UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to

 

Commission File Number 000-54576

 

RICHFIELD OIL & GAS COMPANY

(Exact name of registrant as specified in its charter)

 

Nevada	35-2407100
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

 

175 South Main Street, Suite 900

Salt Lake City, UT  84111

(Address of principal executive offices)

 

(801) 519-8500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ¨	Accelerated Filer ¨
Non-Accelerated Filer ¨ (Do not check if a smaller reporting company)	Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

 

The issuer had 60,616,448 sharess of common stock outstanding as of November 14, 2014.

 

  

TABLE OF CONTENTS

 

		Page
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	2
	Condensed Consolidated Balance Sheets (Unaudited) September 30, 2014 and December 31, 2013	2
	Condensed Consolidated Statements of Operations (Unaudited) For the Three and Nine Months Ended September 30, 2014 and 2013	3
	Condensed Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2014 and 2013	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
PART II.  OTHER INFORMATION		28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 6.	Exhibits	28
SIGNATURES		29

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

RICHFIELD OIL & GAS COMPANY

Condensed Consolidated Balance Sheets

September 30, 2014 and December 31, 2013

(Unaudited)

 

		September 30,				December 31,
		2014				2013
ASSETS
Current assets
Cash and cash equivalents		$	63,406			$	60,395
Restricted Cash			-				153,348
Accounts receivables, net			320,885				322,604
Deposits and prepaid expenses			67,777				77,475
Total current assets			452,068				613,822
Properties and equipment, at cost - successful efforts method:
Proved properties			8,361,135				7,139,663
Unproved properties			14,129,598				14,095,020
Well and related equipment			2,700,115				1,997,913
Accumulated depletion, depreciation and amortization			(1,400,048	)			(1,224,523	)
			23,790,800				22,008,073
Other properties and equipment			107,674				219,231
Accumulated depreciation			(95,322	)			(203,743	)
			12,352				15,488
Total assets		$	24,255,220			$	22,637,383
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable		$	1,423,707			$	2,049,750
Accrued expenses and other payables			1,278,896				3,104,485
Notes payable			4,278,073				1,338,524
Current portion of convertible notes payable, net of discount of $24,770 and $120,264 at 9/30/14 and 12/31/13, respectively			475,987				1,861,386
Capital lease obligations			96,230				135,311
Current portion of asset retirement obligations			-				48,000
Derivative liability			-				310,156
Due to related parties			415,250				-
Total current liabilities			7,968,143				8,847,612
Long-term liabilities
Convertible notes payable, net of current portion			3,194,972				-
Asset retirement obligations, net of current portion			384,845				394,075
Total long-term liabilities			3,579,817				394,075
Total liabilities			11,547,960				9,241,687
Commitments and contingencies
Stockholders' equity
Common stock, par value $.001; 250,000,000 authorized; 60,616,448 shares and 39,906,770 shares issued and outstanding at 9/30/2014 and 12/31/2013, respectively			60,616				39,907
Additional paid-in capital			56,819,911				51,360,380
Accumulated deficit			(44,173,267	)			(38,004,591	)
Total stockholders' equity			12,707,260				13,395,696
Total liabilities and stockholders' equity		$	24,255,220			$	22,637,383

 

See the accompanying notes to condensed consolidated financial statements

  

  

RICHFIELD OIL & GAS COMPANY

Condensed Consolidated Statements of Operations

For the Three Months and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2013				2014				2013
Revenues
Oil and natural gas sales		$	463,656			$	254,554			$	882,916			$	772,394
Total revenues			463,656				254,554				882,916				772,394
Operating expenses
Production expenses			331,189				205,312				817,643				653,758
Production taxes			20,280				10,741				36,845				29,957
Exploration			34,957				32,292				168,686				103,843
Lease expiration			10,958				109,292				124,891				156,229
Depletion, depreciation, amortization and accretion			174,374				88,477				385,221				271,627
General and administrative expenses			1,029,987				1,087,997				3,977,983				3,275,525
Asset retirement obligation expenses			-				25,094				4,380				161,601
Loss (gain) on sale of assets			-				-				(29,875	)			16,130
Total expenses			1,601,745				1,559,205				5,485,774				4,668,670
Loss from operations			(1,138,089	)			(1,304,651	)			(4,602,858	)			(3,896,276	)
Other income (expenses)
Gain on settlement of liabilities			38,310				-				460,285				30,367
Loss on extinguishment of debt			-				(472,349	)			(530,218	)			(1,103,702	)
Loss on share issuance			-				(287,571	)			(642,502	)			(287,571	)
Interest and finance expenses			(192,382	)			(254,813	)			(852,264	)			(797,436	)
Total other income (expenses)			(154,072	)			(1,014,733	)			(1,564,699	)			(2,158,342	)
Loss before income taxes			(1,292,161	)			(2,319,384	)			(6,167,557	)			(6,054,618	)
Income tax provision			(472	)			-				(1,119	)			(1,567	)
Net loss		$	(1,292,633	)		$	(2,319,384	)		$	(6,168,676	)		$	(6,056,185	)
Net loss per common share – basic and diluted		$	(0.02	)		$	(0.06	)		$	(0.11	)		$	(0.17	)
Weighted average shares outstanding – basic and diluted			60,616,448				38,255,935				55,194,182				35,339,019

 

See the accompanying notes to condensed consolidated financial statements 

 

  

RICHFIELD OIL & GAS COMPANY

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2014 and 2013

(Unaudited)

 

		Nine Months Ended
		September 30,
		2014				2013
Cash flows from operating activities:
Net loss		$	(6,168,676	)		$	(6,056,185	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depletion, depreciation, amortization and accretion			385,221				271,627
Asset retirement obligation release on plugged wells			-				(39,000	)
Gain on settlement of liabilities			(421,975	)			(30,367	)
Loss on extinguishment of debt			530,218				1,103,702
Loss on share issuance			642,502				287,571
Capitalized interest on notes payable			-				16,317
Amortization of pre-paid interest			-				6,164
Lease expirations			124,891				156,229
Transfer of property for services			35,000				-
Loss (gain) on sale of assets			(29,875	)			16,130
Amortization of debt discounts			145,048				50,098
Related party severance compensation			434,000				-
Issuance of common stock, options and warrants for services and other expenses			1,829,828				1,115,884
Changes in operating assets and liabilities:
Decrease in accounts receivables			8,129				311,247
Decrease in deposits and prepaid expenses			9,698				294,711
Decrease in asset retirement obligation			(65,146	)			-
Increase (decrease) in accounts payable			(1,049,355	)			187,102
Increase in accrued expenses and other payables			661,863				1,570,122
Net cash used in operating activities			(2,928,629	)			(738,648	)
Cash flows from investing activities:
Investment in oil and gas properties, including wells and related equipment			(2,007,181	)			(1,077,978	)
Proceeds from sale of assets			835,434				354,700
Net cash used in investing activities			(1,171,747	)			(723,278	)
Cash flows from financing activities:
Proceeds from notes and convertible notes payable			4,322,214				1,921,811
Payments on notes and convertible notes payable			(601,344	)			(68,372	)
Restricted cash for settlement of note and litigation (see NOTE 16 LEGAL PROCEEDINGS)			153,348				(1,639,403	)
Payments on related party notes payable			(18,750	)
Payments on capital lease obligation			(127,081	)			(15,748	)
Proceeds from issuance of warrants			-				7,378
Proceeds from issuance of common stock - net of issuance costs			375,000				1,069,000
Net cash provided by financing activities			4,103,387				1,274,666
Net increase (decrease) in cash and cash equivalents			3,011				(187,260	)
Cash and cash equivalents - beginning of period			60,395				286,013
Cash and cash equivalents - end of period		$	63,406			$	98,753
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	93,447			$	14,569
Cash paid during the period for income taxes		$	647			$	1,567
Non-cash financing and investing activities:
Purchase of oil and gas properties and conversion of JIB receivables billed to working interest holders through issuance of common stock and warrants		$	165,711			$	79,832
Capitalized oil and gas properties included in accounts payable		$	912,863			$	938,973
Return of stock for payment of receivable		$	45,000			$	-
Sale of oil and gas properties for return of common stock		$	-			$	45,625
Purchase of well and related equipment throught capital lease		$	88,000			$	-
Conversion of pre-paid expenses, payables, and notes payable through issuance of common stock and warrants		$	1,322,653			$	3,084,084
Conversion of payables through issuance of note payable		$	1,326,404			$	21,000
Disposal of well and related equipment		$	62,735			$	-
Derivative liability on common stock issued		$	(310,156	)		$	344,572
Amortization of plugged wells		$	121,942			$	41,766
Capitalized asset retirement obligations		$	16,432			$	30,892
Write down of asset retirement obligation on sold properties		$	14,742			$	18,839

 

See the accompanying notes to condensed consolidated financial statements

 

 

 

RICHFIELD OIL & GAS COMPANY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 1     ORGANIZATION AND NATURE OF BUSINESS

 

Richfield Oil & Gas Company (the “Company,” “Richfield” or “ROIL”) is a Nevada corporation headquartered in Salt Lake City, Utah which was incorporated on April 8, 2011. The Company is engaged in the exploration, development and production of oil and natural gas in the states of Kansas, Oklahoma, Utah and Wyoming. The Company’s common stock trades on the OTCQX under the symbol “ROIL”.

 

Contemporaneously with ROIL’s incorporation, the Company merged (the “HPI Merger”) with its predecessor company, Hewitt Petroleum, Inc., a Delaware corporation which was incorporated on May 17, 2008 (“HPI”). In connection with the HPI Merger, HPI was merged out of existence and the Company assumed all of the assets and liabilities of HPI and the Company became the parent company of HPI’s two wholly owned subsidiaries, Hewitt Energy Group, Inc., a Texas corporation (“HEGINC”) and Hewitt Operating, Inc., a Utah corporation (“HOPIN”). The Plan of Merger required that all HPI common stock be exchanged on a one-for-one basis for ROIL common stock and that ROIL assume all of the liabilities of HPI as of the effective date of the HPI Merger. As a result, the Company’s historical financial statements are a continuation of the financial statements of HPI. In addition, effective March 31, 2011, HPI entered into a Stock Exchange Agreement with Freedom Oil & Gas, Inc., a Nevada corporation (“Freedom”), which called for the exchange of stock in HPI for all of the outstanding stock of Freedom (the “Freedom Acquisition”). Upon completion of the Freedom Acquisition, it became a wholly owned subsidiary of the Company from March 31, 2011 until June 20, 2011 when Freedom was merged into ROIL with ROIL being the surviving entity.

 

HEGINC is licensed and bonded as a Kansas operator. HOPIN is licensed and bonded as a Utah operator and as a Wyoming operator HEGINC and its subsidiary HOPIN were acquired by Hewitt Petroleum, Inc. from Hewitt Energy Group, LLC effective on January 1, 2009. On June 25, 2013 HOI Kansas Property Series, LLC, a Kansas series limited liability company (“HOIK”), was organized to hold the oil and gas leases within the State of Kansas. On August 5, 2013 HOI Utah Property Series, LLC, a Utah series limited liability company (“HOIU”), was organized to hold the oil and gas leases within the State of Utah.

 

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, HEGINC, HOPIN, HOIK and HOIU. All significant intercompany transactions and balances have been eliminated in our consolidation.

 

The Company is involved in leasing, exploring and drilling in Kansas, Utah and Wyoming. The Company is participating in over 39,000 acres of leaseholds (including leases from our lease option agreement with LT Land), seismic surveys, and numerous drilling projects in these states.  The Company uses proven technologies and drilling and production methods it believes are efficient and environmentally sound.

 

NOTE 2     GOING CONCERN

 

The Company’s condensed consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from operations causing negative working capital, in that current liabilities exceed current assets, and the Company has negative operating cash flows, which raise substantial doubt about the Company’s ability to continue as a going concern. The Company sustained a net loss for the nine months ended September 30, 2014 of $6,168,676 and a net loss for the year ended December 31, 2013 of $6,799,584, and has an accumulated deficit of $44,173,267 as of September 30, 2014.

 

The Company intends to make its planned capital expenditures in order to continue its drilling programs, but does not have sufficient realized revenues or operating cash flows in order to finance these activities internally. As a result, the Company has obtained financing in order to fund its working capital and capital expenditure needs. On May 6, 2014 the Company entered into an Agreement and Plan of Merger with Stratex Oil & Gas Holdings, Inc. a Colorado corporation (“Stratex Merger”). Upon the execution of the Stratex Merger agreement the Company entered into a $3,000,000 loan agreement with Stratex which was amended in July 2014 to increase the loan amount to $4,000,000 and extend the due date from November 2014 to January 2015. As of September 30, 2014, the Company has two notes payable due to Stratex totaling $3,592,429 (See NOTE 5 NOTES PAYABLE).

 

 

RICHFIELD OIL & GAS COMPANY

Notes to Condensed Consolidated Financial Statements (Unaudited)

  

The Company is unable to determine if the funds obtained will be sufficient to meet its short-term needs.  The Company may seek additional funding through sales of working interest in its oil and gas properties; the issuance of debt; preferred stock; common stock; or a combination of these items. Any proceeds received from these items could provide the needed funds for continued operations and drilling programs. The Company can provide no assurance that it will be able to obtain sufficient additional financing that it needs to develop its properties and alleviate doubt about its ability to continue as a going concern. If the Company is able to obtain sufficient additional financing proceeds, the Company cannot be certain that this additional financing will be available on acceptable terms, if at all. To the extent the Company raises additional funds by issuing equity securities; the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

NOTE 3     SIGNIFICANT ACCOUNTING POLICIES

 

These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The financial statements included herein were prepared from the records of the Company in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Regulation S-X and S-K. In the opinion of management, all adjustments, of a normal recurring nature that are considered necessary for a fair presentation of the interim financial information, have been included. However, operating results for the periods presented are not necessarily indicative of the results that may be expected for a full year. The Company’s annual report on Form 10-K includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. There have been no material changes to the information disclosed in the notes to the consolidated financial statements included in the Company’s annual report on Form 10-K.

 

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of oil and gas reserves, assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates are reasonable, actual results could differ from these estimates. The Company evaluates its estimates on an on-going basis and bases its estimates on historical experience and on various other assumptions the Company believes to be reasonable under the circumstances. Although actual results may differ from these estimates under different assumptions or conditions, the Company believes that its estimates are reasonable. The Company’s activities are accounted for under the successful efforts method.

 

Loss Per Common Share

 

Basic earnings per share (“EPS”) is computed by dividing net income (loss) (the numerator) by the weighted-average number of common shares outstanding for the period (the denominator).  Diluted EPS is computed by dividing net income (loss) by the weighted-average number of common shares and potential common shares outstanding (if dilutive) during each period.  Potential common shares include common shares to be issued related to warrants outstanding, convertible debentures, stock options, and stock pending issue under the ratchet provision.  The number of potential common shares outstanding is computed using the treasury stock method.

 

As the Company has incurred losses for the nine months ended September 30, 2014 and 2013, the potentially dilutive shares are anti-dilutive and are thus not added into the loss per share calculations. As of September 30, 2014 and 2013, there were 19,755,230 and 12,959,062 potentially dilutive shares, respectively.

 

Reclassifications

 

Certain prior period balances have been reclassified to conform to the current period presentation. Such reclassifications had no impact on net loss, statements of cash flows, working capital or equity previously reported.

 

 

 

RICHFIELD OIL & GAS COMPANY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Financial Instruments and Concentration of Risks

 

The Company’s financial instruments include cash and cash equivalents, accounts receivable and accounts payable. The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of their immediate or short-term maturities.

  

Substantially all of the Company’s accounts receivable result from oil and gas sales and joint interest billings (“JIBs”) to third parties in the oil and gas industry.  This concentration of customers and joint interest owners may impact the Company’s overall credit risk in that these entities may be similarly affected by changes in economic and other conditions. As of September 30, 2014, 54% of the accounts receivable balance resulted from two entities. For the nine months ended September 30, 2014, all of the revenues resulted from producing wells in Kansas.

 

New Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, and shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15 Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's financial statements.

 

NOTE 4 OIL AND NATURAL GAS PROPERTIES

 

Divestitures for the nine months ended September 30, 2014

 

In March 2014, the Company sold a 9.5% before and after payout working interest in the Liberty #1 Well and the Nephi Prospect for total net proceeds of $335,434 in cash.

 

In May 2014, the Company sold a 3.0% working interest in the Liberty # 1 well located in Juab County, Utah, along with certain leases covering approximately 447 mineral acres for total net proceeds of $500,000 in cash. Included in the sale was a right of first refusal to acquire from the Company, or its affiliate HOI Utah Property Series, L.L.C. - HUOP Freedom Trend Series, an undivided three percent (3.0%) of 8/8ths out of its working interest in certain deep rights pertaining to the HUOP Freedom Trend Prospect near Fountain Green, Utah.

 

Acquisitions for the nine months ended September 30, 2014

 

In April 2014, the Company replaced two oil and gas leases with Joseph P. Tate, a director, and his spouse covering a combined 1,823 gross acres in the HUOP Freedom Trend Prospect with a new lease. The new lease is for a 10 year primary term commencing April 15, 2014 totaling $182,308 and was paid by the issuance of 729,232 shares of common stock valued at $0.25 per share. This amount is similar to third party 10 year primary term leases obtained by the Company in the HUOP Freedom Trend Prospect during 2013 (see NOTE 15 RELATED PARTY TRANSACTIONS).

 

  

RICHFIELD OIL & GAS COMPANY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

In April 2014, the Company entered into a lease option agreement with LT Land Group, L.L.C. (LT Land) for the Company to purchase all oil and gas leases acquired by LT Land in Utah. From inception to June 21, 2014, Joseph P. Tate, a director of the Company, was also a member of LT Land. The premium paid for the option agreement which expires in June 2015, was $21,919 and was paid by $16,639 in cash and $5,280 paid by the issuance of 24,000 shares of common stock valued at $0.22 per share. The 24,000 shares of common stock were issued to Joseph P. Tate, a director of the Company (see NOTE 15 RELATED PARTY TRANSACTIONS). The exercise price to be paid by the Company to acquire the leases is the cost of the leases to LT Land plus 35%. No partial exercises of the leases are allowed. At the time of exercise, if the Company’s, or its successor by merger, 10 trading day average stock price is $0.30 or more per share, then the payment shall be in shares of common stock of the Company, or its successor by merger, at a value of $0.30 per share. If the Company’s, or its successor by merger, 10 trading day average stock price is below $0.30 or more per share, then the exercise price shall be paid in cash. As of September 30, 2014, leases covering 6,056 gross acres have been acquired by LT Land pursuant to this lease option agreement.

 

In September 2014, the Company began participating in the drilling of a well designated as the Moroni 11M-1102 Well in Sanpete County, Utah. The Company owns a 3.0% WI in this well that is operated by Whiting Oil & Gas Corporation. As of September 30, 2014 we have incurred capital costs totaling $199,770 for our portion of the initial drilling costs.

 

NOTE 5     NOTES PAYABLE

 

Notes Payable consists of the following:

 

		September 30,				December 31,
		2014				2013
Note Payable, interest at 7.5% per annum, secured by vehicle.		$	-			$	8,496
Note Payable, interest at 10.0% per annum, monthly payments of $15,000, due June 2015, secured by a 10.00% working interest in certain HUOP Freedom Trend Prospect leases.			584,644				581,327
Note Payable, interest at 8.0% per annum, unsecured.			-				94,701
Note Payable, interest at 12.0% per annum, secured by a 10.00% working interest in the Liberty Prospect.			-				389,000
Note Payable, interest at 0.0% per annum, unsecured			15,000				15,000
Note Payable, interest at 12.0% per annum, secured by a 10.00% working interest in the Liberty Prospect.			-				50,000
Note Payable, interest at 8.0% per annum, secured by a working interest in certain Kansas leases.			-				100,000
Note Payable, interest at 8.0% per annum, secured by a working interest in certain Kansas leases.			-				100,000
Note Payable, interest at 12.0% per annum, due December 2014, secured by receivables from working interest investors on Liberty #1 Well.			86,000				-
Note Payable, interest at 6.0% per annum, due January 2015, secured by a first lien position on all oil and gas leases.			3,392,659				-
Note Payable, interest at 6.0% per annum, due January 2015, secured by a first lien position on all oil and gas leases.			199,770				-
Total Notes Payable			4,278,073				1,338,524
Less: Current Portion			(4,278,073	)			(1,338,524	)
Long-Term Portion		$	-			$	-

 

 

RICHFIELD OIL & GAS COMPANY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 6     CONVERTIBLE NOTES PAYABLE

 

Convertible Notes Payable consists of the following:

 

		September				December 31,
		2014				2013
Note Payable, interest at 12.0% per annum, due on demand, convertible into common shares of the Company at a conversion rate of $2.50 per common share, unsecured.		$	52,560			$	52,560
Note Payable, interest at 10.0% per annum, convertible into common shares of the Company at a conversion rate of $2.50 per common share, secured by certain Kansas Leases and 10.00% working interest in certain Fountain Green Project Leases.			-				369,090
Note Payable, interest at 12.0% per annum, due June 2016, convertible into common shares of the Company at a conversion rate of $0.25 per common share, secured by a subordinated second lien position on all oil and gas leases.			3,194,972				1,310,000
Note Payable, interest at 12.0% per annum, due December 2014, convertible into common shares of the Company at a conversion rate of $0.60 per common share, unsecured.			150,000				150,000
Note Payable, interest at 12.0% per annum, convertible into common shares of the Company at a conversion rate determined by 50% of the weighted average price of the stock during the five trading days immediately preceding the conversion date, secured by a 10.0% working interest in the Liberty Prospect.			-				50,000
Note Payable, interest at 12.0% per annum, convertible into common shares of the Company at a conversion rate determined by 50% of the weighted average price of the stock during the five trading days immediately preceding the conversion date, secured by a 10.0% working interest in the Liberty Prospect.			-				50,000
Note Payable, interest at 12% per annum, due May 2015, convertible into common shares of the Company at a conversion rate of $0.25 per common share, unsecured.			298,182				-
Total Convertible Notes Payable			3,695,714				1,981,650
Less: Unamortized Debt Discount			(24,770	)			(120,264	)
Less: Current Portion (includes demand notes)			(475,972	)			(1,861,386	)
Long-Term Portion		$	3,194,972			$	-

 

NOTE 7    CAPITAL LEASE OBLIGATION

 

The Company currently leases certain well equipment under two capital lease agreements. The term of the first capital lease is for 10 months with monthly payments of $21,000. The final payment on this lease is due in October 2014.  The second capital lease was entered into in September 2014 with a term of one year with monthly payments of $8,627. A previous capital lease agreement was paid off in April 2013. As of September 30, 2014 and December 31, 2013, the remaining capital lease obligations were $96,230 and $135,311, respectively.

 

As of September 30, 2014 and December 31, 2013, total well equipment acquired under capital leases was $267,796 and $333,951 respectively, and accumulated depreciation was $110,340 and $139,165, respectively.

 

Estimated annual future maturities of capital leases are as follows:

 

Years Ended December 31,		Amount
2014		$	35,930
2015			60,300
Thereafter			-
Total		$	96,230

 

  

RICHFIELD OIL & GAS COMPANY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 8     OPERATING LEASES

 

The Company leases office space in Salt Lake City, Utah (“Premises Lease”) which consists of approximately 5,482 square feet.  The Company entered into a five year and five month lease agreement effective September 1, 2013. The annualized lease obligations for the 12 month period September 1, 2014 to August 31, 2015 is $118,576 with annualized lease obligations for the subsequent 3 years in the amount of $118,576. The Company has a prepaid security deposit of $11,122.  For the nine month periods ended September 30, 2014 and 2013, the Premises Lease payments were $85,950 and $89,482, respectively.  

 

The Company leases a printer, copier and fax machine. The Company entered into a 36 month lease commencing January 2013 with monthly payments of $654. For the nine month period ended September 30, 2014 and 2013 the lease payments were $5,989 and $5,897, respectively.

 

NOTE 9     DUE TO RELATED PARTY

 

The resignation of Douglas C. Hewitt, Sr. our former President and Chief Executive Officer on September 9, 2014, and the termination of his employment agreement resulted in a severance compensation liability to the Company. The employment agreement provided for severance compensation equal to his annual salary of $410,000 plus $2,000 per month in medical insurance reimbursements for 12 months for a total of $24,000. The amount of the total severance compensation of $434,000 will be paid in semi-monthly increments. As of September 30, 2014, $18,750 was paid to Mr. Hewitt pursuant to this agreement and reducing the remaining severance liability to $415,250.

 

NOTE 10      ASSET RETIREMENT OBLIGATIONS

 

FASB ASC 410 requires that an asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable. Under this method, when liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded, the carrying amount of the related oil and gas properties is increased. The fair value of the ARO asset and liability is measured using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted using the units of production method. Should either the estimated life or the estimated abandonment costs of a property change materially upon the Company’s periodic review, a new calculation is performed using the same methodology of taking the abandonment cost and inflating it forward to its abandonment date and then discounting it back to the present using the Company’s credit-adjusted-risk-free rate. The carrying value of the asset retirement obligation is adjusted to the newly calculated value, with a corresponding offsetting adjustment to the carrying cost of the related asset.

 

The following table summarizes the Company’s asset retirement obligation transactions recorded in accordance with the provisions of FASB ASC 410 during the nine months ended September 30, 2014:  

 

		September 30,
		2014
Beginning asset retirement obligation, as of December 31, 2013		$	442,075
Liabilities increased for new wells			16,432
Liabilities decreased for wells sold or plugged			(79,888	)
Accretion of discount on asset retirement obligations			6,226
Ending asset retirement obligations, as of September 30, 2014		$	384,845

 

 

RICHFIELD OIL & GAS COMPANY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 11 PREFERRED STOCK

 

As of September 30, 2014 and December 31, 2013, the Company had 50,000,000 shares of preferred stock authorized at a par value of $0.001 per share and had no shares of preferred stock issued or outstanding.

 

NOTE 12     COMMON STOCK

 

In January 2014, the Company issued 3,969,408 shares of common stock to unaffiliated investors and one director, Mr. Joseph P. Tate, pursuant to a ratchet provision under the terms of common stock subscription agreements. The fair value of these shares at the time of issuance was $952,658 or $0.24 per share of which $310,156 eliminated the derivative liability resulting in a loss of $642,502 on the date of issuance.

 

In January 2014, The Board of Directors approved the cancellation of 3,500,000 outstanding employee stock options issued to Mr. Alan D. Gaines, our Executive Chairman of the Board of Directors and the issuance to him of 4,908,532 restricted Company common stock representing 9.9% of the Company’s common shares at the time. The stock was fully vested and the fair value of the shares issued in the amount of $1,225,660 or $0.25 per share was expensed on the date of grant.

 

In January and March 2014, the Company issued 1,500,000 shares of common stock to unaffiliated investors for cash of $375,000 at a price of $0.25 per share. In addition, the Company granted warrants to purchase up to 1,500,000 shares of common stock with an exercise price of $0.25 per share that expire in July and September 2014.

 

In January and March 2014, the Company issued 2,311,670 shares of common stock to unaffiliated debt holders at a contract price between $0.12 and $0.25 per share for the conversions of notes payable, accrued interest, and settlement conversion incentives. The fair value of these shares at the time of issuance was $555,904, or between $0.20 and $0.25 per share of which $115,477 was expensed as finance charges and $215,385 resulted in a net loss on settlement of debt on the date of issuance.

 

During the nine months ended September 30, 2014, the Company issued 1,493,219 shares of common stock to consultants as compensation for services in the amount of $166,799 and reduction of an outstanding payable in the amount of $198,967. The shares issued were fully vested and the fair value of the shares issued in the amount of $362,153 or between $0.18 and $0.26 per share of which $166,799 was expensed on the date of grant and $3,613 resulted in a gain on settlement of debt.

 

In March 2014, a consultant returned 62,500 shares of the Company’s common stock as settlement of a receivable pursuant to 2013 agreements at a price of $45,000 or $0.72 per share which was the fair market value of the shares at the time of the agreements.

 

In April 2014, the Company issued 753,232 shares of common stock valued at $187,588 or between $0.22 and $0.25 per share to Joseph P. Tate, a director and his spouse related to a new lease in the HUOP Freedom Trend Prospect for a 10 year primary term commencing April 15, 2014 and a lease option agreement. The new lease terms are similar to third party 10 year primary term leases obtained by the Company in the HUOP Freedom Trend Prospect during 2013.

 

In May 2014, the Company issued 5,836,117 shares of common stock to directors, officers and independent consultants at a conversion price of $0.25 per share for the settlement of $1,459,029 of outstanding compensation and services performed. The stock was valued at $1,063,509 or $0.18 per share on the date of grant resulting in a $218,593 gain on settlement of debt and a $176,927 contribution to capital.

 

In July 2014 the Company issued 30,000 shares of common stock to certain employees as compensation for services at a value of $7,500 or $0.25 per share. The $7,500 was expensed on the date of issuance.

 

  

RICHFIELD OIL & GAS COMPANY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 13     WARRANTS TO PURCHASE COMMON STOCK

 

As of September 30, 2014, there were 5,511,561 warrants to purchase shares of common stock outstanding and fully vested. These warrants have an exercise price between $0.25 and $5.00 per share and expire at various times between December 2014 and May 2017.

 

During the nine months ended September 30, 2014, warrants totaling 5,980,000 for shares of common stock were granted.

 

Of the total warrants granted during the nine months ended September 30, 2014, 1,500,000 warrants were granted in conjunction with private placements of common stock for cash proceeds (see NOTE 12 COMMON STOCK) with an exercise price of $0.25 per share all of which expired between July and September 2014.

 

The remaining 4,480,000 warrants granted during the nine months ended September 30, 2014, were issued in conjunction with the issuance of a new note payable, the extension of an existing note payable and in conjunction with the reduction of an outstanding payable. These transactions are accounted for by the Company under the provisions of FASB ASC 470 and 505. These standards require the Company to determine the fair value of the warrants.  The Company uses the Black-Scholes option valuation model to calculate the fair value of stock-based payments at the date of grant.  Warrant pricing models require the input of highly subjective assumptions, including the expected price volatility.  For warrants granted, the Company used its own stock trading history to determine the expected volatility.  Changes in these assumptions can materially affect the fair value estimate. 

 

During the nine months ended September 30, 2014, the Company has determined the fair value of the 4,480,000 warrants granted to be $665,516 of which $640,746 has been expensed in the period.

 

The following is the weighted average of the assumptions used in calculating the fair value of the warrants granted during the period using the Black-Scholes model:

 

		Nine Months Ended
		September 30, 2014
Fair market value		$	0.19
Exercise price		$	0.27
Risk free rates			0.74	%
Dividend yield			0.00	%
Expected volatility			171.25	%
Contractual term			2.67 Years

The weighted-average fair market value at the date of grant for warrants granted are as follows:

 

Fair value per warrant		$	0.14855
Total warrants granted			4,480,000
Total fair value of warrants granted		$	665,516

 

The following table summarizes the Company’s total warrant activity for the nine months ended September 30, 2014:

 

										Weighted-
										Average
						Weighted-				Remainder
						Average				Contractual
		Warrants				Exercise Price				Term in Years
Warrants outstanding as of December 31, 2013			5,361,587			$	1.27				0.63
Granted			5,980,000			$	0.26				2.13
Exercised			-				-				-
Expired/Canceled			(5,830,026	)			-				-
Warrants outstanding as of September 30, 2014			5,511,561			$	0.69				1.92

 

 

RICHFIELD OIL & GAS COMPANY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 14     FAIR VALUE

 

FASB ASC 820 defines fair value, establishes a framework for measuring fair value under U.S. generally accepted accounting principles and enhances disclosures about fair value measurements.  Fair value is defined under FASB ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value under FASB ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs.  The standard describes a fair value hierarchy based on three levels of inputs, with the first two inputs considered observable and the last input considered unobservable, that may be used to measure fair value as follows:

 

¨

Level one — Quoted market prices in active markets for identical assets or liabilities;

 

¨

Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

 

¨

Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

 

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company has two liabilities measured at fair value, the Company’s asset retirement obligation and a derivative liability in connection with a ratchet provision on certain issuances of the Company’s common stock. The Company has no assets that are measured at fair value.

 

The fair value of the Company’s asset retirement obligations are determined using discounted cash flow methodologies based on inputs that are not readily available in public markets. These estimates are derived from historical costs as well as management’s expectation of future costs environments. As there is no corroborating market activity to support the assumptions used, the Company has designated these liabilities as Level 3. A reconciliation of the beginning and ending balances of the Company’s asset retirement obligation is presented in NOTE 10 ASSET RETIREMENT OBLIGATIONS.

 

The fair value of the Company’s derivative liability was determined using estimates and assumptions that are not readily available in public markets and has designated this liability as Level 3. As of September 30, 2014 the derivative liability was extinguished as the required stock was issued (see NOTE 12 COMMON STOCK). The following table presents a reconciliation of the beginning and ending balances of our derivative liability, as of September 30, 2014:

 

Balance at December 31, 2013		$	310,156
New Derivative Liability			-
Transfers to (from) Level 3			-
Total (gains)/losses included in earnings			-
Issuances			(310,156	)
Balance at September 30, 2014		$	-

 

NOTE 15     RELATED PARTY TRANSACTIONS

 

Certain Relationships and Related Transactions

 

A.	Douglas C. Hewitt, Sr., Former President, Chief Executive Officer

 

Douglas C. Hewitt, Sr., who has been serving as our President and Chief Executive Officer resigned from all Company positions on September 9, 2014. Mr. Hewitt is a party to the following transaction with the Company for the nine months ended September 30, 2014 as described below.

 

 

RICHFIELD OIL & GAS COMPANY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

·

Mr. Hewitt entered into a consulting agreement on September 9, 2014 with the Company which provides for consulting services with respect to the Company’s Utah properties. The agreement is for a three year term, with monthly payments of $25,000 and up to $2,000 per month for medical insurance reimbursement, subject to certain conditions. The agreement also provides for a monthly production bonus based upon the net production of Richfield’s Utah properties. Upon entering into this consulting agreement, Mr. Hewitt’s previous employment agreement was terminated resulting in a severance liability to the Company in the amount of $434,000 (See NOTE 9 DUE TO RELATED PARTY). As of September 30, 2014, $18,750 was paid to Mr. Hewitt pursuant to this consulting agreement and reducing the severance liability.

 

·      In July 2014 the Company sold a Company vehicle to Mr. Hewitt at a price of $5,400 as valued by an independent vehicle appraiser. The amount was paid by the return of 30,000 shares of common stock valued at $0.18 per share. The shares were returned to treasury for cancellation.

 

An affiliate of Douglas C. Hewitt, Sr., is a party to the following transaction with the Company for the nine months ended September 30, 2014 as described below.

 

The D. Mack Trust

 

·

Mr. Hewitt is the sole beneficiary of The D. Mack Trust, an irrevocable trust established by Mr. Hewitt on May 15, 2009. As of March 31, 2014, the D. Mack Trust had overriding royalty interests (“ORRIs”) ranging from 0.50% to 3.625% in 1,636 net acres leased by the Company in Kansas. The D. Mack Trust received $22,448 and $16,772 in royalties for the nine months ended September 30, 2014 and 2013, respectively, from the ORRIs.

 

B.

Joseph P. Tate, a Director

 

Joseph P. Tate became one of our directors effective March 31, 2012. Mr. Tate has entered into the following transaction with the Company for the nine months ended September 30, 2014 as described below.

 

·      In January 2014, Mr. Tate received 262,821 shares of the Company’s common stock pursuant to a ratchet provision under the terms of common stock subscription agreements that were similar to unaffiliated investors (see NOTE 12 COMMON STOCK). The fair value of these shares at the time of issuance was $63,077 or $0.24 per share.

·

Mr. Tate is a beneficial owner of land within the HUOP. In April 2014, the Company replaced two oil and gas leases with Joseph P. Tate, a director, and his spouse covering a combined 1,823 gross acres in the HUOP Freedom Trend Prospect with a new lease. The new lease is for a 10 year primary term commencing April 15, 2014 totaling $182,308 and was paid by the issuance of 729,232 shares of common stock valued at $0.25 per share. The lease terms are similar to third party 10 year primary term leases obtained by the Company in the HUOP Freedom Trend Prospect during 2013. Pursuant to the terms of the new Tate lease, Tate is entitled to 12.50% landowner royalty-interest revenues relating to hydrocarbons produced by Richfield. No oil or natural gas has been extracted from the leased land and therefore no landowner royalties have been paid to Tate.

·

Mr. Tate was a member of LT Land until June 21, 2014. Pursuant to his interest in LT Land, he was issued 24,000 shares of common stock valued at $5,280 or $0.22 per share. (see NOTE 4 OIL AND NATURAL GAS PROPERTIES).

 

C.	Alan D. Gaines, Former Chairman of the Board

 

Alan D. Gaines became one of our directors and Chairman of the Board effective May 6, 2013. On May 6, 2014 Mr. Gaines resigned from this position and as a director. Mr. Gaines entered into the following transaction with the Company for the nine months ended September 30, 2014 as described below.

 

·

In January 2014, The Board of Directors approved the cancellation of 3,500,000 outstanding employee stock options issued to Mr. Alan D. Gaines, who at the time was our Executive Chairman of the Board of Directors and the issuance to him of 4,908,532 restricted Company common stock representing 9.9% of the Company’s common shares at the time. The stock was fully vested and the fair value of the shares issued in the amount of $1,225,660 or $0.25 per share was expensed on the date of grant. (see NOTE 12 COMMON STOCK).

 

 

RICHFIELD OIL & GAS COMPANY

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 16 LEGAL PROCEEDINGS

 

On September 30, 2013 Roger Buller filed an action against Richfield Oil & Gas Company in the Twentieth Judicial District Court of Russell County, Kansas. The case was filed based on a claimed failure to pay a note in full. Richfield contends that the note has been paid in full by the issuance of Richfield Common Stock which was accepted by Mr. Buller for the payment of the note. The action requests the sum of $50,386 plus interest. The Company believes that this claim was paid in full in September 2011 and plans on vigorously defending the action. A trial has been scheduled for November 20, 2014.

 

Litigation in the Ordinary Course

 

We may become involved in litigation from time to time relating to claims arising in the ordinary course of our business. We do not believe that the ultimate resolution of such claims would have a material effect on our business, results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material effect on our business, results of operations, financial condition and cash flows.

 

NOTE 17     SUBSEQUENT EVENTS

 

On October 24, 2014 the SEC issued a Notice of Effectiveness of Stratex’s Form S-4 which included the Company’s preliminary Proxy Statement. The same day, the Company filed its Definitive Proxy Statement pursuant to section 14(a) of the Securities Exchange Act of 1934. The Definitive Proxy Statement was mailed to shareholders on or about October 30, 2014. Pursuant to the Definitive Proxy Statement the special meeting of stockholders will be held on November 24, 2014 in Salt Lake City, Utah for the purpose of voting for the proposal to approve the Stratex Merger Agreement.

 

In November 2014, the Company entered into agreements with two third parties to sell its 39.0625% after payout (“APO”) WI in the Liberty #1 Well and 47.0625% APO WI in the 320 acre Winn leases in Juab County, Utah. The total consideration was $1,698,084 for the sale and was paid as follows: i) 6.0% carried interest until commercial production is established in either the Liberty #1 Well, or a subsequent well drilled on the Winn leases, valued at $600,000; ii) cancelation in the amount of $521,652 of the Company’s debt to one of the third parties; iii) return to the Company of 1,500,000 shares of Common Stock at a value of $375,000 or $0.25 per share; and iv) the assumption by the third parties of up to $201,432 in Company payables.

 

In November 2014, the Company entered into an agreement, with three third parties, to sell its remaining 20.0% WI in the Wasatch National Forest #16-15 Well and surrounding 640 acres located in Wasatch County, Wyoming for $120,000 was paid in cash.

 

As of November 7, 2014, the Company has borrowed an additional $381,161 pursuant to the loan agreement with Stratex.

 

As of November 7, 2014, leases covering 7,051 gross acres have been acquired by LT Land pursuant to the lease option agreement (see NOTE 4 OIL AND NATURAL GAS PROPERTIES).

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion is intended to assist in understanding our results of operations and our financial condition. Our consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q contains additional information that should be referred to when reviewing this material. Certain statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, which could cause actual results to differ from those expressed in this report.

 

Forward-Looking Statements

 

The statements contained in this quarterly report on Form 10-Q that are not historical facts represent management’s beliefs and assumptions based on currently available information and constitute “forward-looking statements.” These statements include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. These forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include but are not limited to the following:

 

·

uncertainty regarding our ability to raise the funds necessary to pay our current liabilities and carry out our business plan;

·

the continuing adequacy of our capital resources and liquidity including, but not limited to, access to borrowing capacity;

·

the availability (or lack thereof) of acquisition, disposition or combination opportunities;

·

domestic and global supply and demand for oil and natural gas;

·

sustained or further declines in the prices we receive for oil and natural gas;

·

the geologic quality of our properties with regard to, among other things, the existence of hydrocarbons in economic quantities;

·

uncertainties about the estimates of our oil and natural gas reserves;

·

our ability to increase our production of oil and natural gas income through exploration and development;

·

our ability to successfully apply horizontal drilling techniques and tertiary recovery methods;

·

the number of well locations to be drilled, the cost to drill, and the time frame within which they will be drilled;

·

the effects of adverse weather on operations;

·

drilling and operating risks;

·

the ability of contractors to timely and adequately perform their drilling, construction, well stimulation, completion and production services;

·

the availability of equipment, such as drilling rigs and related equipment and tools;

·

changes in our drilling plans and related budgets;

·

uncertainties associated with our legal proceedings and their outcome;

·

the effects of government regulation, permitting, and other legal requirements;

·

uncertainties regarding economic conditions in the United States and globally; and

·

difficult and adverse conditions in the domestic and global capital and credit markets.

 

You can often identify these and other forward-looking statements by the use of words such as “may,” “will,” “could,” “would,” “should,” “expects,” “plans,” “anticipates,” “estimates,” “intends,” “potential,” “projected,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

 

These statements are based on current expectations and assumptions regarding future events and business performance and involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements.

 

Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We will assume no obligation to update any of the forward-looking statements to conform these statements to actual results or changes in our expectations, except as required by law. You should not place undue reliance on these forward-looking statements.

 

 

Overview of our Business

 

We are an independent oil and gas exploration and production company with projects in Kansas, Utah and Wyoming. The focus of our business is acquiring, retrofitting and operating or selling oil and gas assets and related production. We have three primary strategic directions:

 

	●	We use our research technology to identify prospective properties in Kansas that were initially developed between the 1920s and 1950s, but which may be subject to further development through the use of more modern production techniques. We refer to these properties as our “Mid-Continent Project,” which currently includes 2,186 gross (2,071 net) acres. We have identified significant oil and natural gas reserves from these early exploration properties, many of which were previously underdeveloped due to inefficient and antiquated exploration and production methods and low commodity prices. In most cases these wells were developed and left fallow by major oil and gas companies. Using current technology and methodologies, we have successfully developed both production and proved reserves within these fields, and we intend to continue to pursue this strategy in the future.
	●	We have three properties on the Utah–Wyoming Overthrust, including one property containing a well that was placed into production during 2013 but is currently shut-in. We currently own or lease 2,311 gross (1,971 net) acres on the Utah-Wyoming Overthrust, near the border between northern Utah and south-western Wyoming.  We refer to these properties as our “Utah-Wyoming Overthrust Project.” We intend to conduct additional development activities with respect to our Utah-Wyoming Overthrust Project.
	●	We have conducted a limited amount of exploration for oil and natural gas reserves in the Central Utah Overthrust region, where we are participating in over 34,598 gross (13,829) acres, including leases from our lease option agreement with LT Land.  We refer to these properties as our “Central Utah Overthrust Project.” We and our partners intend to conduct drilling operations, acquire additional acreage and conduct further exploration activities with respect to our Central Utah Overthrust Project.

 

Our approach to acquiring leases and developing producing properties focuses on three types of development activities:

 

	●	Activities involving the identification, acquisition and development of leases of property in which oil or natural gas is known to exist.
	●	Activities involving low or moderate exploration and development risk. These include leases of property where oil and natural gas has been produced in the past but there are no existing wells.
	●	Activities involving the acquisition of properties where it is reasonably believed that potential hydrocarbon values exist based on analysis involving geochemical, radiometric, gravitational and seismic data. This may include projects that have never been drilled or tested for oil and natural gas in the past.

 

We have developed a database to evaluate wells that are on record in our Kansas areas of operation. The database contains extensive well records, including information on historic production, seismic data, geological data, well depth, well logs and drilling records, and where available, handwritten driller notes concerning rock formation depths and other relevant information. This system has been developed internally from data obtained from appropriate state agencies and private organizations. The database enables us to identify potential bypassed hydrocarbons throughout the state of Kansas.

 

Through statistical modeling and data evaluation, we believe greater oil and natural gas reserves exist and can be found, measured, and produced in areas where initial reserves were previously found but abandoned prior to full development. We believe that with our current technologies and systems, acquiring and developing older fields mitigates exploration risk and is a safe and predictable method of managing our business.

 

 

Production History

 

The following table presents information about our produced oil volumes during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. We did not produce natural gas during these time periods. As of September 30, 2014, we were selling oil from a total of 16 gross wells (14.9 net), compared to 16 gross wells (15.2 net) as of September 30, 2013.

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2013				2014				2013
Net Production:
Oil (Bbl)			5,064				2,534				9,467				8,392
Average Sales Price:
Oil (per Bbl)		$	91.56			$	100.46			$	93.26			$	92.04
Average Production Costs:
Oil (per Bbl)		$	65.40			$	81.02			$	86.36			$	77.90

  

Depletion of Oil and Gas Properties

 

Our depletion expense is driven by many factors, including certain costs incurred in the development of producing reserves, production levels and estimates of proved reserve quantities.  Our depletion expense totaled $84,448 and $139,840 for the three and nine months ended September 30, 2014, respectively, compared to $28,000 and $94,031 for the three and nine months ended September 30, 2013, respectively.

 

The following table presents our depletion expenses per barrel of oil for the three and nine months ended September 30, 2014 and 2013.

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2013				2014				2013
Depletion of Oil (per Bbl):		$	16.68			$	11.05			$	14.77			$	11.20

 

Results of Operations

 

The following presents an overview of our results of operations for the three and nine months ended September 30, 2014, compared to the three and nine months ended September 30, 2013.

  

Three months ended September 30, 2014 Compared to the three months ended September 30, 2013

 

Average Daily Production. Our net oil production for the three months ended September 30, 2014 averaged approximately 55 Bopd after royalties compared to approximately 27 Bopd for the three months ended September 30, 2013. The increase in production in 2014 compared to 2013 is due to the funding received from the loan agreement with Stratex, enabling us to carry out our work plan relating our Kansas field operations.

 

Oil Revenues. Our oil revenues increase by $209,102, or 82.1%, from $254,554 for the three months ended September 30, 2013 to $463,656 for the three months ended September 30, 2014. The increase in revenue is due to an increase of 2,530 barrels of oil produced for the three months ended September 30, 2014 from the same period in 2013, equating to an increase of $254,164 partially offset by an $8.90 decrease in the weighted average price per barrel sold for the three months ended September 30, 2014, equating to an decrease of $45,062.

 

 

Net Loss on Earnings Per Share. We realized a net loss of $1,292,633 or $0.02 per basic and diluted share of common stock, for the three months ended September 30, 2014, compared to a net loss of $2,319,384 or $0.06 per basic and diluted share of common stock for the three months ended September 30, 2013. The lower net loss of $1,026,751 was due mainly to the change in other income and expense items relating to a reduction in our loss on extinguishment of debt and loss on share issuance.

 

Operating Expenses. Total operating expenses were $1,601,745 for the three months ended September 30, 2014 compared to $1,559,205 for the three months ended September 30, 2013. The $42,540 or 2.7% increase in operating expenses was due primarily to an increase in production expenses of $125,877 and depletion, depreciation, amortization and accretion of $85,897, partially offset by a decrease in lease expiration expenses of $98,334 and general and administrative expenses of $58,010 and a decrease all other expenses in the amount of $12,890.

 

Production Expenses. Our production expenses for the three months ended September 30, 2014 were $331,189 or $65.40 per barrel of oil, compared to $205,312 or $81.02 per barrel of oil, for the three months ended September 30, 2013, which represents a $125,877 or 61.3% increase. The overall production expenses increased due to increased repair efforts on our wells during the quarter as a result of funding availability. Our cost per barrel for the three months ended September 30, 2014 decreased due the higher production volumes. Our cost per barrel continues to remain above the industry averages due to our fixed costs, such as electricity, personnel and related expenses, and the cost of maintaining our 28 current non-producing wells including nine salt water disposal wells. We expect our fixed costs on a per barrel basis will continue to decline as we place into production our non-producing wells.

 

Exploration Expenses. Exploration expenses increased 8.3%, or $2,665, from $32,292 for the three months ended September 30, 2013 to $34,957 for the three months ended September 30, 2014. We continue to focus on our developed properties and do minimal work on our undeveloped Utah prospects.

 

Lease Expiration. Lease expiration expenses decreased $98,334 or 90.0% to $10,958 for the three months ended September 30, 2014 from $109,292 for the three months ended September 30, 2013. The decrease is to a charge for the three months ended September 30, 2013 for leases pertaining to property in our undeveloped Utah prospects.

 

Depletion, Depreciation, Amortization and Accretion. We recorded depletion, depreciation, amortization and accretion of $174,374 during the three months ended September 30, 2014 compared to $88,477 during the three months ended September 30, 2013. The increase of 97.1% or $85,897, was mainly due to increased depletion of $56,448 and increased depreciation of $29,648 during the three months ended September 30, 2014. Depletion expense increases as a result of an increase in the depletion cost per barrel as well as increased production volumes for the period. Depreciation expense increased as a result of increased well equipment additions since September 30, 2013. These increases were partially offset by a decrease of $199 in the accretion of the discount on our asset retirement obligation.

 

General and Administrative Expenses. General and administrative expenses were $1,029,987 for the three months ended September 30, 2014 compared to $1,087,997 for the three months ended September 30, 2013. The decrease of $58,010 or 5.3% was due to decrease of $205,572 in expenses for external consultants including legal and accounting, partially offset by an increase of $128,619 in non-cash compensation to directors and officers and a net increase in all other expenses of $18,963 during the three months ended September 30, 2014 from the same period in 2013.

 

Asset Retirement Obligation Expense. We incurred asset and retirement obligation expenses in the amount of $25,094 for the three months ended September 30, 2013 compared to no expenses during the three months ended September 30, 2014. This decrease is due to no additional expense for the plugging of wells during the three months ended September 30, 2014.

 

Other Income (Expenses). Total other income and expenses during the three months ended September 30, 2014 resulted in a net other expense of $154,072 compared to a net other expense of $1,014,733 for the three months ended September 30, 2013 representing a net favorable increase of $860,661 as detailed below.

 

 

Gain on settlement of liabilities. The Company realized a gain on settlement of liabilities in the amount of $38,310 for the three months ended September 30, 2014 compared to no gain for the three months ended September 30, 2013. This increase of $38,310 is due to the favorable settlement terms of outstanding liabilities for cash and common stock.

 

Loss on extinguishment of debt. The Company incurred a loss on extinguishment of debt in the amount of $472,349 for the three months ended September 30, 2013 and did not incur any loss on the extinguishment of debt for the three months ended September 30, 2014. This decrease in the loss of $472,349 is due to the efforts made in 2013 to reduce debt through the conversions to common stock with a ratchet provision and warrants.

 

Loss on Share issuance. The Company incurred a loss of $287,571 on the derivative valuation of the ratchet provision on certain shares of common stock during the three months ended September 31, 2013. We did not incur any loss on share issuance during the three months ended September 30, 2014 resulting in a decrease in the loss.  This is a non-cash expense incurred in 2013 which was determined by the change in the fair value of the provision for this period.

 

Interest and Finance Expenses. For the three months ended September 30, 2014, we incurred interest and finances expenses of $192,382 compared to $254,813 for the three months ended September 30, 2013. The decrease of $62,431 in 2014 over 2013 is due to reduced interest expenses from lower outstanding debt during the period due to the conversion to common stock of notes payable in previous periods and lower overall interest rate terms on current debt.

 

Nine Months ended September 30, 2014 Compared to the Nine Months ended September 30, 2013

 

Average Daily Production. Our net oil production for the nine months ended September 30, 2014 averaged approximately 35 Bopd after royalties compared to approximately 31 Bopd for the nine months ended September 30, 2013. The increase in production in 2014 compared to 2013 is due to the funding received from the loan agreement with Stratex, enabling us to carry out our work plan relating our Kansas field operations.

 

Oil Revenues. Our oil revenues increased by $110,522, or 14.3%, from $772,394 for the nine months ended September 30, 2013 to $882,916 for the nine months ended September 30, 2014. The increase in revenue is due to an increase of 1,075 barrels of oil produced for the nine months ended September 30, 2014 over the same period in 2013, equating to an increase of $98,972 along with an $1.22 increase in the weighted average price per barrel sold for the nine months ended September 30, 2014, equating to an increase of $11,550.

 

Net Loss on Earnings Per Share. We realized a net loss of $6,168,676, or $0.11 per basic and diluted share of common stock, for the nine months ended September 30, 2014, compared to a net loss of $6,056,185 or $0.17 per basic and diluted share of common stock for the nine months ended September 30, 2013. The higher net loss of $112,491 was due mainly to the increase in our general and administrative expenses, partially offset by an increase in the gain on the settlement of liabilities and a lower loss on the extinguishment of debt.

 

Operating Expenses. Total operating expenses were $5,485,774 for the nine months ended September 30, 2014 compared to $4,668,670 for the nine months ended September 30, 2013. The $817,104 or 17.5% increase in operating expenses was due primarily to an increase in general and administrative expenses of $702,458.

 

Production Expenses. Our production expenses for the nine months ended September 30, 2014 were $817,643 or $86.36 per barrel of oil, compared to $653,758 or $77.90 per barrel of oil, for the nine months ended September 30, 2013, which represents a $163,885 or 25.1% increase. The overall production expenses increased due to higher repair costs and increased repair efforts on our wells as a result of funding availability. Our cost per barrel for the nine months ended September 30, 2014 continues to remain above the industry averages due to our fixed costs, such as electricity, personnel and related expenses, and the cost of maintaining our 28 current non-producing wells including nine salt water disposal wells that are underutilized. We expect our fixed costs on a per barrel basis will decline as we place into production our non-producing wells.

 

Exploration Expenses. Exploration expenses increased 62.4%, or $64,843, from $103,843 for the nine months ended September 30, 2013 to $168,686 for the nine months ended September 30, 2014. We performed some additional work on our undeveloped Utah prospects as a result of funding availability from the proceeds of the sale of working interest.

 

 

Lease Expiration. Lease expirations decreased from $156,229 for the nine months ended September 30, 2013 to $124,891 for the nine months ended September 30, 2014. The decrease of $31,338 was due to fewer leases expiring pertaining to property in our undeveloped Utah prospects in the next year without the option contained in the lease to renew.

 

Depletion, Depreciation, Amortization and Accretion. We recorded depletion, depreciation, amortization and accretion of $385,221 during the nine months ended September 30, 2014 compared to $271,627 during the nine months ended September 30, 2013. The increase of 41.8% or $113,594 was mainly due to increased depreciation of $68,137 and increased depletion of $45,809 during the nine months ended September 30, 2014. Depreciation expense increased as a result of increased well equipment additions since September 30, 2013. Depletion expense increased as a result of an increase in overall production volumes and an increase in the cost per barrel. The remaining decrease of $352 is due to the net change in accretion of the discount on our asset retirement obligation.

 

General and Administrative Expenses. General and administrative expenses were $3,977,983 for the nine months ended September 30, 2014 compared to $3,275,525 for the nine months ended September 30, 2013. The increase of $702,458 or 21.4% was mainly due to an increase $1,409,612 in non-cash compensation to directors and officers, partially offset by a decrease of $629,194 in expenses for external consultants including legal and accounting and a net decrease of $77,960 in all other expenses during the nine months ended September 30, 2014 from the same period in 2013.

 

Asset Retirement Obligation Expense. We incurred asset and retirement obligation expenses in the amount of $4,380 for the nine months ended September 30, 2014 compared to $161,601 during the nine months ended September 30, 2013. This decrease of $157,221 is due to the additional expense in 2013 for the plugging of three wells in Kansas that exceeded their asset retirement obligation liability.

 

Other Income (Expenses). Total other income and expenses during the nine months ended September 30, 2014 was a net expense of $1,564,699 compared to a net expense of $2,158,342 for the nine months ended September 30, 2013 representing a decrease of $593,643 or 27.5% as detailed below.

 

Gain on settlement of liabilities. The Company realized a gain on settlement of liabilities in the amount of $460,285 for the nine months ended September 30, 2014 compared to a gain of $30,367 for the nine months ended September 30, 2013. This increase of $429,918 is due to the favorable settlement terms of outstanding liabilities for cash and common stock in 2014.

 

Loss on extinguishment of debt. The Company incurred a loss on extinguishment of debt in the amount of $530,218 for the nine months ended September 30, 2014 compared to a loss of $1,103,702 for the nine months ended September 30, 2013. This decrease in the loss of $573,484 is due to the efforts made in 2013 to reduce debt through the conversions to common stock with a ratchet provision and warrants. In 2014, the extinguishment of one of our convertible notes resulted in a loss of $545,466 which was partially offset by other gains on extinguishment of debt in the amount of $15,248.

 

Interest and Finance Expenses. For the nine months ended September 30, 2014, we incurred interest and finances expenses of $852,264 compared to $797,436 for the nine months ended September 30, 2013. The increase of $54,828 or 6.9% in 2014 over 2013 is due primarily to an increase of $246,640 in interest expense due to extension and conversion incentives on convertible notes during the nine months ended September 30, 2014 offset by $191,812 due to reduced interest expenses from lower outstanding debt during the period because of the conversion to common stock of notes payable in previous periods and lower overall interest rate terms on current debt.

 

Liquidity and Capital Resources

 

Liquidity is a measure of a company’s ability to meet potential cash requirements. We have historically met our capital requirements through the issuance of common and preferred stock, short-term borrowings and selling working interests in our oil and natural gas properties. In the future, we expect to generate cash from sales of crude oil from production from our existing wells and new wells we intend to develop. Until cash provided by our operations is sufficient to cover our expenses and execute our development plans, we intend to continue to finance our operations through additional debt or equity financings, if available.

 

 

The following table summarizes our total current assets, total current liabilities and working capital deficiency as of September 30, 2014 compared to December 31, 2013: 

 

		September 30,				December 31,
		2014				2013
Current Assets		$	452,068			$	613,822
Current Liabilities			7,968,143				8,847,612
Working Capital Deficiency		$	(7,516,075	)		$	(8,233,790	)

 

Cash and cash equivalents were $63,406 as of September 30, 2014, compared to $60,395 as of December 31, 2013. Changes in the net cash provided by and (used in) our operating, investing and financing activities for the nine months ended September 30, 2014 and 2013 are set forth in the following table:

  

		Nine Months Ended								Net Cash
		September 30,								Increase
		2014				2013				(Decrease)
Net cash used in operating activities		$	(2,928,629	)		$	(738,648	)		$	(2,189,981	)
Net cash used in investing activities			(1,171,747	)			(723,278	)			(448,469	)
Net cash provided by financing activities			4,103,387				1,274,666				2,828,721
Increase (decrease) in cash and cash equivalents		$	3,011			$	(187,260	)		$	190,271

  

Net cash from operating activities is derived from net loss from operations adjusted for non-cash items, changes in the balances of accounts receivables, deposits and prepaid expenses, accounts payables, accrued expenses and other payables. For the nine months ended September 30, 2014, we used net cash in operating activities in the amount of $2,928,629 compared to $738,648 for the nine months ended September 30, 2013. This decrease in net cash of $2,189,981 from 2013 to 2014 was primarily due to a decrease in accounts payable of $1,236,457 and a decrease in accrued expenses and other payables of $908,259 and a net decrease of $45,265 from all other operating items.

 

Net cash from investing activities is derived from the proceeds and disbursements from sales and purchases of oil and gas properties, including wells and related equipment. For the nine months ended September 30, 2014, we used cash in investing activities in the amount of $1,171,747 compared to cash used by investing activities in the amount of $723,278 for the nine months ended September 30, 2013. This decrease in net cash of $448,469 was primarily due to an increase in the purchases of oil and gas properties in the amount of $929,203 partially offset by an increase in the proceeds from the sale of oil and gas assets in the amount of $480,734.

 

Net cash from financing activities is derived from the proceeds from the issuance of equity securities and notes and convertible notes payable reduced by payments on our notes and convertible notes payable. For the nine months ended September 30, 2014, we had net cash provided by financing activities of $4,103,387 compared to net cash provided by financing activities $1,274,666 for the nine months ended September 30, 2013, resulting in an increase of $2,828,721 in net cash provided by financing activities period over period. This increase is due primarily to an increase of $2,400,403 in cash raised through the issuance of notes and convertible notes payable as well as a $1,792,751 decrease in restricted cash used for settlement of the NTOG note and litigation. These increases were partially offset by $1,364,433 due to increased payments on our notes payable and capital lease obligation and decreased proceeds from the issuance of common stock.

 

Satisfaction of our cash obligations for the next 12 months and our ability to continue as a going concern

 

Our operations do not produce significant cash flow and we rely almost exclusively on external sources of liquidity. As of September 30, 2014, we have a $7,516,075 working capital deficiency and we need additional funding to pay our current liabilities, debt service obligations, continue as a going concern and execute our business plan. We have historically addressed working capital deficiencies through frequent private sales of stock and warrants for cash, exchanges of stock and warrants in satisfaction of liabilities or for services, issuing short- and long-term promissory notes and sales of our assets. The Company intends to make its planned capital expenditures in order to continue its drilling programs, but does not have sufficient realized revenues or operating cash flows in order to finance these activities internally. As a result, the Company has obtained financing in order to fund its working capital and capital expenditure needs. On May 6, 2014 the Company entered into an Agreement and Plan of Merger with Stratex Oil & Gas Holdings, Inc. a Colorado corporation (“Stratex Merger”). Upon the execution of the Stratex Merger agreement the Company entered into a $3,000,000 loan agreement with Stratex which was amended in July 2014 to increase the loan amount to $4,000,000 and extend the due date from November 2014 to January 2015.

 

 

We will continue to depend on these and other external sources of liquidity for the foreseeable future. If we cannot obtain the necessary capital to pay our current liabilities, we may be subject to litigation and foreclosure proceedings. We will also need to obtain additional funding to make our planned capital expenditures. If we are unable to secure such additional funding, we will be unable to pursue our plans, we may have to cease or significantly curtail our operations, including our plans to acquire additional acreage positions and development activities. Our ability to raise additional capital is critical to our ability to continue to operate our business. 

 

Our independent registered public accounting firm’s report on our December 31, 2013 financial statements expresses doubt about our ability to continue as a going concern. The report includes an explanatory paragraph stating that there is substantial doubt about our ability to continue as a going concern due to substantial losses from operations, negative working capital, negative cash flow, and the lack of sufficient capital, as of the date the report was issued, to support our planned capital expenditures to continue our drilling programs through 2014 or later. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

We are not currently generating significant revenues, and our cash and cash equivalents will continue to be depleted by our ongoing development efforts as well as our general and administrative expenses. Until we are in a position to generate significant revenues, we will need to continue to raise additional funds to continue operating as a going concern. We may seek this additional funding through the issuance of debt, preferred stock, equity or a combination of these instruments. We may also seek to obtain financing through the sale of working interests in one or more of our projects. We cannot be certain that funding from any of these sources will be available on reasonable terms or at all. If we are unable to secure adequate funds on a timely basis on terms acceptable to us, we may have to cease or significantly curtail our operations including our plans to acquire additional acreage positions and development activities.

 

Over the next twelve months, we do not expect our existing capital and anticipated funds from operations to be sufficient to sustain our planned expansion. Consequently, we intend to seek additional capital to fund growth and expansion through equity financings, debt financings and/or credit facilities. We have no assurance that such financing will be available, and if available, the terms under which such financing would be given.

 

Our lack of significant operating history makes predictions of future operating results difficult. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in an early stage of development, particularly companies in the oil and gas exploration industry. Such risks include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks we must, among other things, implement and successfully execute our business and marketing strategy, continue to develop and upgrade technology and products, respond to competitive developments, and attract, retain and motivate qualified personnel. We have no assurance that we will be successful in addressing such risks, and the failure to do so would have a material adverse effect on our business prospects, financial condition and results of operations.

 

Effects of Inflation and Pricing

 

The oil and gas industry is cyclical and the demand for goods and services by oil field companies, suppliers and others associated with the industry put significant pressure on the economic stability and pricing structure within the industry. Typically, as prices for oil and natural gas increase all other associated costs increase as well. Conversely, in a period of declining prices, associated cost declines are likely to lag and may not adjust downward in proportion to the declining prices. Material changes in prices also impact our current revenue stream, estimates of future reserves, impairment assessments of oil and natural gas properties, and values of properties in purchase and sale transactions. Material changes in prices can impact the value of oil and gas companies and their ability to raise capital, borrow money and retain personnel. While we do not currently expect business costs to materially increase, higher prices for oil and natural gas could result in increases in the costs of materials, services and personnel. 

 

 

Critical Accounting Policies

 

The establishment and consistent application of accounting policies is a vital component of accurately and fairly presenting our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), as well as ensuring compliance with applicable laws and regulations governing financial reporting. While there are rarely alternative methods or rules from which to select in establishing accounting and financial reporting policies, proper application often involves significant judgment regarding a given set of facts and circumstances and a complex series of decisions.

 

Asset Retirement Obligations

 

We have significant obligations to plug and abandon our oil and natural gas wells and related equipment. Liabilities for asset retirement obligations are recorded at fair value in the period incurred. The related asset value is increased by the same amount. Asset retirement costs included in the carrying amount of the related asset are subsequently allocated to expense as part of our depletion calculation.

 

Estimating future asset retirement obligations requires us to make estimates and judgments regarding timing, existence of a liability, as well as what constitutes adequate restoration. We use the present value of estimated cash flows related to our asset retirement obligations to determine the fair value. Present value calculations inherently incorporate numerous assumptions and judgments, which include the ultimate retirement and restoration costs, 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 present value of our existing asset retirement obligation liability, a corresponding adjustment will be made to the carrying cost of the related asset.

 

Revenue Recognition

 

Revenue from the sale of crude oil, natural gas and natural gas liquids is recorded when the significant risks and rewards of ownership of the product is transferred to the buyer, which is usually when legal title passes to the external party. For crude oil and natural gas liquids, delivery generally occurs upon pick up at the field tank battery and natural gas delivery occurs at the pipeline delivery point. Revenue is not recognized for the production in tanks, or oil in pipelines that has not been delivered to the purchaser. Revenue is measured net of discounts and royalties. Royalties and severance taxes are incurred based on the actual price received from the sales. We use the sales method of accounting for natural gas balancing of natural gas production, and we would recognize a liability if the existing proven reserves were not adequate to cover the current imbalance situation. For all periods reported, we had no natural gas production.

 

 Stock-Based Compensation

 

We have accounted for stock-based compensation under the provisions of FASB ASC 718. This standard requires us to record an expense associated with the fair value of stock-based compensation over the period in which it is earned, typically the vesting period. We use the Black-Scholes option valuation model to calculate the value of options and warrants at the date of grant. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in these assumptions can materially affect the fair value estimate.

 

Stock Issuance

 

We record the stock-based awards issued to consultants and other external entities for goods and services at either the fair market value of the goods received or services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in FASB ASC 505.

 

Income Taxes

 

We account for income taxes under FASB ASC 740. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized.

 

 

The tax effects from an uncertain tax position can be recognized in the consolidated financial statements only if the position is more likely than not of being sustained if the position were to be challenged by a taxing authority. We have examined the tax positions taken in our tax returns and determined that there are no uncertain tax positions. As a result, we have recorded no uncertain tax liabilities in our consolidated balance sheet.

 

Oil and Gas Properties

 

We account for oil and natural gas properties by the successful efforts method. Under this method of accounting, costs relating to the acquisition and development of proved areas are capitalized when incurred. The costs of development wells are capitalized whether productive or non-productive. Leasehold acquisition costs are capitalized when incurred. If proved reserves are found on an unproved property, leasehold costs are transferred to proved properties. Exploration dry holes are charged to expense when it is determined that no commercial reserves exist. Other exploration costs, including personnel costs, geological and geophysical expenses and delay rentals for oil and natural gas leases, are charged to expense when incurred. The costs of acquiring or constructing support equipment and facilities used in oil and natural gas producing activities are capitalized. Production costs are charged to expense as incurred and are those costs incurred to operate and maintain our wells and related equipment and facilities.

 

Depletion of producing oil and natural gas properties is recorded based on units of production. Acquisition costs of proved properties are depleted on the basis of all proved reserves, developed and undeveloped, and capitalized development costs (wells and related equipment and facilities) are depleted on the basis of proved developed reserves. As more fully described below, proved reserves are estimated by our independent petroleum engineer and are subject to future revisions based on availability of additional information. Asset retirement costs are recognized when the asset is placed in service, and are depleted over proved reserves using the units of production method.

 

Oil and natural gas properties are reviewed for impairment when facts and circumstances indicate that their carrying value may not be recoverable. We compare net capitalized costs of proved oil and natural gas properties to estimated undiscounted future net cash flows using management’s expectations of future oil and natural gas prices. These future price scenarios reflect our estimation of future price volatility. If net capitalized costs exceed estimated undiscounted future net cash flows, the measurement of impairment is based on estimated fair value, using estimated discounted future net cash flows based on management’s expectations of future oil and natural gas prices. We have recorded no impairment on any of our properties.

 

Unproven properties that are individually significant are assessed for impairment and if considered impaired are charged to expense when such impairment is deemed to have occurred.

 

The sale of a partial interest in a proved oil and natural gas property is accounted for as normal retirement and no gain or loss is recognized as long as this treatment does not significantly affect the units-of-production depletion rate. If the units-of-production rate is significantly affected, then the sale is accounted for as the sale of an asset, and a gain or loss is recognized. The unamortized cost of the property or group of properties is apportioned to the interest sold and interest retained on the basis of the fair values of those interests. A gain or loss is recognized for all other sales of producing properties and is included in the results of operations. The sale of a partial interest in an unproved property is accounted for as a recovery of cost when substantial uncertainty exists as to recovery of the cost applicable to the interest retained. A gain on the sale is recognized to the extent the sales price exceeds the carrying amount of the unproved property. A gain or loss is recognized for all other sales of nonproducing properties and is included in the results of operations.

 

 

Oil and Gas Reserves

 

The determination of depreciation, depletion and amortization expense as well as impairments that are recognized on our oil and natural gas properties are highly dependent on the estimates of the proved oil and natural gas reserves attributable to our properties. Our estimate of proved reserves is based on the quantities of oil and natural gas which geological and engineering data demonstrate, with reasonable certainty, to be recoverable in the future years from known reservoirs under existing economic and operating conditions. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation, and judgment. For example, we must estimate the amount and timing of future operating costs, production taxes and development costs, all of which may in fact vary considerably from actual results. In addition, as the prices of oil and natural gas and cost levels change from year to year, the economics of producing our reserves may change and therefore the estimate of proved reserves may also change. Any significant variance in these assumptions could materially affect the estimated quantity and value of our reserves.

 

The information regarding present value of the future net cash flows attributable to our proved oil and natural gas reserves are estimates only and should not be construed as the current market value of the estimated oil and natural gas reserves attributable to our properties. Thus, such information includes revisions of certain reserve estimates attributable to our properties included in the prior year’s estimates. These revisions reflect additional information from subsequent activities, production history of the properties involved and any adjustments in the projected economic life of such properties resulting from changes in oil and natural gas prices. Any future downward revisions could adversely affect our financial condition, our borrowing ability, our future prospects and the value of our common stock.

 

Use of Estimates

 

The preparation of financial statements under GAAP in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to proved oil and natural gas reserve volumes, certain depletion factors, future cash flows from oil and natural gas properties, estimates relating to certain oil and natural gas revenues and expenses, valuation of equity-based compensation, valuation of asset retirement obligations, estimates of future oil and natural gas commodity pricing and the valuation of deferred income taxes. Actual results may differ from those estimates.

 

Jumpstart Our Business Startups Act (“JOBS Act”), adopted January 3, 2012

 

We qualify as an “emerging growth company,” as defined in Section 2(a) of the Securities Act as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, we are permitted to rely on exemptions from various reporting requirements including, but not limited to, the requirement to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes–Oxley Act of 2002, and the requirement to submit certain executive compensation matters to shareholder advisory votes such as “say on pay” and “say on frequency.”

 

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

We will remain an emerging growth company up to the fifth anniversary of our first registered sale of common equity securities, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

 

New Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by FASB that we adopt as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our financial statements upon adoption.

 

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, and shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15 Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's financial statements.

  

Off-Balance Sheet Arrangements

 

In April 2014, the Company entered into a lease option agreement with LT Land Group, L.L.C. (LT Land) for the Company to purchase all oil and gas leases acquired by LT Land in Utah. The premium paid for the option agreement which expires in June 2015, was $21,919 and was paid by $16,639 in cash and $5,280 paid by the issuance of 24,000 shares of common stock valued at $0.22 per share. The exercise price to be paid by the Company to acquire the leases is the cost of the leases to LT Land plus 35%. No partial exercises of the leases are allowed. At the time of exercise of the lease option, if the Company’s (or its successor by merger) 10 trading day average stock price is $0.30 or more per share, then the price of the exercise price must be in shares of common stock of the Company (or its successor by merger), at a value of $0.30 per share. If the Company’s (or its successor by merger) 10 trading day average stock price is below $0.30 or more per share, then the exercise price must be paid in cash. As of September 30, 2014, leases covering 6,056 gross acres have been acquired by LT Land pursuant to this lease option agreement.

 

We currently do 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we have elected not to provide the disclosures required by this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2014. Based on this evaluation, the CEO and CFO have concluded that, as of September 30, 2014, our disclosure controls and procedures were effective, in that they ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes made in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the nine months ended September 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On September 30, 2013 Roger Buller filed an action against Richfield Oil & Gas Company in the Twentieth Judicial District Court of Russell County, Kansas. The case was filed based on a claimed failure to pay a Note in full. Richfield contends that the Note has been paid in full by the issuance of Richfield Common Stock which was accepted by Mr. Buller for the payment of the Note. The action requests the sum of $50,386 plus interest. The Company believes that this claim was paid in full in September 2011 and plans on vigorously defending the action. A trial has been scheduled for November 20, 2014.

 

Litigation in the Ordinary Course

 

We may become involved in litigation from time to time relating to claims arising in the ordinary course of our business. We do not believe that the ultimate resolution of such claims would have a material effect on our business, results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material effect on our business, results of operations, financial condition and cash flows.

 

ITEM 1A. RISK FACTORS

 

As a smaller reporting company, we have elected not to provide the disclosures required by this item.

  

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following summarizes all sales of our unregistered securities during the quarterly period ended September 30, 2014. The securities listed in each of the below referenced transactions were (i) issued without registration and (ii) were issued in reliance on the private offering exemptions contained in Sections 4(2), 4(5) and/or 3(b) of the Securities Act and on Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state laws as a transaction not involving a public offering. No placement or underwriting fees were paid in connection with these transactions. Proceeds from the sales of these securities were used for general working capital purposes. The securities are deemed restricted securities for purposes of the Securities Act.

 

Sales of Common Stock

 

In July 2014 the Company issued 30,000 shares of common stock to certain employees as compensation for services at a value of $7,500 or $0.25 per share.

 

Warrant and Stock Option Issuances

 

None.

 

ITEM 6. EXHIBITS

 

The list of exhibits in the Exhibit Index to this quarterly report is incorporated herein by reference.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	RICHFIELD OIL & GAS COMPANY
Dated:  November 14, 2014	By:	/s/ MICHAEL A. CEDERSTROM
		Michael A. Cederstrom
		Chief Executive Officer
Dated:  November 14, 2014	By:	/s/ GLENN G. MACNEIL
		Glenn G. MacNeil.
		Chief Financial Officer

  

 

EXHIBIT INDEX

 

Exhibit
Number	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document