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EXCEL - IDEA: XBRL DOCUMENT - Cardinal Energy Group, Inc. | Financial_Report.xls |
EX-32.1 - EXHIBIT 32.1 - Cardinal Energy Group, Inc. | ex32-1.htm |
EX-31.1 - EXHIBIT 31.1 - Cardinal Energy Group, Inc. | ex31-1.htm |
EX-32.2 - EXHIBIT 32.2 - Cardinal Energy Group, Inc. | ex32-2.htm |
EX-31.2 - EXHIBIT 31.2 - Cardinal Energy Group, Inc. | ex31-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] | QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2013
OR |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-53923
CARDINAL ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Nevada | 26-0703223 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
6037 Frantz Rd., Suite 103, Dublin, OH | 43017 | |
(Address of principal executive offices) | (Zip Code) |
(614) 459-4959
(Registrant’s telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 last 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 (SS 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer | [ ] | Accelerated Filer | [ ] | ||
Non-accelerated Filer | [ ] | Smaller Reporting Company | [X] | ||
(Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of August 12, 2013 there were 34,828,362 shares issued and outstanding of Registrant’s Common Stock (par value $0.00001 per share)
CARDINAL ENERGY GROUP, INC.
For the Quarter Ended June 30, 2013
TABLE OF CONTENTS
2 |
PART I – FINANCIAL INFORMATION
ITEM 1. | FINANCIAL INFORMATION. |
Balance Sheets
(Unaudited)
June 30, 2013 | December 31, 2012 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | 50,678 | $ | 3,460 | ||||
Accounts receivable - related party | - | 16,978 | ||||||
Investments | 23,100 | 124,740 | ||||||
Total Current Assets | 73,778 | 145,178 | ||||||
PROPERTY AND EQUIPMENT, net | 54,101 | 20,073 | ||||||
OIL AND GAS PROPERTIES (full cost method) | ||||||||
Proved properties, net of accumulated depletion, depreciation, amortization, and impairment of $579,963 and $579,963, respectively | 671,972 | 653,222 | ||||||
OTHER ASSETS | 58,107 | 3,452 | ||||||
TOTAL ASSETS | $ | 857,958 | $ | 821,925 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable and accrued expenses | $ | 251,012 | $ | 50,948 | ||||
Related party payables | 147,755 | 122,845 | ||||||
Notes payable | 95,500 | - | ||||||
Derivative liability | 65,019 | 74,240 | ||||||
Total Current Liabilities | 559,286 | 248,033 | ||||||
LONG-TERM LIABILITIES | ||||||||
Convertible notes, net of debt discount of $38,380 and $-0-, respectively | 144,620 | - | ||||||
Asset retirement obligation | 8,199 | 7,760 | ||||||
Total Long-Term Liabilities | 152,819 | 7,760 | ||||||
TOTAL LIABILITIES | 712,105 | 255,793 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock, 100,000,000 shares authorized at par value of $0.00001; 34,828,362 and 34,545,000 shares issued and outstanding, respectively | 348 | 346 | ||||||
Additional paid-in capital | 3,922,980 | 3,518,752 | ||||||
Accumulated other comprehensive loss | (2,194,500 | ) | (2,092,860 | ) | ||||
Retained earnings (deficit) | (1,582,975 | ) | (860,106 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 145,853 | 566,132 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 857,958 | $ | 821,925 |
The accompanying notes are an integral part of these unaudited financial statements.
F-1 |
Statements of Operations and Other Comprehensive Income (Loss)
(Unaudited)
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
REVENUES | ||||||||||||||||
Oil and gas revenues | $ | 5,471 | $ | 34 | $ | 7,342 | $ | 1,521 | ||||||||
Total Revenues | 5,471 | 34 | 7,342 | 1,521 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Well operating costs | 1,017 | 734 | 2,726 | 2,529 | ||||||||||||
Depreciation and amortization | 2,857 | 693 | 4,608 | 1,369 | ||||||||||||
Accretion expense | 220 | 28 | 439 | 56 | ||||||||||||
General and administrative | 238,882 | 11,360 | 719,394 | 37,877 | ||||||||||||
Total Operating Expenses | 242,976 | 12,815 | 727,167 | 41,831 | ||||||||||||
LOSS FROM OPERATIONS | (237,505 | ) | (12,781 | ) | (719,825 | ) | (40,310 | ) | ||||||||
OTHER INCOME (EXPENSES) | ||||||||||||||||
Interest expense, net | (9,219 | ) | - | (12,265 | ) | - | ||||||||||
Gain (loss) on derivative | (15,940 | ) | 9,221 | |||||||||||||
Total Other Income (Expenses) | (25,159 | ) | - | (3,044 | ) | - | ||||||||||
NET LOSS | $ | (262,664 | ) | $ | (12,781 | ) | $ | (722,869 | ) | $ | (40,310 | ) | ||||
OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
Change in value of investments | 6,160 | 5,236 | (101,640 | ) | 3,080 | |||||||||||
NET COMPREHENSIVE LOSS | $ | (256,504 | ) | $ | (7,545 | ) | $ | (824,509 | ) | $ | (37,230 | ) | ||||
Basic and diluted loss per common share | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.02 | ) | $ | (0.00 | ) | ||||
Weighted average shares outstanding (basic and diluted) | 34,802,801 | 34,500,000 | 34,743,977 | 34,500,000 |
The accompanying notes are an integral part of these unaudited financial statements.
F-2 |
Statements of Stockholders’ Equity
(Unaudited)
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | Total | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
Balance at December 31, 2012 | 34,545,000 | $ | 346 | $ | 3,518,752 | $ | (860,106 | ) | $ | (2,092,860 | ) | $ | 566,132 | |||||||||||
Common stock issued for services | 242,500 | 2 | 307,773 | - | - | 307,775 | ||||||||||||||||||
Common stock issued for deferred costs | 25,862 | - | 34,655 | - | - | 34,655 | ||||||||||||||||||
Common stock issued for property | 15,000 | - | 18,750 | - | - | 18,750 | ||||||||||||||||||
Beneficial conversion feature | - | - | 43,050 | - | - | 43,050 | ||||||||||||||||||
Unrealized holding loss for available-for-sale-securities | - | - | - | - | (101,640 | ) | (101,640 | ) | ||||||||||||||||
Net loss for the six months ended June 30, 2013 | - | - | - | (722,869 | ) | - | (722,869 | ) | ||||||||||||||||
Balance at June 30, 2013 | 34,828,362 | $ | 348 | $ | 3,922,980 | $ | (1,582,975 | ) | $ | (2,194,500 | ) | $ | 145,853 |
The accompanying notes are an integral part of these unaudited financial statements.
F-3 |
Statements of Cash Flows
(Unaudited)
For the Six Months Ended | ||||||||
June 30, | ||||||||
2013 | 2012 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (722,869 | ) | $ | (40,310 | ) | ||
Adjustments to reconcile net loss to net cash used in operations: | ||||||||
Depreciation | 4,608 | 1,369 | ||||||
Accretion | 439 | 56 | ||||||
Amortization of debt discount | 4,670 | - | ||||||
Stock based compensation | 307,775 | - | ||||||
Gain on derivative liability | (9,221 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable - related party | (22,859 | ) | - | |||||
Accounts payable and accrued expenses | 200,064 | (4,047 | ) | |||||
Accounts payable - related party | 38,310 | - | ||||||
Net Cash Used in Operating Activities | (199,083 | ) | (42,932 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Notes receivable | - | (20,000 | ) | |||||
Purchase of property and equipment | (38,636 | ) | - | |||||
Sale of oil and gas properties | - | 75,000 | ||||||
Net Cash Provided by (Used in) Investing Activities | (38,636 | ) | 55,000 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from notes payable - related party | 49,600 | - | ||||||
Proceeds from notes payable | 278,500 | - | ||||||
Repayment of notes payable -related party | (43,163 | ) | (10,022 | ) | ||||
Net Cash Provided by (Used in) Financing Activities | 284,937 | (10,022 | ) | |||||
NET INCREASE IN CASH | 47,218 | 2,046 | ||||||
CASH AT BEGINNING OF PERIOD | 3,460 | 111 | ||||||
CASH AT END OF PERIOD | $ | 50,678 | $ | 2,157 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
CASH PAID FOR: | ||||||||
Interest | $ | - | $ | - | ||||
Income Taxes | $ | - | $ | - | ||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Unrealized gain (loss) on AFS securities | $ | (101,640 | ) | $ | 3,080 | |||
Related party debt issued for cash bond | $ | 20,000 | $ | - | ||||
Debt discount from beneficial conversion feature | $ | 43,050 | $ | - | ||||
Common stock issued for deferred costs | $ | 34,655 | $ | - | ||||
Common stock issued for oil and gas properties | $ | 18,750 | $ | - |
The accompanying notes are an integral part of these unaudited financial statements.
F-4 |
Notes to the Condensed Financial Statements
For the Periods Ended June 30, 2013 and December 31, 2012
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at June 30, 2013, and for all periods presented herein, have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2012 audited financial statements. The results of operations for the period ended June 30, 2013 and 2012 are not necessarily indicative of the operating results for the full year.
Nature of Operations and Organization
Cardinal Energy Group, Inc. (the “Company”) was incorporated in the State of Nevada on June 19, 2007, for the purpose of developing, manufacturing and selling a steak timer. On September 28, 2012, the Company changed the focus of its business when it acquired all of the ownership interests of Cardinal Energy Group, LLC, an Ohio limited liability company which is engaged in the business of exploring, purchasing, developing and operating oil and gas leases. The Company changed its name to Cardinal Energy Group, Inc. on October 10, 2012 in connection with this acquisition.
The Company has been engaged in the exploration, development, exploitation and production of oil and natural gas. The Company sells its oil and gas products primarily to domestic purchasers of oil and gas production. Its operations are presently focused in the states of California, Ohio and Texas. The recoverability of the capitalized exploration and development costs for these properties is dependent upon the existence of economically recoverable reserves, the Company’s ability to obtain the necessary financing to complete exploration and development, and future profitable production or proceeds from disposition of such property.
Basis of Presentation and Use of Estimates
These financial statements have been prepared in accordance with accounting principles generally accepted in United States of America which requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures of revenues and expenses for the reported year. Actual results may differ from those estimates.
Revenues and direct operating expenses of the California properties represent members’ interest in the properties acquired for the periods prior to the closing date and are presented on the accrual basis of accounting and in accordance with generally accepted accounting principles. The financial statements presented are not indicative of the results of operations of the acquired properties going forward due to changes in the business and inclusion of the above mentioned expenses.
Oil and Gas Properties
The Company follows the full cost method of accounting for its oil and natural gas properties, whereby all costs incurred in connection with the acquisition, exploration for and development of petroleum and natural gas reserves are capitalized. Such costs include lease acquisition, geological and geophysical activities, rentals on non-producing leases, drilling, completing and equipping of oil and gas wells and administrative costs directly attributable to those activities and asset retirement costs. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capital costs and proved reserves of oil and gas, in which case the gain or loss is recognized to income.
Depletion and depreciation of proved oil and gas properties is calculated on the units-of-production method based upon estimates of proved reserves. Such calculations include the estimated future costs to develop proved reserves. Oil and gas reserves are converted to a common unit of measure based on the energy content of 6,000 cubic feet of gas to one barrel of oil. Costs of unevaluated properties are not included in the costs subject to depletion. These costs are assessed periodically for impairment.
During the six months ended June 30, 2013, the Company issued 15,000 shares of its common stock valued at fair market value of $18,750 for oil and gas property.
F-5 |
Cardinal Energy Group, Inc.
Notes to the Condensed Financial Statements
For the Periods Ended June 30, 2013 and December 31, 2012
New Accounting Pronouncements
Management has considered all recent accounting pronouncements issued since the last audit of our financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.
NOTE 2 – GOING CONCERN
The Company currently utilizes production revenues to fund its operating expenses. The Company’s negative cash flows from operations, projected cost of capital improvements of the oil and gas wells, and its projected operating losses to be incurred raise substantial doubt about its ability to continue as a going concern. The Company plans to use additional equity financing through fiscal year 2013 to fund potential acquisitions and business expansion.
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.
The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of June 30, 2013 and December 31, 2012. As required by ASC 820, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between fair value hierarchy levels for the years ended June 30, 2013 and December 31, 2012.
The carrying amounts reported in the balance sheets for cash, accounts receivable, loans payable, and accounts payable and accrued expenses, approximate their fair market value based on the short-term maturity of these instruments. The following table presents assets and liabilities that are measured and recognized at fair value as of June 30, 2013 and December 31, 2012, on a recurring basis:
Assets and liabilities at fair value on a recurring basis at June 30, 2013:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets | ||||||||||||||||
Marketable securities | $ | 23,100 | - | - | $ | 23,100 | ||||||||||
Total | $ | 23,100 | - | - | $ | 23,100 | ||||||||||
Liabilities | ||||||||||||||||
Derivative liability | - | - | $ | 65,019 | $ | 65,019 | ||||||||||
Total | - | - | $ | 65,019 | $ | 65,019 |
F-6 |
Cardinal Energy Group, Inc.
Notes to the Condensed Financial Statements
For the Periods Ended June 30, 2013 and December 31, 2012
Assets and liabilities at fair value on a recurring basis at December 31, 2012:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets | ||||||||||||||||
Marketable securities | $ | 124,740 | - | - | $ | 124,740 | ||||||||||
Total | $ | 124,740 | - | - | $ | 124,740 | ||||||||||
Liabilities | ||||||||||||||||
Derivative liability | - | - | $ | 74,240 | $ | 74,240 | ||||||||||
Total | - | - | $ | 74,240 | $ | 74,240 |
The balance of the derivative liability decreased from $74,240 on December 31, 2012 to $65,019 on June 30, 2013. This is due to the change in fair value of $9,221, which was recorded as gain on derivative in “Statement of Operations and Other Comprehensive Income (Loss)”.
The carrying value of short term financial instruments including cash, accounts payable, accrued expenses and short-term borrowings approximate fair value due to the short period of maturity for these instruments. The long-term debentures payable approximates fair value since the related rates of interest approximate current market rates.
NOTE 4 – STOCKHOLDERS’ EQUITY
During the six months ended June 30, 2013, the Company issued 242,500 shares of common stock for services valued at fair market value of $307,775.
During the three months ended March 31, 2013 the Company issued 15,000 shares of common stock valued at fair market value of $18,750 for the acquisition of oil and gas property.
During the three months ended June 30, 2013, the Company issued 25,862 shares of common stock valued at fair market value of $34,655 to a potential investor as due diligence fees. The fair value of these shares was recorded to the other assets as a deferred cost.
NOTE 5 – RELATED PARTY TRANSACTIONS
On January 23, 2013 the Company entered into an agreement in which a related party transferred a $20,000 bond to the Company.
Various general and administrative expenses of the Company as well as loans for operating purposes have been paid for or made by related parties of the Company. During the six months ended June 30, 2013 the Company received cash of $49,600 and repaid $43,163 on these payables and had $38,310 in expenses paid by a related party on behalf of the Company. Related party payables totaled $147,755 and $122,845 at June 30, 2013 and December 31, 2012, respectively. These amounts payable bear no interest, are uncollateralized and due on demand.
NOTE 6 – CONVERTIBLE NOTES PAYABLE
On February 26, 2013 the Company borrowed $53,000 from an unrelated third party entity in the form of a convertible note. The note bears interest at a rate of 8.0% per annum, with principal and interest due on November 29, 2013. The principal balance of the note along with accrued interest is convertible after 180 days, at the option of the note holder, into the Company’s common stock at 58 percent of the current market price. The current market price is defined as the average of the lowest trading prices for the Common Stock during the ten day period on the latest complete trading day prior to the conversion date. The note is not convertible at June 30, 2013.
On April 2, 2013 the Company borrowed $42,500 from an unrelated third party entity in the form of a convertible note. The note bears interest at a rate of 8.0 percent per annum, with principal and interest due on January 8, 2014. The principal balance of the note along with accrued interest is convertible after 180 days, at the option of the note holder, into the Company’s common stock at 58 percent of the current market price. The current market price is defined as the average of the lowest three trading prices for the Common Stock during the ten day period on the latest complete trading day prior to the conversion date. The note is not convertible at June 30, 2013.
F-7 |
Cardinal Energy Group, Inc.
Notes to the Condensed Financial Statements
For the Periods Ended June 30, 2013 and December 31, 2012
During the six months ended June 30, 2013 pursuant to a convertible debenture offering the Company borrowed $183,000. The convertible notes accrue interest at 8% per annum, with principal and interest due two years from issuance. The notes carry a default interest rate of 12% per annum. The notes are convertible for two years from the issue date into shares of the Company’s common stock at a price of $1.00 per share.
The Company analyzed the convertible debts for derivative accounting consideration under ASC 815 “Derivatives and Hedging” and determined that derivative accounting is not applicable. The Company further analyzed the convertible debts for a beneficial conversion feature under ASC 470-20 on the date of the notes and determined that a beneficial conversion feature exists. The intrinsic value of the beneficial conversion feature was determined to be $43,050 and was recorded as debt discount. During the six months ended June 30, 2013, debt discount of $4,670 was amortized.
NOTE 7 – WARRANTS AND WARRANT DERIVATIVE LIABILITY
On December 31, 2012 the Company issued 30,000 units at $1.00 per unit resulting in total cash proceeds of $30,000. Each unit sold consists of one share of the Company’s common stock, one Class A Redeemable Warrant, and one Class B Redeemable Warrant.
The Class A warrants are exercisable into one share of the Company’s common stock at $5.00 per share, expire on December 31, 2015, and are callable by the Company any time after December 31, 2014 upon 30 days written notice by the Company. If the holders do not exercise the warrants within 30 days of receiving notice from the Company, the warrants terminate 30 days from the date of notice.
The Class B warrants are exercisable into one share of the Company’s common stock at $9.375 per share, expire on December 31, 2017, and are callable by the Company any time after December 31, 2015 upon 30 days written notice by the Company. If the holders do not exercise the warrants within 30 days of receiving notice from the Company, the warrants terminate 30 days from the date of notice.
For both the Class A and Class B warrants, the exercise price and/or the number of shares of common stock to be issued upon exercise is subject to adjustment in certain cases. Such adjustments would be triggered in instances where the Company does any of the following: a) pays a stock dividend, splits or reverse-splits its common stock; b) issues common stock, convertible securities, or debentures to obtain shares at a price less than the warrant exercise price; or c) distributes to shareholders evidences of its indebtedness or securities or assets.
The Company has analyzed this price adjustment provision under ASC 815 “Derivative and Hedging” and determined that these instruments should be classified as liabilities and recorded at fair value do to there being no explicit limit to the number of shares to be delivered upon settlement of the warrants. The Company has estimated the fair value of the derivative using the Black-Scholes option-pricing model at June 30, 2013. Assumptions included (1) 0.50-1.02% risk-free interest rate, (2) expected term is the remaining term of the warrant, (3) expected volatility of 182.76-185.77%, (4) zero expected dividends, (5) exercise prices as set within the agreements, (6) common stock price of the underlying share on the valuation date, and (7) number of shares to be issued if the instrument is converted. At June 30, 2013 the embedded derivative liability was valued at $65,019 and a loss of $15,940 and a gain of $9,221 were recorded for the three and six months ended June 30, 2013.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Litigation
The Company may be party to various legal actions arising in the ordinary course of business. Matters that are probable of unfavorable outcomes to the Company and which can be reasonably estimated are accrued. Such accruals are based on the Company’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. There is no litigation or contingencies that require accrual or disclosure as of June 30, 2013 and December 31, 2012.
F-8 |
Cardinal Energy Group, Inc.
Notes to the Condensed Financial Statements
For the Periods Ended June 30, 2013 and December 31, 2012
NOTE 9 – SUBSEQUENT EVENTS
In accordance with ASC 855, Company management reviewed all material events through the filing or these financial statements and there are no material subsequent events to report.
In July 2013, the Company purchased an 85% working interest and 75% net revenue interest in certain oil and gas leases for a purchase price of $400,000. The Company issued a promissory note in the amount of $400,000 to finance the purchase. The promissory note accrues interest at 6% per annum and is due two years from issuance.
In July 2013, the Company borrowed $15,000 in the form of a convertible note pursuant to the convertible debenture offering (see Note 6). The note accrues interest at 8% per annum, with principal and interest due two years from issuance. The notes carry a default interest rate of 12% per annum. The note is convertible for two years from the issue date into shares of the Company’s common stock at a price of $1.00 per share.
F-9 |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
This section of the quarterly report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results of our predictions.
We were incorporated in the State of Nevada on January 19, 2007 under the name Koko Ltd. for the purpose of developing, manufacturing and selling a steak timer. On September 28, 2012, we changed the focus of our business when we acquired all of the ownership interests of Cardinal Energy Group, LLC, an Ohio limited liability company which is engaged in the business of exploring, purchasing, developing and operating oil and gas leases. We acquired Cardinal Energy Group, LLC in exchange for 31,050,000 shares of our common stock. We changed our name to Cardinal Energy Group, Inc. on October 10, 2012 in connection with this acquisition.
On July 3, 2013 we completed the acquisition of an 85% working interest in producing oil and gas leases located in Shackelford County, Texas known as the Conway-Dawson Leases (the “Conway-Dawson Leases”) from an unaffiliated third party. We paid $400,000 for the Conway-Dawson Leases, all of which was paid pursuant to a 24-month balloon Secured Promissory Note (the “Note”) with an annual interest rate of six percent (6%). If we pay the Note in full within 90 days of its issuance, the outstanding principal amount of the note and accrued interest shall be reduced by 10%. We intend to repay the Note by allocating 40% of the monthly proceeds after the lease operating expenses attributable to our working interests are deducted will be paid directly to the seller to reduce the debt under the Note.
The continued implementation of our business model, which includes acquiring additional producing and non-producing oil and gas properties, will in all likelihood require additional capital. Accordingly, we may raise additional capital through private or public financing. We have filed registration statement on Form S-1 with the Securities and Exchange Commission which, once declared effective, will permit us to sell up to 2,500,000 shares of our common stock at $1.30 per share for a proposed maximum aggregate offer price of $3,250,000 along with certain selling shareholders who may sell up 15,801,751 shares of our common stock.
Assuming we are able to raise the maximum amount of this offering, the following reflects how we intend to use the proceeds of the offering over the next twelve months:
Operations | $ | 2,100,000 | ||
Administrative | $ | 450,000 | ||
Working capital | $ | 410,000 | ||
Debt repayment | $ | 290,000 | ||
Total | $ | 3,250,000 |
Currently, we do not have sufficient capital on hand or expected from production from our properties to complete our proposed budget and maintain operations for the current year. Accordingly we will have to raise additional capital through the sale of our common or preferred stock or from loans from our officers and directors or unrelated third parties. As of the date of this report, we have not entered into any agreements with anyone to provide us with capital through the sale of capital stock or through loans.
Currently, based upon our current resources, we believe we can maintain operations through 2013.
We are focused on growth via the reworking of marginal oil and gas wells in mature but marginally producing fields that have significant proven reserves yet to be produced throughout the Appalachian Basin. Many of these wells were drilled during the boom time of the early 1980’s. Newer production theories and technology make it possible to re-enter these older wells that have been ‘walked away from’ by their original operators. In addition, we intend to acquire additional producing and non-producing oil and gas properties in future. We have acquired a 2,200 acre lease in Wayne County, OH. Plans to develop this acreage are underway.
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We have nominal revenues, have achieved losses since inception, have limited operations, have been issued a going concern opinion by our auditors and currently rely upon the sale of our securities to fund operations. We are concentrating on acquiring producing and non-producing properties in the United States. We currently own interests in oil and gas leases located in the states of California, Ohio and Texas. We may enter into agreements with major and independent oil and natural gas companies to drill and own interests in oil and natural gas properties. We also may drill and own interests without such strategic partners.
This discussion relates to Cardinal Energy Group, Inc. and its consolidated subsidiaries and should be read in conjunction with our consolidated financial statements and accompanying notes included under Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q, as well as our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with the SEC on March 28, 2013.
Results of Operations
The results discussed below are for the three and six months ended June 30, 2013 and 2012. For comparative purposes, we are comparing the three and six months ended June 30, 2013 to the three and six months ended June 30, 2012.
Revenues
For the three months ended June 30, 2013 revenues increased to $5,471 compared to $34 for the three months ended June 30, 2012. For the six months ended June 30, 2013 revenues increased to $7,342 compared to $1,521 for the six months ended June 30, 2012. These increases are primarily attributable to increased production. We expect to increase revenues in the future from our July 2013 acquisition of the Conway-Dawson Leases and by acquiring additional oil and gas wells and reworking them to increase production.
Operating Expense
For the three months ended June 30, 2013 well operating costs increased to $1,017 compared to $734 for the three months ended June 30, 2012. For the six months ended June 30, 2013 well operating costs increased to $2,726 compared to $2,526 for the six months ended June 30, 2012.
General and Administrative Expenses
For the three months ended June 30, 2013 general and administrative expenses increased to $238,882 compared to $ 11,360 for the three months ended June 30, 2012. For the six months ended June 30, 2013 general and administrative expenses increased to $719,394 compared to $37,877 for the six months ended June 30, 2012. The increase was primarily attributable to stock based compensation as we have increased our efforts to locate additional future oil and gas leasing opportunities following our acquisition of Cardinal Energy Group, LLC and increases in our administrative costs of our SEC reporting obligations.
Depreciation, Depletion and Amortization
For the three months ended June 30, 2013 depreciation and amortization expense increased to $2,857 compared to $693 for the three months ended June 30, 2012. For the Six months ended June 30, 2013 depreciation and amortization expense increased to $4,608 compared to $1,369 for the six months ended June 30, 2012. This increase was mainly due to the purchase of a new vehicle during 2013.
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Other Income (Expenses)
Other expense for the three months ended June 30, 2013 was $25,159 compared to $0 for the three months ended June 30, 2012. Other income for the six months ended June 30, 2013 was $3,044 compared to $0 for the six months ended June 30, 2012. The changes were due to a loss on derivative liabilities and interest expense associated with our borrowing activities.
Net Loss
For the three months ended June 30, 2013 our net loss was $ 262,664 compared to a net loss of $12,781 for the three months ended June 30, 2013. For the six months ended June 30, 2013 our net loss was $722,869 compared to a net loss of $40,310 for the six months ended June 30, 2013. The increase was primarily due to the increase in General and Administrative expenses discussed above.
Net Comprehensive Loss
Net comprehensive loss for the three months ended June 30, 2013 was $256,504 compared to $7,545 for the three months ended June 30, 2012. Net comprehensive loss for the six months ended June 30, 2013 was $824,509 compared to $37,230 for the six months ended June 30, 2012. The changes were primarily due to increases in net loss as discussed above and decreases in value of investments.
BALANCE SHEET
Total Assets
The Company had total assets of $857,958 as of June 30, 2013 compared to $821,925 as of December 31, 2012. The increase was related primarily to increases of $47,218 in cash, $34,028 in property and equipment and $54,655 in other assets partially offset by a reduction in value of investments.
Total Liabilities
The Company had total liabilities of $712,105 as of June 30, 2013 compared to $255,793 as of December 31, 2012. The increase was related to increased borrowings, accounts payable and accrued expenses as a result of the Company’s development activities.
Well Workovers
We did not undertake any substantial well maintenance or replacements (workovers) during the six months ended June 30, 2013. As of the date of this filing, we have no plans to undertake any workovers pending receipt of additional capital.
Financial Condition, Liquidity and Capital Resources
We continue to incur operating expenses in excess of net revenue and will require capital infusions to sustain our operations until operating results improve. We may not be able to obtain such capital in a timely manner and as a result may incur liquidity imbalances.
Capital Resources and Liquidity
We used cash in operations of $199,083 during the six months ended June 30, 2013 compared to $42,932 during the six months ended June 30, 2012. The increase was due to the increased loss from operations partially offset increases in stock based compensation and accounts payables and accrued expenses.
We used cash from investing activates of $38,636 during the six months ended June 30, 2013 for purchases of property and equipment compared to net receipts of $55,000 during the six months ended June 30, 2012. In 2012, $75,000 came from the sale of oil properties. We used $20,000 in 2012 to make payments on a note receivable.
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We were provided $284,937 of net cash from financing activities during the six months ended June 30, 2013 compared to $10,022 used during the same period in 2012. The funds in 2013 came primarily from sales of convertible notes, related party loans partially offset by payments on related party loans.
At June 30, 2013 we had cash on hand of $50,678 which is not sufficient to meet our operating needs for the next twelve months. We anticipate the need to raise $1,250,000 to $5,000,000 from a combination of the issuance of common stock and borrowings to meet our operating requirements and allow the rework of our existing wells and to drill new wells.
At June 30, 2013 our current assets were $73,778 and our current liabilities were $559,286 resulting in a negative working capital of $485,508. The decrease is primarily attributable to a $311,253 increase in current liabilities and a $71,400 reduction in total current assets.
We have a note receivable for $20,000. The note was due in October 2012 with accrued interest at 4% per annum. The note is currently in default and we anticipate filing suit shortly to obtain a judgment for the unpaid, principle, interest, attorney’s fees and court costs.
As discussed above, we have filed a registration statement on Form S-1 with the Securities and Exchange Commission which, once declared effective, will permit us to sell up to 2,500,000 shares of our common stock at $1.30 per share for a proposed maximum aggregate offer price of $3,250,000 along with certain selling shareholders who may sell up 15,801,751 shares of our common stock. No shares of our common stock have been sold as of the date of this report.
Critical Accounting Policies and Estimates
We prepared our financial statements and the accompanying notes in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions about future events that affect the reported amounts in the financial statements and the accompanying notes. We identified certain accounting policies as critical based on, among other things, their impact on the portrayal of our financial condition, results of operations, or liquidity and the degree of difficulty, subjectivity, and complexity in their deployment. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. Management routinely discusses the development, selection, and disclosure of each of the critical accounting policies. The following is a discussion of our most critical accounting policies.
We follow the full cost method of accounting for our oil and natural gas properties, whereby all costs incurred in connection with the acquisition, exploration for and development of petroleum and natural gas reserves are capitalized. Such costs include lease acquisition, geological and geophysical activities, rentals on non-producing leases, drilling, completing and equipping of oil and gas wells and administrative costs directly attributable to those activities and asset retirement costs. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capital costs and proved reserves of oil and gas, in which case the gain or loss is recognized to income.
Depletion and depreciation of proved oil and gas properties is calculated on the units-of-production method based upon estimates of proved reserves. Such calculations include the estimated future costs to develop proved reserves. Oil and gas reserves are converted to a common unit of measure based on the energy content of 6,000 cubic feet of gas to one barrel of oil. Costs of unevaluated properties are not included in the costs subject to depletion. These costs are assessed periodically for impairment.
In applying the full cost method, we performed an impairment test (ceiling test) at each reporting date, whereby the carrying value of oil and gas property and equipment is limited to the “estimated present value” of the future net revenues from its proved reserves, discounted at a 10-percent interest rate and based on current economic and operating conditions, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to any book and tax basis differences of the properties. As of June 30, 2013 and 2012 no impairment of oil and gas properties was recorded.
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We follow FASB ASC 410, Asset Retirement and Environmental Obligations which requires entities to record the fair value of a liability for asset retirement obligations (“ARO”) and recorded a corresponding increase in the carrying amount of the related long-lived asset. The asset retirement obligation primarily relates to the abandonment of oil and gas properties. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of oil and gas properties and is depleted over the useful life of the asset. The settlement date fair value is discounted at our credit adjusted risk-free rate in determining the abandonment liability. The abandonment liability is accreted with the passage of time to its expected settlement fair value. Revisions to such estimates are recorded as adjustments to ARO are charged to operations in the period in which they become known. At the time the abandonment cost is incurred, the Company is required to recognize a gain or loss if the actual costs do not equal the estimated costs included in ARO. The ARO is based upon numerous estimates and assumptions, including future abandonment costs, future recoverable quantities of oil and gas, future inflation rates, and the credit adjusted risk free interest rate. The ARO is $ 8,199 as of June 30, 2013.
Off-Balance Sheet Arrangements.
Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. |
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and our Chief Financial Officer, CFO, to allow timely decisions regarding required disclosure. Management, with the participation of our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2013. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were ineffective as of June 30, 2013.
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
Changes in Internal Control
There were no changes identified in connection with our internal control over financial reporting during the three months ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 1. | LEGAL PROCEEDINGS. |
We are not presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us that may materially affect us.
ITEM 1A. | RISK FACTORS. |
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
We issued 25,000 shares of our unregistered common stock to service providers during the three month period ended June 30, 2013 as compensation for services provided to us which we valued at $35,900.
These shares of our common stock were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). In addition, the recipients of our shares were sophisticated investors and had access to information normally provided in a prospectus regarding us. In addition, the recipients of these shares had the necessary investment intent as required by Section 4(2) since they agreed to allow us to include a legend on the shares stating that such shares are restricted pursuant to Rule 144 of the Securities Act. These restrictions ensure that these shares would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act for the above transactions.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
ITEM 5. | OTHER INFORMATION. |
None.
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ITEM 6. | EXHIBITS. |
Incorporated by reference | ||||||||||
Exhibit No. | Document Description | Form | Date | Number | Filed herewith | |||||
3.1(a) | Articles of Incorporation of Koko, Ltd. | S-1 | 3/12/09 | 3.1 | ||||||
3.1(b) | Amendment to Articles of Incorporation of Koko, Ltd. | 10-Q | 5/15/2013 | 2.1 | ||||||
3.2 | Bylaws of Koko, Ltd. | S-1 | 3/12/09 | 3.2 | ||||||
3.3 | Articles of Organization of Continental Energy Partners, LLC. | 8-K | 10/04/12 | 3.3 | ||||||
3.4 | Amended Articles of Organization of Cardinal Energy Group, LLC. | 8-K | 10/04/12 | 3.4 | ||||||
3.5 | Operating Agreement of Cardinal Energy Group, LLC. | 8-K | 10/04/12 | 3.5 | ||||||
4.1 | Form of Class A Redeemable Warrant | 10-Q | 5/15/2013 | 4.1 | ||||||
4.2 | Form of Class B Redeemable Warrant | 10-Q | 5/15/2013 | 4.2 | ||||||
10.1 | License Agreement with Gregory Ruff. | S-1 | 6/13/11 | 10.1 | ||||||
10.2 | Share Exchange Agreement. | 8-K | 10/04/12 | 10.4 | ||||||
10.3 | Commercial Lease Agreement – Triangle Commercial Properties, LLC. | 10-K | 4/01/2013 | 10.2 | ||||||
10.4 | 8% Convertible Promissory Note dated February 26, 2013 | 10-Q | 5/15/2013 | 10.6 | ||||||
10.5 | Form of 8% Convertible Debenture | 10-Q | 5/15/2013 | 10.7 | ||||||
10.6 | Consulting Agreement with Atlanta Capital Partners, LLC dated May 31, 2013. | 8-K | 6/07/2013 | 10.8 | ||||||
10.7 | Working Interest Purchase Agreement with HLA Interests, LLC dated July 3, 2013. | 8-K | 7/08/2013 | 10.1 | ||||||
10.8 | Form of Secured Promissory Note | 8-K | 7/08/2013 | 10.2 | ||||||
10.9 | Form of Security Agreement | 8-K | 7/08/2013 | 10.3 | ||||||
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||
101.INS* | XBRL Instance Document. | X | ||||||||
101.SCH* | XBRL Taxonomy Extension – Schema. | X | ||||||||
101.CAL* | XBRL Taxonomy Extension – Calculations. | X | ||||||||
101.DEF* | XBRL Taxonomy Extension – Definitions. | X | ||||||||
101.LAB* | XBRL Taxonomy Extension – Labels. | X | ||||||||
101.PRE* | XBRL Taxonomy Extension – Presentation. | X |
* | In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 14th day of August, 2013.
CARDINAL ENERGY GROUP, INC. | ||
BY: | /s/ TIMOTHY W. CRAWFORD | |
Timothy W. Crawford | ||
Chief Executive Officer (Principal Executive Officer) | ||
BY: | /s/ DANIEL TROENDLY | |
Daniel Troendly | ||
Chief Financial Officer (Principal Financial and Accounting Officer) |
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