| Summary of Significant Accounting Policies | Note
2 – Summary of Significant Accounting Policies Principles
of Consolidation The
consolidated financial statements include the accounts and balances of the Company and have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”). All intercompany accounts and transactions have been eliminated
in consolidation. Use
of Estimates The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Estimated
quantities of crude oil, natural gas and natural gas liquids (“NGL”) reserves are the most significant of the Company’s
estimates. All reserve data used in the preparation of the Consolidated Financial Statements, as well as included in Supplemental
Information of Oil and Natural Gas Producing Activities (Unaudited)
are based on estimates. Reservoir engineering is a subjective
process of estimating underground accumulations of crude oil, natural gas and NGL. There are numerous uncertainties inherent in estimating
quantities of proved crude oil, natural gas and NGL reserves. The accuracy of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. As a result, reserve estimates may be different from the quantities
of crude oil, natural gas and NGLs that are ultimately recovered. Other
items subject to estimates and assumptions include, but are not limited to, the carrying amounts of property, plant and equipment, asset
retirement obligations, valuation allowances for deferred income tax assets, and valuation of derivative instruments. Management evaluates
estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic and commodity
price environment. The volatility of commodity prices results in increased uncertainty inherent in such estimates and assumptions. Although
management believes these estimates are reasonable, actual results may differ from estimates and assumptions of future events and these
revisions could be material. Future production may vary materially from estimated oil and natural gas proved reserves. Actual future
prices may vary significantly from price assumptions used for determining proved reserves and for financial reporting. Out of Period
Adjustments and Reclassifications In
the third quarter of 2022, the Company identified and recorded an out-of-period adjustment related to the Joint Development Agreement
discussed in Note 5. The impact of recording this adjustment reduced Utility and Other Deposits and increased Lease Operating Expense
by approximately $ 1.3 million 797,000 Gas and NGL sales in 2021 reflect an immaterial
reclassification of approximately $ 800,000 Accounts Receivable Accounts receivable include estimated amounts due from crude oil, natural
gas, and NGL purchasers and from non-operating working interest owners. Accrued revenue related to product sales from purchasers and
operators are due under normal trade terms, generally requiring payment within 60 days of production. For receivables from joint interest
owners, the Company generally has the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings.
Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written
off against the allowance for doubtful accounts only after all collection attempts have been exhausted. The Company did not have an allowance
for doubtful accounts at either December 31, 2022 or 2021. The Company’s accounts receivable as of December 31, 2022 and 2021 are
as follows: Schedule
of account receivable
2022 2021
Oil and Gas Receivables $ 3,060,341 $ 4,173,116
Joint Interest Billings 2,057,719 2,893,122
Receivable from Former CEO (See Note 18) 2,130,614 —
Other 531,565 667,667
Total Accounts Receivable $ 7,780,239 $ 7,733,905 Derivative
Instruments The
Company enters into hedge agreements to manage its exposure to oil and natural gas price fluctuations. The fair value of derivative contracts
is recognized as an asset or liability on the Company’s consolidated balance sheets. Realized gain or loss is recognized as a component
of revenue when the derivative contracts mature. For contracts which have not matured, an unrealized gain or loss is recorded based on
the change in the fair value of the outstanding contracts. Inventory Inventory
consists of oil in tanks which has not been delivered and is valued at the lower of cost or net realizable value. Oil
and Natural Gas and Other Properties The
Company uses the successful efforts method of accounting for its oil and gas activities. Costs incurred are deferred until exploration
and completion results are evaluated. At such time, costs of activities with economically recoverable reserves are capitalized as proven
properties, and costs of unsuccessful or uneconomical activities are expensed. Capitalized
drilling costs are reviewed periodically for impairment. Costs related to impaired prospects or unsuccessful exploratory drilling is
charged to expense. Management's assessment of the results of exploration activities, commodity price outlooks, planned future sales
or expiration of all or a portion of such leaseholds impact the amount and timing of impairment provisions. An impairment expense could
result if oil and gas prices decline in the future as it may not be economical to develop some of these unproved properties. Lease
options are capitalized as unproved property acquisition costs and are reviewed for impairment if indicators exist that the carrying
value of the lease option may not be recoverable. If the lease options become impaired, expire or are abandoned, the options will
be expensed. If proved reserves are discovered after the options are exercised, these costs will be reclassified as proved property. Depreciation,
depletion and amortization of producing properties is computed on the units-of-production method on a property-by-property basis. The
units-of-production method is based primarily on estimates of proved reserve quantities. Due to uncertainties inherent in this estimation
process, it is at least reasonably possible that reserve quantities will be revised in the near term. Changes in estimated reserve quantities
are applied to depreciation, depletion and amortization computations prospectively. Other property and equipment
is depreciated on the straight-line method. Segment Reporting Operating
segments are components of an enterprise that engage in activities from which it may earn revenues and incur expenses and for which separate
operational financial information is available and is regularly evaluated by management. Based on the Company’s organization and
management, it has only one reportable operating segment, which is oil and natural gas exploration and production. Asset
Retirement Obligations The
Company records the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding
increase in the carrying amount of the related oil and natural gas property asset. Subsequently, the asset retirement cost included in
the carrying amount of the related asset is allocated to expense through depletion of the asset. Changes in the liability due to passage
of time are recognized as an increase in the carrying amount of the liability through accretion expense. Based on certain factors, including
commodity prices and costs, the Company may revise its previous estimates of the liability, which would also increase or decrease the
related oil and natural gas property asset. Revenue Recognition The
Company’s revenues are comprised solely of revenues from customers and include the sale of oil, natural gas and NGL. The Company
believes that the disaggregation of revenue into these three major product types, as presented in the Consolidated Statements of Operations,
appropriately depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors based
on its single geographic region, the continental United States. Revenues are recognized at a point in time when production is sold to
a purchaser at a determinable price, delivery has occurred, control has transferred and it is probable substantially all of the consideration
will be collected. The Company fulfills its performance obligations under its customer contracts through delivery of oil, natural gas
and NGL and revenues are recorded on a monthly basis. The Company receives payment from one to three months after delivery. Generally,
each unit of product represents a separate performance obligation. The prices received for oil, natural gas and NGL sales under the Company’s
contracts are generally derived from stated market prices which are then adjusted to reflect deductions including transportation, fractionation
and processing. As a result, revenues from the sale of oil, natural gas and NGL will decrease if market prices decline. The sales of
oil, natural gas and NGL, as presented on the Consolidated Statements of Operations, represent the Company’s share of revenues
net of royalties and excluding revenue interests owned by others. When selling oil, natural gas and NGL on behalf of royalty or working
interest owners, the Company is acting as an agent and thus reports the revenue on a net basis. To the extent actual volumes and prices
of oil and natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties,
the expected sales volumes and prices for those properties are estimated and recorded. Variances between the Company’s estimated
revenue and actual payment are recorded in the month the payment is received. Historically, these differences have been insignificant. At
the end of each month when the performance obligation is satisfied, the variable consideration can be reasonably estimated and amounts
due from customers are recorded in Accounts Receivable in the Consolidated Balance Sheets. Taxes assessed by governmental authorities
on oil, natural gas and NGL sales are presented separately from such revenues in the Consolidated Statements of Operations. Oil
Sales Oil
production is transported from the wellhead to tank batteries or delivery points through flow-lines or gathering systems. Purchasers
of the oil take delivery at the tank batteries and transport the oil by truck or at a pipeline delivery point and the Company collects
a market price, net of pricing differentials. Revenue is recognized when control transfers to the purchaser at the net price received
by the Company. Natural
Gas and NGL Sales Under
the Company’s natural gas sales arrangements, the purchaser takes control of wet gas at a delivery point near the wellhead or at
the inlet of the purchaser’s processing facility. The purchaser gathers and processes the wet gas and remits proceeds to the Company
for the resulting natural gas and NGL sales. Based on the nature of these arrangements, the processor is the agent and the purchaser
is the Company’s customer, thus, the Company recognizes natural gas and NGL sales based on the net amount of proceeds received
from the purchaser. Transaction
Price Allocated to Remaining Performance Obligations Substantially
all of the Company’s product sales are short-term in nature with
a contract term of one year or less. For these contracts, the Company has utilized the practical expedient in ASC 606 which exempts the
Company from the requirements to disclose the transaction price allocated to remaining performance obligations if the performance obligation
is part of a contract that has an original expected duration of one year or less. For
the Company’s product sales that have a contract term greater than one year, the Company has utilized the practical expedient in
ASC 606 which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if
the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these contracts, each unit of
product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the
transaction price allocated to remaining performance obligations is not required. Prior-Period
Performance Obligations The
Company records revenue in the month that product is delivered to the purchaser. Settlement statements for certain natural gas and NGL
sales, however, may not be received for 30 to 90 days after the date the product is delivered, and as a result the Company is required
to estimate the amount of product delivered to the purchaser and the price that will be received for the sale of the product. In these
situations, the Company records the differences between its estimates and the actual amounts received for product sales in the month
that payment is received from the purchaser. Any identified differences between the Company’s revenue estimates and actual revenue
received have historically been insignificant. For the years ended December 31, 2022 and 2021, revenue recognized in the reporting period
related to performance obligations satisfied in prior reporting periods was not material. Stock-Based
Compensation The
Company recognized stock-based compensation expense associated with granted stock options. The Company accounts for forfeitures of equity-based
incentive awards as they occur. Stock-based compensation expense related to time-based restricted stock units is based on the price of
the common stock on the grant date and recognized as vesting occurs. Income
Taxes The
Company accounts for income taxes in accordance with the asset and liability method of accounting for income taxes. Under the asset
and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss
and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the
taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established
if management determines it is more likely than not that some portion of a deferred tax asset will not be realized. Per
Share Amounts The
Company calculates and discloses basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS").
The computation of basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average
number of outstanding common shares during the period. Diluted
EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume
conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on losses. As a result, if there
is a loss from continuing operations, Diluted EPS is computed in the same manner as Basic EPS. Fair
Value Measurements The
Financial Accounting Standards Board ("FASB") fair value measurement standards define fair value, establish a consistent framework
for measuring fair value and establish a fair value hierarchy based on the observability of inputs used to measure fair value. The
three-level fair value hierarchy for disclosure of fair value measurements defined by ASC Topic 820 is as follows: Level
1 Level
2 Level
3 A
financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to
the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such
prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques
involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the
instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the
beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original
level. There were no transfers between fair value hierarchy levels for the years ended December 31, 2022 and 2021. Impairment
of oil and natural gas properties - The
fair value of asset retirement obligations is included in proved oil and natural gas properties with a corresponding liability. The fair
value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount
rate, inflation rate and timing associated with the incurrence of these costs. The
inputs used to value oil and natural gas properties for impairments and asset retirement obligations require significant judgment and
estimates made by management and represent Level 3 inputs. Financial
instruments and other- Derivatives
The
fair values of derivative instruments in asset positions include measures of counterparty nonperformance risk, and the fair values of
derivative instruments in liability positions include measures of the Company’s nonperformance risk. These measurements were not
material to the Consolidated Financial Statements. Related
Party Transactions Transactions
between related parties are considered to be related party transactions even though they may not be given accounting recognition. FASB
ASC 850, Related Party Disclosures Recently
Issued Accounting Pronouncements FASB
periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The Company
has reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable: In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an
Entity’s Own Equity. The amendments in this ASU affect entities that issue convertible instruments and/or contracts in an
entity’s own equity. The amendments in this ASU primarily affect convertible instruments issued with beneficial conversion
features or cash conversion features because the accounting models for those specific features are removed. However, all entities
that issue convertible instruments are affected by the amendments to the disclosure requirements of this ASU. For contracts in an
entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted
for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope
exception related to certain requirements of the settlement assessment. Also affected is the assessment of whether an embedded
conversion feature in a convertible instrument qualifies for the derivatives scope exception. Additionally, the amendments in this
ASU affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The
amendments in this ASU are effective for public business entities, excluding entities eligible to be smaller reporting companies,
for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the
amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.
The Board specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The Board decided to
allow entities to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of
transition. The Company is analyzing the effect that adoption will have but does not expect a material impact as a result of
adopting these standards. In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. This ASU, as further amended, affects trade receivables,
financial assets and certain other instruments that are not measured through net income. This ASU will replace the currently required
incurred loss approach with an expected loss model for instruments measured at amortized cost and is effective for financial statements
issued for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not
believe the adoption of this ASU will have a material impact on the Company's consolidated financial statements since the Company does
not have a history of material credit losses. |
