CoJax Oil & Gas Corp 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto. The management's discussion and analysis contain forward-looking statements, such as statements of our plans, objectives, expectations, and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect," and the like, and/or future tense or conditional 29 constructions ("will," "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, or performance to be materially different from any future results, levels of activity, or performance expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. You should not place undue reliance on these statements, which speak only as of the date of this Annual Report. These cautionary statements should be considered with any written or oral forward-looking statements that we may issue in the future. You should read this Annual Report on Form 10-K with the understanding that our actual future results may be materially different from what we expect. All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by applicable law. Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The following discussion and analysis of financial condition and results of operations of the Company is based upon and should be read in conjunction with the audited consolidated financial statements and related notes elsewhere in this Annual Report on Form 10-K. Overview We were incorporated on November 13, 2017, under the laws of the Commonwealth of Virginia, to acquire, fund, and operate oil exploration and production from assets in the Gulf States Drill Region. We are an early-stage corporation seeking to become an independent energy company focused on the acquisition and subsequent exploitation and development of crude oil in the Gulf States Drill Region. Since our inception, we have incurred operating losses. Prior to the Acquisitions, we had not generated positive cash flows from operations, and while after the Acquisitions, we started to generate revenue, there are no assurances that we will be successful in obtaining an adequate level of financing for the development and commercialization of our proposed oil exploration and production business. These factors raise substantial doubt about our ability to continue as a going concern. We expect to incur expenses and operating losses for the foreseeable future as we seek to implement our business plan. Due to its limited revenues, the Acquisitions do not remedy substantial doubts about our ability as a going concern. The Company has been unable to raise additional capital as of the date of this Annual Report, other than personal loans by Jeffrey J. Guzy, CoJax’s Chief Executive Officer and Chairman of the Board of Directors, and $53,000 raised in the public offering. Reserve engineering is a process of estimating underground accumulations of oil that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data, and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing, and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil that are ultimately recovered. When we acquire oil exploration and production leases and rights, we will use 30 oil reserve reports as one factor in deciding whether to drill in the property of a specific oil lease or right. Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in reserve estimates or underlying assumptions will materially affect the quantities and present value of oil from a drilling site. Risks and Uncertainties Since March 2020, and throughout the last two years, global markets and commodity prices have been extremely volatile due to the impacts from the COVID-19 pandemic, with further impacts on volatility caused by the war in Ukraine that began in February 2022. Commodity prices remained steady during the fourth quarter of 2022 as demand has continued to outpace relative supply. While recessionary concerns have placed some downward pressure on commodity prices, causing oil and gas prices to decline in the first quarter of 2023 from their earlier highs in 2022, worldwide commodity demand continues to exceed pre COVID-19 pandemic levels. Although supply has increased and we have seen continued recovery in commodity prices since the beginning of the pandemic, there is still an element of volatility and uncertainty that we expect to continue at least for the near-term and possibly longer, in part by the impact of the Russian-Ukrainian military conflict on global commodity and financial markets, and the associated effect of trade sanctions on imports of oil and natural gas from Russia. This volatility could negatively impact future prices for oil, natural gas, petroleum products and industrial products. Recent Developments On November 8, 2022, the Company, through Barrister, acquired from Taxodium 100% ownership, right, title and interest in certain properties located in Mississippi and Alabama, including all oil and gas leases, interests, royalties, overriding royalties, subleases, fee estates, net profits interest, and carried interests (collectively, known as “NONOP Assets”) pursuant to the NONOP Assignment. In consideration of the acquisition of NONOP Assets, the Company issued 1,600,000 shares of the Company’s Common Stock to all members of Taxodium in proportion to their interest in Taxodium. This transaction became effective on October 1, 2022, for accounting purposes. On December 2, 2022, the Company, through Barrister, acquired from Taxodium 100% ownership, right, title and interests in additional properties located in Mississippi, including certain wells, facilities, the oil gas and mineral leases, together with all surface and subsurface and all operating rights, working interest, and net revenue interest arising out of such leases and rights (collectively known as “Buckley Assets”) pursuant to the to the Buckley Assignment. In consideration of the acquisition of Buckley Assets, the Company issued to members of Taxodium an aggregate of 1,500,000 shares of its Common Stock, valued at $2.00 per share, in proportion of their ownership interest in Taxodium. The Buckley Assignment became effective on October 15, 2022 for accounting purposes. 31 Results of Operations Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 For the Year Ended December 31, Change Change 2022 2021 Amount % Revenues $ 106,554 $ 8,160 $ 98,394 * Lease operating expenses 321,103 31,918 289,185 906% General & administrative expenses 2,111,761 1,461,534 650,227 44.5% Depletion and accretion on discounted liabilities 42,321 2,416 39,905 * Impairment expense 3,909,700 - 3,909,700 100% Loss from operations (6,278,331) (1,487,708) (4,790,623) 322.0% Other income (expense) 40,716 (2,488) 43,204 * Net loss $ (6,237,615) $ (1,490,196) $ (4,747,419) 318.6% * In excess of 1,000% Revenues Revenues were $106,554 for the year ended December 31, 2022, and $8,160 for the year ended December 31, 2021. The Company is an early-stage company, having just begun to acquire assignments of hydrocarbon revenues and underlying oil and gas exploration and production rights, and therefore has just begun producing significant revenue in 2023. General and Administrative Expenses General and administrative expenses consisted primarily of accounting and audit fees, legal and professional services fees, and payroll-related expenses. General and administrative expenses were $2,111,761 for the year ended December 31, 2022, compared to $1,461,534 in the same period in 2021, representing an increase of 5.9% or $85,227. The increase was primarily driven by an increase in share-based compensation expense. Lease Operating Expenses Lease operating expenses were $321,103 for the year ended December 31, 2022, compared to $31,918 in the same period in 2021. The increase was due to additional operating expenses resulting from acquisitions of oil and gas properties during 2022. Loss from Operations Total operating loss was $6,278,331 for the year ended December 31, 2022, and $1,487,708 for the year ended December 31, 2021. The loss was primarily driven by the $3,909,700 impairment loss on oil and gas properties in addition to the increase in general and administrative expenses. Other Income (Expense) 32 Other income was $40,716 for the year ended December 31, 2022, compared to other expense of $2,488 in the same period in 2021. The increase was primarily due to an increase in interest income of $41,660. Net Loss As a result of the above factors, there was a net loss of $6,237,615 for the year ended December 31, 2022, compared to a net loss of $1,490,196 in the same period of last year. Liquidity and Capital Resources Sources of Liquidity The Company had cash and cash equivalents of $37,750 at December 31, 2022. The Company has incurred net operating losses and operating cash flow deficits since inception, continuing through the years ended December 31, 2022, and December 31, 2021. Since inception, the primary sources of financing have been a combination of loans or contributions of Jeffrey J. Guzy, an officer and director of the Company, and $53,000 raised in the public offering. This limited funding has been inadequate as of the date of this Annual Report to fund our business strategy. The Company has not attained profitable operations and its ability to pursue any future plan of operation is dependent upon our ability to obtain additional financing. Funding Requirements The Company believes that its working capital on hand, as of the date of this report, will not be sufficient to fund its plan of operations over the next 12 months. Until such time, if ever, as the Company can generate substantial revenues, it expects to continue relying on a combination of equity offerings and debt financings to fund ongoing operations. To the extent that the Company raises additional capital through the sale of equity or debt securities, the ownership interest of the Company may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect the rights of the Company’s existing stockholders. There is no assurance that the Company will be able to complete any additional sales of equity securities or that it will be able to arrange for other financing to fund its planned business activities. Debt or equity financing arrangements may not be available to us or may be available only on unfavorable terms. Based on prior experience in seeking funding for drilling on properties without any significant oil production, funding for drilling is challenging to obtain at all or on affordable terms. Our ability to obtain additional financing may be impaired by many factors outside of our control, including the capital markets (both generally and in the crude oil industry in particular), our lack of operating history, the location of our proposed or future crude oil properties and prices of crude oil on the commodities markets (which will influence the amount of asset-based financing available to us) and other factors. Further, if oil prices on the commodities markets decline, our revenues from any exploitation of the Company Oil Rights will likely decrease, and such decreased revenues may increase our requirements for capital. The Company may continue to incur substantial costs in the future in connection with raising capital to fund our business, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses, and other costs. The Company may also be required to recognize non-cash expenses in connection with certain securities we may issue, which may adversely affect our financial condition. 33 If the Company is unable to raise additional funds through equity or debt financings or other arrangements sufficient to satisfy its long-term capital requirements, together with its revenues from any acquired operations, it may be required to reduce operating costs, which are already minimal and delay, reduce or eliminate its acquisition and development activities. That reduction could jeopardize the Company’s future strategic initiatives and business plans. The Company may be required to sell some or all of its acquired properties (which could be on unfavorable terms), seek joint ventures with one or more strategic partners, strategic acquisitions, and other strategic alternatives, cease our operations, sell or merge our business, or file a petition for bankruptcy (either liquidation or reorganization under the U.S. Bankruptcy Code). Any of these actions could result in investors in the common stock losing their investment or failing to realize any appreciation in the common stock from the purchase price. Working Capital (Deficit) The following table summarizes our total current assets, total current liabilities, and working capital (deficit) as of December 31, 2022, and December 31, 2021: As of As of December 31, 2022 December 31, 2021 Current assets $ 89,800 $ 103,765 Current liabilities 2,1 05 ,308 794,376 Working capital deficit $ (2,0 15 ,508) $ (690,611) Cash Flows Changes in the net cash provided by and (used in) operating, investing, and financing activities for the years ended December 31, 2022, and December 31, 2021, are set forth in the following table: Year Ended Year Ended December 31, 2022 December 31, 2021 Net cash used in operating activities $ (78,323) $ (108,618) Net cash used in investing activities - - Net cash provided by financing activities 103,975 76,665 Cash at beginning of period 12,098 44,051 Net increase (decrease) in cash $ 25,652 $ (31,953) Net cash from operating activities is derived from net loss from operations adjusted for non-cash items, changes in the balances of accounts receivables, prepaid expenses, accounts payables, and accrued expenses. For the period ended December 31, 2022, net cash used in operating activities was $78,323 compared to net cash used in operating activities of $108,618 for the period ended December 31, 2021. Net cash used in investing activities was $0 for the periods ended December 31, 2022, and December 31, 2021. Total net cash provided by financing activities was $103,975 and $76,665 for the periods ended December 31, 2022, and December 31, 2021, respectively. The net decrease was primarily due to the decrease in SBA PPP loans. 34 Going Concern The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial statements. On a consolidated basis, we have incurred significant operating losses since inception. Because we do not expect that existing operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability to continue as a going concern. Therefore, we will need to raise additional funds and are currently exploring sources of financing. Historically, we have raised capital through private offerings of debt and equity and officer loans to finance working capital needs. There can be no assurances that we will be able to continue to raise additional capital through the sale of common stock or other securities or obtain short-term loans. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Critical Accounting Policies and Estimates Our discussion of financial condition and results of operations is based upon the information reported in our financial statements. The preparation of these statements requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, weather, politics, global economics, mechanical problems, general business conditions, and other factors. Our significant accounting policies are detailed in Note 1 to our financial statements included in this Annual Report. We have outlined below certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management. On May 9, 2022, the Board of directors of the Company, after discussion with management, determined that the Company’s previously issued financial statements included in the Original Form 10-K need to be restated, to among other things, amend the statements used in the Original Form 10-K regarding the method of accounting it uses. On May 31, 2022, the Company filed an amendment to the Original Form 10-K in which it modified and restated certain statements, including that the Company uses the successful efforts method of accounting for oil and gas activities. Under this method, the costs of productive exploratory wells, all development wells, related asset retirement obligation assets and productive leases are capitalized and amortized, principally by field, on a units-of-production basis over the life of the remaining proved reserves. Exploration costs, including personnel costs, geological and geophysical expenses and delay rentals for oil and gas leases are charged to expense as incurred. Exploratory drilling costs are initially capitalized but charged to expense if and when the well is determined not to have found reserves in commercial quantities. All of our properties are located within the continental United States . Revenue Recognition. In January 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Codification Revenues from Contracts with Customers (Topic 606) . The timing of recognizing revenue from the sale of produced crude oil and natural gas was not changed as a result of adopting ASC 606. The Company predominantly derives its revenue from the sale of produced crude oil and natural gas. 35 The contractual performance obligation is satisfied when the product is delivered to the purchaser. Revenue is recorded in the month the product is delivered to the purchaser. The Company receives payment within one month after pickup. The transaction price includes variable consideration as product pricing is based on published market prices and reduced for contract-specified differentials. The new guidance regarding ASC 606 does not require that the transaction price be fixed or stated in the contract. Estimating the variable consideration does not require significant judgment. Revenue is recognized net of royalties due to third parties in an amount that reflects the consideration the Company expects to receive in exchange for those products. See Note 2 of our financial statements for additional information. Successful Efforts Method of Accounting. We account for oil and natural gas properties in accordance with the successful efforts method. Under this method, all acquisition costs of proved properties are capitalized and amortized on a unit-of-production basis over the remaining life of the proved reserves. All development costs of proved properties are capitalized and amortized on a unit-of-production basis over the remaining life of the proved developed reserves. Costs of retired, sold, or abandoned properties that constitute a part of an amortization base are charged or credited, net of proceeds, to accumulated depreciation, depletion and amortization unless doing so significantly affects the unit-of-production amortization rate, in which case a gain or loss is recognized in the current period. Gains or losses from the disposal of other properties are recognized in the current period. For assets acquired, we base the capitalized cost on the fair value at the acquisition date. We expense expenditures for maintenance and repairs necessary to maintain properties in operating condition, as well as annual lease rentals, as they are incurred. Estimated dismantlement and abandonment costs are capitalized at their estimated net present value and amortized over the remaining lives of the related assets. Interest is capitalized only during the periods in which these assets are brought to their intended use. We only capitalize the interest on borrowed funds related to our share of costs associated with qualifying capital expenditures. Impairment of Oil and Natural Gas Properties . We evaluate the impairment of our proved oil and natural gas properties generally on a field-by-field basis or at the lowest level for which cash flows are identifiable, whenever events or changes in circumstance indicate that the carrying value may not be recoverable. We reduce the carrying values of proved properties to fair value when the expected undiscounted future cash flows are less than the net book value. We measure the fair values of proved properties using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of proved properties include estimates of (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a risk-adjusted discount rate. These inputs require significant judgments and estimates by our management at the time of the valuation. The most significant financial statement effect from a change in our oil and gas reserves or impairment of its proved properties would be the DD&A rate. An impairment may not be reversed in future periods even though higher oil and natural gas prices may subsequently increase the ceiling. Our estimates of reserves and future cash flow as of December 31, 2022, and 2021 were prepared using an average price equal to the unweighted arithmetic average of the first day of the month price for each month within the 12-month periods ended December 31, 2022, and 2021, respectively, in accordance with SEC guidelines. As of December 31, 2022, our reserves are based on an SEC average price of $92.01 per Bbl of WTI oil posted and $6.957 per MCF natural gas. As of December 31, 2021, our reserves are based on an SEC average price of $45.66 per Bbl of WTI oil posted and $2.51 per MCF natural gas. Prices are adjusted by local field and lease level differentials and are held constant for the life of reserves in accordance with SEC guidelines. 36 Income Taxes. Deferred income taxes are provided for the difference between the tax basis of assets and liabilities and the carrying amount in our financial statements. This difference will result in taxable income or deductions in future years when the reported amount of the asset or liability is settled. Since our tax returns are filed after the financial statements are prepared, estimates are required in valuing tax assets and liabilities. We record adjustments to the actual values in the period we file our tax returns. In January 2018, the Company adopted ASC 718, Compensation – Stock Compensation . Recent Accounting Pronouncements See Note 4 in the notes to our consolidated financial statements for further discussion regarding recently issued accounting standards. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS As a smaller reporting company, we are not required to provide the information required by this Item. 37