Item 1. Unaudited Consolidated Financial
Statements.
CITADEL EXPLORATION, INC.
CONSOLIDATED BALANCE SHEETS
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
ASSETS
|
|
(unaudited)
|
|
|
Current assets:
|
|
|
|
|
Cash
|
|
$
|
251,271
|
|
|
$
|
772,103
|
|
Other receivable
|
|
|
98,960
|
|
|
|
16,540
|
|
Prepaid expenses
|
|
|
5,296
|
|
|
|
29,280
|
|
Product inventory
|
|
|
20,107
|
|
|
|
20,107
|
|
Total current assets
|
|
|
375,634
|
|
|
|
838,030
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10,100
|
|
|
|
10,100
|
|
Restricted cash
|
|
|
200,000
|
|
|
|
200,000
|
|
Oil and gas properties (successful efforts basis)
Proved, net
|
|
|
5,898,620
|
|
|
|
5,018,086
|
|
Unproved
|
|
|
1,170,000
|
|
|
|
1,170,000
|
|
Fixed asset, net
|
|
|
77,879
|
|
|
|
82,969
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,732,233
|
|
|
$
|
7,319,185
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
1,995,694
|
|
|
$
|
2,220,938
|
|
Accrued interest payable
|
|
|
240,377
|
|
|
|
459,416
|
|
Drilling obligation, net of discount of $105,000 and $126,000 as of March 31, 2018 and December 31, 2017 respectively
|
|
|
721,000
|
|
|
|
700,000
|
|
Notes payable, net
|
|
|
1,659,010
|
|
|
|
579,951
|
|
Total current liabilities
|
|
|
4,616,081
|
|
|
|
3,960,305
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligation
|
|
|
239,849
|
|
|
|
224,380
|
|
Production payment liability
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,155,930
|
|
|
|
4,484,685
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 300,000,000 shares authorized, 45,000,000 and 44,449,742 shares issued and outstanding as of March 31, 2018 and December 31, 2017 respectively
|
|
|
45,000
|
|
|
|
44,450
|
|
Series A Preferred stock, $20.00 par value, 500,000 shares authorized, 395,615 and 394,365 shares issued and outstanding as of March 31, 2018 and December 31, 2017 respectively
|
|
|
7,912,300
|
|
|
|
7,887,300
|
|
Additional paid-in capital
|
|
|
5,959,407
|
|
|
|
5,691,239
|
|
Accumulated deficit
|
|
|
(11,340,404
|
)
|
|
|
(10,788,489
|
)
|
Total stockholders' equity (deficit)
|
|
|
2,576,303
|
|
|
|
2,834,500
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
7,732,233
|
|
|
$
|
7,319,185
|
|
See Accompanying Notes to Unaudited Consolidated
Financial Statements.
CITADEL EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
For the three months
|
|
|
ended
|
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Revenue
|
|
$
|
212,554
|
|
|
$
|
36,925
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Lease operating expense
|
|
|
285,796
|
|
|
|
48,681
|
|
General and administrative
|
|
|
73,126
|
|
|
|
65,282
|
|
Depreciation, amortization
|
|
|
133,426
|
|
|
|
8,097
|
|
Professional fees
|
|
|
80,645
|
|
|
|
63,148
|
|
Executive compensation
|
|
|
180,000
|
|
|
|
154,590
|
|
Total operating expenses
|
|
|
752,993
|
|
|
|
339,798
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(11,476
|
)
|
|
|
(25,332
|
)
|
Total other expenses
|
|
|
(11,476
|
)
|
|
|
(25,332
|
)
|
Loss before credit for income taxes
|
|
|
(551,915
|
)
|
|
|
(328,205
|
)
|
Income tax benefit
|
|
|
—
|
|
|
|
112
|
|
Net loss before provision for income taxes
|
|
$
|
(551,915
|
)
|
|
$
|
(328,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred stock dividends
|
|
|
(194,789
|
)
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(746,704
|
)
|
|
$
|
(328,093
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - outstanding - basic and diluted
|
|
|
44,718,759
|
|
|
|
39,087,342
|
|
Net loss per share – basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
See Accompanying Notes to Unaudited Consolidated
Financial Statements.
CITADEL EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
For the three months
|
|
|
Ended
|
|
|
March 31,
|
|
|
2018
|
|
2017
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(551,915
|
)
|
|
$
|
(328,093
|
)
|
Depreciation, depletion and amortization
|
|
|
133,426
|
|
|
|
8,097
|
|
Stock based preferred stock interest expense
|
|
|
—
|
|
|
|
406,800
|
|
Stock based compensation expense
|
|
|
90,051
|
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in other receivable
|
|
|
(82,420
|
)
|
|
|
(703
|
)
|
Decrease (increase) in prepaid expenses
|
|
|
23,984
|
|
|
|
10,199
|
|
Increase (decrease) in accrued interest payable
|
|
|
10,349
|
|
|
|
(382,208
|
)
|
Increase (decrease) in accounts payable and accrued payables
|
|
|
(131,492
|
)
|
|
|
115,666
|
|
Net cash used in operating activities
|
|
|
(508,017
|
)
|
|
|
(170,242
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Exploration and development of oil and gas properties
|
|
|
(1,039,413
|
)
|
|
|
(172,307
|
)
|
Purchase of equipment
|
|
|
—
|
|
|
|
(2,215
|
)
|
Cash received from disposal of O&G asset
|
|
|
100,215
|
|
|
|
—
|
|
Asset retirement obligation
|
|
|
—
|
|
|
|
12,264
|
|
Net cash used in investing activities
|
|
|
(939,198
|
)
|
|
|
(162,258
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from sale of preferred stock, net of costs
|
|
|
25,000
|
|
|
|
200,000
|
|
Proceeds from notes payable
|
|
|
920,612
|
|
|
|
—
|
|
Repayments of notes payable
|
|
|
(19,229
|
)
|
|
|
(20,622
|
)
|
Net cash provided by financing activities
|
|
|
926,383
|
|
|
|
179,378
|
|
Net increase in cash, cash equivalents, and restricted cash
|
|
|
(520,832
|
)
|
|
|
(153,122
|
)
|
Cash, cash equivalents, and restricted cash at beginning of year
|
|
|
972,103
|
|
|
|
433,793
|
|
Cash, cash equivalents, and restricted cash at end of the period
|
|
$
|
451,271
|
|
|
$
|
280,672
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
—
|
|
|
|
—
|
|
Income taxes paid (credit)
|
|
|
—
|
|
|
$
|
(112
|
)
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
—
|
|
Shares issued to pay off bonus payable
|
|
|
20,000
|
|
|
|
|
|
Debt Discount from senior secured credit facility
|
|
|
158,667
|
|
|
|
—
|
|
Asset retirement obligation
|
|
|
12,128
|
|
|
|
—
|
|
O&G property purchased still in AP
|
|
|
26,248
|
|
|
|
—
|
|
Non-cash addition of senior loan facility for payment of San Benito litigation
|
|
|
100,000
|
|
|
|
—
|
|
Accrued interest payable rolled over to senior loan facility
|
|
|
229,388
|
|
|
|
—
|
|
Conversion from preferred stock issuable
|
|
|
—
|
|
|
$
|
6,514,600
|
|
Issuance for preferred stock for services
|
|
|
—
|
|
|
$
|
92,700
|
|
See Accompanying Notes to Unaudited Consolidated
Financial Statements.
CITADEL EXPLORATION, INC.
Notes to Unaudited Consolidated Financial
Statements
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of presentation
The interim consolidated financial statements
included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars,
have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted
accounting principles have been or omitted pursuant to such rules and regulations, although the Company believes that the disclosures
are adequate to make the information presented not misleading.
These statements reflect all adjustments,
consisting of normal recurring adjustments, which in the opinion of management, are necessary for fair presentation of the information
contained therein. It is suggested that these interim consolidated financial statements be read in conjunction with the financial
statements of the Company for the year ended December 31, 2017 and notes thereto included in the Company’s 10-K annual report
and all amendments. The Company follows the same accounting policies in the preparation of interim reports.
Results of operations for the interim
period are not indicative of annual results.
Principles of consolidation
The consolidated financial statements
include the accounts of Citadel Exploration, Inc., Citadel Exploration, LLC and Citadel Kern Bluff, LLC, the Company’s wholly
owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Citadel Exploration,
Inc., Citadel Exploration, LLC and Citadel Kern Bluff, LLC will be collectively referred herein to as the “Company”.
Nature of operations
Currently, the Company is focused on
the acquisition and development of oil and gas properties in California.
Impairment
The Company evaluates
the impairment of its proved oil and natural gas properties on a field-by-field basis whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. The carrying values of proved properties are reduced to fair value when
the expected undiscounted future cash flows are less than net book value. The fair values of proved properties are measured using
valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant
inputs used to determine the fair values of proved properties include estimates of: (i) reserves; (ii) future operating
and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate.
As of March 31,2018, management believes that no impairment indicators exist.
Use of estimates
The preparation of consolidated financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ
significantly from those estimates.
CITADEL EXPLORATION, INC.
Notes to Unaudited Consolidated Financial
Statements
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Fair value of financial instruments
The carrying value of the
Company’s financial instruments, including cash, due to shareholders/related parties and accounts and other payables
approximate their fair values due to the immediate or short-term maturity of these instruments. It is management’s
opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial
instruments.
Cash and cash equivalents
The Company considers all highly liquid
instruments with maturity of three months or less at the time of issuance to be cash equivalents. The Company had no cash equivalents
as of March 31, 2018 and December 31, 2017.
Earnings per share
The Company follows ASC Topic 260 to
account for the earnings per share. Basic earnings per common share (“EPS”) calculations are determined by dividing
net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common
share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share
equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the
computation.
Recent pronouncements
The Company has evaluated the recent
accounting pronouncements ASC 606 and ASC 230 through March 31, 2018 and believes that none of them will have a material effect
on the Company’s consolidated financial statements. In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts
with Customers (Topic 606)” (“ASU 2014-09”). ASI 2014-09 supersedes the revenue recognition requirements in ASC
Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 05-35, “Revenue Recognition
– Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized
when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects
to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable
readdress of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash
flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and
changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods
to retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented.
The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date
of initial application. ASU 2014-09 will be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, “Revenue
from Contracts with Customers (Topic 0): Deferral of the Effective Date,” which was issued by the FASB in August 2015 and
extended to the original date by one year.
Disaggregation of revenue
The Company does not disaggregate revenue,
as all revenue is generated from oil at one property located in California. Revenue for the three months ending March 31, 2018
and 2017 was $212,554 and $36,925.
In November of 2016, the FASB issued
ASU 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cash” (“ASU 2016-18). The update is effective for
fiscal years beginning after December 15, 201, including interim reporting periods within those fiscal years. Early adoption is
permitted. The purpose of Update NO. 2016-18 is to clarify guidance and presentation related to restricted cash in the statement
of cash flows. The amendment requires beginning of period and end of period total amounts shown on the statement of cash flows
to included cash and cash equivalents as well as restricted cash and restricted cash equivalents. The Company has evaluated the
impact and timing of the adoption of ASU 2016-18 and has concluded it will not have a material impact on its consolidated financial
statements.
CITADEL EXPLORATION, INC.
Notes to Unaudited Consolidated Financial
Statements
NOTE 2 – GOING CONCERN
The accompanying unaudited consolidated
financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability
of assets and the satisfaction of liabilities in the normal course of business. Since its inception, the Company has been engaged
substantially in financing activities and developing its business plan and incurring startup costs and expenses. As a result, the
Company incurred a net loss in the amount of $551,915 for the period ended March 31, 2018. In addition, the Company’s development
activities since inception have been financially sustained through debt and equity financing. There can be no assurance that the
Company will be successful to raise sufficient cash to operate over the 12 months immediately following the issuance of its financial
reports.
The ability of the Company to continue
as a going concern is dependent upon its ability to raise additional capital from the sale of common stock and, ultimately, the
achievement of significant operating revenues. These consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result
from this uncertainty.
NOTE 3 – OIL AND GAS PROPERTIES
Oil and natural gas properties, buildings and equipment consist
of the following:
|
|
March
31, 2018
(unaudited)
|
|
December
31, 2017
|
Oil and Natural Gas:
|
|
|
|
|
Proved properties
|
|
$
|
4,388,372
|
|
|
$
|
3,468,306
|
|
Unproved properties
|
|
|
1,170,000
|
|
|
|
1,170,000
|
|
Facilities
|
|
|
2,297,724
|
|
|
|
2,244,716
|
|
|
|
|
7,860,596
|
|
|
|
6,883,022
|
|
Less oil property impairment
|
|
|
(562,030
|
)
|
|
|
(562,030
|
)
|
Less accumulated depreciation, depletion, and amortization
|
|
|
(225,446
|
)
|
|
|
(132,906
|
)
|
|
|
$
|
7,068,620
|
|
|
$
|
6,188,086
|
|
Total accumulated depreciation and depletion
totaled $225,446 and $132,906, respectively, as of March 31, 2018 and December 31, 2017. For the period ending March 31, 2018 and
March 31, 2017 total depreciation and depletion expense totaled $92,540 and $1,309, respectively.
CITADEL EXPLORATION, INC.
Notes to Unaudited Consolidated Financial
Statements
NOTE 4 – RESTRICTED CASH
Restricted cash consists of one bond
totaling $200,000 as of March 31, 2018. This bond was required in the normal course of business in the oil and gas industry. The
bond totaling $200,000 was purchased in August 2015 following the acquisition of the Kern Bluff Oil Field. This was a blanket bond,
which will cover 50 wells.
NOTE 5 – DEPOSITS
The Company had deposits at March 31,
2018 and December 31, 2017 totaling $10,100 for both years.
NOTE 6 – NOTES PAYABLE
Notes payable consists of the following:
|
|
March
31, 2018
(unaudited)
|
|
December
31, 2017
|
Note payable to an entity for the financing of insurance
premiums, unsecured; 7.75% interest, due March 2018
|
|
$
|
(1,327
|
)
|
|
$
|
14,548
|
|
Debt Discount
|
|
$
|
(151,713
|
)
|
|
|
—
|
|
Senior Secured Facility Loan 10% interest; due March 31, 2019.
|
|
|
1,750,000
|
|
|
|
|
|
Chandler/Lloyd Trust-Notes Payable
|
|
|
—
|
|
|
|
500,000
|
|
Note payable to an entity for the financing of a company vehicle, secured; 4.95% interest, due October 2022
|
|
|
30,606
|
|
|
|
32,351
|
|
Note payable to an entity for the financing of a company vehicle, secured; 4.95% interest, due November 2022
|
|
|
31,444
|
|
|
|
33,052
|
|
Total – Notes Payable
|
|
$
|
1,659,010
|
|
|
$
|
579,951
|
|
In March of 2018, the Company closed
on a $3,000,000 senior secured credit facility. The facility bears 10% interest and has a one-year term. For every two dollars
drawn on the facility, the investor receives one five-year warrant to purchase common stock at a price of $0.10. The Company has
drawn down $1,750,000 on the facility and issued 875,000 warrants. The warrants were valued using the relative fair value and the
amount recorded as a debt discount amortized over the life of the line of credit using effective interest method. Future drawdowns
are at the discretion of the lender. The senior secured facility is secured by a deed of trust on the Kern Bluff Oil Field. Proceeds
from the first draw where used to retire the previous bridge loan and accrued interest. The balance was used for general corporate
purposes, including the drilling of a well.
NOTE 7 – STOCKHOLDERS’ EQUITY (DEFICIT)
The Company is authorized to issue 300,000,000
shares of its $0.001 par value common stock.
The Company is authorized to issue 500,000
shares of Series A Convertible Participating Preferred Stock.
In February of 2018, we sold an additional
1,250 shares of Series A Convertible Participating Preferred Stock for cash proceeds of $25,000.
In February of 2018, we issued 550,262 shares of our common
stock valued at $.20 to vendors for services in 2017, including accounting and oil field work.
CITADEL EXPLORATION, INC.
Notes to Unaudited Consolidated Financial
Statements
NOTE 8 – STOCK OPTION
PLAN
The following is a summary of the status
of all of the Company’s stock options as of March 31, 2018 and changes during the period ended on that date:
|
|
Number
of Options
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining Life (Years)
|
|
Outstanding as of December 31, 2017
|
|
|
|
9,500,000
|
|
|
$
|
0.20
|
|
|
|
3.26
|
|
|
Granted
|
|
|
|
—
|
|
|
$
|
0.00
|
|
|
|
—
|
|
|
Exercised
|
|
|
|
—
|
|
|
$
|
0.00
|
|
|
|
—
|
|
|
Cancelled
|
|
|
|
—
|
|
|
$
|
0.00
|
|
|
|
—
|
|
|
Outstanding as of March 31, 2018
|
|
|
|
9,500,000
|
|
|
$
|
0.20
|
|
|
|
3.01
|
|
|
Exercisable at March 31, 2018
|
|
|
|
9,500,000
|
|
|
$
|
0.20
|
|
|
|
3.01
|
|
NOTE 9 – WARRANTS
In March 2018, the Company closed on
a $3,000,000 Senior Secured Credit Facility. The Company drew down $1,750,000 at close. As per the terms of the facility, the Company
issued 875,000 warrants to the lender. The warrants were valued using the relative fair value and the amount recorded as a debt
discount amortized over the life of the line of credit using effective interest method
|
|
Number
of Warrants
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining Life (Years)
|
|
Outstanding at December 31, 2017
|
|
|
|
—
|
|
|
$
|
0.00
|
|
|
|
—
|
|
|
|
Granted
|
|
|
|
875,000
|
|
|
$
|
0.10
|
|
|
|
5.0
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
$
|
0.00
|
|
|
|
—
|
|
|
|
Cancelled
|
|
|
|
—
|
|
|
$
|
0.00
|
|
|
|
—
|
|
|
|
Total Outstanding at March 31, 2018
|
|
|
|
875,000
|
|
|
$
|
0.10
|
|
|
|
4.96
|
|
|
|
Exercisable at March 31, 2018
|
|
|
|
875,000
|
|
|
$
|
0.10
|
|
|
|
4.96
|
|
|
NOTE 10 – RELATED PARTY TRANSACTIONS
During the period the Company purchased
$108,092 of equipment from Grey Energy. Grey Energy is owned by one of the Company’s Board of Directors. As of the end of
the period, the Company had a production payment liability of $300,000 outstanding to a related party.
NOTE 11 – DRILLING OBLIGATION
The Company entered into a joint venture
agreement with investors to drill two wells in the fourth quarter of 2017. The $700,000 liability has an 18% rate of return. The
Company originally booked a debt discount of $126,000 and will be amortized over the next 18 months. During the period the company
amortized $21,000 of the debt discount.
FORWARD-LOOKING STATEMENTS
This Quarterly Report
on Form 10-Q contains forward-looking statements and involves risks and uncertainties that could materially affect expected results
of operations, liquidity, cash flows, and business prospects. These statements include, among other things, statements regarding:
o
|
|
exploration risks such as drilling unsuccessful wells;
|
o
|
|
our ability to operate profitably;
|
o
|
|
our ability to efficiently and effectively finance our operations;
|
o
|
|
inability to achieve future sales levels or other operating results;
|
o
|
|
inability to raise additional financing for working capital;
|
o
|
|
inability to efficiently manage our operations;
|
o
|
|
inability to hire or retain sufficient qualified operating field personnel;
|
o
|
|
the inability of management to effectively implement our strategies and business plans;
|
o
|
|
the unavailability of funds for capital expenditures and/or general working capital;
|
o
|
|
deterioration in general or regional economic conditions;
|
o
|
|
the fact that our accounting policies and methods are fundamental to how we report
our financial condition and results of operations, and they may require management to make estimates about matters that are inherently
uncertain;
|
o
|
|
changes in U.S. GAAP or in the legal, regulatory and legislative environments in the
markets in which we operate;
|
o
|
|
adverse state or federal legislation or regulation that increases the costs of compliance,
or adverse findings by a regulator with respect to existing operations;
|
As well as other statements regarding
our future operations, financial condition and prospects, and business strategies. These forward-looking statements are subject
to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this
Quarterly Report on Form 10-Q, and in particular, the risks discussed under the heading “Risk Factors” in Part II,
Item 1A and those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation
to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties,
readers are cautioned not to place undue reliance on such forward-looking statements.
References in
the following discussion and throughout this quarterly report to “we”, “our”, “us”, “Citadel”,
“the Company”, and similar terms refer to Citadel Exploration, Inc. and its subsidiary, unless otherwise expressly
stated or the context otherwise requires.
AVAILABLE INFORMATION
We file annual,
quarterly and other reports and other information with the SEC. You can read these SEC filings and reports over the Internet at
the SEC's website at www.sec.gov or on our website at
www.citadelexploration.com
. You can also obtain copies of the documents
at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, NE, Washington, DC 20549 on official
business days between the hours of 10:00 am and 3:00 pm. Please call the SEC at (800) SEC-0330 for further information on the operations
of the public reference facilities. We will provide a copy of our annual report to security holders, including audited financial
statements, at no charge upon receipt to of a written request to us at Citadel Exploration, Inc., 417 31
st
Street, Unit
A, Newport Beach, California 92663.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
Citadel is an energy
company engaged in the exploration and development of oil and natural gas properties. Our properties are located in the San Joaquin
Basin of California. Subject to availability of capital, we strive to implement an accelerated development program utilizing capital
resources, a regional operating focus, an experienced management and technical team, and enhanced recovery technologies to attempt
to increase production and increase returns for our stockholders. Our corporate strategy is to build value in the Company through
the acquisition of oil and gas leases with significant upside potential, successful exploration and exploitation and the efficient
development of these assets.
Our revenues, profitability
and future growth depend substantially on prevailing prices for oil and natural gas and our ability to find, develop and acquire
oil and gas reserves that are economically recoverable.
Our Operations
Our principal strategy
is to focus on the acquisition of oil and natural gas mineral leases that have known hydrocarbons or are in close proximity to
known hydrocarbons that have been underdeveloped. Once acquired, we strive to implement an accelerated development program utilizing
capital resources, a regional operating focus, an experienced management and technical team, and enhanced recovery technologies
to attempt to increase production and increase returns for our stockholders. Our oil and natural gas acquisition and development
activities are currently focused in the State of California.
On July 31, 2015
Citadel acquired approximately 1,100 acres of leases, production facilities and equipment that encompassed the Kern Bluff Oil Field.
As consideration for this acquisition Citadel issued 6,000,000 shares of common stock and paid $2,000,000 in cash. The transaction
was financed via a $3,500,000 one-year term loan from Cibolo Creek Partners, of Midland Texas. In March of 2016, Cibolo Creek Partners
converted the $3,500,000 term loan into Series A Convertible Participating Preferred Stock.
In December of 2015,
Citadel shifted its CAPEX focus to remediation of the existing acquired facilities. At the time of purchase, the oil at Kern Bluff
was being processed by temporary facilities installed by the previous owner. As production increased in September, it quickly became
apparent that these facilities were not capable of processing the additional volumes of oil and water being produced. The existing
permanent facilities were built in the 1970’s by Gulf Oil and require extensive remediation including new pipe, valves, flanges
and tank repair.
In July of 2016,
Citadel completed its facility upgrades; the new facilities have production capacity of 500 BOPD. Citadel drilled three wells
in June of 2016 and returned to production 9 idle wells.
In
December of 2017, Citadel completed the installation of a 25MM BTU steam generator. The oil and Kern Bluff is characterized as
heavy oil, therefore requiring stimulation via steam injection. This steam generator has capacity of over 1,400 barrels of steam
per day (BOSPD) which will allow the Company to steam approximately 50 wells per year.
In February of 2018,
Citadel completed the drilling of three new wells. The company currently has approximately 14 wells on production and has seen
field wide production increase from approximately 20 barrels per day to approximately 100 barrels per day.
Going Concern
The consolidated
financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that
contemplate the continuance of the Company as a going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. As shown on the accompanying consolidated financial statements, the Company has incurred
an accumulated deficit in the amount of $11,340,404 as of March 31, 2018. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern.
The future of the
Company is dependent upon its ability to obtain financing and upon future profitable operations from the development of its oil
and gas business opportunities.
RESULTS OF OPERATIONS
Results of Operations for the
Three Months Ended March 31, 2018 and March 31, 2017
During the three-month
period ended March 31, 2018 we generated $212,554 from the sale of oil. During the three-month period ended March 31, 2017 we generated
$36,925 from the sale of oil.
Operating expenses
totaled $752,993 during the three-month period ended March 31, 2018 which was an increase over the period ended March 31, 2017.
Operating expenses consisted of lease operating expense, general and administrative costs, amortization and depreciation, professional
fees, and executive compensation. The increase consisted primarily of an increase in lease operating expenses. During the period
ended March 31, 2017 the Company's operating expense totaled $339,798.
General and administrative
fees increased from $65,282 to $73,126 from the three-month period ended March 31, 2017 to the three-month period ended March 31,
2018. This increase was primarily due to insurance, marketing and meals and entertainment expenses.
Professional fees
increased from $63,148 to $80,645 from the three-month period ended March 31, 2017 to the three-month period ended March 31, 2018.
The increase was primarily due to services provided to the Company for accounting, consulting and legal.
Executive compensation
increased from $154,900 to $180,000 from the three-month period ended March 31, 2017 to the three-month period ended March 31,
2018. The increase was due to the salary increase based upon the employment agreement.
Liquidity and Capital Resources
The Company has
established a capital budget for 2018 of $6,000,000 to return to production up to 10 wells and drill up to 20 vertical wells and
1 horizontal well. The Company’s ability to complete this capital budget will be highly dependent on higher oil prices and
access to capital.
As of March 31,
2018, the Company had $375,634 of current assets; of this amount $251,271 was cash. The following table provides detailed information
about the net cash flow for the quarters ended March 31, 2018 and March 31, 2017 as presented in this quarterly report. To date,
we have financed our operations through the issuance of stock and borrowings from related parties and an unrelated third party.
The following table sets forth a summary
of our cash flows for the three months ended March 31, 2018 and 2017:
|
|
Three Months Ended
March 31,
|
|
|
2018
|
|
2017
|
Net cash used in operating activities
|
|
$
|
(508,017)
|
|
|
$
|
(170,241
|
)
|
Net cash used in investing activities
|
|
|
(939,198)
|
|
|
|
(162,258
|
)
|
Net cash provided by financing activities
|
|
|
926,383
|
|
|
|
179,378
|
|
Net change in cash
|
|
|
(520,832)
|
|
|
|
(153,122
|
)
|
Cash, cash equivalent and restricted cash, beginning of period
|
|
|
972,103
|
|
|
|
433,793
|
|
Cash, cash equivalent and restricted cash end of period
|
|
$
|
451,271
|
|
|
$
|
280,672
|
|
Operating activities
The net loss in
the period was greater than the non-cash adjustments to reconcile the changes in the balance sheet and statement of operations,
which is the reason cash used in operating activities was negative.
Investing activities
The net cash used
in investing activities consisted of drilling expenses and facility upgrades on oil and gas properties of $939,198 on the Company’s
properties.
Financing activities
The net cash provided
by financing activities consisted of proceeds from the preferred stock offering, net of offering costs, totaling $25,000 and a
new senior secured credit facility of $3,000,000 of which $1,750,000 was drawn, the Company also repaid notes totaling $500,000.
As of March 31,
2018, we continue to use traditional and/or debt financing as well as through the issuance of stock to provide the capital we need
to run our business.
Without cash flow
from operations we will require additional cash resources, including the sale of equity or debt securities, to meet our planned
capital expenditures and working capital requirements for the next 12 months. We will require additional cash resources due to
changed business conditions, implementation of our strategy to successfully develop our Kern Bluff Oil Field, and or acquisitions
we may decide to pursue. If our own financial resources and then current cash-flows from operations are insufficient to satisfy
our capital requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional
equity securities will result in dilution to our stockholders. The incurrence of indebtedness will result in increased debt service
obligations and could require us to agree to operating and financial covenants that could restrict our operations or modify our
plans to grow the business. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us
to raise additional funds on terms favorable to us, or at all, will limit our ability to expand our business operations and could
harm our overall business prospects.
Our ability to obtain
additional capital through additional equity and/or debt financing, and Joint Venture or Working Interest partnerships will also
be important to our expansion plans. In the event we experience any significant problems assimilating acquired assets into our
operations or cannot obtain the necessary capital to pursue our strategic plan, we may have to reduce the growth of our operations.
This may materially impact our ability to increase revenue and develop our assets.
Contractual Obligations
An operating lease
for rental office space was entered into beginning March 1, 2013 for two years at $2,150 per month. The original lease was amended
to include additional space at a price of $1,100 per month for the same term. The original term of the lease expired on March
1, 2015. As such our office lease is now on a month to month basis at a rate of $3,000 per month.
Off-Balance Sheet Arrangements
As of the date of
this report, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
Operation Plan
Our plan is to
focus on the acquisition and drilling of prospective oil and natural gas mineral leases. Once we have tested a prospect as productive,
subject to availability of capital, we will implement a development program with a regional operating focus in order to increase
production and increase returns for our stockholders. Exploration, acquisition and development activities are currently focused
in California. Depending on availability of capital, and other constraints, our goal is to increase stockholder value by finding
and developing oil and natural gas reserves at costs that provide an attractive rate of return on our investments.
We expect to achieve
these results by:
|
•
|
Investing capital in exploration and development drilling and in secondary and tertiary recovery of oil as well as natural gas;
|
|
•
|
Using the latest technologies available to the oil and natural gas industry in our operations;
|
|
•
|
Finding additional oil and natural gas reserves on the properties we acquire.
|
In addition to raising
additional capital we plan to take on Joint Venture (JV) or Working Interest (WI) partners who may contribute to the capital costs
of drilling and completion and then share in revenues derived from production. This economic strategy may allow us to utilize our
own financial assets toward the growth of our leased acreage holdings, pursue the acquisition of strategic oil and gas producing
properties or companies and generally expand our existing operations.
Our future financial
results will depend primarily on: (i) the ability to continue to source and screen potential projects; (ii) the ability to discover
commercial quantities of natural gas and oil; (iii) the market price for oil and natural gas; and (iv) the ability to fully implement
our exploration and development program, which is dependent on the availability of capital resources. There can be no assurance
that we will be successful in any of these respects, that the prices of oil and gas prevailing at the time of production will be
at a level allowing for profitable production, or that we will be able to obtain additional funding to increase our currently limited
capital resources.