Attached files
SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended:
October 31, 2018
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-52392
AMAZING ENERGY OIL AND GAS,
CO.
(Exact name of registrant as specified in its charter)
Nevada
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82-0290112
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(State or other jurisdiction of incorporation)
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(I.R.S. Employer Identification Number)
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5700 W Plano Pkwy
Suite 3600
Plano, Texas 75093
(Address of principal executive office)
Registrant’s telephone number, including area code: (972)
233-1244
Indicate
by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act
during the past 12 months (or for such shorter period that the
Registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days.
YES ☒ NO
☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (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 ☒ 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.
Large Accelerated Filer
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☐
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Accelerated Filer
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☐
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Non-accelerated Filer
(Do not check if smaller reporting company)
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☐
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Smaller Reporting Company
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☒
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Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
State
the number of shares outstanding of each of the issuer’s
classes of common equity, as of the latest practicable date:
85,075,232 as of
December 14,
2018.
AMAZING ENERGY
OIL AND GAS, CO.
TABLE OF CONTENTS
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Page
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FINANCIAL INFORMATION
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3
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Financial
Statements (unaudited)
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3
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3
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4
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5
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6
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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Quantitative and
Qualitative Disclosures About Market Risk
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31
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Controls and
Procedures
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31
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OTHER INFORMATION
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31
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Legal
Proceedings
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31
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Risk
Factors
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31
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Unregistered
Sales of Equity Securities and Use of Proceeds
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31
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Defaults Upon
Senior Securities
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32
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Mine
Safety Disclosures
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32
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Other
Information
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32
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Exhibits
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32
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33
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34
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ITEM 1.
FINANCIAL
STATEMENTS.
AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS (Unaudited)
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October
31
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July
31
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2018
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2018
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$666,852
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$523,695
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Receivable
from working interest owners
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66,514
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33,954
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Production
revenue receivable
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31,127
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48,188
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Deposit
on property acquisition
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100,000
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-
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Prepaid
expenses
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29,500
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40,000
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Total
current assets
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893,993
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645,837
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Oil
and gas properties - proved, net
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5,336,444
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5,422,989
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Oil
and gas properties - unproved
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3,662,060
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3,079,492
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Property
and equipment, net
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403,255
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434,528
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Other
assets
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78,598
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78,600
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TOTAL
ASSETS
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$10,374,350
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$9,661,446
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current
liabilities:
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Accounts
payable and accrued liabilities
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$666,019
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$295,015
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Payable
to related party
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40,038
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25,038
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Promissory
notes, related parties, net of debt discount
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124,000
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-
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Notes
payable, related parties
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528,502
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311,730
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Equipment
note payable
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10,247
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10,247
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Due
to working interest owners
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403,464
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389,562
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Accrued
interest payable, related parties
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448,098
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400,805
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Total
current liabilities
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2,220,368
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1,432,397
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Long
term liabilities:
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Promissory
note payable, net of debt discount
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20,765
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-
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Promissory
notes, related party
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2,552,668
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2,769,440
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Equipment
note payable
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20,859
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22,847
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Asset
retirement obligation
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269,899
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258,575
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Total
liabilities
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5,084,559
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4,483,259
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Commitments
and contingencies, (Note 13)
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-
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-
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Stockholders’
equity:
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Preferred stock, no par value, 10,000,000 shares
authorized;
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Series
A, par value $0.01, 9,000 shares issued and
outstanding
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90
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90
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Series
B, par value $0.01, 50,000 shares issued and
outstanding
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500
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500
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Common
stock, par value $0.001 per share; 3,000,000,000 shares
authorized;
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85,042
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83,977
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85,040,232
issued and outstanding at October 31, 2018
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83,975,232
issued and outstanding at July 31, 2018
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Additional
paid-in capital
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39,135,704
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37,637,323
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Accumulated
deficit
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(33,931,545)
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(32,543,703)
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Total
stockholders' equity
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5,289,791
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5,178,187
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
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$10,374,350
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$9,661,446
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AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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Three Months Ended October 31,
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2018
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2017
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Revenue
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Oil
and gas sales
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$130,025
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$70,594
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Oilfield
service revenue
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-
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51,668
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Total
Gross Revenue
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130,025
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122,262
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Operating
Expense
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Production
costs
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87,280
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46,502
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Depreciation,
depletion and amortization
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79,869
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63,117
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General
and administrative expense
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986,659
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2,632,589
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Accretion
expense
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3,479
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2,362
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Total
Operating Expenses
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1,157,287
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2,744,570
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Loss
from operations
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(1,027,262)
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(2,622,308)
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Other
(income) expense
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Interest
and other income
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(322)
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(92)
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Interest
expense
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2,231
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3,757
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Financing
costs, related parties
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60,000
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Interest
expense, related parties
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298,671
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56,696
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Total
other (income) expense
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360,580
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60,361
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Loss
before taxes
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(1,387,842)
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(2,682,669)
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Provision
for income taxes
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-
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-
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Net loss
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$(1,387,842)
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$(2,682,669)
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Net
Loss per share:
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Net
Loss per share of common stock, basic and diluted
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$(0.016)
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$(0.040)
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Weighted
average shares of common stock outstanding, basic and
diluted
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84,310,449
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66,963,694
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AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
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Three
Months Ended October 31,
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2018
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2017
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Cash Flows From Operating Activities
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Net
loss
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$(1,387,842)
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$(2,682,669)
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Adjustments to reconcile net loss to net cash from
operations:
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Stock
based compensation
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614,193
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1,886,978
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Financing
fee in debt issuance
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60,000
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Accretion
expense
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3,479
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2,362
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Depreciation,
depletion and amortization
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79,869
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63,117
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Amortization
of note discount
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253,536
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-
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Other
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2
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5,588
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Change
in:
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Receivable
from working interest owners
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(32,560)
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(40,904)
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Production
revenue receivable
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17,061
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(1,175)
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Prepaid
expenses
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10,500
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7,373
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Accounts
payable and accrued liabilities
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387,486
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394,672
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Payable
to related party
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15,000
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Due
to working interest owners
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13,902
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13,882
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Accrued
interest payable, related parties
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47,293
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56,696
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Net cash from operating activities
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81,919
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(294,080)
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Cash Flows From Investing Activities
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Investment
in oil and gas properties
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(786,774)
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(96,664)
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Deposit
on property acquisition
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(100,000)
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-
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Proceeds
from sale of oil and gas working interests
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150,000
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Net cash from investing activities
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(736,774)
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(96,664)
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Cash Flows From Financing Activities
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Proceeds
from sale of common stock
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100,000
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300,000
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Proceeds
from notes payable, related parties
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1,100,000
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25,000
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Payments
on equipment note
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(1,988)
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(2,453)
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Payments
on note payable, related parties
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(400,000)
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(62,500)
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Net cash from financing activities
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798,012
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260,047
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Net change in cash
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143,157
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(130,697)
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Cash and cash equivalents and restricted cash - beginning of
period
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573,695
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806,603
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Cash and cash equivalents and restricted cash - end of
period
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$716,852
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$675,906
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Non-cash investing and financing activities
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Warrant
modification with issuance of note payable, related
party
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$480,771
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$-
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Note
payable, related party settled with participation in oil and gas
working interest
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$100,000
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$-
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Accounts
payable settled with shares of common stock
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$16,482
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$-
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Warrants
issued with notes payable, related party
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$288,000
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$-
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AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OCTOBER 31, 2018
NOTE 1 – NATURE OF OPERATIONS
Amazing Energy Oil and Gas, Co. is incorporated in the State of
Nevada. Through its primary subsidiary, Amazing Energy, Inc., also
a Nevada corporation, the Company operates its main business of
exploration, development, and production of oil and gas in the
Permian Basin of West Texas. On October 7, 2014, the Company
entered into a change in control agreement with certain
shareholders of Amazing Energy, Inc. The change in control
agreement was the first step in a reverse merger process whereby
the shareholders of Amazing Energy, Inc. would control about 95% of
the shares of common stock of Amazing Energy Oil and Gas, Co., and
Amazing Energy Oil and Gas, Co. would own 100% of the outstanding
shares of common stock of Amazing Energy, Inc. This entire reverse
merger process was completed in July of 2015.
Amazing Energy, Inc. was formed in 2010 as a Texas corporation and
then changed its domicile to Nevada in 2011. The Company owns
interests in oil and gas properties located in Texas. The Company
is primarily engaged in the acquisition, exploration and
development of oil and gas properties and the production and sale
of oil and natural gas.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
This summary of significant accounting policies is presented to
assist in understanding the financial statements. The financial
statements and notes are representations of the Company’s
management, which is responsible for their integrity and
objectivity. The accompanying unaudited financial statements have
been prepared by the Company in accordance with accounting
principles generally accepted in the United States of America
(“U.S. GAAP”) for interim financial information, as
well as the instructions to Form 10-Q. Accordingly, the financial
statements do not include all of the information and footnotes
required by accounting principles generally accepted in the United
States of America for complete financial statements. In the
opinion of management, the accompanying unaudited financial
statements contain all adjustments, consisting of only normal
recurring adjustments, necessary for a fair statement of its
financial position as of October 31, 2018, and its results of
operations for the three months ended October 31, 2018 and 2017,
and cash flows for the three months ended October 31, 2018 and
2017. The balance sheet at July 31, 2018, was derived from
audited annual financial statements but does not contain all of the
footnote disclosures from the annual financial statements. All
amounts presented are in U.S. dollars. For further
information, refer to the financial statements and footnotes
thereto in the Company’s Annual Report on Form 10-K for the
year ended July 31, 2018.
The financial statements are presented on a consolidated basis and
include all of the accounts of Amazing Energy Oil and Gas, Co. and
its wholly owned subsidiaries, Amazing Energy, LLC, Amazing Energy,
Inc., and Jilpetco, Inc., All significant intercompany balances and
transactions have been eliminated. The consolidated statement of
operations for the three months ended October 31, 2017 has been
revised to eliminate intercompany oilfield service revenue and
related production costs between Amazing Energy Oil and Gas, Co.
and Jilpetco. The impact of the revisions was to decrease both
categories by $25,342. The revision had no impact on the net loss
on the consolidated statement of operations or the consolidated
statement of cash flows for the three month period ended October
31, 2017.
Going Concern
These consolidated financial statements have been prepared in
accordance with U.S. GAAP to a going concern, which assumes that
the Company will be able to meet its obligations and continue its
operations for its next fiscal year.
As
shown in the accompanying financial statements, the Company has
incurred operating losses since inception. As of October 31, 2018,
the Company has limited financial resources with which to achieve
the objectives and obtain profitability and positive cash flows. As
shown in the accompanying consolidated balance sheets, the Company
has an accumulated deficit of $33,931,545. At October 31, 2018, the
Company's working capital deficit was $1,326,375. Achievement of
the Company's objectives will be dependent upon the ability to
obtain additional financing, to locate profitable mineral
properties and generate revenue from current and planned business
operations, and control costs. The Company plans to fund its future
operations by joint venturing, obtaining additional financing from
investors, and/or lenders, and attaining additional production.
However, there is no assurance that the Company will be able to
achieve these objectives, therefore substantial doubt about its
ability to continue as a going concern exists. Although management
believes that it will be able to obtain the necessary funding to
allow the Company to remain a going concern through the methods
discussed above, there can be no assurances that such methods will
prove successful. The financial statements do not include
adjustments relating to the recoverability of recorded assets nor
the implications of associated bankruptcy costs should the Company
be unable to continue as a going concern.
- 6 -
AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OCTOBER 31, 2018
The Company recognizes revenues from the sales of oil and natural
gas to its customers and presents them disaggregated on the
Company's consolidated statements of operations. The Company enters
into contracts with customers to sell its oil and natural gas
production. Revenue on these contracts is recognized in accordance
with the five-step revenue recognition model prescribed in
Accounting Standard Codification (“ASC”) 606.
Specifically, revenue is recognized when the Company's performance
obligations under these contracts are satisfied, which generally
occurs with the transfer of control of the oil and natural gas to
the purchaser. Control is generally considered transferred when the
following criteria are met: (i) transfer of physical custody, (ii)
transfer of title, (iii) transfer of risk of loss and (iv)
relinquishment of any repurchase rights or other similar rights.
Given the nature of the products sold, revenue is recognized at a
point in time based on the amount of consideration the Company
expects to receive in accordance with the price specified in the
contract. Consideration under the oil and natural gas marketing
contracts is typically received from the purchaser one to two
months after production. At
October 31, 2018, the Company had receivables related to contracts
with customers of $31,127.
During the quarter ended October 31, 2017, the Company also
provided oilfield services to both related party entities and
outside oil and gas well owners. Revenue from administration fees
to unrelated working interest owners are recognized on an accrual
basis in the period services are provided.
Receivables
Production revenue receivable consist of oil and natural gas
revenues due under normal trade terms. Receivables are carried at
original amounts on joint interest billings less an estimate for
doubtful accounts. Management determines the allowance by regularly
evaluating individual working interest owner receivables and
considering their financial condition, credit history and current
economic conditions.
Due to Working Interest Owners
The Company provides oilfield services which includes interest
owner accounting and subsequent disbursement of the interest
owners’ pro-rata share of oil proceeds from a given lease.
Generally, the pro-rata share of oil proceeds, less any applicable
pro-rata share of operating expenses, is distributed to the
interest owner within two months of sale of oil and natural gas.
Revenues suspended for specific reasons are released as those
matters are resolved. The Due to working interest owners balance is
comprised of those proceeds which have yet to be distributed to
interest owners as a result of the time required to process
administrative functions and process payment and any revenue
suspense.
Asset Retirement Obligations
The fair value of a liability for an asset’s retirement
obligation (“ARO”) is recognized in the period in which
a contractual obligation is created and if a reasonable estimate of
fair value can be made. A corresponding charge is capitalized as
part of the carrying amount of the related long-lived asset. The
liability is accreted to its then-present value each subsequent
period, and the capitalized cost is depleted over the useful life
of the related asset. Abandonment costs incurred are recorded as a
reduction of the ARO liability.
Inherent in the fair value calculation of an ARO are numerous
assumptions and judgments including the ultimate settlement
amounts, inflation factors, credit adjusted discount rates, timing
of settlement, and changes in the legal, regulatory, environmental,
and political environments. To the extent future revisions to these
assumptions impact the fair value of the existing ARO liability, a
corresponding adjustment is made to the oil and gas property
balance. Settlements greater than or less than amounts accrued as
ARO are recorded as a gain or loss upon settlement.
Use of estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and certain assumptions
that affect the amounts reported in these consolidated financial
statements and accompanying notes. Management’s estimates
include estimates of impairment in carrying value of assets and
liabilities, and collectability of recorded oilfield services
receivables, stock-based compensation, deferred income taxes, asset
retirement obligations, oil and gas property ceiling tests,
and depreciation, depletion and
amortization. Actual results could differ from these
estimates.
Risks and uncertainties
The Company’s operations are subject to significant risks and
uncertainties, including financial, operational, technological, and
other risks associated with operating an emerging oil and gas
business, including the potential risk of business
failure.
Concentration of risks
The Company’s cash is placed with a highly rated financial
institution, and the Company periodically reviews the credit
worthiness of the financial institutions with which it does
business. At times, the Company’s cash balances are in excess
of amounts guaranteed by the Federal Deposit Insurance
Corporation.
- 7 -
AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OCTOBER 31, 2018
The Company’s oil and gas revenue originated from production
from its properties in Texas. Each revenue stream is sold to a
single customer through month to month contracts. While this
creates a customer concentration, there are alternate buyers of the
production in event the sole customer is unable or unwilling to
purchase.
The Company sells its oil and gas production to only two customers.
Oil production was sold to Rio Energy International, Inc. and
natural gas production was sold to Trans-Pecos Natural Gas Company,
LLC during the three months ended October 31, 2018 and to Sunoco
and Trans-Pecos during the three months ended October 31, 2017. As
a result, during the three months ended October 31, 2018 and 2017
these customers represented 100% of its oil and gas revenue
(“major customers”).
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
a remaining maturity of three months or less when acquired to be
cash equivalents.
Restricted Cash
As of October 31, 2018, the Company has a letter of credit in the
amount of $50,000 in favor of the Texas Railroad Commission as a
bond for reclamation on its oil and gas properties. The amount is
presented in other assets on the consolidated balance
sheet.
Income Taxes
The Company accounts for income taxes using the liability method.
The liability method requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
(i) temporary differences between financial statement carrying
amounts of assets and liabilities and their basis for tax purposes
and (ii) operating loss and tax credit carry-forwards for tax
purposes. Deferred tax assets are reduced by a valuation allowance
when management concludes that it is more likely than not that a
portion of the deferred tax assets will not be realized in a future
period. The Company recognizes a tax benefit from an uncertain
position when it is more likely than not that the position will be
sustained upon examination, based on the technical merits of the
position and will record the largest amount of tax benefit that is
greater than 50% likely of being realized upon settlement with a
taxing authority. The Company classifies any interest and penalties
associated with income taxes as income tax expense.
Fair value of financial instruments
Financial instruments consist of cash and various notes payable.
The fair value of these financial instruments approximates the
carrying values.
Property, plant, and equipment
Property, plant, and equipment are stated at cost. Improvements
which significantly increase an asset’s value or
significantly extend its useful life are capitalized and
depreciated over the asset’s remaining useful life. When
property, plant or equipment is sold at a price either higher or
lower than its carrying amount, or un-depreciated cost at the date
of disposal, the difference between the sale proceeds over the
carrying amount is recognized as gain, while a loss is recognized
when the carrying amount exceeds the sale proceeds. Property,
plant, and equipment are depreciated on a straight-line basis over
their useful lives, which are typically five to seven years for
equipment. Realization of the carrying value of other property and
equipment is reviewed for possible impairment whenever events or
changes in circumstances indicate that the carrying amount may not
be recoverable. Assets are determined to be impaired if a forecast
of undiscounted estimated future net operating cash flows directly
related to the asset, including disposal value, if any, is less
than the carrying amount of the asset. If any asset is determined
to be impaired, the loss is measured as the amount by which the
carrying amount of the asset exceeds its fair value. Repairs and
maintenance costs are expensed in the period incurred.
Oil and gas properties
The Company uses the full cost method of accounting for oil and gas
properties. Under this method of accounting, all costs incurred in
the acquisition, exploration and development of oil and natural gas
properties, including unproductive wells, are capitalized. This
includes any internal costs that are directly related to property
acquisition, exploration and development activities but does not
include any costs related to production, general corporate overhead
or similar activities. Gain or loss on the sale or other
disposition of oil and natural gas properties is not recognized,
unless the gain or loss would significantly alter the relationship
between capitalized costs and proved reserves.
Oil and natural gas properties include costs that are excluded from
costs being depleted or amortized. Excluded costs represent
investments in unproved and unevaluated properties and include
non-producing leasehold, geological and geophysical costs
associated with leasehold or drilling interests and exploration
drilling costs. These costs are excluded until the project is
evaluated and proved reserves are established or impairment is
determined. Excluded costs are reviewed periodically to determine
if impairment has occurred. The amount of any evaluated or impaired
oil and gas properties is transferred to capitalized costs being
amortized.
- 8 -
AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OCTOBER 31, 2018
Depletion and amortization
The depletion base for oil and natural gas properties includes the
sum of all capitalized costs net of accumulated depreciation,
depletion, and amortization (“DD&A”), estimated
future development costs and asset retirement costs not included in
oil and natural gas properties, less costs excluded from
amortization. The depletion base of oil and natural gas properties
is amortized on a units-of-production method.
Limitation on Capitalized Costs
Under the full-cost method of accounting, the Company is required,
at the end of each fiscal quarter, to perform a test to determine
the limit on the book value of our oil and natural gas properties
(the "Ceiling Test"). If the capitalized costs of our oil and gas
properties, net of accumulated amortization and related deferred
income taxes, exceed the "Ceiling", this excess or impairment is
charged to expense and reflected as additional accumulated
depreciation, depletion and amortization or as a credit to oil and
natural gas properties. The expense may not be reversed in future
periods, even though higher oil and natural gas prices may
subsequently increase the Ceiling. The Ceiling is defined as the
sum of: (a) the present value, discounted at 10 percent, and
assuming continuation of existing economic conditions, of 1)
estimated future gross revenues from proved reserves, which is
computed using oil and natural gas prices determined as the
unweighted arithmetic average of the first-day-of-the-month price
for each month within the 12-month period prior to the end of the
reporting period (with consideration of price changes only to the
extent provided by contractual arrangements including hedging
arrangements), less 2) estimated future expenditures (based on
current costs) to be incurred in developing and producing the
proved reserves; plus (b) the cost of properties not being
amortized; plus (c) the lower of cost or estimated fair value of
unproven properties included in the costs being amortized; and net
of (d) the related tax effects related to the difference between
the book and tax basis of our oil and natural gas properties. The
Ceiling Tests did not result in an impairment of our oil and
natural properties for the three months ended October 31, 2018 or
2017.
The determination of oil and gas reserves is a subjective process,
and the accuracy of any reserve estimate depends on the quality of
available data and the application of engineering and geological
interpretation and judgment. Estimates of economically recoverable
reserves and future net cash flows depend on a number of variable
factors and assumptions that are difficult to predict and may vary
considerably from actual results. In particular, reserve estimates
for wells with limited or no production history are less reliable
than those based on actual production. Subsequent re-evaluation of
reserves and cost estimates related to future development of proved
oil and gas reserves could result in significant revisions to
proved reserves. Other issues, such as changes in regulatory
requirements, technological advances, and other factors, which are
difficult to predict, could also affect estimates of proved
reserves in the future.
Stock-based compensation
Compensation cost for equity awards is based on the fair value of
the equity instrument on the date of grant. The Company estimates
the fair value of options and warrants to purchase common stock
using the Black-Scholes model, which requires the input of some
subjective assumptions. These assumptions include estimating the
length of time employees will retain their vested stock options
before exercising them ("expected life"), the estimated volatility
of the Company's common stock price over the expected term
("volatility"), employee forfeiture rate, the risk-free interest
rate and the dividend yield. Changes in the subjective assumptions
can materially affect the estimate of fair value of stock-based
compensation. Options granted have a ten-year maximum term and
varying vesting periods as determined by the Board of
Directors.
For options issued with service vesting conditions, compensation
cost is recognized over the vesting period. For options issued with
performance conditions, compensation cost is recognized if and when
the Company concludes that the performance condition will be
achieved, net of an estimate of pre-vesting forfeitures. For
options issued with market conditions, compensation cost is
recognized over the requisite service period and discounted by the
probability of the condition thereof being met.
Environmental laws and regulations
The Company is subject to extensive federal, state, and local
environmental laws and regulations. Environmental expenditures are
expensed or capitalized depending on their future economic benefit.
The Company believes that it is in compliance with existing laws
and regulations.
- 9 -
AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OCTOBER 31, 2018
Fair value measurements
When required to measure assets or liabilities at fair value, the
Company uses a fair value hierarchy based on the level of
independent, objective evidence surrounding the inputs used. The
Company determines the level within the fair value hierarchy in
which the fair value measurements in their entirety fall. The
categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the fair value
measurement. Level 1 uses quoted prices in active markets for
identical assets or liabilities, Level 2 uses significant other
observable inputs, and Level 3 uses significant unobservable
inputs. The amount of the total gains or losses for the period are
included in earnings that are attributable to the change in
unrealized gains or losses relating to those assets and liabilities
still held at the reporting date. At October 31, 2018 and October
31, 2017, the Company had no assets or liabilities accounted for at
fair value on a recurring basis.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09 Revenue Recognition, replacing
guidance currently codified in Subtopic 605-10 Revenue
Recognition-Overall with various SEC Staff Accounting Bulletins
providing interpretive guidance. The guidance establishes a new
five step principle-based framework in an effort to significantly
enhance comparability of revenue recognition practices across
entities, industries, jurisdictions, and capital markets. The
Company adopted the new standard on August 1, 2018 using the
modified retrospective method. The adoption resulted in no changes
in the timing of revenue recognition compared to the prior
methodology.
In February 2016 the FASB issued ASU, No. 2016-02, Leases. The ASU
requires companies to recognize on the balance sheet the assets and
liabilities for the rights and obligations created by leased
assets. ASU No. 2016-02 will be effective for the Company on August
1, 2019, with early adoption permitted. The Company is currently
evaluating the impact that the adoption of ASU No. 2016-02 will
have on the Company’s consolidated financial statements and
related disclosures.
In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash
Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments. The update provides guidance on classification for cash
receipts and payments related to eight specific issues. The update
is effective for fiscal years beginning after December 15, 2017,
and interim periods within those fiscal years, with early adoption
permitted. The adoption of this update on August 1, 2018 had no
impact to the consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash
Flows (Topic 230): Restricted Cash. The update requires that a
statement of cash flows explain the change during the period in the
total of cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents. The Company adopted
this update as of August 1, 2018. Cash, cash equivalents, and
restricted cash and cash equivalents on the consolidated statement
of cash flows includes restricted cash of $50,000
and
$50,000 as of October 31, 2018 and July 31, 2018, $50,000 and
$50,000 as of October 31, 2017 and July 31, 2017, as well as
amounts previously reported for cash and cash
equivalents.
In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock
Compensation, Improvements to Nonemployee Share-Based Payment
Accounting. ASU No. 2018-07 expands the scope of to include
share-based payment transactions for acquiring goods and services
from nonemployees. ASU No. 2018-07 will become effective for the
Company on August 1, 2019 and early adoption is permitted. The
Company is currently evaluating the impact of this update on its
consolidated financial statements and related
disclosures.
Other accounting standards that have been issued or proposed by
FASB that do not require adoption until a future date are not
expected to have a material impact on the consolidated financial
statements upon adoption. The Company does not discuss recent
pronouncements that are not anticipated to have an impact on or are
unrelated to its financial condition, results of operations, cash
flows or disclosures.
NOTE 3 – EARNINGS PER SHARE
Basic Earnings Per Share (“EPS”) is computed by
dividing net income (loss) by the weighted-average number of shares
outstanding during the period and includes no dilution. Diluted EPS
reflects the potential dilution of securities that could occur from
common shares issuable through convertible debt, convertible
preferred stock and warrants.
The outstanding securities at October 31, 2018 and 2017, that could
have a dilutive effect on future periods are as
follows:
|
October 31, 2018
|
October 31, 2017
|
Convertible
preferred stock
|
6,490,000
|
6,490,000
|
Warrants
|
8,785,408
|
3,674,576
|
Stock
options
|
30,085,000
|
28,085,000
|
Total
potential dilution
|
45,360,408
|
38,249,576
|
For the
three months ended October 31, 2018 and 2017, the effect of this
potential dilution has not been recognized since it would have been
anti-dilutive.
- 10 -
AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OCTOBER 31, 2018
As of October 31, 2018 and July 31, 2018, the property and
equipment asset balance was composed of the
following:
|
October 31,2018
|
July 31, 2018
|
|
|
|
Drilling
equipment
|
$612,000
|
$612,000
|
Other
equipment
|
253,530
|
252,204
|
|
865,530
|
864,204
|
Less:
Accumulated depreciation
|
(462,275)
|
(429,676)
|
Total
property and equipment
|
$403,255
|
$434,528
|
NOTE 5 – OIL AND GAS PROPERTIES
The Company is currently participating in oil and gas exploration
activities in Texas. The Company’s oil and gas properties are
located entirely in the United States.
The Company’s mineral lease interests represent leased
acreage within the Pecos County 70,000 acre AMI as of October 31,
2018. Through a series of agreements with representatives of
mineral owners, the Company has the right to acquire additional
acreage for future development encompassing a large percentage of
the 70,000 acres not under lease at October 31, 2018. Under those
agreements the Company is required to make annual payments into
trust accounts to hold the acquisition opportunity. As actual
leases are acquired those trust funds are available to pay the
lease cost per acre at predetermined amounts.
The Company is obligated to pay certain bonus lease payments
related to certain of its lease properties. The Company is required
to pay $27,000 each year on the JT Walker lease on annually on
August 7th. The Company is also required to pay $200,000
every five years on August 7th for the JPMorgan lease. The most recent payment on
this lease was made in July 2017. The next JPMorgan lease payment
is due by August 7, 2022. The Company is current in its lease
payments under these leases.
At October 31, 2018, the Company has a 100% working interest in
twenty-six (26) wells located on these leasehold premises. The
Company has drilled 26 wells throughout the property, with
twenty-four producing and two shut-in. The oil and gas property
balances at October 31, 2018 and July 31, 2018, are set forth in
the table below:
|
October 31,2018
|
July 31,2018
|
|
|
|
Unproved
properties not subject to amortization
|
$3,662,060
|
$3,079,492
|
Property
costs subject to amortization
|
6,581,676
|
6,627,470
|
Asset
retirement obligation, asset
|
202,460
|
194,615
|
Total
cost of oil and gas properties
|
10,446,196
|
9,901,577
|
Less:
Accumulated depletion
|
(1,447,692)
|
(1,399,096)
|
Oil
and gas properties, net full cost method
|
$8,998,504
|
$8,502,481
|
During the quarter ended October 31, 2018, the Company continued
development principally consisting of drilling and development of
the WWJD Well #30, workover operations on various wells, and
further investment in unevaluated lease costs.
During the quarter ended October 31, 2018, the Company offered an
opportunity to investors for participation in development of the
WWJD Well #31. The investment
was offered to Joint Venture Working Interest Partners (“the
Partners”) that will pay 100% of drilling and completion
costs on a turnkey basis for the development of the newly planned
horizontal well. In exchange the Partners will receive 50% working
interest in the well-bore and will receive a 75% preferred payout
of invested capital plus 10%. Proceeds from the offering received
through October 31, 2018 totaled $250,000, of which $100,000 was in
the form of a principal reduction on a note payable to a related
party and receipt of $150,000 in cash from unrelated
investors.
On October 17, 2018 the Company closed on the acquisition of the
deep rights in 21,000 mostly contiguous acres in the Permian Basin
in Pecos County, Texas. With the acquisition the Company controls
all rights to all depths within the 61,000 acres with undivided
mineral interest and rights to the depth of 3,000 feet to surface
on its additional approximately 9,000 acres. The purchased acreage
is subject to the same option terms that are applicable to the
other Pecos County, Texas acreage controlled by the Company. The
cost of the acquisition was $500,000.
On
October 12, 2018 the Company entered into an Option Agreement for
the acquisition of oil and gas producing property which required a
$100,000 deposit. The option expires on December 31,
2018.
- 11 -
AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OCTOBER 31, 2018
NOTE 6 – NOTES PAYABLE
Notes payable, related parties
On January 3, 2011, the Company formalized a loan agreement for
$1,940,000 with Jed Miesner, the Company’s CEO and Chairman
at the time of the agreement and currently a director. The loan is
scheduled to mature on December 31, 2030, bear interest at the rate
of 8% per annum, and collateralized with a leasehold deed of trust
covering certain leasehold interests in Pecos County,
Texas.
On December 30, 2010, Amazing Energy, LLC, formalized loan
agreements with Petro Pro Ltd., an entity controlled by Jed Miesner
for $1,100,000. The loan is scheduled to mature on December 31,
2030, bear interest at the rate of 8% per annum and is
collateralized with a leasehold deed of trust covering certain
leasehold interests in Pecos County, Texas.
On December 30, 2010, Amazing Energy, LLC, (a wholly owned
subsidiary of the Company) entered into a $2,000,000 line of credit
facility with JLM Strategic Investments LP, an entity controlled by
Jed Miesner. Funds advanced on the line of bear interest at the
rate of 8% per annum and are collateralized with a leasehold deed
of trust covering certain leasehold interests in Pecos County,
Texas.
Terms of the notes, as amended, provide for adjustment to the
interest rate beginning February 1, 2017 from 8% to a rate of 6%
through February 1, 2019, and a rate of Prime plus 2% for the
remaining years.
Principal maturities for the two loan agreements and the credit
facility outstanding at October 31, 2018 for the remaining terms
are summarized by year as follows:
|
Principal Maturities
|
|||
Year
ending October 31,
|
Jed Miesner
|
Petro Pro, Ltd.
|
JLM Strategic Investments, LP
|
Total
|
2019
|
$310,995
|
$176,337
|
$41,170
|
$528,502
|
2020
|
67,272
|
38,144
|
-
|
105,416
|
2021
|
72,655
|
41,196
|
-
|
113,851
|
2022
|
78,467
|
44,492
|
-
|
122,959
|
2023
|
84,744
|
48,051
|
-
|
132,795
|
Subsequent
years
|
1,325,867
|
751,780
|
-
|
2,077,647
|
|
$1,940,000
|
$1,100,000
|
$41,170
|
$3,081,170
|
At October 31, 2018, Mr. Miesner has waived any event of default on
the delinquent payments of principal and interest due on the loans
and credit facility.
As of October 31, 2018 and July 31, 2018, the accrued and unpaid
interest on this related party convertible debt was $447,403 and
$400,805, respectively. Related party interest expense for the
three months ended October 31, 2018 and 2017 was $46,597 and
$46,597, respectively. On September 10, 2018, in accordance with
modifications to Series A Preferred Stock (see note 9), the Company
agreed to pay accrued interest of $309,130 on or before December
31, 2018 and $169,168 on or before February 28, 2019.
At October 31, 2018, the balance of the convertible debt and
accrued interest was convertible into membership shares of Amazing
Energy, LLC, a wholly owned subsidiary of the Company at $0.60 per
share.
- 12 -
AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OCTOBER 31, 2018
Promissory notes payable, related parties
On October 16, 2018, the Company entered into promissory notes with
its Chairman of the Board and one of its Directors to fund the
acquisition of the Wyatt properties in Pecos County, Texas and to
enter into an option agreement for acquisition of oil and gas
producing property. The aggregate principal amount of the new notes
was $600,000. The notes required a placement fee of $60,000 equal
to 10% of the principal amounts of the loans which was expensed as
financing costs in the three months ended October 31, 2018.
Principal and placement fee are due at maturity on December 15,
2018. As additional consideration for the financing, the Company
issued 2,400,000 warrants for the right to acquire its common stock
at an exercise price of $0.25 per share for a term of six years. As
a result, the Company recorded a debt discount of $288,000 to
account for the relative fair value of the warrants (see note 9).
The debt discount is being amortized as interest expense over the
term of the note.
On October 16, 2018, the Company entered into promissory notes with
its Chairman of the Board and one of its Directors to fund the
acquisition of the Wyatt properties in Pecos County, Texas and to
enter into an optio
On October 26, 2018, the Company paid $400,000 on the promissory
notes. An additional $100,000 of the Chairman’s promissory
note was satisfied with transfer of partial working interest in the
drilling program for the development of the Company’s WWJD
#31 well (see note 5). The remaining promissory notes balance of
$160,000 is due on December 15, 2018. These payments accelerated
$252,000 in amortization of the discount for the three month period
ended October 31, 2018. At October 31, 2018, the discount balance
is $36,000.
Promissory note payable
On October 22, 2018, the Company entered into a promissory note
with Bories Capital, LLC (Bories) for $500,000, the owner of which
is a holder of all of the outstanding shares of the Company’s
Preferred B stock. The note bears interest at the Hancock Whitney
Bank prime rate plus two percent (7.25% at October 31, 2018) and is
due in full at maturity on October 24, 2020. Interest is payable
monthly beginning on November 30, 2018. As additional consideration
for the note, the Company agreed to modify the terms of 2,674,576
warrants to acquire common stock held by the owner of Bories. The
warrants were amended to change the exercise price from $0.60 to
$0.40 per share and extend the expiration date from July 31, 2019
to April 1, 2024. These modifications resulted in financing fee of
$480,771 which represents the difference in the fair value of the
warrants before and after the change in terms. The amount was
recognized as a discount on the note and is being amortized as
interest expense over the term of the note. Amortization of $1,536
was recognized as interest expense during the three months ended
October 31, 2018. At October 31, 2018, the discount balance is
$479,235.
In addition, terms of the Series B Preferred Stock held by the
owner of Bories were modified. The Company agreed to suspend its
right to call the preferred stock until from the original call date
of April 1, 2019 to April 1, 2024. In exchange for this suspension,
the Series B Preferred stockholder’s right to convert the
preferred shares into warrants to acquire the Company’s
common stock was amended to extend the conversion period to April
1, 2024.
NOTE 7 – ASSET RETIREMENT OBLIGATIONS
The information below details the asset retirement obligation for
three months ended October 31, 2018:
Balance,
July 31, 2018
|
$258,575
|
|
|
Asset
retirement obligation incurred
|
7,845
|
Accretion
expense
|
3,479
|
|
|
Balance,
October 31, 2018
|
$269,899
|
NOTE 8 – COMMITMENTS AND CONTINGENCIES
The Company is subject to contingencies because of environmental
laws and regulations. Present and future environmental laws and
regulations applicable to the Company's operations could require
substantial capital expenditures or could adversely affect its
operations in other ways that cannot be predicted at this
time.
- 13 -
AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OCTOBER 31, 2018
Legal contingency
On
September 7, 2017, Amazing Energy LLC and Jilpetco Inc. were served
with a lawsuit, in Cause No. P-7600-83-CV in the
83rd
District Court in Pecos County, Texas.
The nature of the litigation is that Amazing Energy & Jilpetco
were joined as defendants in a case in Pecos County, Texas, between
Fredrick Bartlett Wulff, Sr. et al plaintiffs and Benedum &
Trees, LLC et al defendants. The suit alleges breach of lease,
breach of implied duty to explore and develop, and requests a
declaratory judgment that the leases are terminated, and the suit
requests an accounting of lease production. The case is in the
early stages of discovery as to the claims against the Company.
Management intends to seek an early resolution but will vigorously
defend the case. It is too early in the litigation to evaluate the
likely outcome or to evaluate the range of losses, as the lease
interests involved are small fractional interests. In the opinion
of the Company’s management, none of the pending litigation,
disputes or claims against it, if decided adversely, will have a
material adverse effect on the Company’s financial condition,
cash flows or results of operations.
On December 11, 2017, Amazing Energy LLC and Jilpetco Inc. were
each served with a summons and complaint in Cause No. P-7813-83-CV
in the 83rd
District Court in Pecos County, Texas.
Amazing Energy and Jilpetco were named as defendants in a case by
Rumson Royalty Company as the plaintiff. The suit alleges
Amazing Energy and Jilpetco have suspended certain royalty and/or
overriding interest payments owed to the plaintiff, and requests a
declaratory judgment seeking the plaintiff’s share of
production proceeds and reasonable attorney’s fees.
Management will vigorously defend the case. It is too early in the
litigation to evaluate the likely outcome or to evaluate the
financial impact of the lawsuit, if any. In the opinion of the
Company’s Management, none of the pending litigation,
disputes or claims against it, if decided adversely, will have a
material adverse effect on the Company’s financial condition,
cash flows or results of operations
Lease commitments
The Company’s principal executive offices are in leased
office space in Amarillo, Texas. The leased office space consists
of approximately 3,700 square feet and is leased through February
28, 2019 at an annual cost of approximately $52,000. The Company is
in transition of its corporate headquarters to Plano, Texas at
October 31, 2018.
Oil and gas lease commitments
The Company is obligated to pay royalties to holders of oil and
natural gas interests in its Texas operations. The Company is also
obligated to pay working interest holders a pro-rata portion of
revenue in oil operations net of shared operating expenses. The
amounts are based on monthly oil and gas sales and are charged
monthly net of oil and gas revenue and recognized as “Revenue
Payable to Interest Owners” on the Company’s
Consolidated Balance Sheet.
The Company is also obligated to pay certain ‘bonus’
lease payments related to certain of its Pecos, TX lease
properties. The Company is required to pay $27,000 each year on the
JT Walker lease, beginning August 7, 2017. The Company is also
required to pay $200,000 every five years on the JPMorgan lease,
beginning August 7, 2017. The Company is current in its lease
payments under these leases. These payments are included in Oil and
Gas Properties – Leasehold acquisition costs (Note 5) in
accordance with full-cost accounting.
NOTE 9 – STOCKHOLDERS’ EQUITY
Common stock
The Company is authorized to issue 3,000,000,000 shares of its
common stock. All shares of common stock are equal to each other
with respect to voting, liquidation, dividend, and other rights.
Owners of shares are entitled to one vote for each share owned at
any Shareholders’ meeting. The common stock of the Company
does not have cumulative voting rights, which means that the
holders of more than fifty percent (50%) of the shares voting in an
election of directors may elect all of the directors if they choose
to do so.
Preferred stock
The Company is authorized to issue 10,000,000 shares of its
preferred stock with a no-par value per share.
Series A convertible preferred stock:
The Company has 9,000 shares of Series A preferred stock
outstanding at October 31, 2018. These shares were issued from the
designated 10,000,000 shares of preferred stock, no par value, with
the following rights and preferences:
AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OCTOBER 31, 2018
●
|
Liquidation
preference: Upon a liquidation event, an amount in cash equal to
$100 per share, for a total of $900,000 computed as of October 31,
2018, shall be paid prior to liquidation payments to holders of the
Company securities junior to the Series A preferred
stock.
|
●
|
Dividends:
Holders of the Series A preferred stock are not entitled to receive
a dividend.
|
●
|
Voting: Each share of preferred stock has 10,000 votes and votes
with the common shares on all matters submitted to the shareholders
for a vote. Effective September 10, 2018 the
sole holder of Series A Preferred Stock of the Company agreed to
material modifications of the rights associated with the Series A
Preferred. Jed Miesner is the holder of 9,000 shares of Series A
Preferred that possess the right to vote on any matters to which
common stock holders of the Company are entitled to vote. The 9,000
shares of Series A Preferred possess the voting power equivalent to
90,000,000 shares of the Company’s common stock. Mr. Miesner
has agreed, until January 1, 2019 to not vote the Series A
Preferred shares on any matter not related to a change of control
of the Company or its assets. As part of this agreement, the
Company has agreed to pay accrued interest on promissory notes
payable due to Mr. Meisner and related parties associated with him
(see Note 6).
|
●
|
Non-transferrable:
The shares of Series A preferred stock are not transferrable except
under a plan for wealth transfer and estate planning or upon
conversion or redemption as set forth below.
|
●
|
Conversion:
On July 31, 2021, any shares of the Series A preferred stock
outstanding will be convertible, at the discretion of the
shareholder, for a period of three years, into common stock
purchase warrants of the Company with an exercise price of $1.00
per share on the basis of 110 shares of common stock for each one
share of Series A preferred stock outstanding.
|
Series B convertible preferred stock:
The
Company has 50,000 shares of Series B preferred stock outstanding
at October 31, 2018. These shares were issued from the designated
10,000,000 shares of preferred stock, no par value, with the
following rights and preferences:
●
|
Liquidation
preference: Upon a liquidation event, an amount in cash equal to
$100 per share, for a total of $5,000,000 computed as of July 31,
2018, shall be paid prior to liquidation payments to holders of
Company securities junior to the Series B preferred stock. Holders
of the Company’s Series A preferred stock shall be paid in
advance of holders of the Series B preferred stock on the
occurrence of a liquidation event.
|
●
|
Dividends:
Holders of the Series B preferred stock are not entitled to receive
a dividend.
|
●
|
Voting:
The Series B preferred stock has no voting rights other than to be
voted when required by the laws of the State of
Nevada.
|
●
|
Non-transferrable:
The shares of Series B preferred stock are not transferrable except
under a plan for wealth transfer and estate planning or upon
conversion or redemption as set forth below.
|
●
|
Conversion:
On July 31, 2021, any shares of the Series B preferred stock
outstanding will be convertible, at the discretion of the
shareholder, for a period of three years, into common stock
purchase warrants of the Company with an exercise price of $1.00
per share on the basis of 110 shares of common stock for each one
share of Series B preferred stock outstanding.
As
additional consideration for a new promissory note dated October
22, 2018 (Note 6), the terms of the right to convert preferred
shares into warrants to acquire common stock attached to the
Company’s Series “B” Preferred Stock, were
amended to extend the conversion period to April 1, 2024 and to
reduce the underlying warrant exercise price from $0.60 per share
to $0.40 per share. The Company further agreed to suspend its right
to call the Series “B” Preferred Stock until April 1,
2024.
|
Common Stock
During the three months ended October 31, 2018 and 2017, the
Company issued 400,000 and 1,200,000 shares of common stock for
cash of $100,000 and $300,000, respectively.
During the three months ended October 31, 2018 and 2017, the
Company issued 599,000 and 100,000 shares of common stock with
total fair value of $141,768 and $40,000, respectively as
compensation for professional services. In addition, the Company
issued 66,000 shares of common stock with a fair value of $16,482
for satisfaction of accounts payable.
Warrants:
During the three months ended October 31, 2018 and 2017, the
Company issued 104,775 and 1,000,000 warrants to purchase common
stock valued at $23,449 and $274,112, respectively, for
professional services. Additionally, during the three months ended
October, 31, 2018, the Company issued 2,400,000 warrants to
purchase common stock in connection with promissory notes with a
fair value of $288,000 and changed the terms of 2,674,576 existing
warrants with an incremental fair value due to the modification of
$480,771. See Note 6
- 15 -
AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OCTOBER 31, 2018
Warrant transaction for the three months ended October 31, 2018 and
2017 are summarized as follows:
|
Three
Months ended October 31,
|
|
|
2018
|
2017
|
|
|
|
Outstanding
warrants - beginning
|
6,280,633
|
2,674,576
|
Issued
|
2,504,775
|
1,000,000
|
Exercised
|
-
|
-
|
Expired
|
-
|
-
|
|
|
|
Outstanding
warrants - ending
|
8,785,408
|
3,674,576
|
The weighted average fair value of warrants and the key assumptions
used in the Black-Scholes valuation model to calculate the fair
value, are as follows:
2018
|
|
Weighted average fair value
|
$0.21 to $0.26
|
Exercise price
|
$0.25 to $0.40
|
Risk-free interest rate
|
2.74% - 3.01%
|
Expected volatility of common stock
|
166% - 168%
|
Dividend yield
|
0.00%
|
Expected term of warrant
|
Five to Six Years
|
2017
|
|
Weighted average fair value
|
$0.27
|
Exercise price
|
$0.40
|
Risk-free interest rate
|
1.57%
|
Expected volatility of common stock
|
176.70%
|
Dividend yield
|
0.00%
|
Expected term of warrant
|
Four Years
|
The Company’s outstanding warrants at October 31, 2018 are
detailed as follows:
|
Number
|
|
Expiration
Year
|
of
Warrants
|
Exercise
Price
|
|
|
|
2020
|
1,200,000
|
$0.50
|
2021
|
1,858,332
|
$0.40 to $1.00
|
2022
|
305,000
|
$0.40 to $0.60
|
2023
|
347,500
|
$0.27 to $0.74
|
2024
|
5,074,576
|
$0.40
|
|
|
|
|
8,785,408
|
|
Stock Options
In February 2017, the Board of Directors adopted and approved the
2017 Stock Option Plan (the “2017 Plan”). Pursuant to
the 2017 Plan terms, if the 2017 Plan was not approved by a
majority of the shareholders of the Company within twelve months of
the adoption of the 2017 Plan, the 2017 Plan would become void. The
2017 Plan was never approved by a majority vote of the shareholders
of the Company and therefore is now void. No options were ever
issued pursuant to the 2017 Plan.
- 16 -
AMAZING ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OCTOBER 31, 2018
2017 Grants
On August 11, 2017, the Board of Directors authorized the grant of
5,835,000 options to purchase shares of common stock of the Company
to certain officers related to their employment agreements (the
“Listing Options”). The Listing Options will vest and
be immediately exercisable on the date the Company's stock is
traded on the American Stock Exchange, the New York Stock Exchange,
or any of the NASDAQ trading tiers. The Listing Options shall have
an exercise price equal to the closing price on the date such
trading commences. As of October 31, 2018, management has
determined the probability of such an event is doubtful and,
therefore, has not recognized any compensation expense to date
regarding the Listing Options.
On August 11, 2017, the Board of Directors authorized the grant of
11,750,000 options to purchase shares of common stock of the
Company to certain officers. The options have an exercise price of
$0.40 and expire five years from the date of grant. 2,937,500 of
the options vested immediately on the grant date and the remainder
vest 25% annually upon each anniversary of the grant date. For the
three months ended October 31, 2018 and 2017, the Company
recognized stock-based compensation of $191,824 and $897,859,
respectively, for these options. At October 31, 2018 unrecognized
compensation related to the option grant is $1,244,751 will be
recognized over the remaining term of 3.78 years.
On August 11, 2017, the Board of Directors authorized the grant of
10,000,000 options to purchase shares of common stock of the
Company to its Chief Executive Officer. The options have an
exercise price of $0.40 per share and expire five years from the
date of grant. 2,000,000 options vested on the date of grant. The
fair value of the grant was $489,047 which was recognized as
stock-based compensation at the date of grant. The remaining
8,000,000 options contained market and performance conditions, of
which 4,000,000 options are to vest based on market conditions
being met and 4,000,000 options will vest upon achievement of
certain performance objectives. Management has assessed the
likelihood of market conditions and the probability of performance
conditions being realized and recognize stock based compensation of
$24,452 and $48,905 for the three month periods ended October 31,
2018 and 2017, respectively. At October 31, 2018, unrecognized
compensation related to the option grant is $167,091 which will be
recognized over the remaining term of 3.78 years.of $647,987 for
the year ending July 31, 2018.
On September 26, 2017, the Board of Directors also authorized the
grant of 500,000 options to purchase shares of common stock of the
Company to certain directors. The options vested immediately at the
date of grant. These options have an exercise price of $0.40 and
expire on September 26, 2021. The fair value of the grant was
$137,056 which the Company recognized as stock-based compensation
for the three month period ended October 31, 2017.
2018 Grants
On
October 23, 2018, the Board of Directors authorized the grant of
1,000,000 options to purchase shares of common stock of the Company
to its Chief Financial Officer. The options have an exercise price
of $0.30 and expire five years from the date of grant. 100,000 of
the options vested immediately on the grant date and the remainder
vest 25% annually upon each anniversary of the grant date. For the
three month period ended October 31, 2018, the Company recognized
stock based compensation of $17,974 for these options. At October
31, 2018, unrecognized compensation related to the option grant is
$150,679 which will be recognized over the next three years. On
October 10, 2018, the Board of Directors also authorized the grant
of 1,000,000 options to purchase shares of common stock of the
Company to certain directors. The options vested immediately at the
date of grant. These options have an exercise price of $0.30 and
expire on October 23, 2023. The fair value of the grant was
$214,726 which the Company recognized as stock-based compensation
for the three month period ended October 31, 2018.
Option activity for the three months ending October 31, 2018 and
2017 is summarized as follows:
|
For the
three months ended October 31
|
|||
|
2018
|
2017
|
||
|
Options
|
Exercise
price
|
Options
|
Exercise
Price
|
|
|
|
|
|
Beginning
balance, outstanding
|
28,085,000
|
|
-
|
|
Granted
|
2,000,000
|
$0.30
|
28,085,000
|
$0.40
|
Exercised
|
-
|
|
-
|
|
Forfeited
or rescinded
|
-
|
|
-
|
|
Balance
outstanding, ending
|
30,085,000
|
|
28,085,000
|
|
|
|
|
|
|
Outstanding
at the end of the period, vested
|
9,475,000
|
|
5,437,500
|
|
- 17 -
AMAZING
ENERGY OIL AND GAS, CO. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OCTOBER
31, 2018
The
Company has estimated the fair value of all option grants using the
Black-Scholes model with the following information andrange of
assumptions:
|
For the
three months ended
|
|
|
October
31, 2018
|
October
31, 2017
|
Weighted
average fair value
|
$0.17
to $0.21
|
$0.24
to $0.27
|
Options
issued
|
2,000,000
|
28,085,000
|
Exercise
Price
|
$0.30
|
$0.40
|
Expected
volatility
|
157
% to 166%
|
175% to
200%
|
Term
|
Five
to Six Years
|
Four to
Five years
|
Risk-free
rate
|
2.95%
to 3.05%
|
1.57%
to 1.74%
|
The following is a summary of the Company's options outstanding as
of October 31, 2018:
|
|
Number
|
|
|
Expiration Year
|
|
of Options
|
|
Exercise Price
|
|
|
|
|
|
2021
|
|
600,000
|
|
$0.30 to $0.40
|
2022
|
|
27,885,000
|
|
$0.30 to $0.40
|
2023
|
|
1,300,000
|
|
$0.30
|
2024
|
|
300,000
|
|
$0.30
|
|
|
|
|
|
|
|
30,085,000
|
|
|
At October 31, 2018, the Company had reserved 38,870,408 common
shares for future exercise of warrants and options. At October 31,
2018, the Company’s stock options had no intrinsic
value.
NOTE 10 – SUBSEQUENT EVENTS
On November 6, 2018 the Company closed on a transaction providing
the Company with financing that it will apply to the drilling and
completion of a new horizontal San Andres well. The investment is
being made by Joint Venture Working Interest Partners (“the
Partners”) that will pay 100% of drilling and completion
costs on a turnkey basis of a newly planned horizontal well. In
exchange, the Partners will receive a 50% working interest in the
well-bore and will receive 75% of the net monthly revenue to the
working interest until such time that they recover 110% of their
original investment. To date, $750,000 has been received including
$250,000 received prior to October 31,
2018.
ITEM 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion should be read in conjunction with our
audited financial statements and notes thereto included herein. In
connection with, and because we desire to take advantage of, the
“safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995, we caution readers regarding certain
forward-looking statements in the following discussion and
elsewhere in this report and in any other statement made by us, or
on our behalf, whether or not in future filings with the Securities
and Exchange Commission. Forward-looking statements are statements
not based on historical information and which relate to future
operations, strategies, financial results or other developments.
Forward-looking statements are necessarily based upon estimates and
assumptions that are inherently subject to significant business
economic and competitive uncertainties and contingencies, many of
which are beyond our control and many of which, with respect to
future business decisions, are subject to change. These
uncertainties and contingencies can affect actual results and could
cause actual results to differ materially from those expressed in
any forward-looking statements made by us, or on our behalf. We
disclaim any obligation to update forward-looking
statements.
The independent registered public accounting firm’s report on
the Company’s financial statements as of July 31,2018, and
for each of the years in the two-year period then ended, includes a
“going concern” explanatory paragraph that describes
substantial doubt about the Company’s ability to continue as
a going concern.
Safe Harbor Provision
This
Management’s Discussion and Analysis includes a number of
forward-looking statements that reflect our current views with
respect to future events and financial performance. Forward-looking
statements are often identified by words like:
“believe,” “expect,” “plan,”
“estimate,” “anticipate,”
“intend,” “project,” “will,”
“predicts,” “seeks,” “may,”
“would,” “could,” “potential,”
“continue,” “ongoing,”
“should,” and similar expressions, or words which, by
their nature, refer to future events. You should not place undue
certainty on these forward-looking statements, which apply only as
of the date of this Form 10-K. These forward-looking statements are
subject to certain risks or uncertainties that could cause actual
results to differ materially from historical results or from our
predictions. We undertake no obligation to update or revise
publicly any forward-looking statements, whether because of new
information, future events, or otherwise.
Overview
We are
in the business of exploration, development, and production of oil
and gas in the Permian Basin of West Texas. This basin, which is one of the major
producing basins in the United States, is characterized by an
extensive production history, a favorable operating environment,
mature infrastructure, long reserve life, multiple producing
horizons, enhanced recovery potential and a large number of
operators. The
Permian Basin is characterized by high oil and liquids rich natural
gas, multiple vertical and horizontal target horizons, extensive
production history, long-lived reserves and high drilling success
rates. As of October 31, 2018, the Company has leasehold
rights located within approximately 70,000 acres in Pecos County,
Texas. We believe that our concentrated acreage position provides
us with an opportunity to achieve cost, operating and recovery
efficiencies in the development of our drilling inventory. Our
activities have been primarily focused on vertical development of
the Queen formation over the Central Basin platform, which
separates the Midland Basin from the Delaware Basin, all of which
are part of the Permian Basin in West Texas. Additional drilling
targets could include the Greyburg, San Andreas and Devonian
zones.
Our
near-term success depends primarily on attracting developmental
capital to continue to drill, develop reserves and increase
production within the leased acreage that we currently control. We
are also open to acquiring oil and gas producing properties that
would be accretive to our shareholders. We are the operator of 100%
of our Permian Basin acreage. This operating control allows us to
better execute on our strategies of enhancing returns through
operational and cost efficiencies and increasing ultimate
hydrocarbon recovery by seeking to continually improve our drilling
techniques, completion methodologies and reservoir evaluation
processes. Additionally, as the operator of all of our acreage, we
retain the ability to increase or decrease our capital expenditure
program based on commodity price outlooks. This operating control
also enables us to obtain data needed for efficient exploration of
our prospects. The Company owns a small drilling rig
(2,500’), completion rig, pulling unit and various equipment
to operate the property.
We have
been operating at a net loss situation. Given the current oil
prices, and the inherent expenses of running a public company in
the oil and gas industry, it is uncertain if and when we may
achieve profitable operations as a small company.
Commodity Prices.
Our
results of operations are heavily influenced by commodity prices.
Factors that may impact future commodity prices, including the
price of oil and natural gas, include: (1) weather conditions in
the United States and where the Company's property interests are
located; (2) economic conditions, including demand for
petroleum-based products, in the United States and the rest of the
world; (3) actions by OPEC, the Organization of Petroleum Exporting
Countries; (4) political instability in the Middle East and other
major oil and natural gas producing regions; (5) governmental
regulations; (6) domestic tax policy; (7) the price of foreign
imports of oil and natural gas; (8) the cost of exploring for,
producing and delivering oil and natural gas; (9) the discovery
rate of new oil and natural gas reserves; (9) the rate of decline
of existing and new oil and natural gas reserves; (10) available
pipeline and other oil and natural gas transportation capacity;
(11) the ability of oil and natural gas companies to raise capital;
(12) the overall supply and demand for oil and natural gas; and
(13) the availability of alternate fuel sources.
The
Company cannot predict the occurrence of events that may affect
future commodity prices or the degree to which these prices will be
affected, the prices for any commodity that we produce will
generally approximate current market prices in the geographic
region of the production. Furthermore, the Company has not entered
into any derivative contracts, including swap agreements for oil
and gas.
Fiscal 2018 Activity
Our
fiscal year ended July 31, 2018 activity focused on conventional
drilling in the Queen formation in Pecos County, Texas. We spudded
two conventional wells and completed two wells in fiscal 2018,
compared to spudding one conventional well and completion of one
well in fiscal 2017. We continued to develop the Queen formation in
Pecos County, Texas during fiscal 2018. The rate of drilling wells
depends on raising capital to fund drilling and
completion.
Plan for Fiscal 2019
For the fiscal year ending July 31, 2019, in order to develop
additional reserves and production, we plan to continue to raise
funds to drill oil and gas wells located within the 70,000 acres,
in Pecos County, Texas where our leasehold rights exist. We
anticipate raising such funds through joint ventures working
interest holder participations, whereby the company would retain a
carried working interest. In order to keep the leasehold in good
standing, we adhere to the Continuous Drilling Clause for each
respective lease and strictly adhere to the requirements within
said Drilling Clause. The level of capital expenditures, and thus
drilling activity for fiscal year 2019, will significantly depend,
on the future market prices for oil.
During the quarter ended October 31, 2018, the Company continued
development principally consisting of drilling and development of
the WWJD Well #30, workover operations on various wells, and
further investment in unevaluated lease costs.
The #30 well was drilled to a total depth of 1,768 feet and Amazing
encountered approximately fourteen feet of pay zone thickness based
on comparison to a southern offset well. The Company has also
completed the well utilizing a technique known as an open hole
completion. The well is free flowing oil and gas, without
stimulation, to the existing production facility at a rate of
approximately 10 BOPD on a 14/64th inch choke with flowing tubing
pressure of 25 PSI and 160 PSI on the casing. During drilling, the
Company encountered two benches of the Queen A formation and will
continue testing the well to establish a stabilized initial
potential (IP) production rate.
On October 17, 2018 the Company closed on the acquisition of the
deep rights in 21,000 mostly contiguous acres in the Permian Basin
in Pecos County, Texas. Post-closing the Company now controls all
rights to all depths within the 61,000 acres with undivided mineral
interest and rights to the depth of 3,000 feet to surface on its
additional ~9,000 acres. The purchased acreage is subject to the
same option terms that are applicable to the other Pecos County,
Texas acreage controlled by the Company. Jilpetco, Inc. will be the
operator of record on all current and future wells, if any, on the
acquired acreage. The cost of the acquisition was
$500,000.
Amazing will leverage the extensive geological work done covering
the acreage to select new well drilling locations. Identified and
prolific pay zone horizons proven on the acreage include the Queen,
Grayburg, Clearfork, Wolfcamp, Penn, Devonian, Ellenberger. Modern
3-D seismic covers most of the leasehold, where 17 deep exploratory
wells were drilled in the early 2000's targeting Devonian and
Ellenberger pay at depths of 8,000-9,000 ft Measured Depth. The
Seismic data set primarily targeted Devonian wells which have
produced 4 BCFG and 150,000 barrels of oil in the area.
Additionally, the data has identified prospects that have yet to be
drilled on the acreage and a recent new field discovery by an
offset operator in 2017 which will provide additional detailed
geological insight as to rock properties, reserves, and production
potentials. Amazing plans to shoot a larger 3-D survey which has
the potential to uncover additional new target areas.
Over the past years Amazing has focused on shallower plays
available under our existing options to incrementally increase
production. Our strategy is getting a tremendous boost with the
addition of these deep rights and associated well-known pay zones.
We expect this acquisition to add several hundred potential new
well locations to our current drilling inventory. The potential of
our acreage is now on par with many of our much larger peers and in
the same well-known plays where they are experiencing marked
success.
On November 6, 2018 the Company closed on a transaction providing
the Company with financing that it will apply to the drilling and
completion of a new horizontal San Andres well. The investment is
being made by Joint Venture Working Interest Partners (“the
Partners”) that will pay 100% of drilling and completion
costs on a turnkey basis of a newly planned horizontal well. In
exchange the Partners will receive 50% working interest in the
well-bore and will receive a 75% preferred payout of invested
capital plus 10%. $750,000 has been received up to the date of this
filing.
The new well, planned to be drilled in December 2018, will be a
3,000 to 4,500-foot Total Measure Depth horizontal including a 2000
to 2,500-foot lateral section that will test the prolific San
Andres formation. The well represents the first horizontal San
Andres well drilled by Amazing. Transitioning to horizontal
drilling and into a well-known regional zone like the San Andres is
a crucial step in the growth of the Company. These wells have been
known to produce high-impact production results and have escalated
the growth rate of many of our peers in the area.
The Company’s Expansion Strategy includes the
following:
●
|
Capital
Expenditure Strategy for Pecos Asset
|
●
|
Pecos
County acreage represents the main revenue driver for Amazing
Energy.
|
●
|
Management
plans to implement a monthly capital budget to drill additional
wells
|
●
|
Seeking
to Acquire Additional Assets
|
●
|
Potential
pipeline acquisition with current positive cash flow.
|
●
|
The
company is geographically agnostic within the U.S. and is
comfortable participating in both operated and non-operated
transactions in most geological basins located in the lower 48
States but on a more practical basis prefers locations contiguous
to Texas.
|
●
|
Growth
through JV/ Farm Out
|
●
|
The
Company intends to initiate discussions with other operators for
the purpose of forming joint-ventures on current acreage as well as
any acreage acquired in the future.
|
●
|
Any
such joint-ventures could allow Amazing to leverage the resources
and know-how of leading operators to drive
significant shareholder value within Amazing.
|
Overview of Current Operations
Through October 31, 2018, the Company has drilled twenty-six wells
on its leasehold in Pecos County, Texas. Twenty-four of the
twenty-six wells are currently productive, and two wells are shut
in. During the quarter ended October 31, 2018, the Company drilled
and completed one well on its properties.
Compliance with Government Regulations
The oil
and gas industry in the United States is subject to extensive
regulation by federal, state and local authorities. At the federal
level, various federal rules, regulations and procedures apply,
including those issued by the U.S. Department of Interior, the U.S.
Department of Transportation Office of Pipeline Safety (the
“DOT”) and the U.S. Environmental Protection Agency
(the “EPA”). At the state and local level, various
agencies and commissions regulate drilling, production and
midstream activities. For the state of Texas, the regulatory agency
is the Texas Railroad Commission. These federal, state and local
authorities have various permitting, licensing and bonding
requirements. Various remedies are available for enforcement of
these federal, state and local rules, regulations and procedures,
including fines, penalties, revocation of permits and licenses,
actions affecting the value of leases, wells or other assets,
suspension of production, and, in certain cases, criminal
prosecution. As a result, there can be no assurance that we will
not incur liability for fines, penalties or other remedies that are
available to these federal, state and local authorities. However,
we believe that we are currently in material compliance with
federal, state and local rules, regulations and procedures, and
that continued substantial compliance with existing requirements
will not have a material adverse effect on our financial position,
cash flows or results of operations.
Transportation and Sale of Oil
The Company sells its oil and gas production to only two
purchasers. Oil production is sold to Rio Energy International,
Inc. and natural gas production is sold to Trans-Pecos Natural Gas
Company, LLC. As a result, during the fiscal years ended October
31, 2018 these customers represented 100% of its oil and gas
sales.
Sales of crude oil are negotiated with Rio Energy International,
Inc., via a Crude Oil Purchase Agreement which is subject to a
month to month term, and a 30-day notice termination clause. The
agreement specifies the pricing terms and transportation
deductions, amongst other terms. Our sales of crude oil are
affected by the availability, terms and cost of
transportation.
Regulation of Production
Oil and
gas production is regulated under a wide range of federal and state
statutes, rules, orders and regulations. State and federal statutes
and regulations require permits for drilling operations, drilling
bonds and reports concerning operations. The state in which we
operate, Texas, has regulations governing conservation matters,
including provisions for the unitization or pooling of oil and gas
properties, the establishment of maximum rates of production from
oil and gas wells, the regulation of spacing, and requirements for
plugging and abandonment of wells. Also, Texas imposes a severance
tax on production and sales of oil, and gas within its
jurisdiction. The failure to comply with these rules and
regulations can result in substantial penalties. Our competitors in
the oil and gas industry are subject to the same regulatory
requirements and restrictions that affect our
operations.
Environmental Matters and Regulation
Our oil
and natural gas exploration, development and production operations
are subject to stringent laws and regulations governing the
discharge of materials into the environment or otherwise relating
to environmental protection. Numerous federal, state and local
governmental agencies, such as the EPA, issue regulations that
often require difficult and costly compliance measures that carry
substantial administrative, civil and criminal penalties and may
result in injunctive obligations for non-compliance. These laws and
regulations may require the acquisition of a permit before drilling
commences; restrict the types, quantities and concentrations of
various substances that can be released into the environment in
connection with drilling and production activities; limit or
prohibit construction or drilling activities on certain lands lying
within wilderness, wetlands, ecologically or seismically sensitive
and other protected areas; require action to prevent or remediate
pollution (from current or former operations), such as plugging
abandoned wells or closing pits; take action resulting in the
suspension or revocation of necessary permits, licenses and
authorizations; and/or require that additional pollution controls
be installed and impose substantial liabilities for pollution
resulting from our operations or related to our owned or
operated facilities. Liability under such laws and regulations
is often strict (i.e., no showing of “fault” is
required) and can be joint and several. Moreover, it is not
uncommon for neighboring landowners and other third-parties to file
claims for personal injury and property damage allegedly caused by
the release of hazardous substances, hydrocarbons or other waste
products into the environment. Changes in environmental laws and
regulations occur frequently, and any changes that result in more
stringent and costly pollution control or waste handling, storage,
transport, disposal or cleanup requirements could materially
adversely affect our operations and financial position, as
well as the oil and natural gas industry in general. Our management
believes that we are in substantial compliance with applicable
environmental laws and regulations and we have not experienced any
material adverse effect from compliance with these environmental
requirements. This trend, however, may not continue in the
future.
Waste Handling. The Resource Conservation and Recovery
Act, as amended, and comparable state statutes and regulations
promulgated thereunder, affect oil and natural gas exploration,
development and production activities by imposing requirements
regarding the generation, transportation, treatment, storage,
disposal and cleanup of hazardous and non-hazardous wastes. With
federal approval, the individual states administer some or all the
provisions of the Resource Conservation and Recovery Act, sometimes
in conjunction with their own, more stringent requirements.
Although most wastes associated with the exploration, development
and production of crude oil and natural gas are exempt from
regulation as hazardous wastes under the Resource Conservation and
Recovery Act, such wastes may constitute “solid wastes”
that are subject to the less stringent non-hazardous waste
requirements. Moreover, the EPA or state or local governments may
adopt more stringent requirements for the handling of non-hazardous
wastes or categorize some non-hazardous wastes as hazardous for
future regulation. Indeed, legislation has been proposed from time
to time in Congress to re-categorize certain oil and natural gas
exploration, development and production wastes as “hazardous
wastes.” Also, in December 2016, the EPA agreed in a consent
decree to review its regulation of oil and gas waste. It has until
March 2019 to determine whether any revisions are necessary. Any
such changes in the laws and regulations could have a material
adverse effect on our capital expenditures and operating
expenses.
Administrative,
civil and criminal penalties can be imposed for failure to comply
with waste handling requirements. We believe that we are in
substantial compliance with applicable requirements related to
waste handling, and that we hold all necessary and up-to-date
permits, registrations and other authorizations to the extent that
our operations require them under such laws and regulations.
Although we do not believe the current costs of managing our
wastes, as presently classified, to be significant, any legislative
or regulatory reclassification of oil and natural gas exploration
and production wastes could increase our costs to manage and
dispose of such wastes.
Remediation of Hazardous Substances. The Comprehensive
Environmental Response, Compensation and Liability Act, as amended,
which we refer to as CERCLA or the “Superfund” law, and
analogous state laws, generally impose liability, without regard to
fault or legality of the original conduct, on classes of persons
who are considered to be responsible for the release of a
“hazardous substance” into the environment. These
persons include the current owner or operator of a contaminated
facility, a former owner or operator of the facility at the time of
contamination, and those persons that disposed or arranged for the
disposal of the hazardous substance at the facility. Under CERCLA
and comparable state statutes, persons deemed “responsible
parties” are subject to strict liability that, in some
circumstances, may be joint and several for the costs of removing
or remediating previously disposed wastes (including wastes
disposed of or released by prior owners or operators) or property
contamination (including groundwater contamination), for damages to
natural resources and for the costs of certain health studies. In
addition, it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property
damage allegedly caused by the hazardous substances released into
the environment. During our operations, we use materials that, if
released, would be subject to CERCLA and comparable state statutes.
Therefore, governmental agencies or third parties may seek to hold
us responsible under CERCLA and comparable state statutes for all
or part of the costs to clean up sites at which such
“hazardous substances” have been released.
Water Discharges. The Federal Water Pollution Control
Act of 1972, as amended, also known as the “Clean Water
Act,” the Safe Drinking Water Act, the Oil Pollution Act and
analogous state laws and regulations promulgated thereunder impose
restrictions and strict controls regarding the unauthorized
discharge of pollutants, including produced waters and other gas
and oil wastes, into navigable waters of the United States, as well
as state waters. The discharge of pollutants into regulated waters
is prohibited, except in accordance with the terms of a permit
issued by the EPA or the state. Spill prevention, control and
countermeasure plan requirements under federal law require
appropriate containment berms and similar structures to help
prevent the contamination of navigable waters in the event of a
petroleum hydrocarbon tank spill, rupture or leak. The Clean Water
Act and regulations implemented thereunder also prohibit the
discharge of dredge and fill material into regulated waters,
including jurisdictional wetlands, unless authorized by an
appropriately issued permit. The EPA has also adopted regulations
requiring certain oil and natural gas exploration and production
facilities to obtain individual permits or coverage under general
permits for storm water discharges. In addition, on June 28, 2016,
the EPA published a final rule prohibiting the discharge of
wastewater from onshore unconventional oil and gas extraction
facilities to publicly owned wastewater treatment plants, which
regulations are discussed in more detail below under the caption
“–Regulation of Hydraulic Fracturing.” Costs may
be associated with the treatment of wastewater or developing and
implementing storm water pollution prevention plans, as well as for
monitoring and sampling the storm water runoff from certain of our
facilities. Some states also maintain groundwater protection
programs that require permits for discharges or operations that may
impact groundwater conditions.
The Oil
Pollution Act is the primary federal law for oil spill liability.
The Oil Pollution Act contains numerous requirements relating to
the prevention of and response to petroleum releases into waters of
the United States, including the requirement that operators of
offshore facilities and certain onshore facilities near or crossing
waterways must develop and maintain facility response contingency
plans and maintain certain significant levels of financial
assurance to cover potential environmental cleanup and restoration
costs. The Oil Pollution Act subjects owners of facilities to
strict liability that, in some circumstances, may be joint and
several for all containment and cleanup costs and certain other
damages arising from a release, including, but not limited to, the
costs of responding to a release of oil to surface
waters.
Non-compliance with the Clean Water Act or the Oil Pollution Act
may result in substantial administrative, civil and criminal
penalties, as well as injunctive obligations. We believe we
are in material compliance with the requirements of each of these
laws.
Air Emissions. The federal Clean Air Act, as amended,
and comparable state laws and regulations, regulate emissions of
various air pollutants through the issuance of permits and the
imposition of other requirements. The EPA has developed, and
continues to develop, stringent regulations governing emissions of
air pollutants at specified sources. New facilities may be required
to obtain permits before work can begin, and existing facilities
may be required to obtain additional permits and incur capital
costs to remain in compliance. For example, on August 16,
2012, the EPA published final regulations under the federal Clean
Air Act that establish new emission controls for oil and natural
gas production and processing operations, which regulations are
discussed in more detail below in “Regulation of Hydraulic
Fracturing.” Also, on May 12, 2016, the EPA issued a final
rule regarding the criteria for aggregating multiple small surface
sites into a single source for air-quality permitting purposes
applicable to the oil and gas industry. This rule could cause small
facilities, on an aggregate basis, to be deemed a major source,
thereby triggering more stringent air permitting processes and
requirements. These laws and regulations may increase the costs of
compliance for some facilities we own or operate, and federal and
state regulatory agencies can impose administrative, civil and
criminal penalties for non-compliance with air permits or other
requirements of the federal Clean Air Act and associated state laws
and regulations. We believe that we are in substantial
compliance with all applicable air emissions regulations and that
we hold all necessary and valid construction and operating permits
for our operations. Obtaining or renewing permits has the
potential to delay the development of oil and natural gas
projects.
Climate Change. In December 2009, the EPA issued an
Endangerment Finding that determined that emissions of carbon
dioxide, methane and other greenhouse gases present an endangerment
to public health and the environment because, according to the EPA,
emissions of such gases contribute to warming of the earth’s
atmosphere and other climatic changes. In May 2010, the EPA adopted
regulations establishing new greenhouse gas emissions thresholds
that determine when stationary sources must obtain permits under
the Prevention of Significant Deterioration, or PSD, and Title V
programs of the Clean Air Act. On June 23, 2014, in Utility Air Regulatory Group v. EPA,
the U.S. Supreme Court held that stationary sources could not
become subject to PSD or Title V permitting solely because of their
greenhouse gas emissions. The Court ruled, however, that the EPA
may require installation of best available control technology for
greenhouse gas emissions at sources otherwise subject to the PSD
and Title V programs. On August 26, 2016, the EPA proposed changes
needed to bring the EPA’s air permitting regulations in line
with the Supreme Court’s decision on greenhouse gas
permitting. The proposed rule was published in the Federal Register
on October 3, 2016 and the public comment period closed on December
2, 2016.
Additionally,
in September 2009, the EPA issued a final rule requiring the
reporting of greenhouse gas emissions from specified large
greenhouse gas emission sources in the U.S., including natural gas
liquids fractionators and local natural gas distribution companies,
beginning in 2011 for emissions occurring in 2010. In November
2010, the EPA expanded the greenhouse gas reporting rule to include
onshore and offshore oil and natural gas production and onshore
processing, transmission, storage and distribution facilities,
which may include certain of our facilities, beginning in 2012 for
emissions occurring in 2011. In October 2015, the EPA amended the
greenhouse gas reporting rule to add the reporting of greenhouse
gas emissions from gathering and boosting systems, completions and
workovers of oil wells using hydraulic fracturing, and blowdowns of
natural gas transmission pipelines.
The EPA
has continued to adopt greenhouse gas regulations applicable to
other industries, such as its August 2015 adoption of three
separate, but related, actions to address carbon dioxide pollution
from power plants, including final Carbon Pollution Standards for
new, modified and reconstructed power plants, a final Clean Power
Plan to cut carbon dioxide pollution from existing power plants,
and a proposed federal plan to implement the Clean Power Plan
emission guidelines. Upon publication of the Clean Power Plan on
October 23, 2015, more than two dozen states as well as industry
and labor groups challenged the Clean Power Plan in the D.C.
Circuit Court of Appeals. On February 9, 2016, the Supreme Court
stayed the implementation of the Clean Power Plan while legal
challenges to the rule proceed. Because of this continued
regulatory focus, future greenhouse gas regulations of the oil and
gas industry remain a possibility. In addition, the U.S. Congress
has from time to time considered adopting legislation to reduce
emissions of greenhouse gases and almost one-half of the states
have already taken legal measures to reduce emissions of greenhouse
gases primarily through the planned development of greenhouse gas
emission inventories and/or regional greenhouse gas cap and trade
programs. Although the U.S. Congress has not adopted such
legislation at this time, it may do so in the future and many
states continue to pursue regulations to reduce greenhouse gas
emissions. Most of these cap and trade programs work by
requiring major sources of emissions, such as electric power
plants, or major producers of fuels, such as refineries and gas
processing plants, to acquire and surrender emission allowances
corresponding with their annual emissions of greenhouse gases. The
number of allowances available for purchase is reduced each year
until the overall greenhouse gas emission reduction goal is
achieved. As the number of greenhouse gas emission allowances
declines each year, the cost or value of allowances is expected to
escalate significantly.
In
December 2015, the United States participated in the 21st
Conference of the Parties of the United Nations Framework
Convention on Climate Change in Paris, France (the “Paris
Accords”). The Paris Accords call for the parties to
undertake “ambitious efforts” to limit the average
global temperature, and to conserve and enhance sinks and
reservoirs of greenhouse gases. The Agreement went into effect on
November 4, 2016. On June 1, 2017, President Trump announced the
United States would withdraw from the Paris Accords. The Agreement
establishes a framework for the parties to cooperate and report
actions to reduce greenhouse gas emissions. Also, on June 29, 2016,
the leaders of the United States, Canada and Mexico announced an
Action Plan to, among other things, boost clean energy, improve
energy efficiency, and reduce greenhouse gas emissions. The Action
Plan specifically calls for a reduction in methane emissions from
the oil and gas sector by 40% to 45% by 2025.
Restrictions
on emissions of methane or carbon dioxide that may be imposed could
adversely affect the oil and natural gas industry. At this time, it
is not possible to accurately estimate how potential future laws or
regulations addressing greenhouse gas emissions would impact our
business. It also remains unclear whether and how the results of
the 2016 U.S. election could impact the regulation of greenhouse
gas emissions at the federal and state level.
In
addition, claims have been made against certain energy companies
alleging that greenhouse gas emissions from oil and natural gas
operations constitute a public nuisance under federal and/or state
common law. As a result, private individuals may seek to enforce
environmental laws and regulations against us and could allege
personal injury or property damages. While our business is not a
party to any such litigation, we could be named in actions making
similar allegations. An unfavorable ruling in any such case could
significantly impact our operations and could have an adverse
impact on our financial condition.
Moreover,
there has been public discussion that climate change may be
associated with extreme weather conditions such as more intense
hurricanes, thunderstorms, tornadoes and snow or ice storms, as
well as rising sea levels. Another possible consequence of climate
change is increased volatility in seasonal temperatures. Some
studies indicate that climate change could cause some areas to
experience temperatures substantially colder than their historical
averages. Extreme weather conditions can interfere with our
production and increase our costs and damage resulting from extreme
weather may not be fully insured. However, at this time, we are
unable to determine the extent to which climate change may lead to
increased storm or weather hazards affecting our
operations.
Regulation of Hydraulic Fracturing
Hydraulic
fracturing is an important common practice that is used to
stimulate production of hydrocarbons, particularly natural gas,
from tight formations, including shales. The process, which
involves the injection of water, sand and chemicals under pressure
into formations to fracture the surrounding rock and stimulate
production, is typically regulated by state oil and natural gas
commissions. However, legislation has been proposed in recent
sessions of Congress to amend the Safe Drinking Water Act to repeal
the exemption for hydraulic fracturing from the definition of
“underground injection,” to require federal permitting
and regulatory control of hydraulic fracturing, and to require
disclosure of the chemical constituents of the fluids used in the
fracturing process. Furthermore, several federal agencies have
asserted regulatory authority over certain aspects of the process.
For example, the EPA has recently taken the position that hydraulic
fracturing with fluids containing diesel fuel is subject to
regulation under the Underground Injection Control program,
specifically as “Class II” Underground Injection
Control wells under the Safe Drinking Water Act.
In
addition, the EPA plans to develop a Notice of Proposed Rulemaking
by June 2018, which would describe a proposed mechanism -
regulatory, voluntary, or a combination of both - to collect data
on hydraulic fracturing chemical substances and mixtures. Also, on
June 28, 2016, the EPA published a final rule prohibiting the
discharge of wastewater from onshore unconventional oil and gas
extraction facilities to publicly owned wastewater treatment
plants. The EPA is also conducting a study of private wastewater
treatment facilities (also known as centralized waste treatment, or
CWT, facilities) accepting oil and gas extraction wastewater. The
EPA is collecting data and information related to the extent to
which CWT facilities accept such wastewater, available treatment
technologies (and their associated costs), discharge
characteristics, financial characteristics of CWT facilities, and
the environmental impacts of discharges from CWT
facilities.
On
August 16, 2012, the EPA published final regulations under the
federal Clean Air Act that establish new air emission controls for
oil and natural gas production and natural gas processing
operations. Specifically, the EPA’s rule package includes New
Source Performance standards to address emissions of sulfur dioxide
and volatile organic compounds and a separate set of emission
standards to address hazardous air pollutants frequently associated
with oil and natural gas production and processing activities. The
final rule seeks to achieve a 95% reduction in volatile organic
compounds emitted by requiring the use of reduced emission
completions or “green completions” on all
hydraulically-fractured wells constructed or refractured after
January 1, 2015. The rules also establish specific new
requirements regarding emissions from compressors, controllers,
dehydrators, storage tanks and other production equipment. The
EPA received numerous requests for reconsideration of these rules
from both industry and the environmental community, and court
challenges to the rules were also filed. In response, the EPA has
issued, and will likely continue to issue, revised rules responsive
to some of the requests for reconsideration. On May 12, 2016,
the EPA
amended its regulations to impose new standards for methane and
volatile organic compounds emissions for certain new, modified, and
reconstructed equipment, processes, and activities across the oil
and natural gas sector. On the same day, the EPA finalized a plan
to implement its minor new source review program in Indian country
for oil and natural gas production, and it issued for public
comment an information request that will require companies to
provide extensive information instrumental for the development of
regulations to reduce methane emissions from existing oil and gas
sources. These standards, as well as any future laws and their
implementing regulations, may require us to obtain pre-approval for
the expansion or modification of existing facilities or the
construction of new facilities expected to produce air emissions,
impose stringent air permit requirements, or mandate the use of
specific equipment or technologies to control
emissions.
Furthermore,
there are certain governmental reviews either underway or being
proposed that focus on environmental aspects of hydraulic
fracturing practices. The EPA is currently evaluating the
potential impacts of hydraulic fracturing on drinking water
resources. On December 13, 2016, the EPA released a study examining
the potential for hydraulic fracturing activities to impact
drinking water resources, finding that, under some circumstances,
the use of water in hydraulic fracturing activities can impact
drinking water resources. Also, on February 6, 2015, the EPA
released a report with findings and recommendations related to
public concern about induced seismic activity from disposal wells.
The report recommends strategies for managing and minimizing the
potential for significant injection-induced seismic events. Other
governmental agencies, including the U.S. Department of Energy, the
U.S. Geological Survey, and the U.S. Government Accountability
Office, have evaluated or are evaluating various other aspects of
hydraulic fracturing. These ongoing or proposed studies could spur
initiatives to further regulate hydraulic fracturing and could
ultimately make it more difficult or costly for us to perform
fracturing and increase our costs of compliance and doing
business.
Several
states, including Texas, and local jurisdictions, have
adopted, or are considering adopting, regulations that could
restrict or prohibit hydraulic fracturing in certain circumstances,
impose more stringent operating standards and/or require the
disclosure of the composition of hydraulic fracturing
fluids. The Texas Legislature adopted legislation, effective
September 1, 2011, requiring oil and gas operators to publicly
disclose the chemicals used in the hydraulic fracturing
process. The Texas Railroad Commission adopted rules and
regulations implementing this legislation that apply to all wells
for which the Texas Railroad Commission issues an initial drilling
permit after February 1, 2012. The law requires that the well
operator disclose the list of chemical ingredients subject to the
requirements of OSHA for disclosure on an internet website and file
the list of chemicals with the Texas Railroad Commission with the
well completion report. The total volume of water used to
hydraulically fracture a well must also be disclosed to the public
and filed with the Texas Railroad Commission. Also, in May 2013,
the Texas Railroad Commission adopted rules governing well casing,
cementing and other standards for ensuring that hydraulic
fracturing operations do not contaminate nearby water resources.
The rules took effect in January 2014. Additionally, on October 28,
2014, the Texas Railroad Commission adopted disposal well rule
amendments designed, among other things, to require applicants for
new disposal wells that will receive non-hazardous produced water
and hydraulic fracturing flowback fluid to conduct seismic activity
searches utilizing the U.S. Geological Survey. The searches are
intended to determine the potential for earthquakes within a
circular area of 100 square miles around a proposed new disposal
well. The disposal well rule amendments, which became effective on
November 17, 2014, also clarify the Texas Railroad
Commission’s authority to modify, suspend or terminate a
disposal well permit if scientific data indicates a disposal well
is likely to contribute to seismic activity. The Texas Railroad
Commission has used this authority to deny permits for waste
disposal wells.
There
has been increasing public controversy regarding hydraulic
fracturing with regard to the use of fracturing fluids, induced
seismic activity, impacts on drinking water supplies, use of water
and the potential for impacts to surface water, groundwater and the
environment generally. A number of lawsuits and enforcement actions
have been initiated across the country implicating hydraulic
fracturing practices. If new laws or regulations that significantly
restrict hydraulic fracturing are adopted, such laws could make it
more difficult or costly for us to perform fracturing to stimulate
production from tight formations as well as make it easier for
third parties opposing the hydraulic fracturing process to initiate
legal proceedings based on allegations that specific chemicals used
in the fracturing process could adversely affect groundwater. In
addition, if hydraulic fracturing is further regulated at the
federal, state or local level, our fracturing activities could
become subject to additional permitting and financial assurance
requirements, more stringent construction specifications, increased
monitoring, reporting and recordkeeping obligations, plugging and
abandonment requirements and also to attendant permitting delays
and potential increases in costs. Such legislative changes could
cause us to incur substantial compliance costs, and compliance or
the consequences of any failure to comply by us could have a
material adverse effect on our financial condition and results of
operations. Currently, it is not possible to estimate the impact on
our business of newly enacted or potential federal, state or local
laws governing hydraulic fracturing.
Other Regulation of the Oil and Natural Gas Industry
The oil
and natural gas industry is extensively regulated by numerous
federal, state and local authorities. Legislation affecting the oil
and natural gas industry is under constant review for amendment or
expansion, frequently increasing the regulatory burden. Also,
numerous departments and agencies, both federal and state, are
authorized by statute to issue rules and regulations that are
binding on the oil and natural gas industry and its individual
members, some of which carry substantial penalties for failure to
comply. Although the regulatory burden on the oil and natural gas
industry increases our cost of doing business and,
consequently, affects our profitability, these burdens
generally do not affect us any differently or to any greater or
lesser extent than they affect other companies in the industry with
similar types, quantities and locations of production.
The
availability, terms and cost of transportation significantly affect
sales of oil and natural gas. The interstate transportation and
sale for resale of oil and natural gas is subject to federal
regulation, including regulation of the terms, conditions and rates
for interstate transportation, storage and various other matters,
primarily by FERC. Federal and state regulations govern the price
and terms for access to oil and natural gas pipeline
transportation. FERC’s regulations for interstate oil and
natural gas transmission in some circumstances may also affect the
intrastate transportation of oil and natural gas.
Although
oil and natural gas prices are currently unregulated, Congress
historically has been active in oil and natural gas regulation. We
cannot predict whether new legislation to regulate oil and natural
gas might be proposed, what proposals, if any, might actually be
enacted by Congress or the various state legislatures, and what
effect, if any, the proposals might have on our operations. Sales
of condensate and oil and natural gas liquids are not currently
regulated and are made at market prices.
Drilling and Production. Our operations are subject to
various types of regulation at the federal, state and local level.
These types of regulation include requiring permits for the
drilling of wells, drilling bonds and reports concerning
operations. The state, and some counties and municipalities, in
which we operate also regulate one or more of the
following:
the
locations of wells;
the
method of drilling and casing wells;
the
timing of constructions or drilling activities, including seasonal
wildlife closures;
the
rates of productions or “allowables”;
the
surface use and restoration of properties upon which wells are
drilled;
the plugging and
abandoning of wells; and
notice
to, and consultation with, surface owners and other
third-parties
State
laws regulate the size and shape of drilling and spacing units or
proration units governing the pooling of oil and natural gas
properties. Some states allow forced pooling or integration of
tracts to facilitate exploration while other states rely on
voluntary pooling of lands and leases. In some instances, forced
pooling or unitization may be implemented by third parties and may
reduce our interest in the unitized properties. In addition, state
conservation laws establish maximum rates of production from oil
and natural gas wells, generally prohibit the venting or flaring of
natural gas and impose requirements regarding the ratability of
production. These laws and regulations may limit the amount of oil
and natural gas we can produce from our wells or limit
the number of wells or the locations at which we can drill.
Moreover, each state generally imposes a production or severance
tax with respect to the production and sale of oil, natural gas and
natural gas liquids within its jurisdiction. States do not regulate
wellhead prices or engage in other similar direct regulation, but
we cannot assure you that they will not do so in the
future. The effect of such future regulations may be to limit the
amounts of oil and natural gas that may be produced from our wells,
negatively affect the economics of production from these wells or
to limit the number of locations we can drill.
Federal,
state and local regulations provide detailed requirements for the
abandonment of wells, closure or decommissioning of production
facilities and pipelines and for site restoration in
areas where we operate. The U.S. Army Corps of Engineers
and many other state and local authorities also have regulations
for plugging and abandonment, decommissioning and site restoration.
Although the U.S. Army Corps of Engineers does not require bonds or
other financial assurances, some state agencies and municipalities
do have such requirements.
Natural Gas Sales and Transportation. Historically,
federal legislation and regulatory controls have affected the
price of the natural gas we produce and the manner in which we
market our production. FERC has jurisdiction over the
transportation and sale for resale of natural gas in interstate
commerce by natural gas companies under the Natural Gas Act of 1938
and the Natural Gas Policy Act of 1978. Since 1978, various federal
laws have been enacted which have resulted in the complete removal
of all price and non-price controls for sales of domestic natural
gas sold in “first sales,” which include all of our
sales of our own production. Under the Energy Policy Act of
2005, FERC has substantial enforcement authority to prohibit the
manipulation of natural gas markets and enforce its rules and
orders, including the ability to assess substantial civil
penalties.
FERC
also regulates interstate natural gas transportation rates and
service conditions and establishes the terms under which we may use
interstate natural gas pipeline capacity, which affects the
marketing of natural gas that we produce, as well as the
revenues we receive for sales of our natural gas and release of
our natural gas pipeline capacity. Commencing in 1985, FERC
promulgated a series of orders, regulations and rule makings that
significantly fostered competition in the business of transporting
and marketing gas. Today, interstate pipeline companies are
required to provide nondiscriminatory transportation services to
producers, marketers and other shippers, regardless of whether such
shippers are affiliated with an interstate pipeline company.
FERC’s initiatives have led to the development of a
competitive, open access market for natural gas purchases and sales
that permits all purchasers of natural gas to buy gas directly from
third-party sellers other than pipelines. However, the natural gas
industry historically has been very heavily regulated; therefore,
we cannot guarantee that the less stringent regulatory approach
currently pursued by FERC and Congress will continue indefinitely
into the future nor can we determine what effect, if any, future
regulatory changes might have on our natural gas related
activities.
Under
FERC’s current regulatory regime, transmission services are
provided on an open-access, non-discriminatory basis at cost-based
rates or negotiated rates. Gathering service, which occurs upstream
of jurisdictional transmission services, is regulated by the states
onshore and in state waters. Although its policy is still in flux,
FERC has in the past reclassified certain jurisdictional
transmission facilities as non-jurisdictional gathering facilities,
which has the tendency to increase our costs of transporting
gas to point-of-sale locations.
Oil Sales and Transportation. Sales of crude oil,
condensate and natural gas liquids are not currently regulated and
are made at negotiated prices. Nevertheless, Congress could reenact
price controls in the future.
Our
crude oil sales are affected by the availability, terms and
cost of transportation. The transportation of oil in common carrier
pipelines is also subject to rate regulation. FERC regulates
interstate oil pipeline transportation rates under the Interstate
Commerce Act and intrastate oil pipeline transportation rates are
subject to regulation by state regulatory commissions. The basis
for intrastate oil pipeline regulation, and the degree of
regulatory oversight and scrutiny given to intrastate oil pipeline
rates, varies from state to state. Insofar as effective interstate
and intrastate rates are equally applicable to all comparable
shippers, we believe that the regulation of oil transportation
rates will not affect our operations in any materially different
way than such regulation will affect the operations of our
competitors.
Further,
interstate and intrastate common carrier oil pipelines must provide
service on a non-discriminatory basis. Under this open access
standard, common carriers must offer service to all shippers
requesting service on the same terms and under the same rates. When
oil pipelines operate at full capacity, access is governed by
prorationing provisions set forth in the pipelines’ published
tariffs. Accordingly, we believe that access to oil pipeline
transportation services generally will be available to us to
the same extent as to our competitors.
State Regulation. Texas regulates the drilling for, and
the production, gathering and sale of, oil and natural gas,
including imposing severance taxes and requirements for obtaining
drilling permits. Texas currently imposes a 4.6% severance tax on
oil production and a 7.5% severance tax on natural gas production.
States also regulate the method of developing new fields, the
spacing and operation of wells and the prevention of waste of oil
and natural gas resources. States may regulate rates of production
and may establish maximum daily production allowable from oil and
natural gas wells based on market demand or resource conservation,
or both. States do not regulate wellhead prices or engage in other
similar direct economic regulation, but we cannot
assure you that they will not do so in the future. The
effect of these regulations may be to limit the amount of oil and
natural gas that may be produced from our wells and to limit the
number of wells or locations we can drill.
The
petroleum industry is also subject to compliance with various other
federal, state and local regulations and laws. Some of those laws
relate to resource conservation and equal employment opportunity.
We do not believe that compliance with these laws will have a
material adverse effect on us.
OSHA and Other Laws and Regulations
We are
subject to the requirements of the federal Occupational Safety and
Health Act (“OSHA”) and comparable state statutes. The
OSHA hazard communication standard, the EPA community right-to-know
regulations under Title III of CERCLA and similar state statutes
require that we organize and/or disclose information about
hazardous materials used or produced in our operations. These laws
also require the development of risk management plans for certain
facilities to prevent accidental releases of pollutants. We believe
that we are in substantial compliance with these applicable
requirements and with other OSHA and comparable
requirements.
Competition
The oil and natural gas industry is intensely competitive, and we
compete with other companies that have greater resources. Many of
these companies not only explore for and produce oil and natural
gas, but also carry on midstream and refining operations and market
petroleum and other products on a regional, national or worldwide
basis. These companies may be able to pay more for productive oil
and natural gas properties and exploratory prospects or to define,
evaluate, bid for and purchase a greater number of properties and
prospects than our financial or human resources permit. In
addition, these companies may have a greater ability to continue
exploration activities during periods of low oil and natural gas
market prices. Our larger or more integrated competitors may be
able to absorb the burden of existing, and any changes to, federal,
state and local laws and regulations more easily than we can, which
would adversely affect our competitive position. Our ability to
acquire additional properties and to discover reserves in the
future will be dependent upon our ability to evaluate and select
suitable properties and to consummate transactions in a highly
competitive environment. In addition, because we have fewer
financial and human resources than many companies in our industry,
we may be at a disadvantage in bidding for exploratory prospects
and producing oil and natural gas properties. Further, oil and
natural gas compete with other forms of energy available to
customers, primarily based on price. These alternate forms of
energy include electricity, coal and fuel oils. Changes in the
availability or price of oil and natural gas or other forms of
energy, as well as business conditions, conservation, legislation,
regulations and the ability to convert to alternate fuels and other
forms of energy may affect the demand for oil and natural
gas.
Office and Other Facilities
Our corporate headquarters were
previously located in Amarillo, Texas. The Company is in
the process of transitioning its corporate headquarters to Plano,
Texas at October 31, 2018. We
believe that the Plano, Texas facilities are adequate for our
current and perceived future level of
operations.
Employees
As of
October 31, 2018, we had two full-time employees. We regularly use
independent contractors and consultants to perform various drilling
and other services. None of our employees are represented by a
labor union or covered by any collective bargaining
agreement.
Research and Development Expenditures
None.
Reports to Security Holders
We file
annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, proxy statements and other documents
with the SEC under the Exchange Act. The public may read and copy
any materials that we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington DC 20549. The public
may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains
an Internet website that contains reports, proxy and information
statements, and other information regarding issuers, including the
Company, that file electronically with the SEC. The public can
obtain any document we file with the SEC at www.sec.gov.
PLAN OF OPERATION
Title to Properties
As is customary in the oil and natural gas industry, we initially
conduct only a cursory review of the title to our properties. When
we determine to conduct drilling operations on those properties, we
conduct a thorough title examination and perform curative work with
respect to significant defects prior to commencement of drilling
operations. To the extent title opinions or other investigations
reflect title defects on those properties, we are typically
responsible for curing any title defects at our expense. We
generally will not commence drilling operations on a property until
we have cured any material title defects on such property. We have
obtained title opinions on substantially all our producing
properties and believe that we have satisfactory title to our
producing properties in accordance with standards generally
accepted in the oil and natural gas industry. Prior to completing
an acquisition of producing oil and natural gas leases, we perform
title reviews on the most significant leases and, depending on the
materiality of properties, we may obtain a title opinion, obtain an
updated title review or opinion or review previously obtained title
opinions. Our oil and natural gas properties are subject to
customary royalty and other interests, liens for current taxes and
other burdens which we believe do not materially interfere with the
use of or affect our carrying value of the properties.
Oil and Gas Leases
The
typical oil and natural gas lease agreement covering our acreage
position in Pecos County provides for the payment of royalties to
the mineral owners for all oil and natural gas produced form any
wells drilled on the leased premises. The lessor royalties and
other leasehold burdens on our properties generally range from 20%
to 25%, resulting in a net revenue interest to the working interest
owners generally ranging from 75% to 80%.
RESULTS OF OPERATIONS
The
following table presents selected financial and operational data
for the three-month periods ended October 31, 2018 and 2017,
respectively.
Oil and Gas Production and Revenue
|
Three months ended October 31,
|
|
|
|
|
2018
|
2017
|
Change
|
% Change
|
Revenue,
oil and gas sales
|
$130,025
|
$70,594
|
$59,431
|
84.19%
|
Number
of BOE sold
|
3,309
|
2,738
|
571
|
20.85%
|
Average
price per BOE
|
$53.55
|
$25.79
|
$27.76
|
107.64%
|
Net
production (BOE)
|
2,487
|
2,710
|
-223
|
-8.23%
|
Average
daily net production (BOE)
|
28
|
29
|
-1
|
-3.45%
|
Production
Costs
Production costs increased $40,778 from $46,502 for the three
months ended October 31, 2017 to $87,280 for the three months ended
October 31, 2018. This increase for the comparable three-month
period was attributable primarily to increased reasonable and
customary lease operating expenses.
Depletion, depreciation and amortization of asset retirement
obligation liability accretion
(“DD&A”)
Depletion
of oil and gas properties is calculated under the units of
production method, following the full cost method of
accounting.
For the three-month period ended October 31, 2018, DD&A was
$79,869 as compared to $63,117 for the three-month period ended
October 31, 2017. The increase in DD&A of $16,752 for the
three-month comparable period was primarily due to the decrease in
proved reserves for the current period relative to the prior
year.
General and Administrative Expenses
For the three months ended October 31, 2018, the Company’s
general and administrative expenses were $986,659 compared to
$2,632,589 for the comparative quarter ended October 31, 2017, a
decrease of $1,645,930.
Detail
of the changes in general and administrative expense is as
follows:
Increase(decrease)
in non cash stock and warrant compensation
|
$(1,232,783)
|
Increase(decrease)
in consulting expense
|
$(121,025)
|
Increase(decrease)
in investor relations expense
|
$(43,605)
|
Increase(decrease)
in travel expense
|
$(15,952)
|
Increase(decrease)
in salaries, employee benefits and payroll taxes
|
$(69,201)
|
Increase(decrease)
in general corporate expenses
|
$(163,364)
|
|
|
Total
Increase in General and Administrative Expenses
|
$(1,645,930)
|
Liquidity and Capital Resources
The Company had a working capital deficit of $1,326,375 as of
October 31, 2018, compared to a working capital deficit of $786,560
as of July 31, 2018. The change in the working capital deficit was
primarily due to the net increase in the current portion of related
party notes.
The Company continues to seek sufficient capital to expand its
drilling program. The most cost-effective source of capital would
be joint-ventured working interest participation funds. A typical
joint venture would involve 100% of the drilling and completion
funds– provided by such working interest participants who
would receive a negotiated working interest in the applicable
wells.
The Company’s operating cash flow is dependent upon many
factors, including production levels, sales volume, oil and gas
prices and other factors that may be beyond its
control.
Critical Accounting Policies and Recent Accounting
Pronouncements
The
Company has identified the policies below as critical to business
operations and the understanding of the Company’s financial
statements. The impact of these policies and associated risks is
discussed throughout Management’s Discussion and Analysis
where such policies affect the Company’s reported and
expected financial results.
Principles of Consolidation
The
Company’s consolidated financial statements include all its
subsidiaries.
The
following table shows the wholly owned subsidiaries of Amazing
Energy Oil and Gas, Co. engaged in the oil, and gas
business:
Name of Subsidiary
|
|
State of
Incorporation
|
Ownership
Interest
|
Principal
Activity
|
Amazing Energy,
Inc.
|
|
Nevada
|
100%
|
Oil and gas
exploration, development, and products
|
|
|
|
|
|
Amazing Energy,
LLC
|
|
Texas
|
100%
|
Ownership oil and
gas leases
|
|
|
|
|
|
Jilpetco,
Inc.
|
|
Texas
|
100%
|
Operating
company
|
Oil and Gas Reserve Information
The
Company’s total net proved developed and undeveloped and
probable oil and gas reserves and related values as of July 31,
2018 are summarized in the following table:
|
Net Reserves
|
Cash Flows
|
||
|
Oil
|
Gas
|
Non
|
Discounted
|
|
(BO)
|
(MCF)
|
Discounted
|
at 10%
|
|
|
|
|
|
As of July 31,
2018
|
444,090
|
993,440
|
$13,045,460
|
$9,077,420
|
The
information regarding the Company’s oil and gas reserves, the
changes thereto and the estimated future net cash flows are
dependent upon reservoir evaluation, price and other assumptions
used in preparing its annual reserve study. A qualified independent
petroleum engineer was engaged to prepare the estimates of the
Company’s oil and gas reserves in accordance with applicable
reservoir engineering standards and in accordance with Securities
and Exchange Commission guidelines. However, there are numerous
uncertainties inherent in estimating quantities of proved reserves
and in projecting future rates of production and the timing of
development expenditures. These uncertainties are greater for
properties which are undeveloped or have a limited production
history. Changes in prices and cost levels, as well as the timing
of future development costs, may cause actual results to vary
significantly from the data presented. The Company’s oil and
gas reserve data represent estimates only and are not intended to
be a forecast or fair market value of its assets.
Full Cost Method of Accounting
The
Company accounts for its oil and natural gas operations using the
full cost method of accounting. Under this method, all costs
associated with property acquisition, exploration and development
of oil and gas reserves are capitalized. Costs capitalized include
acquisition costs, geological and geophysical expenditures, lease
rentals on undeveloped properties and cost of drilling and
equipping productive and non-productive wells. Drilling costs
include directly related overhead costs. All of the Company’s
properties are located within the continental United
States.
ITEM 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a
smaller reporting company, we are not required to provide the
information required by this Item.
ITEM 4.
CONTROLS
AND PROCEDURES
Conclusions of Management Regarding Effectiveness of Disclosure
Controls and Procedures
At the
end of the period covered by this Quarterly Report on Form 10-Q, an
evaluation was carried out under the supervision and with the
participation of the Company's management, including the President
and Principal Executive Officer ("PEO") and Principal Financial
Officer ("PFO"), of the effectiveness of the design and operations
of the Company's disclosure controls and procedures (as defined in
Rule 13a – 15(e) and Rule 15d – 15(e) under the
Exchange Act). Based on that evaluation, the PEO and the PFO have
concluded that as of the end of the period covered by this report,
the Company's disclosure controls and procedures were not effective
as it was determined that there were material weaknesses affecting
our disclosure controls and procedures.
Management
of the Company believes that these material weaknesses are due to
the small size of the company's accounting staff. The small size of
the Company's accounting staff may prevent adequate controls in the
future, such as segregation of duties, due to the cost/benefit of
such remediation. To mitigate the current limited resources and
limited employees, we rely heavily on direct management oversight
of transactions, along with the use of external legal and
accounting professionals. As the Company grows, management expects
to increase the number of employees, which will enable us to
implement adequate segregation of duties within the internal
control framework.
PEO and PFO Certifications
Appearing
immediately following the Signatures section of this report there
are Certifications of the PEO and the PFO. The Certifications are
required in accordance with Section 03 of the Sarbanes-Oxley Act of
2002 (the Section 302 Certifications). This Items of this report
which you are currently reading is the information concerning the
Evaluation referred to in Section 302 Certifications and this
information should be read in conjunction with Section 302
Certifications for a more complete understanding of the topics
presented.
Changes in Internal Control over Financial Reporting
There
have been no changes during the quarter ended October 31, 2018 in
the Company’s internal controls over financial reporting that
have materially affected, or are reasonably likely to materially
affect, internal controls over financial reporting.
PART II
ITEM 1.
LEGAL
PROCEEDINGS.
Reference
Note 12
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.
During
the quarter ended October 31, 2018, the Company offered an
opportunity to investors for participation in development of the
WWJD Well #31 as working interest owners. Proceeds from the offering received through
October 31, 2018 totaled $250,000, of which $100,000 was in the
form of a principal reduction on a note payable to a related party
and receipt of $150,000 in cash from unrelated
investors.
As a continuance of the September, 2017 offering, the Company
issued 400,000 shares of common stock for cash of $100,000 during
the three months ended October 31, 2018.
During the three months ended October 31, 2018, the Company issued
599,000 shares of common stock with total fair value of $141,768 as
compensation for professional services. In addition, the Company
issued 66,000 shares of common stock with a fair value of $16,482
for satisfaction of accounts payable.
During the three months ended October 31, 2018, the Company issued
104,775 warrants to purchase common stock valued at $23,449 for
professional services. Additionally, during the three months ended
October, 31, 2018, the Company issued 2,400,000 warrants to
purchase common stock in connection with promissory notes with a
fair value of $288,000 and changed the terms of 2,674,576 existing
warrants with an incremental fair value due to the modification of
$480,771
During
the three months ended October 31 2018, the Board of Directors
authorized the grant of 1,000,000 options to purchase shares of
common stock of the Company to its Chief Financial
Officer.
On
October 10, 2018, the Board of Directors also authorized the grant
of 1,000,000 options to purchase shares of common stock of the
Company to certain directors.
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES.
None.
ITEM 4.
MINE
SAFETY SECURITIES.
Not
Applicable.
ITEM 5.
OTHER
INFORMATION.
None
ITEM 6.
EXHIBITS.
Exhibit
Number
|
Description of Document
|
Form
|
Incorporated
by Reference Date
|
Number
|
Filed
herewith
|
Exchange Agreement with K. Meade,
effective June 27, 2018
|
8-K
|
9/24/2018
|
10.1
|
|
|
Exchange Agreement with J. Etter,
effective June 27, 2018
|
8-K
|
9/24/2018
|
10.2
|
|
|
Exchange Agreement with Golf South Energy
Partners 2012A, LP, Gulf South Energy Partners 2013 LP, Gulf South
Energy Partners 2014 LP and Gulf South Energy Partners 2015A LP,
effective June 27, 2018
|
8-K
|
9/24/2018
|
10.3
|
|
|
Exchange Agreement with R. O’Brien,
effective June 27, 2018
|
8-K
|
9/24/2018
|
10.4
|
|
|
Exchange Agreement with Petro Pro, Ltd.,
effective June 27, 2018
|
8-K
|
9/24/2018
|
10.5
|
|
|
Exchange Agreement with M. Khorassani,
effective June 27, 2018
|
8-K
|
9/24/2018
|
10.6
|
|
|
Exchange Agreement with F.W. Thomas and
B. Thomas, effective June 27, 2018
|
8-K
|
9/24/2018
|
10.7
|
|
|
Exchange Agreement with T. Alford,
effective July 24, 2018
|
8-K
|
9/24/2018
|
10.8
|
|
|
Exchange Agreement with D. Hudson,
effective July 30, 2018
|
8-K
|
9/24/2018
|
10.9
|
|
|
Exchange Agreement with D. Bromberg,
effective August 08, 2018
|
8-K
|
9/24/2018
|
10.10
|
|
|
Exchange Agreement with D. Lazier,
effective August 08, 2018
|
8-K
|
9/24/2018
|
10.11
|
|
|
Wyatt Purchase and Sale Agreement dated
October 12, 2018.
|
8-K
|
10/22/2018
|
10.1
|
|
|
Wyatt Assignment and Bill of
Sale.
|
8-K
|
10/22/2018
|
10.2
|
|
|
Loan Agreement dated October 24,
2018.
|
8-K
|
10/26/2018
|
10.1
|
|
|
Promissory Note dated October 24,
2018.
|
8-K
|
10/26/2018
|
10.2
|
|
|
Employment Agreement with Benjamin M.
Dobbins, effective October 23, 2018
|
|
|
10.16
|
X
|
|
Employment Agreement with David C. Arndt,
effective November 1, 2018
|
|
|
10.17
|
X
|
|
Certification of Principal Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
X
|
|
Certification of Principal Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
X
|
|
Certification of Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
X
|
|
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 –
Calculation
|
|
|
|
X
|
101.DEF
|
XBRL Taxonomy Extension –
Definition
|
|
|
|
X
|
101.LAB
|
XBRL Taxonomy Extension –
Label
|
|
|
|
X
|
101.PRE
|
XBRL Taxonomy Extension –
Presentation
|
|
|
|
X
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its
behalf by the undersigned thereunto duly authorized on December 17,
2018.
|
AMAZING ENERGY OIL AND GAS, CO.
|
|
|
|
|
|
By:
|
WILLARD MCANDREW III
|
|
|
Willard
McAndrew III
|
|
|
Principal
Executive Officer
|
|
|
|
|
|
|
|
By:
|
Benjamin M. Dobbins
|
|
|
Benjamin
M. Dobbins
|
|
|
Principal
Financial Officer and Principal Accounting Officer
|
- 33 -