| 12. CONTINGENCIES | Certain Legal Proceedings From time to time, the Company is party to various legal proceedings
arising in the ordinary course of business. While the outcome of lawsuits cannot be predicted with certainty, the Company is not
currently a party to any proceeding that it believes, if determined in a manner adverse to the Company, could have a potential
material adverse effect on its financial condition, results of operations, or cash flows. Amanda Olivier, et al. v. Nabors Drilling USA, L.P., and Yuma
Exploration and Production, Inc. On July 9, 2014, Nabors Drilling USA, L.P. and other Nabors entities
and Yuma Energy, Inc. and several of its wholly owned subsidiaries were named in a lawsuit filed in the District Court of Harris
County, Texas, in the 80th Judicial District, concerning the death of an employee of Timco Services during the drilling of the
Crosby 12-1 well. All of the Yuma-related entities, except for Yuma Exploration and Production, Inc., were voluntarily dismissed
from the lawsuit by the Plaintiffs. The Company has tendered its defense to its liability insurance carriers who are responding.
There has been one unsuccessful mediation session. Depositions are still ongoing. Defense counsel intends to file a motion seeking
dismissal of the claims against Exploration, which is currently being finalized. Management believes that the Company is not liable,
and has adequate insurance to meet any potential claim from this suit. Ontiveros v. Pyramid Oil, LLC, Yuma Energy, Inc. et al In September 2015, a suit was filed against the Company and Pyramid
Oil LLC styled Mark A. Ontiveros and Louise D. Ontiveros, Trustees of The Ontiveros Family Trust dated March 29, 2007 vs. Pyramid
Oil, LLC, et al., Case Number 15CV02959 in the Superior Court of California, County of Santa Barbara, Cook Division. In the suit,
the plaintiffs allege that the 1950 Community Oil and Gas Lease between them and Pyramid Oil LLC has expired by non-production.
The Company claims that the lease is still in effect, as there is no cessation of production time frame set out in the lease; production
had temporarily ceased, but was still profitable when measured over an appropriate time period; and the Company was conducting
workover operations on a well on the lease in an effort to re-establish production when served with the quit claim deed demand
from the plaintiff’s attorney. All present owners of the minerals covered by the 1950 Community Oil and Gas Lease,
with the exception of the plaintiffs, have executed amendments signifying their concurrence that the 1950 Community Oil and Gas
Lease is still in force and effect. On June 23, 2016, Pyramid Oil LLC filed a First Amended Cross Complaint against Texican
Energy Corporation and Everett Lawley alleging interference with contractual relations and prospective economic relations, and
violation of the California Uniform Trade Secrets Act. The parties are presently in the process of document discovery. Yuma Energy, Inc. v. Cardno PPI Technology Services, LLC Arbitration On May 20, 2015, counsel for Cardno PPI Technology Services, LLC
(“Cardno PPI”) sent a notice of the filing of liens totaling $304,209 on the Company’s Crosby 14 No. 1 Well and
Crosby 14 SWD No. 1 Well in Vernon Parish, Louisiana. The Company disputed the validity of the liens and of the underlying invoices,
and notified Cardno PPI that applicable credits had not been applied. The Company invoked mediation on August 11, 2015 on the issues
of the validity of the liens, the amount due pursuant to terms of the parties’ Master Service Agreement (“MSA”),
and PPI Cardno’s breaches of the MSA. Mediation was held on April 12, 2016; no settlement was reached. On May 12, 2016, Cardno filed a lawsuit in Louisiana state court
to enforce the liens; the Court entered an Order Staying Proceeding on June 13, 2016, ordering that the lawsuit “be stayed
pending mediation/arbitration between the parties.” On June 17, 2016, the Company served a Notice of Arbitration on Cardno
PPI, stating claims for breach of the MSA billing and warranty provisions. On July 15, 2016, Cardno PPI served a Counterclaim for
$304,209 plus attorneys’ fees. The parties are currently engaged in the arbitrator selection process. Management intends
to pursue the Company’s claims and to defend the counterclaim vigorously. Environmental Remediation Contingencies As of September 30, 2016, there were no known environmental or other
regulatory matters related to the Company’s operations that were reasonably expected to result in a material liability to
the Company. The Company’s operations are subject to numerous laws and regulations governing the discharge of materials into
the environment or otherwise relating to environmental protection. Board of Commissioners of the Southeast Louisiana Flood Protection
Authority-East, et al. v. Tennessee Gas Pipeline Company, LLC, et al. Exploration, a subsidiary of the Company, has been named as one of
97 defendants in a matter entitled Board of Commissioners of the Southeast Louisiana Flood Protection Authority – East, Individually
and As the Board Governing the Orleans Levee District, the Lake Borgne Basin Levee District, and the East Jefferson Levee District
v. Tennessee Gas Pipeline Company, LLC, et al., Civil District Court for the Parish of Orleans, State of Louisiana, No. 13-6911,
Division “J” - 5, now removed as Civil Action No. 13-5410, before the United States District Court, Eastern District
of Louisiana. Plaintiff filed the suit on July 24, 2013 seeking damages and injunctive relief arising out of defendants’
drilling, exploration, and production activities from the early 1900s to the present day in coastal areas east of the Mississippi
River in Southeast Louisiana. The suit alleges that defendants’ activities have caused “removal,
erosion, and submergence” of coastal lands resulting in significant reduction or loss of the protection such lands afforded
against hurricanes and tropical storms. Plaintiff alleges that it now faces increased costs to maintain and operate the man-made
hurricane protection system and may reach the point where that system no longer adequately protects populated areas. Plaintiff lists hundreds of wells, pipelines, and dredging events
as possible sources of the alleged land loss. Exploration is named in association with 11 wells, four rights-of-way, and one dredging
permit. The suit does not specify any deficiency or harm caused by any individual activity or facility. Although the suit references various federal statutes as sources
of standards of care, plaintiff claims that all causes of action arise under state law: negligence, strict liability, natural servitude
of drain, public nuisance, private nuisance, and as third-party beneficiary under breach of contract. The Company tendered its defense to its liability insurance carriers,
who are responding. On February 13, 2015, the federal judge adjudicating the matter granted defendants “Joint Motion to Dismiss
for Failure to State a Claim Under Rule 12(b)(6)”, thereby dismissing plaintiff’s claims with prejudice in the matter.
On February 20, 2015, the Board of Orleans filed a notice of appeal to the U.S. Fifth Circuit. On February 29, 2016, oral arguments
were held regarding the appeal, but as of July 31, 2016, no ruling on the appeal has been made. The Company will continue to contest
plaintiff’s legal arguments and factual assertions. At this point in the legal process, no evaluation of the likelihood of
an unfavorable outcome or associated economic loss can be made; therefore no liability has been recorded on the Company’s
books. Vintage Assets, Inc. v. Tennessee Gas Pipeline, L.L.C. et al. On October 24, 2016, Texas Southeastern Gas Gathering Company (“TGG”),
a subsidiary of the Company, was named as a defendant in an action by Vintage Assets, Inc. in the United States District Court
for the Eastern District of Louisiana. Vintage claims that its property, located in Plaquemines Parish, has been damaged by the
widening of canals used by the defendants. Between 1953 and 1970, the defendants’ predecessors received multiple right-of-way
servitudes on Vintage’s property, which authorized the construction and operation of pipelines and dredge canals. The defendants
dredged canals and laid pipelines pursuant to the rights of way agreements. Vintage alleges that its property has suffered damage
because of defendants’ failure to maintain the pipeline canals and banks. Further Vintage alleges that this failure has caused
ecological damages and loss of acreage due to erosion. The action is currently scheduled for trial in September 2017. Management
intends to defend the plaintiffs’ claims vigorously and has notified its insurance carrier of the claim. TGG sold all
of its assets to High Point Gas Gathering in 2010. At this point in the legal process, no evaluation of the likelihood of
an unfavorable outcome or associated economic loss can be made; therefore no liability has been recorded on the Company’s
books. The Parish of St. Bernard v. Atlantic Richfield Co., et al On October 13, 2016, two subsidiaries of the Company, Exploration
and Yuma Petroleum Company (“YPC”), were named as defendants, among several other defendants, in an action by the Parish
of St. Bernard in the Thirty-Fourth Judicial District of Louisiana. The petition alleges violations of the State and Local Coastal
Resources Management Act of 1978, as amended, in the St. Bernard Parish. The Company has notified its insurance carrier of
the lawsuit. Management intends to defend the plaintiffs’ claims vigorously. At this point in the legal process,
no evaluation of the likelihood of an unfavorable outcome or associated economic loss can be made; therefore no liability has been
recorded on the Company’s books. Audits Louisiana, et al. Escheat Tax Audits The States of Louisiana, Texas, Minnesota, North Dakota and Wyoming
have notified the Company that they will examine the Company’s books and records to determine compliance with each of the
examining state’s escheat laws. The review is being conducted by Discovery Audit Services, LLC. The Company has engaged Ryan,
LLC to represent it in this matter. The exposure related to the audits is not currently determinable. Louisiana Severance Tax Audit The State of Louisiana, Department of Revenue, notified
Exploration that it was auditing Exploration’s calculation
of its severance tax relating to Exploration’s production from November 2012 through March 2016. The audit relates to the
Department of Revenue’s recent interpretation of long-standing oil purchase contracts to include a disallowable “transportation
deduction,” and thus to assert that the severance tax paid on crude oil sold during the contract term was not properly calculated.
Exploration is currently waiting on the Department of Revenue’s final audit results. The exposure related to this audit is
not currently determinable. |
