,720 |
|
Cash and Restricted Cash, beginning of period |
|
| 4,009,892 |
|
|
| 5,735,259 |
|
|
|
|
|
|
|
|
|
|
Cash and Restricted Cash, end of period |
| $ | 5,044,521 |
|
| $ | 5,806,479 |
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
Interest |
| $ | 4,383,027 |
|
| $ | 866,380 |
|
Income taxes |
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of Non-Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
Recognition of asset retirement obligation |
| $ | 94,796 |
|
| $ | 231,053 |
|
Recognition of right-of-use asset and lease liability |
| $ | 367,365 |
|
| $ | - |
|
Amortization of right-of-use asset and lease liability |
| $ | 28,738 |
|
| $ | - |
|
Purchase of transportation equipment through direct financing |
| $ | 56,760 |
|
| $ | - |
|
Proceeds from sale of oil and gas properties paid directly to reduce debt |
| $ | 3,800,000 |
|
| $ | - |
|
Elimination of asset retirement obligation associated with sale of assets |
| $ | 797,796 |
|
| $ | - |
|
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 |
|
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 |
|
Issuance of shares for contract services |
| $ | - |
|
| $ | 55,000 |
|
Cashless exercise of warrants |
| $ | - |
|
| $ | 60 |
|
Accrued expenses exchanged for long term debt |
| $ | - |
|
| $ | 24,712 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5 |
Table of Contents |
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 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
VIKING ENERGY GROUP, INC. Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) |
For the six months ended June 30, 2019
Prepaid Retained Preferred Stock Common Stock Additional Paid-in Equity- Based Earnings (Accumulated Total Stockholders' Number Amount Number Amount Capital Compensation Deficit) Equity Balances at December 31, 2018 Shares issued for services Net loss for the six months ended June 30, 2019 Balances at June 30, 2019 For the six months ended June 30, 2018 Prepaid Retained Preferred Stock Common Stock Additional Paid-in Equity Based Earnings (Accumulated Total Stockholders' 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 for consulting services Shares issued as prepaid equity-based compensation Shares issued as debt discount Warrants issued for services Shares issued in cashless exercise of warrants Warrants issued as debt discount Amortization of prepaid equity-based compensation Net loss for the six months ended June 30, 2018 Balances at June 30, 2018 28,092 $ 28 90,989,025 $ 90,989 $ 32,015,913 $ - $ (10,891,913 ) $ 21,215,017 210,929 211 41,871 42,082 (10,639,135 ) (10,639,135 ) 28,092 $ 28 91,199,954 $ 91,200 $ 32,057,784 $ - $ (21,531,048 ) $ 10,617,964 28,092 $ 28 72,347,990 $ 72,348 $ 19,029,892 $ (11,827 ) $ 3,417,872 $ 22,508,313.0 807,762 807,762 3,031,748 3,032 548,887 551,919 250,000 250 54,750 (55,000 ) - 7,774,856 7,775 1,229,641 1,237,416 599,353 599,353 60,312 60 (60 ) - 327,740 327,740 66,827 66,827 (5,508,099 ) (5,508,099 ) 28,092 $ 28 83,464,906 $ 83,465 $ 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)
|
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. (“Viking” or the “Company”) is engaged 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. Since 2014 the Company has had the following related activities:
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.
· | In November 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. Effective September 30, 2018, the Company negotiated a sale and settlement of this Canadian joint venture interest and a resolution of all intercompany balances associated with it, for proceeds to the Company of $232,545. An asset retirement obligation of $466,031 offset by the net asset retirement cost of $293,296 associated with this investment generated a gain from disposal of these assets of $405,280. | |
· | In February 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. | |
· | In October 2016, the Company, through its subsidiary Mid-Con Petroleum, LLC (“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 September 11, 2017, the Company through its subsidiary Mid-Con Drilling, LLC (“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. | |
· | 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. | |
· | On December 22, 2017, the Company completed an acquisition of 100% of the 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 29, 2017, the Company through its subsidiary Mid-Con Development, LLC (“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.
These accompanying 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. Although the Company had a net income of $1,292,346 for the three months ended June 30, 2019, the Company had a net loss of $10,639,135 for the six months ended June 30, 2019. Furthermore, as of June 30, 2019, the Company has a working capital deficiency in excess of $45,000,000. The largest components of current liabilities creating this deficiency are (a) notes payable with a face value aggregating approximately $15,000,000 due in August of 2019 and (b) a promissory note payable to the seller of the certain oil and gas interests purchased on December 28, 2018 in the amount of $23,777,948 with all principal and accrued interest due on the earlier of (i) the date the Company or one of its affiliates completes an acquisition with one or more of the Sellers for a purchase price equal to or greater than $50,000,000 or (ii) January 31, 2020. Management has evaluated these conditions and has developed a plan which, in part, address these obligations as follows:
These conditions raise substantial doubt regarding 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 utilize the resources in place to generate future profitable operations, to develop additional acquisition opportunities, and to obtain the necessary financing to meet its obligations and repay its liabilities arising from business operations when they come due. Management believes the Company will be able to continue to develop new opportunities, and will be able to obtain additional funds through debt and / or equity financings to facilitate its development strategy; 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 interim reporting 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, asset retirement obligations and impairment of long-lived assets.
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.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 to provide a base of operations for properties in Canada; Mid-Con Petroleum, LLC, Mid-Con Drilling, LLC, and Mid-Con Development, LLC, which were all formed to provide a base of operations for properties in the Central United States; and Petrodome Energy, LLC (and its subsidiaries) and Ichor Energy Holdings, LLC, its subsidiary Ichor Energy, LLC (Ichor Energy”), and Ichor Energy’s subsidiaries, Ichor Energy (TX), LLC, and Ichor Energy (LA), LLC, which provide a base of operations to facilitate property acquisitions in Texas, Louisiana and Mississippi. All significant intercompany transactions and balances have been eliminated.
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. Significant areas requiring the use of management estimates relate to impairment of long-lived assets, stock-based compensation, asset retirement obligations, and the determination of expected tax rates for future income tax recoveries.
The estimates of proved oil and gas reserves are used as significant inputs in determining the depletion of oil and gas properties and the impairment of proved oil and gas properties. There are numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved 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.
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d) Financial Instruments
ASC Topic 820-10, “Fair Value Measurement” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for other receivable – related party, accrued expenses and other current liabilities, accounts payable, derivative liabilities, amount due to directors, and convertible notes
Accounting Standards Codification, “ASC” Topic 820-10, “Fair Value Measurement” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 820-10, defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measurement. The carrying amounts reported in the consolidated balance sheets for accrued expenses and other current liabilities, accounts payable, derivative liabilities, amount due to director each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
| · | Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
· | Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
· | Level 3: inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Assets and liabilities measured at fair value as of June 30, 2019 are classified below based on the three fair value hierarchy described above:
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Assets and liabilities measured at fair value as of December 31, 2018, are classified below based on the three-level fair value hierarchy described above: Description Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) Financial Assets Commodity Derivative Financial liabilities Commodity Derivative $ $ $ $ The Company has entered into certain commodity derivative instruments containing swaps and collars, which management believes are effective in mitigating commodity price risk associated with a portion of its future monthly natural gas and crude oil production and related cash flows. The Company does not designate its commodities derivative instruments as hedges and therefore does not apply hedge accounting. Changes in fair value of derivative instruments subsequent to the In a commodities swap agreement, the Company trades the fluctuating market prices of oil or natural gas at specific delivery points over a specified period, for The Company has also entered into collar agreements related to oil and gas production with established floors and ceilings. Upon settlement, if the current market price of the commodity is below the floor, the Company receives the difference. Conversely, if the current market price of the commodity is above the ceiling at settlement, the Company pays the excess over the ceiling price. Although the Company is exposed to credit risk to the extent of nonperformance by the counterparties to these derivative contracts, the Company does not anticipate such nonperformance and monitors the credit worthiness of its counterparties on an ongoing basis. The derivative assets were $0 and $681,776 as of June 30, 2019 and December 31, 2018, and the derivative liabilities were $7,121,509 and $2,531,718 as of June 30, 2019 and December 31, 2018 respectively. The change in the fair value of the derivative assets and liabilities
The table below is a summary of the |
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Natural Gas Period Average MMBTU per Month Fixed Price per MMBTU Swap Dec-18 to Dec-22 118,936 $2.715 Crude Oil Period Average BBL per Month Price per BBL Swap Dec-18 to Dec-22 24,600 $50.85 Swap Dec-17 to Dec-19 1,400 $54.77 Swap Jan-20 to Jun-20 1,400 $52.71 Collar Dec-17 to Jun-20 4,000 $55.00 / $72.00 Collar Sep-17 to Sep-19 1,100 $47.00 / $54.10Liabilities measured at fair value as of June 30, 2018, are classified below based on the three-level fair value hierarchy described above:
Description |
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
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| Significant Other Observable Inputs (Level 2) |
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| Significant Unobservable Inputs (Level 3) |
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| Total Gains (Losses) |
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Financial Assets |
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Long term investment |
| $ | - |
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| $ | - |
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| $ | - |
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| $ | - |
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Commodity Derivative |
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| - |
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| - |
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| - |
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| - |
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| $ | - |
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| $ | - |
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| $ | - |
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| $ | - |
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Financial liabilities |
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Derivative liabilities |
| $ | - |
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| $ | - |
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| $ | - |
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| $ | - |
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Commodity Derivative |
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| - |
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| 1,232,810 |
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| - |
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| (987,784 | ) |
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| $ | - |
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| $ | 1,232,810 |
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| $ | - |
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| $ | (987,784 | ) |
Assets and liabilities measured at fair value as of December 31, 2017, are classified below based on the three-level fair value hierarchy described above:
Description |
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
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| Significant Other Observable Inputs (Level 2) |
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| Significant Unobservable Inputs (Level 3) |
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| Total Gains (Losses) |
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Financial Assets |
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Long term investment |
| $ | - |
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| $ | - |
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| $ | - |
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| $ | 1,446 |
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| $ | - |
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| $ | - |
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| $ | - |
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| $ | 1,446 |
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Financial liabilities |
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Derivative liabilities |
| $ | - |
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| $ | - |
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| $ | 807,762 |
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| $ | 232,840 |
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Commodity Derivative |
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| - |
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| 245,026 |
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| - |
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| (183,965 | ) |
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| $ | - |
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| $ | 245,026 |
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| $ | 807,762 |
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| $ | 48,875 |
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The Company’s long-term investment consisted of 1,437,500 common shares of Tanager Energy Inc., as of December 31, 2016, which is traded on the TSX Venture Exchange (Toronto Stock Exchange). During the three months ended March 31, 2017, the Company sold these shares. The change in the fair value of this investment that has been recognized as an unrealized gain in other comprehensive income on the statement of operations and comprehensive loss was $1,446 for the three months ended March 31, 2017.
The Company had commodity financial derivatives in place at June 30, 2018. The Company does not designate its commodities derivative instruments as hedges and therefore does not apply hedge accounting. Changes in fair value of derivative instruments subsequent to the initial measurement are recorded as change in fair value on derivative liability, in other income (expense). The estimated fair value amounts of the Company’s commodity derivative instruments have been determined at discrete points in time based on relevant market information which resulted in the Company classifying such derivatives as Level 2. Although the Company’s commodity derivative instruments are valued using public indices, the instruments themselves are traded with unrelated counterparties and are not openly traded on an exchange.
The Company uses the Black-Scholes model to value its derivative liabilities. This model takes into account inputs such as contract terms, including maturity and market parameters, including assumptions associated with interest rates, volatility and credit worthiness. The derivative assets and liabilities of the Company were $0 and $1,232,810 respectively as of June 30, 2018, and $0 and $1,052,788 respectively as of December 31, 2017, respectively. The change in the fair value of the derivative liabilities for the six months ended June 30, 2018, consisted of an increase of $987,784 associated with commodity derivatives. The decrease in the derivative liabilities associated with warrants and the conversion features of convertible debt in the amount of $807,762 are the result of the Company adopting ASU 2017-11, Derivatives and Hedging (Topic 815) I.Accounting for Certain Instruments with Down Round Features. The effect is a reduction in the derivative liability and a restatement of beginning retained earnings in the amount of $807,762.
e) Cash and Cash Equivalents |
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.
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, 2019, the Company has cash deposits in excess of FDIC insured limits in the amounts of $3,867,375.
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. $4,683,129 as of June 30, 2019 represents the balance of cash held by Ichor Energy, LLC (the “Borrower”) and/or its subsidiaries, generated through the operations of those subsidiaries. Pursuant to the Term Loan Credit Agreement to which the Borrower and its subsidiaries are parties, following March 31, 2019 the Borrower is required at all times to maintain a minimum cash balance of $2,000,000 (the “MLR”). Within 30 days of the end of each quarter, commencing with the quarter ended June 30, 2019, the Borrower is required to pay the lenders, as an additional principal payment on the debt, any cash in excess of (i) the MLR and (ii) any funds necessary for the capital expenditures contemplated to be expended in the next six month period by an approved plan of development (“APOD Capex Amount”). At June 30, 2019, the cash in excess of the MLR does not exceed the APOD Capex Amount..
f) Accounts receivable
Accounts receivable consist of oil and gas receivables. 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 $217,057 at June 30, 2019 and December 31, 2018 respectively.
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:
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| June 30, 2018 |
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| December 31, 2017 |
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In February 2017, a one-year consulting agreement for services related to investor relations, market exposure and content development for a total amount of $44,160. |
| $ | - |
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| $ | 6,412 |
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In April 2017, a one-year consulting agreement comprised of four quarterly incremental installments for services related to analysis of potential oil and gas acquisitions, for an initial quarterly amount of $40,250, a second installment of $28,000 in July 2017, and a third installment of $55,000 in January 2018. |
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| - |
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| 5,415 |
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| $ | - |
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| $ | 11,827 |
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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.
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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:
Oil and Gas Properties by Geographical Cost Center | ||||||||||||||||
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| Three months ended June 30, |
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Cost Center |
| 2018 |
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Canada |
| $ | 10,649 |
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| $ | 221 |
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| $ | 21,387 |
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| $ | 17,228 |
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United States |
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| 449,302 |
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| 35,388 |
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| 928,250 |
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| 69,663 |
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| $ | 459,951 |
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| $ | 35,609 |
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| $ | 949,637 |
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| $ | 86,891 |
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i) Limitation on Capitalized Costs
Under the full-cost method of accounting, the Company isaccounting, we are 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 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, 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; 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,
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i) 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.
j) Income (loss) per Share
Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding and adjusted by any effects of warrants and options outstanding during the period, if dilutive. For the three months ended June 30, 2019 there were approximately 1,411 common stock equivalents that were dilutive; these dilutive shares were immaterial and omitted from the calculation of income per share for such period. For the six months ended June 30, 2019 and 2018 there were approximately 92,274,782 and 34,912,910 and 6,582,259 common stock equivalents respectively, that were anti-dilutive.
Sales of |
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 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 Oil $ 2,248,725 151,386 $ 4,272,909 $ 358,249 Natural gas and Natural gas liquids 69,897 9,044 207,660 9,044 $ 2,318,622 $ 160,430 $ 4,480,569 $ 367,293
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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)
Three months ended Six months ended June 30, June 30, 2019 2018 2019 2018 Oil Natural gas and natural gas liquids $ 7,194,400 $ 2,248,725 $ 14,926,562 $ 4,272,909 1,539,923 69,897 3,154,353 207,660 $ 8,734,323 $ 2,318,622 $ 18,080,915 $ 4,480,569
l) 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.its deferred tax assets, management evaluated whether it is more likely than not that some portion, or all of its deferred tax assets, will be realized. The realization of its deferred tax assets relates directly to the Company’s ability to generate taxable income. The valuation allowance is then adjusted accordingly.
m) Stock-Based Compensation |
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. 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.
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o) 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, 2019:
p) 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. q) Recent Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-02 “Leases” (ASU 2016-02) and subsequently issued supplemental adoption guidance and clarification (collectively, Topic 842). Topic 842 amends a number of aspects of lease accounting, including requiring lessees to recognize right-of-use assets and lease liabilities for operating leases with a lease term greater than one year. Topic 842 supersedes Topic 840 “Leases.” On January 1, 2019, the Company adopted Topic 842 using the modified retrospective approach. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 840. We elected the package of practical expedients permitted under the transition guidance within Topic 842, which allowed us to carry forward the historical lease classification, retain the initial direct costs for any leases that existed prior to the adoption of the standard and not reassess whether any contracts entered into prior to the adoption are leases. We also elected to account for lease and non-lease components in our lease agreements as a single lease component in determining lease assets and liabilities. In addition, we elected not to recognize the right-of-use assets and liabilities for leases with lease terms of one year or less. Upon adoption of Topic 842, we recorded $367,365 of right-of-use assets and operating lease liabilities as of January 1, 2019. The adoption did not have a material impact on our Consolidated Statements of Operations or Consolidated Statements of Cash Flows r) Subsequent events The Company has evaluated all subsequent events from June 30, 2019, through the date of filing this report, and determined there are no additional items to disclose other than those described in Note 9.
Note 3. Business Acquisition
Proforma unaudited condensed selected financial data for the
The
The
The Company is authorized to issue 5,000,000 shares of Preferred Stock, par value $0.001 per share (the “Preferred Stock”), of which 50,000 have been designated as Series C Preferred Stock (the “Series C Preferred Stock”).
Each share of Series C Preferred Stock
On
During the
During the
Note 7. Long Term Debt
Long term debt consisted of the following at June 30,
From time to time the Company may be a party to litigation
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. In preparing the management’s discussion and analysis, the registrant presumes that you have read or have access to the discussion and analysis for the preceding fiscal year.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 or the Reform Act. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earning, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions of performance; and statements of belief; and any statements of assumptions underlying any of the foregoing. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: our ability to raise capital and the terms thereof; ability to gain an adequate player base to generate the expected revenue; competition with established gaming websites; adverse changes in government regulations or polices; and other factors referenced in this Form 10-Q.
The use in this Form 10-Q of such words as “believes”, “plans”, “anticipates”, “expects”, “intends”, and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These forward-looking statements present the Company’s estimates and assumptions only as of the date of this Report. Except for the Company’s ongoing obligation to disclose material information as required by the federal securities laws, the Company does not intend, and undertakes no obligation, to update any forward-looking statements.
Although the Company believes that the expectations reflected in any of the forward-looking statements are reasonable, actual results could differ materially from those projected or assumed or any of the Company’s forward-looking statements. The Company’s future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties.
PLAN OF OPERATIONS
Overview
The
The following overview provides a background for the
Acquisitions – Canada
Acquisitions – Kansas
These Kansas properties are operated by third party contractors. The Company’s plans relative to
Acquisitions – Texas, Louisiana and Mississippi
As a part of this acquisition, the Company retained an operational office in Houston, Texas that includes several senior level professionals with over 100 years of combined oil and gas experience which provides the Company the capability of operating many of its own wells internally. This expertise has since been utilized to evaluate additional oil and gas acquisitions, evaluate the profitable management of all of the Company’s oil and gas assets, and evaluate and develop new drilling prospects. Acquisitions – Texas and Louisiana
This acquisition of these assets is consistent with the location of our Petrodome assets and are effectively managed from our Houston office. Acquisitions – Louisiana
Going Concern Qualification
These accompanying 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. Although the Company had a net income of $1,292,346 for the three months ended June 30, 2019, the Company had a net loss of $10,639,135 for the six months ended June 30, 2019. Furthermore, as of June 30, 2019, the Company has a working capital deficiency in excess of $45,000,000. The largest components of current liabilities creating this deficiency are (a) notes payable with a face value aggregating approximately $15,000,000 due in August of 2019 and (b) a promissory note payable to the seller of the certain oil and gas interests purchased on December 28, 2018 in the amount of $23,777,948 with all principal and accrued interest due on the earlier of (i) the date the Company or one of its affiliates completes an acquisition with one or more of the Sellers for a purchase price equal to or greater than $50,000,000 or (ii) January 31, 2020.
Management has evaluated these conditions and has developed a plan which, in part, address these obligations as follows:
These conditions raise substantial doubt regarding 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 utilize the resources in place to generate future profitable operations,
RESULTS OF CONTINUING OPERATIONS
The following discussion of the financial condition and results of operation of the Company for the three and six months ended June 30,
Liquidity and Capital Resources
As of June 30, As of June 30, 2019, the Company has total long term debt of $105,992,026, with a current portion of $40,231,789. This current portion consists primarily of notes payable with a face value approximating $15,000,000 and a promissory note payable to the seller of the certain oil and gas interests acquired in December 2018, in the amount of $23,777,948 (see Going Concern Qualification).
Three months ended June 30,
Revenue
The Company had gross revenues of $8,734,323 for the three months ended June 30, 2019, as compared to $2,318,622 for the three months ended June 30, 2018,
Expenses
The Company’s operating expenses increased by Income (loss) from Operations The Company, through the increased production coming from its latest acquisition, and controlling the cost of operations and administration, has generated an income from operations for the three months ended June 30, 2019 of $2,312,714, when compared to a loss from operations of
Other
The Company had other income (expense) of $(1,020,368) for the three months ended June 30, 2019, as compared to $(3,164,009) for the three months ended June 30, Net Income (Loss) The Company incurred a net income of $1,292,346 during the three-month period ended June 30, 2019, compared with a net loss of $(3,955,216) for the three-month period ended June 30, 2018. The primary reason for the Company generating a net income for the three months ended June 30, 2019 has to do with the gain associated with the change in the fair value of the commodity derivatives offsetting interest expense.
Six months ended June 30, 2019, compared to the six months ended June 30, 2018 Revenue The Company had gross revenues of $18,080,915 for the six months ended June 30, 2019, as compared to $4,480,569 for the six months ended June 30, 2018, reflecting an increase in excess of 303% or $13,600,346. This substantial increase in revenue is primarily a result of the increased production from the certain oil and gas assets acquired at the end of 2018, but also is reflective of new drilling and enhancements to existing wells. Expenses The Company’s operating expenses increased by approximately 98%, or $6,211,448 to $12,547,164 for the six-month period ended June 30, 2019, from $6,335,716 in the corresponding prior period. Lease operating costs increased by approximately 167%, or $3,412,930, to 5,456,672 from $2,043,742 as compared to the six months ended June 30, 2018. DD&A expense, a non-cash expense, increased by $3,649,242, to $4,598,879 from $949,637 for the corresponding period in 2018. General and administrative expenses only reflected an increase of approximately 15%, to $2,291,304 or $264,843, when compared to $2,026,461 in the corresponding prior period. Income (loss) from Operations The Company, through the increased production coming from its latest acquisition, and controlling the cost of operations and administration, has generated an income from operations for the six months ended June 30, 2019 of $5,533,751, when compared to a loss from operations of $1,855,147 for the six months ended June 30, 2018. Other Income (Expense) The Company had other income (expense) of $(16,172,886) for the six months ended June 30, 2019, as compared to $(4,530,231) for the six months ended June 30, 2018. This significant difference is primarily a result of increased interest expense and amortization of debt discount due to increased debt associated with acquisitions, and loss on commodity
Net Income (Loss)
The Company incurred a net (loss) of
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our financial statements in conformity with GAAP, which requires management to make certain estimates and assumptions and apply judgments. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the financial statements are prepared and actual results could differ from our estimates and such differences could be material. Due to the need to make estimates about the effect of matters that are inherently uncertain, materially different amounts could be reported under different conditions or using different assumptions. On a regular basis, we review our critical accounting policies and how they are applied in the preparation of our financial statements, as well as the sufficiency of the disclosures pertaining to our accounting policies in the footnotes accompanying our financial statements. Described below are the most significant policies we apply in preparing our consolidated financial statements, some of which are subject to alternative treatments under GAAP. We also describe the most significant estimates and assumptions we make in applying these policies. See “Note
Oil and Gas Property Accounting
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 of acquisition, exploration and development of oil and natural gas properties (including such costs as leasehold acquisition costs, geological expenditures, dry hole costs, tangible and intangible development costs and direct internal costs) are capitalized as the cost of oil and natural gas properties when incurred.
The full cost method requires the Company to calculate quarterly, by cost center, a
Proved Reserves
Estimates of our proved reserves included in this report are prepared in accordance with U.S. SEC guidelines for reporting corporate reserves and future net revenue. The accuracy of a reserve estimate is a function of:
Our proved reserve information included in this report was predominately based on estimates. Because these estimates depend on many assumptions, all of which may substantially differ from future actual results, reserve estimates will be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify material revisions to the estimate.
In accordance with SEC requirements, we based the estimated discounted future net cash flows from proved reserves on the unweighted arithmetic average of the prior 12-month commodity prices as of the first day of each of the months constituting the period and costs on the date of the estimate.
The estimates of proved reserves materially impact depreciation, depletion, amortization and accretion (“DD&A”) expense. If the estimates of proved reserves decline, the rate at which we record DD&A expense will increase, reducing future net income. Such a decline may result from lower market prices, which may make it uneconomic to drill for and produce from higher-cost fields.
Asset Retirement Obligation
Asset retirement obligations (“ARO”) primarily represent the estimated present value of the amount we will incur to plug, abandon and remediate our producing properties at the projected end of their productive lives, in accordance with applicable federal, state and local laws. We determined our 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. Periodic accretion of discount of the estimated liability is recorded as accretion expense in the accompanying consolidated statements of
ARO liability is determined using significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of wells and a risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated ARO.
Commodity derivatives The Company does not designate its commodities derivative instruments as hedges and therefore does not apply hedge accounting. Changes in fair value of derivative instruments subsequent to the initial measurement are recorded as change in fair value on derivative liability, in other income (expense). The estimated fair value amounts of the Company’s commodity derivative instruments have been determined at discrete points in time based on relevant market information which resulted in the Company classifying such derivatives as Level 2. Although the Company’s commodity derivative instruments are valued using public indices, as well as the Black-Sholes model, the instruments themselves are traded with unrelated counterparties and are not openly traded on an exchange.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, the Company is not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company does not currently maintain controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified by the Commission’s rules and forms. Disclosure controls and procedures would include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of management, including the Company’s Chief Executive Officer, the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30,
Changes in Internal Control over Financial Reporting
Management and directors will continue to monitor and evaluate the effectiveness of the
From time to time, the Company may be involved in litigation relating to claims arising out of commercial operations in the normal course of business. As of June 30, In April of 2019, the staff (the “Staff”) of the SEC’s Division of Enforcement notified the Company that the Staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company, as well as against its CEO and its CFO, for alleged violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder during the period from early 2014 through late 2016. The Staff’s notice is not a formal allegation or a finding of wrongdoing by the Company, and the Company is in dialogue with the Staff regarding its preliminary determination. The Company believes it has adequate defenses and intends to vigorously defend any enforcement action that may be initiated by the SEC.
As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, the Company is not required to provide the information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During
The
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
* Filed ** 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.
ITEM 7. OFF BALANCE-SHEET ARRANGEMENTS
None.
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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