PDGO Paradigm Oil and Gas Inc (PK)

Large accelerated filer   [  ]                           

Accelerated filer             [  ]

Non-accelerated filer     [  ]

Smaller reporting company      [X]

Income Taxes

 

Income Tax Provision:

a) The provision for income taxes differs from the result which would be obtained by applying the statutory rate of 34% to income before income taxes.

 

		September 30, 2013				December 31, 2012
Loss before income taxes		$	(1,348,036	)		$	(2,019,450	)
Income tax benefit 34% (estimated)			(458,332	)			(686,613	)
Unrecognized benefit of operating loss carry forwards			458,332				686,613
Income tax benefit		$	-			$	-

		September 30, 2013				December 31, 2012
Operating loss carry forwards		$	8,848,000			$	7,500,000
Statutory tax rate			34.0	%			34.0	%
Deferred tax asset			3,008,320				2,550,000
Valuation allowance			(3,008,320	)			(2,550,000	)
Net deferred tax assets		$	-			$	-

		September 30,				December 31,
		2013				2012
Production equipment		$	75,020			$	75,020
Furniture and equipment			-				-
Less accumulated depreciation			(56,032	)			(35,020	)
Property and equipment, net		$	18,988			$	40,000

 

Ownership of Principal Shareholders

Title Of Class	Name and Address of Beneficial Owner		Amount and Nature of  Beneficial Owner				Percent of Class
Common Stock	Vince Vellardita			12,000,000				9.6	%
Series A Preferred Stock	Vince Vellardita			1,000,000				100	%
Total				13,000,000

Ownership of Officers and Directors

 

Title Of Class	Name and Address  of Beneficial Owner		Amount and Nature of  Beneficial Owner				Percent of Class
Common Stock	Vince Vellardita			12,000,000				9.6	%
Series A Preferred Stock	Vince Vellardita			1,000,000				100	%
Total (one person)				13,000,000

Item 5.  Directors and Executive Officers.

 

Identification of Directors and Executive Officers

The following table sets forth the names of all of our current directors and executive officers. These persons will serve until the next annual meeting of the shareholders or until their successors are elected or appointed and qualified, or their prior resignation or termination.

Name	Positions Held	Date of Election  or Designation	Date of Termination or Resignation
Vince Vellardita	President	11/16/2012	*
Vince Vellardita	CEO Director	06/14/2013	*

SUMMARY COMPENSATION TABLE

 

The following table sets forth information concerning all compensation paid or accrued by us to our President and Chief Executive Officer and Chief Financial Officer during the fiscal period ended December 31, 2012 and 2013. None of the officer receives compensation in excess of $100,000 per year.

 

							Long-Term
Name and	Annual Compensation						Compensation Awards
Principal	Fiscal						Stock Options								All Other
Position	Year		Salary				Bonus				Granted				Compensation
Todd Violette	2012		$	70,850				--				--				--
President/ CEO
Todd Violette	2013		$	91,191.88				--				--				--
CEO
Vince Vellardita	2012		$	0				--				--				--
President
Vince Vellardita	2013		$	184,750				--				--				--
President/ Chief
Executive Officer

										Weighted
						Weighted Average				Average Remaining				Average
		Shares				Exercise  Price				Contractual Life				Intrinsic  Value
Outstanding at inception (January 28, 2010)			-				-				-				-
Granted			15,000			$	0.30			5.00 years					-
Exercised			-				-
Forfeited/Expired			-				-
Outstanding at December 31, 2010			15,000			$	0.30			4.75 years					-
Granted			-				-
Exercised			-				-
Forfeited/Expired			(7,500	)		$	0.30
Outstanding at December 31, 2011			7,500			$	0.30			3.75 years					-
Granted			11,000,000			$	0.02
Exercised			(10,000,000	)		$	0.02
Forfeited/Expired			(1,000,000	)		$	0.02
Outstanding at December 31, 2012			7,500			$	0.30			2.75 years					-

Fiscal Year-End Option Values(1)

 

Shares Value

Value

Number of Shares

Value of Unexercised

Acquired

Realized

Underlying Unexercised

In-the-Money Options

upon

From

Options at

Options at

Exercise

Exercise

December 31, 2010

at December 31, 2010

Name

of Options

Of Options

Exercisable

Unexercisable

Exercisable

Unexercisable

Ron Polli

--

--

--

150,000

$ --

$ 4,500

 

 

Stock Option Plan

 

Paradigm has a stock option plan for officers, directors, employees or consultants. 150,000 options have been granted under this plan issued to Ron Polli as indicated above. Options granted remain in effect for 5 years.

 

Compensation of Directors

 

The Company does not pay any compensation to directors.

 

Director Compensation

 

 

		Fees earned									Non-equity incentive			Nonqualified deferred
		or paid			Stock			Option			plan			compensation			All other
		in cash			awards			awards			compensation			earnings			compensation			Total
Name		($)			($)			($)			($)			($)			($)			($)
Todd Violette		$	91,191.88		--			--			-		$	--			-		$	91,191.88
(2013)
Vince Vellardita		$	184,750		-			-			-		$	-			-		$	184,750
(2013)

 

We have no plan for compensating our directors for their service. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. Our board of directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director. No director received and/or accrued any compensation for their services as a director, including committee participation and/or special assignments.

 

 

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Employment Agreements

A former President and CEO, Todd Violette, had an employment agreement with the Company as of December 31, 2012. The agreement provided for an annual salary of $240,000 per annum based on raising sufficient capital and a provision to be granted Series A Preferred Stock and to purchase common stock and warrants of the Company. The employee was also entitled to receive an annual bonus based on net profits and royalty in all new projection started after the execution of the agreement. The agreement could be terminated with 30 days’ notice by the employee.  The agreement was terminated effective June 14, 2013.

The President and CEO Vincent Vellardita has an employment agreement with the Company. The agreement provides for an annual salary of $150,000 per annum and a provision to purchase common stock and warrants of the Company. The employee is also entitled to receive an annual bonus based on net profits and royalty in all new projection started after the execution of the agreement. The agreement can be terminated with 30 days’ notice by the employee.  The contract has been renewed for another three years.

 

There are no other management agreements with our directors or executive officers and we do not anticipate that written agreements will be put in place in the foreseeable future.

 

Item 7.  Certain Relationships and Related Transactions, and Director Independence.

There were no material transactions, or series of similar transactions, during our last fiscal year, or any currently proposed transactions, or series of similar transactions, to which we or any of our subsidiaries was or is to be a party, in which the amount involved exceeded the lesser of $120,000 or one percent of the average of our total assets at year-end for the last three completed fiscal years and in which any director, executive officer or any security holder who is known to us to own of record or beneficially more than five percent of any class of our common stock, or any member of the immediate family of any of the foregoing persons, had an interest.

 

ITEM 8 . LEGAL PROCEEDINGS

 

We are not currently involved in any legal proceedings and we are not aware of any pending or potential legal actions required to be disclosed by Item 103 of Regulation S-K.

 

ITEM 9 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information and Holders

Our common stock is traded over-the-counter and quoted on the pink sheets under the symbol “PDGO.PK”

 

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The following table sets forth the high and low bid prices of our common stock for the fiscal quarters indicated as reported on the pink sheets. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

Period		High*				Low*
Fiscal Year Ended December 31, 2012:
First Quarter Ending March 31, 2012		$	.04			$	.03
Second Quarter Ending June 30, 2012		$	.17			$	.10
Third Quarter Ending September 30, 2012		$	.06			$	.06
Fourth Quarter Ending December 31, 2012		$	.08			$	.03
Fiscal Year Ended December 31, 2013:
First Quarter Ending March 31, 2013		$	.08			$	.06
Second Quarter Ending June 30, 2013		$	.05			$	.04
Third Quarter Ending September 30, 2013		$	.04			$	.04
Fourth Quarter Ending December 31, 2013		$	.02			$	.02

As of close of business on March 27, 2014, there were approximately 4,384 holders of record of our common stock.

*All prices reflect a 10:1 reverse split of the outstanding common stock on December 2, 2013.

 

Dividends

We have never declared any cash dividends with respect to our common stock.  Future payment of dividends is within the discretion of our Board of Directors and will depend on our earnings, capital requirements, financial condition and other relevant factors.  Although there are no material restrictions limiting, or that are likely to limit, our ability to pay dividends on our common stock, we presently intend to retain future earnings, if any, for use in our business and have no present intention to pay cash dividends on our common stock.

Item 10 Recent Sales of Unregistered Securities

Other than described herein, all securities sold by us during the fiscal years ended December 31, 2011, December 31, 2012 and December 31, 2013 were not registered under the Securities Act.

 

Item 11.  Description of Registrant’s Securities to be Registered.

Common Stock

We are authorized to issue 500,000,000 shares of common stock, $0.0001 par value per share.  There are currently 124,842,704 shares of common voting stock issued and outstanding.  The holders of our common stock are entitled to one vote per share on each matter submitted to a vote at a meeting of our shareholders.

Our shareholders have no pre-emptive rights to acquire additional shares of our common stock or other securities; nor shall our shareholders be entitled to vote cumulatively in the election of directors or for any other purpose.  Our common stock is not subject to redemption rights and carries no subscription or conversion rights.  All shares of the common stock now outstanding are fully paid and non-assessable.

For additional information regarding our common stock, see our Amended and Restated Certificate of Incorporation that are filed as an Exhibit hereto and incorporated herein by reference.  See the Exhibit Index, Item 15 of this Registration Statement.

Preferred Stock

The Company is authorized to issue 10,000,000 preferred shares of the Company’s stock.  In 2012, the Company’s Board of Directors designated 1,000,000 shares of Series A Preferred Stock and 2,000,000 shares of Preferred B Stock.  Holders of Series A Preferred Stock have 5,000 votes of common stock per share of Series A Preferred Stock held and may vote on any action requiring any class of shares to vote.  The rights of Series A Preferred Stock are not transferable except when foreclosed upon as collateral for a loan for the Company.

 

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Any sale or foreclosure of Series A Preferred Stock will result in an automatic conversion at a rate of one share of Series A Preferred Stock equaling 5,000 shares of common stock.  Holders of Series B Preferred Stock shall be entitled to receive semi-annual dividends, payable on April 1 and October 1, at a rate of 14% per annum.  The Company will redeem the holders of the Series B Preferred Stock based upon One Dollar of value every 12 months until the entire value of $4.00 plus interest is paid to the holder of Series B Preferred Stock.  Holders of Series B Preferred Stock are entitled to the same voting rights as holders of common stock.  Upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the shares of Series B Preferred Stock shall be entitled to receive before any distribution or payment is made upon any shares or any other class of stock of the Company.

In September 2013 the Company amended in its entirety the Series B Preferred Stock. The amended Series B Convertible Preferred Stock now represents 4,000,000 shares, has a $1.00 stated value and is convertible into the Company’s common stock after one year at a 15% discount to the common stock five day average bid price upon conversion. The Series B Convertible Preferred Stock, at the discretion of the Company, can pay a dividend at a rate of 10% per annum.

In September 2013 the Company created Series C Convertible Preferred Stock, with 3,000,000 shares designated. The Series C Convertible Preferred Stock has a $1.00 Stated Value, can pay dividends at 10% at the Company’s discretion and each share of Series C can convert into a share of common stock.

As of December 31, 2012 and 2013, there were 1,000,000 and 1,000,000 Preferred Series A Shares outstanding, respectively.  There were no Preferred Series B Shares outstanding at December 31, 2012 and there were 550,000 shares of Series B stock outstanding at December 31, 2013.  Upon issuance, the Preferred Series B Shares will be classified on the balance sheets as temporary equity.  This has been determined using the guidance in ASC 480-10-S99. The Preferred Series B Shares contain a provision that makes the shares mandatorily redeemable, which, in accordance with ASC 480-10-S99 requires the shares to be classified as temporary equity. As of December 31, 2013 there were no shares of Series C Convertible Preferred shares issued and outstanding.

No Outstanding Options, Warrants or Calls

There are no outstanding options, warrants or calls to purchase any of our authorized securities.  

No Provisions Limiting Change of Control

There is no provision in our Amended and Restated Certificate of Incorporation or our Amended and Restated Bylaws that would delay, defer, or prevent a change in control of our Company.  Under Article IV of our Amended and Restated Certificate of Incorporation, our Board of Directors has the authority to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, including the designation of “poison pill” and other rights that may delay, defer or prevents such a change in control.  However, as of the date hereof, the Board of Directors has not made any such determination and it has no intention to make such a determination in the foreseeable future.

 

Item 12.  Indemnification of Directors and Officers.

Paradigm Oil and Gas’ Articles of Incorporation and Bylaws provide for the indemnification of a present or former director or officer. Paradigm Oil and Gas indemnifies any director, officer, employee or agent who is successful on the merits or otherwise in defense on any action or suit. Such indemnification shall include, but not necessarily be limited to, expenses, including attorney’s fees actually or reasonably incurred by him. Nevada law also provides for discretionary indemnification for each person who serves as or at Paradigm Oil and Gas request as an officer or director. Paradigm Oil and Gas may indemnify such individual against all costs, expenses, and liabilities incurred in a threatened, pending or completed action, suit, or proceeding brought because such individual is a director or officer. Such individual must have conducted himself in good faith and reasonably believed that his conduct was in, or not opposed to, Paradigm Oil and Gas’s best interests. In a criminal action, he must not have had a reasonable cause to believe his conduct was unlawful.

 

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NEVADA LAW

Pursuant to the provisions of Nevada Revised Statutes 78.751, Paradigm Oil and Gas shall indemnify any director, officer and employee as follows: Every director, officer, or employee of Paradigm Oil and Gas shall be indemnified by us against all expenses and liabilities, including counsel fees, reasonably incurred by or imposed upon him/her in connection with any proceeding to which he/she may be made a party, or in which he/she may become involved, by reason of being or having been a director, officer, employee or agent of Paradigm Oil and Gas or is or was serving at the request of Paradigm Oil and Gas as a director, officer, employee or agent of Paradigm Oil and Gas, partnership, joint venture, trust or enterprise, or any settlement thereof, whether or not he/she is a director, officer, employee or agent at the time such expenses are incurred, except in such cases wherein the director, officer, employee or agent is adjudged guilty of willful misfeasance or malfeasance in the performance of his/her duties; provided that in the event of a settlement the indemnification herein shall apply only when the Board of Directors approves such settlement and reimbursement as being for the best interests of Paradigm Oil and Gas. Paradigm Oil and Gas shall provide to any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of Paradigm Oil and Gas as a director, officer, employee or agent of the corporation, partnership, joint venture, trust or enterprise, the indemnity against expenses of a suit, litigation or other proceedings which is specifically permissible under applicable law.

As to indemnification for liabilities arising under the Securities Act of 1933, as amended, for directors, officers or controlling persons, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy and is, therefore, unenforceable.

 

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ITEM 13. SELECTED FINANCIAL DATA

 

TABLE OF CONTENTS

	PAGE
FINANCIAL STATEMENTS:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-1
CONSOLIDATED BALANCE SHEETS	F-2
CONSOLIDATED STATEMENTS OF OPERATIONS	F-3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS	F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT	F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS	F-6
NOTES TO FINANCIAL STATEMENTS	F-7
CONSOLIDATED BALANCE SHEETS (NINE MONTHS ENDED 9/30/13	F-26
CONSOLIDATED STATEMENTS OF OPERATIONS (NINE MONTHS ENDED 9/30/13)	F-27
CONSOLIDATED STATEMENTS OF CASH FLOWS (NINE MONTHS ENDED 9/30/13)	F-28
NOTES TO FINANCIAL STATEMENTS (NINE MONTHS ENDED 9/30/13)	F-29

 

 

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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Paradigm Oil and Gas, Inc.

Indian Rocks Beach, Florida

We have audited the accompanying consolidated balance sheets of Paradigm Oil and Gas, Inc. (the “Company”) (a corporation in the exploration stage) as of December 31, 2012 and 2011 and the related consolidated statements of operations, comprehensive loss, shareholders’ deficit and cash flows for the years then ended and for the period from January 28, 2010 (entry into the exploration stage) to December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Paradigm Oil and Gas, Inc. at December 31, 2012 and 2011, and the results of their consolidated operations and cash flows for the years ended December 31, 2012 and 2011 and for the period from January 28, 2010 (entry into the exploration stage) through December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred significant recurring losses from operations since entry into the exploration stage and has a working capital deficiency both of which raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Turner, Stone & Company, L.L.P.

Certified Public Accountants

Dallas, Texas

March 26, 2014

 

 

F - 1

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PARADIGM OIL AND GAS, INC.

 (AN EXPLORATION STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2012 AND 2011

		December 31, 2012				December 31, 2011
Assets
Current Assets:
Cash		$	3,642			$	4,683
Inventory			-				6,904
Total Current Assets			3,642				11,587
Undeveloped oil and gas properties			-				565,000
Texas Railroad Commission bond			-				50,000
Deposits			-				800
Property and equipment, net			40,000				189,121
Total Assets		$	43,642			$	816,508
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable		$	26,921			$	37,685
Accrued wages (Note 3)			54,950				42,500
Accrued interest			43,105				4,973
Advances from shareholder (Note 3)			4,646				4,546
Notes payable			118,847				97,497
Short term convertible notes net of $76,331 and $142,947  in unamortized note payable discount (Note 7)			215,150				76,951
Total Current Liabilities			463,619				264,152
Asset retirement obligation liability			-				565,000
Note payable			-				30,600
Long term convertible notes net of $60,714 and $82,142  in unamortized note payable discount (Note 7)			140,820				119,392
Total Liabilities			604,439				979,144
Commitments and Contingencies (Notes 7, 12 and 13)
Shareholders' Deficit (Note 10):
Preferred stock Series A, $0.0001 par value, 1,000,000 shares authorized, 1,000,000 and 0 shares issued and outstanding as of December 31, 2012 and 2011			100				-
Common stock, $0.0001 par value, 500,000,000 shares authorized, 32,547,968 and 7,307,403 shares issued and outstanding as of December 31, 2012  and 2011			3,255				731
Additional paid-in capital			6,814,736				5,739,625
Accumulated deficit			(7,378,888	)			(5,359,438	)
Prepaid stock compensation			-				(540,000	)
Shares to be issued			-				-
Other comprehensive income (loss)			-				(3,554	)
Total Shareholders' Deficit			(560,797	)			(162,636	)
Total Liabilities and Shareholders’ Deficit		$	43,642			$	816,508

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

F - 2

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PARADIGM OIL AND GAS, INC.

 (AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2012

AND 2011 AND THE PERIOD FROM

JANUARY 28, 2010 (INCEPTION)

THROUGH DECEMBER 31, 2012

										For the Period from
										January 28, 2010
		For the Year Ended				For the Year Ended				(Inception) through
		December 31, 2012				December 31, 2011				December 31, 2012
Revenue		$	5,463			$	10,403			$	15,866
Field operation expenses:
Labor			18,354				150,222				242,417
Lease costs			5,410				23,947				44,142
Legal			-				4,000				14,000
Maintenance			1,905				45,402				50,356
Natural gas and oil exploration costs			-				57,453				58,905
Other field expenses			1,558				7,106				8,664
Travel			-				-				14,022
Utilities			-				-				5,571
Total field operation expenses			27,227				288,130				438,077
General and administrative expenses:
Advertising and promotion			12,300				-				12,870
Bad debts			-				87,374				87,374
Depreciation			28,016				13,946				43,709
Impairment			121,105				617,230				738,335
General and administrative			5,377				131,730				185,454
Interest			347,137				369,697				722,939
Management fees			-				62,500				154,802
Miscellaneous			29,914				49,090				95,277
Other office expenses			64,840				75,193				153,665
Payroll			97,226				-				97,226
Professional and consulting fees			677,651				1,006,506				1,828,884
Stock options			571,507				10,500				582,007
Total general expenses			1,955,073				2,423,766				4,702,542
Loss from operations			(1,976,837	)			(2,701,493	)			(5,124,753	)
Other income expense:
Assumption of liabilities in acquisition			-				-				633,279
Loss on disposition of subsidiary			42,613				-				42,613
Loss from shares issued on debt conversion, net			-				321,131				1,719,136
Net loss		$	(2,019,450	)		$	(3,022,624	)		$	(7,519,781	)
Net loss per common share - basic and diluted		$	0.14			$	0.51
Weighted average number of common shares outstanding -   basic and diluted			14,788,584				5,957,741

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

F - 3

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PARADIGM OIL AND GAS, INC.

 (AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF

COMPREHENSIVE LOSS FOR THE YEARS ENDED

DECEMBER 31, 2012 AND 2011 AND THE

PERIOD FROM JANUARY 28, 2010 (INCEPTION)

THROUGH DECEMBER 31, 2012

 

										For the Period from
										January 28, 2010
		For the Year Ended				For the Year Ended				(Inception) through
		December 31, 2012				December 31, 2011				December 31, 2012
Net loss		$	(2,019,450	)		$	(3,022,624	)		$	(7,519,781	)
Other comprehensive income:
Foreign currency translation adjustment			3,554				10,730				-
Comprehensive loss		$	(2,015,896	)		$	(3,011,894	)		$	(7,519,781	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F - 4

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PARADIGM OIL AND GAS, INC.

 (AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2012

AND 2011 AND THE PERIOD FROM JANUARY 28, 2010

(INCEPTION) THROUGH DECEMBER 31, 2012

 

		Preferred Stock																Additional								Prepaid								Other
		Series A								Common Stock								Paid-In				Accumulated				Stock				Shares to				Comprehensive
		Shares				Amount				Shares				Amount				Capital				Deficit				Compensation				be issued				Income (Loss)				Total
Balances at January 28, 2010 (inception)			-			$	-				18,806			$	19			$	541,520			$	-			$	-			$	-			$	-			$	541,539
Change in par value reclass (Note 10)			-				-				-				(17	)			17				-				-				-				-				-
Issuance of common stock for acquisition			-				-				4,200,000				420				8,399,580				-				-				-				-				8,400,000
Adjustment to record basis in Integrated Oil and Gas Solutions Inc.			-				-				-				-				(8,400,000	)			-				-				-				-				(8,400,000	)
Balance at January 28, 2010 after reverse acquisition			-				-				4,218,806				422				541,117				-				-				-				-				541,539
Issuance of common stock for conversion of debt			-				-				1,109,977				111				1,094,807				-				-				-				-				1,094,918
Loss from shares issued on debt conversion			-				-				-				-				1,398,005				-				-				-				-				1,398,005
Net Loss			-				-				-				-				-				(2,477,707	)			-				-				-				(2,477,707	)
Foreign currency translation adjustment			-				-				-				-				-				-				-				-				(14,284	)			(14,284	)
Balances at December 31, 2010			-				-				5,328,783				533				3,033,929				(2,477,707	)			-				-				(14,284	)			542,471
Reclassification of stock to be issued in 2010 debt conversion			-				-				(209,977	)			(21	)			(692,902	)			-				-				692,923				-				-
Write-off of CDN lease expense payable			-				-				-				-				-				140,893				-				-				-				140,893
Adjusted balances at December 31, 2010			-				-				5,118,806				512				2,341,027				(2,336,814	)			-				692,923				(14,284	)			683,364
Cancellation of shares to be issued			-				-				-				-				692,923				-				-				(692,923	)			-				-
Issuance of common stock for conversion of debt			-				-				1,588,597				159				355,841				-				-				-				-				356,000
Loss from shares issued on debt conversion			-				-				-				-				321,131				-				-				-				-				321,131
Beneficial conversion features on issuance of convertible debt (discount)			-				-				-				-				578,263				-				-				-				-				578,263
Stock options			-				-				-				-				10,500				-				-				-				-				10,500
Issuance of common stock for services			-				-				600,000				60				1,439,940				-				(540,000	)			-				-				900,000
Net Loss			-				-				-				-				-				(3,022,624	)			-				-				-				(3,022,624	)
Foreign currency translation adjustment			-				-				-				-				-				-				-				-				10,730				10,730
Balances at December 31, 2011			-				-				7,307,403				731				5,739,625				(5,359,438	)			(540,000	)			-				(3,554	)			(162,636	)
Issuance of common stock for conversion of debt			-				-				10,040,565				1,004				141,680				-				-				-				-				142,684
Beneficial conversion features on issuance of convertible debt (discount)			-				-				-				-				213,444				-				-				-				-				213,444
Issuance of common stock for cash			-				-				1,200,000				120				43,880				-				-				-				-				44,000
Issuance of common stock for services and warrants issued			-				-				14,000,000				1,400				676,107				-				540,000				-				-				1,217,507
Issuance of preferred stock for services			1,000,000				100				-				-				-				-				-				-				-				100
Net Loss			-				-				-				-				-				(2,019,450	)			-				-				-				(2,019,450	)
Foreign currency translation adjustment			-				-				-				-				-				-				-				-				3,554				3,554
Balances at December 31, 2012			1,000,000			$	100				32,547,968			$	3,255			$	6,814,736			$	(7,378,888	)		$	-			$	-			$	-			$	(560,797	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

F - 5

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PARADIGM OIL AND GAS, INC.

 (AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012

AND 2011 AND THE PERIOD FROM JANUARY 28, 2010

 (INCEPTION) THROUGH DECEMBER 31, 2012

 

										For the Period from
										January 28, 2010
		For the Year Ended				For The Year Ended				(Inception) through
		December 31, 2012				December 31,  2011				December 31, 2012
Operating Activities:
Net loss		$	(2,019,450	)		$	(3,022,624	)		$	(7,519,781	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			28,016				13,946				43,709
Impairment			121,105				617,230				738,335
Amortization of discount on convertible notes payable			301,488				353,174				654,662
Issuance of common stock for services			1,217,507				900,000				2,117,507
Issuance of preferred stock for services			100				-				100
Stock options vested			-				10,500				10,500
Issuance of notes payable for services			-				264,167				264,167
Interest expense treated as debt additions			52,350				-				52,350
Bad debt expense, net of recoveries			-				87,374				87,374
Foreign currency translation of liabilities			3,554				10,730				-
Loss from shares issued on debt conversion			-				321,131				1,719,136
Loss on sale of Integrated Oil and Gas Solutions Inc.			42,613				-				42,613
Assumption of liabilities in acquisition			-				-				633,279
Change in operating assets and liabilities:
Employee advances			-				7,059				-
Deposits			-				(800	)			(800	)
Inventory			-				919				(6,904	)
Texas Railroad Commission bond			-				2,500				(50,000	)
Accounts payable			4,644				10,366				41,221
Accrued interest			40,482				12,384				58,941
Accrued wages			12,450				42,500				54,950
Net cash used in operating activities			(195,141	)			(369,444	)			(1,058,641	)
Investing activities:
Proceeds from advances from shareholders			100				8,000				62,151
Repayments for advances from shareholders			-				(4,000	)			(21,530	)
Note receivable			-				(62,324	)			(87,374	)
Related party receivable			-				45,807				-
Furniture and fixtures			-				-				(24,352	)
Production equipment			-				-				(196,124	)
Purchases of natural gas and oil properties			-				-				(60,027	)
Cash acquired in acquisition			-				-				121
Net cash provided by (used in) investing activities			100				(12,517	)			(327,135	)
Financing activities:
Proceeds from convertible notes			150,000				287,500				580,000
Proceeds from convertible debenture payable			-				-				734,918
Proceeds from short term loan			-				15,000				15,000
Repayments for short term loan			-				(15,000	)			(15,000	)
Proceeds from notes payable			-				30,500				30,500
Common stock issuance			44,000				-				44,000
Net cash provided by financing activities			194,000				318,000				1,389,418
Net change in cash			(1,041	)			(63,961	)			3,642
Cash at beginning of the period			4,683				68,644				-
Cash at end of the period		$	3,642			$	4,683			$	3,642
Supplemental disclosure of cash flow information:
Assumption of accounts payable in acquisition		$	-			$	-			$	147,510
Assumption advances from shareholders in acquisition		$	-			$	-			$	40,025
Assumption of note payable in acquisition		$	-			$	-			$	85,864
Assumption of convertible debt in acquisition		$	-			$	-			$	360,000
Interest transferred to principal		$	2,350			$	8,796			$	11,146
Issuance of common stock for conversion of debt		$	(142,684	)		$	(356,000	)		$	(1,593,602	)
Discount on convertible notes		$	(213,444	)		$	(578,263	)		$	(791,707	)
Assignments of shareholder loans to convertible debt		$	-			$	76,000			$	76,000
Reclassification of stock to be issued in debt conversion		$	-			$	-			$	692,923
Cancellation of shares to be issued		$	-			$	(692,923	)		$	(692,923	)
Disposition of asset retirement obligation asset in sale		$	(565,000	)		$	565,000			$	-
Disposition of asset retirement obligation liability in sale		$	565,000			$	(565,000	)		$	-
Disposition of cash in sale		$	3,764			$				$
Disposition of deposits in sale		$	800			$				$
Disposition of Texas Railroad Commission Bond in sale		$	50,000			$				$
Disposition of inventory in sale		$	6,904			$				$
Disposition of accounts payable in sale		$	16,337			$				$
Par value reclass		$	-			$	-			$	17

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

F - 6

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PARADIGM OIL AND GAS, INC.

(AN EXPLORATION STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 AND THE

PERIOD FROM JANUARY 28, 2010 (INCEPTION) THROUGH DECEMBER 31, 2012

 

NOTE 1. ORGANIZATION AND BUSINESS ACTIVITIES

Organization

Paradigm Enterprises, Inc. (the "Company") was incorporated in the state of Nevada on July 15, 2002 to engage in the acquisition, exploration and development of oil and gas properties. On February 7, 2005 the Company changed

its name to Paradigm Oil and Gas, Inc. Effective January 28, 2010 (the “Acquisition Date”), Paradigm Oil & Gas Inc. entered into a share exchange agreement with the shareholders of Integrated Oil and Gas Solutions Inc. (the "Acquired Company") a Texas corporation. The transaction has been accounted for as a reverse acquisition. The Acquisition Date is considered the inception date of the Company.

The consolidated financial statements include the accounts of Paradigm Oil and Gas, Inc. and its subsidiaries, Integrated Oil and Gas Solutions Inc. (Integrated was sold effective June 26, 2012), Paradigm Integrated Technology Solutions Inc., and Centurion Oil Services Inc. Subsequent to June 26, 2012, the consolidated financial statements include the accounts of Paradigm Oil and Gas, Inc. and its remaining subsidiaries, Paradigm Integrated Technology Solutions Inc., and Centurion Oil Services Inc.

The Company is considered an exploration stage company, as it has not generated significant revenues from its operations.

 

On October 9, 2013, the Company’s Board of Directors approved a one-for-ten reverse stock split. The reverse stock split became effective on December 2, 2013. Stock option agreements have been adjusted to reflect the split. An amount equal to the par value of the shares issued has been transferred from additional paid-in capital to the common stock account. All references to number of shares have been adjusted to reflect the stock split on a retroactive basis.

 

Reverse merger of Integrated Oil and Gas Solutions Inc.

On January 28, 2010, the Company entered into a share exchange agreement with the shareholders of the "Acquired Company" in exchange for all of the Acquired Company’s capital stock.

Paradigm issued 4,200,000 of its $.001 par value shares common shares representing 82% of the fully-diluted shares of the Company in exchange for 100% of the Acquired Company's outstanding shares. The Acquired Company was a wholly owned subsidiary of the Company from the Acquisition Date until the Company sold the Acquired Company (see Note 3).

The Acquired Company held 100% working interests in certain oil and gas leases along with certain oil and gas production equipment. On the Acquisition date, the total purchase price to acquire these assets amounted to $541,539. These costs were capitalized on the Acquired Company's books at cost as natural gas and oil properties, unproved properties.

Going Concern

These consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America with the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business rather than through a process of forced liquidation.

The Company's significant operating losses raise substantial doubt about its ability to continue as a going concern. Inherent in the Company's business are various risks and uncertainties, including its limited operating history, historical operating losses, dependence upon strategic alliances, and the historical success rate of oil and gas exploration. Management's plan is to acquire interests in certain oil and gas properties with production and to rework existing wells to bring them on line for production.

 

F - 7

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As shown in the accompanying consolidated financial statements, the Company has incurred net losses of $2,019,450, $3,022,624, and $7,519,781 for the years ended December 31, 2012 and 2011, and for the period from January 28, 2010 (inception) through December 31, 2012 respectively.

The Company’s wells are now producing oil and gas but the Company will need to raise additional capital to increase the oil and gas production from its other wells that are not currently on line.  The Company may take on a joint venture partner or raise capital through their currency or sell some of the other wells and keep the proven ones.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recent accounting pronouncements

During the two years ended December 31, 2012, there were several new accounting pronouncements issued by the Financial Accounting Standards Board (FASB). Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s financial position or operating results. The Company will monitor these emerging issues to assess any potential future impact on its consolidated financial statements.

Use of Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The oil and gas industry is subject, by its nature, to environmental hazards and clean-up costs. At this time, management knows of no substantial costs from environmental accidents or events for which the Company may be currently liable. In addition, the Company's oil and gas business makes it vulnerable to changes in prices of crude oil and natural gas. Such prices have been volatile in the past and can be expected to be volatile in the future.

Fair value of financial instruments

In accordance with the reporting requirements of Accounting Standards Codification ("ASC") Topic No. 825, Financial Instruments, (ASC 825) the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of those financial instruments.

The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at December 31, 2012 and 2011.

Principles of Consolidation

The consolidated financial statements for the years ended December 31, 2012 and 2011 include the accounts of Paradigm Oil and Gas, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Reclassifications

Certain amounts in the comparative consolidated financial statements have been reclassified from financial statements previously presented to conform to the current period presentation.

Cash

Cash consists of cash on deposit with high quality major financial institutions, and to date the Company has not experienced losses on any of its balances. The carrying amounts approximate fair market value due to the liquidity of these deposits. For purposes of the consolidated balance sheets and consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents. At December 31, 2012 and 2011, the Company had $3,642 and $4,683 in cash, respectively.

 

F - 8

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Property and equipment

The following table details the composition of property and equipment:

		December 31,				December 31,
		2012				2011
Production equipment		$	75,020			$	196,125
Furniture and equipment			-				8,689
Less accumulated depreciation			(35,020	)			(15,693	)
Property and equipment, net		$	40,000			$	189,121

 

Property and equipment are stated at the Company's cost and are depreciated on a straight line basis over five or seven years. Maintenance and repair costs are expensed when incurred while major improvements are capitalized.  Depreciation expense totaled $28,016 in 2012, $13,946 in 2011, and $43,709 for the period from January 28, 2010 (inception) through December 31, 2012.

Subsequent to December 31, 2012, the Company sold certain production equipment for $40,000.  In accordance with the guidance for the impairment of long-lived assets, the Company evaluated the equipment for recovery and in 2012 recorded an impairment charge of $121,105 (see Note 5).

Oil and Gas Properties

The Company uses the successful efforts method of accounting for oil and gas producing activities. Under this method, acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole drilling costs are expensed. Costs of drilling and equipping productive wells, including development dry holes and related production facilities are capitalized.

Capitalized costs of producing oil and gas properties, after considering estimated dismantlement and abandonment costs and estimated salvage values are depreciated and depleted by the unit-of-production method. Support equipment and other property and equipment are depreciated over their estimated useful lives. The Company provides for depreciation, depletion and amortization of its investment in producing oil and gas properties on the unit-of-production method, based upon independent reserve engineers' estimates of recoverable oil and gas reserves from the property.

Properties will continue to be carried as an asset pending determination of whether proved reserves have been found only as long as: i) the property has a sufficient quantity of reserves to justify its completion as a producing property if the required capital expenditure is made and ii) there is enough geological and engineering evidence that supports a commercially producible quantity of reserves exist from a previously drilled well on the property. If the well properties cannot support any of these criteria, the property is assumed to be impaired, and its costs are charged to expense.

The impairment of unamortized capital costs is measured at a combined lease level and is reduced to fair value if it is determined that the sum of expected future net cash flows is less than the net book value. The Company determines if impairment has occurred through either adverse changes or as a result of the annual review of all the fields combined.  Impairment expense on oil and gas properties totaled $0 in 2012, $617,230 in 2011, and $617,230 for the period from January 28, 2010 (inception) through December 31, 2012.

Net loss per Common Share

Basic net loss per share is computed by dividing the net loss available to common shareholders (the numerator) for the period by the weighted average number of common shares outstanding (the denominator) during the period. The computation of diluted earnings is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares had been issued. For the years ended December 31, 2012 and 2011, basic and fully diluted loss per share are the same since the calculation of diluted per share amounts would result in an anti-dilutive calculation.

 

F - 9

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Income Taxes

The Company accounts for income taxes under the provisions of ASC Topic No. 740 , Income Taxes (ASC 740) which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The deferred tax assets generated by the Company have been fully reserved through a valuation allowance as the Company is not certain that it is more likely than not to be able to generate profitable operations in the near future.  See Note 9 for further discussion of deferred tax assets.

Foreign Currency Translation

The accounts of the Company's foreign operations have been translated into United States dollars. Assets and liabilities of those operations are translated in U.S. dollars using exchange rates as of the balance sheet date; income and expenses are translated using the average exchange rates for the reporting period. Translation adjustments are included in accumulated other comprehensive loss, a separate component of shareholders' deficit.

Stock-based Compensation

The Company records stock-based compensation in accordance with ASC Topic No. 718, Compensation - Stock Compensation (ASC 718), using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.

Asset Retirement Obligations

The Company has adopted ASC Topic No. 410 Asset Retirement and Environmental Obligations (ASC 410), which requires that asset retirement obligations ("ARO") associated with the retirement of a tangible long-lived asset, including natural gas and oil properties, be recognized as liabilities in the period in which it is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated assets. The cost of tangible long-lived assets, including the initially recognized ARO, is depleted, such that the cost of the ARO is recognized over the useful life of the assets. The ARO is recorded at fair value, and accretion expense is recognized over time as the discounted cash flows are accreted to the expected settlement value. The fair value of the ARO is measured using expected future cash flow, discounted at the Company's credit-adjusted risk-free interest rate. At December 31, 2011, the Company recorded an ARO liability of $565,000.  The ARO was disposed of when the Company sold Integrated Oil and Gas Solutions, Inc. during 2012 (see Note 3).

Environmental Protection and Reclamation Costs

The operations of the Company have been, and may be in the future, affected from time to time in varying degrees by changes in environmental regulations, including those for future removal and site restorations costs. Both the likelihood of new regulations and their overall effect upon the Company may vary from region to region and are not predictable.

The Company's policy is to meet or, if possible, surpass standards set by relevant legislation, by application of technically proven and economically feasible measures. Environmental expenditures that relate to ongoing environmental and reclamation programs will be charged against the consolidated statements of operations as incurred or capitalized and amortized depending upon their future economic benefits. The Company does not currently anticipate any material capital expenditures for environmental control facilities because all property holdings are at early stages of exploration. Therefore, estimated future removal and site restoration costs are presently considered minimal.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets to be held and used, including unproved oil and gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected undiscounted future cash flows is less than the carrying amount of the assets. In such circumstances, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

 

F - 10

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Revenue Recognition

The Company recognizes revenues in accordance with ASC 605, Revenue Recognition, and Staff Accounting Bulletin No 104. Accordingly all of the following criteria must be met for revenues to be recognized: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectability is reasonably assured. During 2012 and 2011, the Company’s revenues were the results of agreements with customers and revenues are generated upon performance of contracted services. Rates for services are based on negotiated rates with the Company’s customers and revenue is recognized when the services have been performed.

The Company uses the sales method of accounting for natural gas and oil revenues. Under this method, revenues are recognized upon the passage of title, net of royalties. Revenues from natural gas production are recorded using the sales method. When sales volumes exceed the Company's entitled share, an overproduced imbalance occurs. To the extent the overproduced imbalance exceeds the Company's share of the remaining estimated proved natural gas reserves for a given property, the Company records a liability. At December 31, 2012 and 2011, respectively, the Company had no overproduced imbalances.

Advertising Costs

Advertising costs are expensed when incurred.

Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the customer's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.

 

NOTE 3. RELATED PARTY TRANSACTIONS

A former Chief Executive Officer of the Company, Brian Kennedy, loaned the Company $76,546. The loan is interest free and has no formal terms of repayment.  During 2011, Kennedy loaned the Company an additional $8,000 and was repaid $4,000.  In addition, during 2011, $53,500 of the loan was transferred to another shareholder of the Company. As of December 31, 2012 and 2011, the balance of the loan was $4,646 and $4,546, respectively.

On May 23, 2011, part of a shareholder loan in the amount of $22,500 was exchanged for a convertible note which was then converted between May 24, 2011 and June 10, 2011 into 24,393 common shares.

On July 20, 2011 $53,500 of shareholder loans were exchanged for a convertible note which then was converted on July 21, 2011 into 294,928 common shares.

During 2011, notes receivable of $12,603 and $46,721 that were due from companies owned by shareholders of the Company were written off due to uncollectability.  $45,807 of this amount was originally loaned to a shareholder of the Company during 2010. Also during 2011, another note receivable of $28,050 that was due from an affiliated company of Brian Kennedy was written off due to uncollectability.

Management fees of $62,500 and $154,802 were paid to Brian Kennedy during the year ended December 31, 2011 and during the period from January 28, 2010 (inception) through December 31, 2012, respectively.

The Company was the guarantor of a loan made to a shareholder of the Company.  During 2011, payments to the shareholder of $116,724, as well as the long term convertible note, were the result of the guarantee made by the Company.

As of December 31, 2012 and 2011, short term convertible notes and accrued interest (net of $0 and $15,250 in unamortized note payable discount) of $38,080 and $16,756, respectively, were payable to Barclay Lyons, LLC.  Todd Violette, a former Chief Executive Officer of the Company, also serves as the Chief Executive Officer of Barclay Lyons, LLC.

Accrued wages to shareholders of the Company were $54,950 and $42,500 as of December 31, 2012 and 2011, respectively.

The Company sold a subsidiary, Integrated Oil and Gas Solutions Inc., for $500 on June 26, 2012 to Terry Rutter, who at the time was the Senior Executive of the Company.  The Company recognized a loss of $42,613 on the sale of the Acquired Company.

 

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NOTE 4. TEXAS RAILROAD COMMISSION BOND

The Company had $50,000 on deposit with the Texas Railroad Commission (RRC) to establish an operators bond. In order to operate wells on properties in Texas, the RRC requires a bond be established by the operating party. The bond was put into a fund to cover any liability on a property which an operator fails to rectify or pay. The deposit was refundable when an operator ceased to be an operator and left the wells and property in an approved condition or transfers the property and wells to another bonded operator.  The amount was included in the sale of Integrated Oil and Gas Services Inc. during 2012.

 

NOTE 5. PRODUCTION EQUIPMENT

During 2010, the Company's subsidiary, Paradigm Integrated Technology Solutions Inc., entered into a Transfer of Technology and Know How Agreement for the worldwide marketing rights for the Transportable Enhanced Oil Recovery Platform. Under the terms of the agreement the Company agreed to purchase the first system during 2010. During 2012, the Company recorded an impairment expense on the system and sold the system subsequent to December 31, 2012 (see Note 2).

 

NOTE 6. NATURAL GAS AND OIL PROPERTIES

On January 28, 2010, the Company entered into a share exchange agreement with the shareholders of the "Acquired Company" in exchange for all of the Acquired Company’s capital stock. The Acquired Company was a 100% subsidiary of the Company from the Acquisition Date until the Company sold the Acquired Company (see Note 3).

The Acquired Company holds 100% working interests in certain oil and gas leases along with certain Oil and Gas production equipment. The costs to acquire these assets amounted to $541,539 as of the Acquisition Date. These costs were capitalized on the acquired company's books at cost as Natural gas and oil properties, Unproved properties.  The Company recorded an impairment expense of $617,230 during the year ended December 31, 2011 against these assets.

The oil and gas properties are comprised of 4 leases totaling approximately nine hundred and thirty four (934) net mineral Acres, all located in the State of Texas, USA. 692 acres in Kaufman County, carry a 80% Net Revenue Interest, 40 acres located in the County of Wood, carry a 87.5% Net Revenue Interest, 122.37 acres located in the County of Henderson carry a 81.25% Net Revenue Interest and 80 acres in the County of Wichita carry a 75% Net Revenue Interest. Combined there are a total of 9 existing previously producing wells and available spacing to support the drilling of approximately 30 new wells in the 3800' to 9000' range and approximately 50 new wells in the 800' to 1,800' range.

On June 22, 2010 the Company's subsidiary, Integrated Oil and Gas Solutions Inc. acquired the Corsicana lease. The cost to acquire this lease amounted to $20,700 for a 50% working interest in the 80% Net Revenue Interest. The lease has 9 previously producing wells and has spacing over a total of 60 acres to support the potential of 17 new wells to depths of up to 2,000'. The Corsicana lease is located in Navarro County, Texas.

On June 30, 2010 the Company's subsidiary, Integrated Oil and Gas Solutions Inc. acquired 2 additional Chilson leases, known as Chilson B. The cost to acquire these leases amounted to $17,977 for a 100% working interest in the 81% Net Revenue Interest. Combined the 2 leases have 5 previously producing wells and have spacing over a total of 154 acres to support the potential of 37 new wells to depths of up to 2000 feet. The new Chilson leases are adjacent to the existing Chilson lease the Company has which are all located in Wichita County, Texas.

 

F - 12

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a) Participation Proposal Agreements

On January 25, 2005, the Company closed two participation proposal agreements with Win Energy Corporation ("Win"), an unrelated Calgary, Alberta-based private corporation. In November 2007 Win was acquired by Compton Petroleum Corporation ("Compton") The Company acquired an interest in two exploration projects in Alberta, Canada for the total payments of $506,014.  The payments were comprised of a $298,631 payment (less a $50,000 deposit) to acquire a 10% interest in the Todd Creek Property (10-34-5-29W4) located in Alberta, Canada and a $207,383 payment to acquire a 5% interest in the Hillsprings Property (10-34-5-29W4) located in Alberta, Canada.  The Company took an impairment charge against both the Todd Creek Property and the Hillsprings Property and wrote the value of each property down to $0.

b) Farmout and Option Agreement

On February 14, 2005 the Company entered into a farmout and Option Agreement with a private Alberta corporation for consideration of $152,423. The agreement called for the Company to farm-in to a 5% interest in a test well, and a similar interest in an additional option well in the Sawn Lake area located in Alberta, Canada. Upon completion, the Company will earn 100% of the farmout's interest (an undivided 10% interest in the drilling spacing unit) before payout, reverting to 50% of the farmout's interest (an undivided 5% interest) after payout. The Company has taken an impairment charge against the Sawn Lake property and wrote the value down to $0.  The Swan Lake property is currently producing gas but the Company has not yet been paid for its interest in the production.

The natural gas and oil properties are accounted for on a consolidated basis as follows:

		December 31, 2011
Chilson Property
Acquisition cost January 28, 2010		$	121,774
Cost of work program			21,350
Impairment expense			(143,124	)
Total		$	-
Lett Finlay Property
Acquisition cost January 28, 2010		$	308,708
Impairment expense			(308,708	)
Total		$	-
Lumpkin Property
Acquisition cost January 28, 2010		$	111,057
Impairment expense			(111,057	)
Total		$	-
Chilson B
Acquisition cost June 30, 2010		$	17,977
Impairment expense			(17,977	)
Total		$	-
Corsicana
Acquisition cost June 22, 2010		$	20,700
Impairment expense			(20,700	)
Total		$	-
Todd Creek Property
Acquisition cost		$	298,631
Cash call			52,102
Refund			(17,022	)
Written off			(50,000	)
Impairment expense			(283,711	)
Total		$	-
Hillsprings Property
Acquisition cost		$	207,383
Impairment expense			(207,383	)
Total		$	-
Swan Lake Property
Farmout and option agreement		$	152,423
Impairment expense			(152,423	)
Total		$	-
Total Natural Gas and Oil Properties, Unproved		$	-

 

All natural gas and oil properties were fully impaired at December 31, 2011 and were sold on June 26, 2012 (see Note 3).  The Company did not hold any natural gas and oil properties at December 31, 2012.

 

F - 13

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NOTE 7. CONVERTIBLE NOTES

The Company entered into several Securities Purchase Agreements for the sale of short term convertible notes. The notes bear annual interest of 7-12% and mature within 365 days after the issue date (maturity date). The notes plus interest can be converted in whole or in part to common shares at the holder's option at the later of the maturity date or the default date. The conversion price is calculated as 50-55% of the market price which is determined by the average of the lowest three closing prices for the Company’s stock during the ten days prior to conversion date. The Company evaluated the notes and determined that the conversion option does not constitute a derivative liability for financial reporting purposes. If the note plus interest is not paid or converted on the maturity date, then default interest begins to accrue on the whole amount bearing annual interest of 22%.

Conversion Price During Major Announcements

For certain notes, in the event the Company (i) makes a public announcement that it intends to consolidate or merge with any other corporation (other than a merger in which the Company is the surviving or continuing corporation and its capital stock is unchanged) or sell or transfer all or substantially all of the assets of the Company or (ii) any person, group or entity (including the Company) publicly announces a tender offer to purchase 50% or more of the Company's common stock (or any other takeover scheme) (the date of the announcement referred to in clause (i) or (ii) is hereinafter referred to as the "Announcement Date"), then the Conversion Price shall, effective upon the Announcement Date and continuing through the Adjusted Conversion Price Termination Date (as defined below), be equal to the lower of (x) the Conversion Price which would have been applicable for a Conversion occurring on the Announcement Date and (y) the Conversion Price that would otherwise be in effect. From and after the Adjusted Conversion Price Termination Date, the Conversion Price shall be determined as set forth above. For purposes hereof, "Adjusted Conversion Price Termination Date" shall mean, with respect to any proposed transaction or tender offer (or takeover scheme) for which a public announcement as contemplated by this paragraph has been made, the date upon which the Company (in the case of clause (i) above) or the person, group or entity (in the case of clause (ii) above) consummates or publicly announces the termination or abandonment of the proposed transaction or tender offer (or takeover scheme) which caused this paragraph to become operative.  The Company does not anticipate that this provision will have a material effect on the Company’s financial statements.

The Company may prepay the short term notes plus accrued interest at any time after 91 days after the issue date and ending up to 180 days after the issue date. The total amount calculated to be prepaid will bear an additional charge of 75% of the calculated prepaid amount. The Company is required at all times to have authorized and reserved from one to five times the number of shares that are actually issuable upon full conversion of the notes (based on the Conversion Price of the Notes in effect from time to time).  As of December 31, 2012 and 2011, respectively, 20,114,979 and 5,400,137 shares of the Company’s Common Stock were reserved for issuance of outstanding convertible notes.

In addition, the Company has entered into a Long Term Convertible Note bearing annual interest of 4.75% which matures in 2015.  This note plus interest can be converted into common shares at the holder's option. The conversion price is calculated as the lesser of (i) $0.60, or (ii) 70% of the market price which is determined by averaging the lowest three day closing price over the last 21 trading day period ending one trading day prior to the day the conversion notice was sent by facsimile. The Company evaluated the note and determined that the conversion option does not constitute a derivative liability for financial reporting purposes. If the note plus interest is not paid or converted on the maturity, then default interest begins to accrue on the whole amount bearing annual interest of 18%.

If at any time that the note is outstanding (i) the daily volume weighted average price is below $0.02, (ii) the Company has not authorized or reserved enough shares of its common stock to account for the conversion of the note in full and the issuance of shares of common stock in accordance with its terms, or (iii) the holder is prohibited for any reason from converting the note, then the holder may elect, in its sole discretion, to convert any portion of the outstanding principal amount and accrued interest into common shares of the Company.

If, on the date the holder delivers a conversion notice to the Company, the applicable conversion price is below $0.03, the Company, within three days after receipt of the conversion notice, shall have the right to prepay the portion of the note that the holder elected to convert.  Any such prepayment shall be made in an amount equal to 120% of the principal amount plus accrued interest of the amount to be converted.

 

F - 14

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Per the provisions of the note, the Company may be in default of this note as the average volume weighted average price of the Company’s common stock was below $0.01 per share for three consecutive trading days during 2012 and 2013.

In conjunction with this note, the Company has also entered into an equity investment agreement whereby the holder may purchase up to $2,000,000 of the Company’s common stock at the sole discretion of the holder.  Under the agreement, 60% of any equity purchase will be made at 75% of the volume weighted average price on the day before the investment is made.  The remaining 40% of the equity purchase will be made at 100% of the volume weighted average price on the day before the investment is made.

At any time, in the holder’s sole discretion, the holder may purchase an additional note in the amount of $300,000, otherwise having the exact same terms as this debenture.  In addition, in the holder’s sole discretion, the holder may enter into a second equity investment agreement for $3,000,000, otherwise having the exact same terms as the equity investment agreement disclosed above.

The following represents a summary of the Company’s short term and long term convertible notes, including the discounts and the amortization of the discounts:

						2011 Net				2012 Net
						Assumptions,				Assumptions,												2012				2011
		Convertible				Assignments, Settlements				Assignments,  Settlements				Outstanding at				Outstanding at				Beneficial Conversion				Beneficial  Conversion				2012				2011
		Note				& Interest				& Interest				December 31,				December 31,				Feature				Feature				Amortization				Amortization
		Issued				Transferred				Transferred				2012				2011				(Discount)				(Discount)				of Discount				of Discount
Short term debentures -   issue date:
October 6, 2010		$	50,000			$	(50,000	)		$	-			$	-			$	-			$	-			$	40,909			$	-			$	(40,909	)
November 18, 2010			40,000				(40,000	)			-				-				-				-				32,727				-				(32,727	)
December 20, 2010			52,500				(52,500	)			-				-				-				-				42,955				-				(42,955	)
January 28, 2011			35,000				(35,000	)			-				-				-				-				26,591				-				(26,591	)
March 9, 2011			25,000				(25,000	)			-				-				-				-				20,455				-				(20,455	)
May 2, 2011			32,500				(32,500	)			-				-				-				-				26,591				-				(26,591	)
May 23, 2011			22,500				(22,500	)			-				-				-				-				14,385				-				(14,385	)
July 11, 2011			44,000				10,172				(20,000	)			34,172				54,172				-				82,115				-				(82,115	)
July 12, 2011			45,000				(45,000	)			-				-				-				-				15,984				-				(15,984	)
July 20, 2011			61,000				3,012				(35,638	)			28,374				64,012				-				61,000				(30,500	)			(30,500	)
August 24, 2011			32,500				433				(32,933	)			-				32,933				-				26,591				(14,773	)			(11,818	)
December 21, 2011			58,167				582				(38,596	)			20,153				58,749				-				87,246				(83,611	)			(3,635	)
December 23, 2011			10,000				32				-				10,032				10,032				-				15,000				(14,062	)			(938	)
January 9, 2012			32,500				-				-				32,500				-				39,722								(39,722	)			-
February 6, 2012			50,000				-				-				50,000				-				50,000								(41,668	)			-
February 8, 2012			32,500				-				-				32,500				-				39,722								(39,722	)			-
July 18, 2012			22,500				-				-				22,500				-				22,500								(9,375	)			-
September 13, 2012			26,250				-				-				26,250				-				26,500								(6,625	)			-
December 14, 2012			35,000				-				-				35,000				-				35,000								-				-
Short term															291,481				219,898
Unamortized discount															(76,331	)			(142,947	)
Total short term															215,150				76,951
Long term debenture -
issue date:
October 24, 2011			200,000				1,534				-				201,534				201,534				-				85,714				(21,430	)			(3,571	)
Unamortized discount															(60,714	)			(82,142	)
Total long term															140,820				119,392
Total														$	355,970			$	196,343			$	213,444			$	578,263			$	(301,488	)		$	(353,174	)

 

Failure to Deliver Common Stock Prior to Deadline

Without in any way limiting the holder's right to pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the common stock issuable upon conversion of certain notes is more than three (3) business days after the deadline, the Company shall pay to the holder $2,000 per day in cash, for each day beyond the deadline that the Company fails to deliver such common stock. Such cash amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or, at the option of the holder (by written notice to the Company by the first day of the month following the month in which it has accrued), shall be added to the principal amount of this Note, in which event interest shall accrue thereon in accordance with the terms of this Note and such additional principal amount shall be convertible into common stock in accordance with the terms of this Note.

 

 

F - 15

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NOTE 8. NOTE PAYABLE

The Company is indebted under a note payable to 1132559 Alberta Ltd, bearing annual interest of 7% and secured by 100% of the first proceeds of production under the Farmout and Option Agreement for the Sawn Lake Property. There are no fixed repayment terms. The Company may be in default of this note as more fully explained in Note 6b of the consolidated financial statements. In addition, at December 31, 2012, the Company is also indebted under a promissory note payable to Greystone Capital Partners LLC.  The note bears an annual interest rate of 9.875% and is payable semi-annually.

 

		December 31, 2012				December 31, 2011
1132559 Alberta Ltd		$	97,497			$	97,497
Greystone			21,350				-
Total		$	118,847			$	97,497

 

NOTE 9. INCOME TAXES

Income Tax Provision:

a) The provision for income taxes differs from the result which would be obtained by applying the statutory rate of 34% to income before income taxes.

		December 31, 2012				December 31, 2011
Loss before income taxes		$	(2,019,450	)		$	(3,022,624	)
Income tax benefit 34% (estimated)			(686,613	)			(1,027,692	)
Unrecognized benefit of operating loss carry forwards			686,613				1,027,692
Income tax benefit		$	-			$	-

 

b) Significant components of the Company's deferred income tax assets are as follows:

		December 31, 2012				December 31, 2011
Operating loss carry forwards		$	7,500,000			$	5,500,000
Statutory tax rate			34.0	%			34.0	%
Deferred tax asset			2,550,000				1,870,000
Valuation allowance			(2,550,000	)			(1,870,000	)
Net deferred tax assets		$	-			$	-

As of December 31, 2012, the Company has incurred operating losses of approximately $7,500,000 which, if unutilized, will expire through the year 2030. However, due the change in control of the Company during June 2013, the Company does not have any significant NOL carry forwards as of the date of the change in control.  Future tax benefits existing at December 31, 2012, which may arise as a result of these losses, have been offset by a valuation allowance. The change in valuation allowance for the years ended December 31, 2012 and 2011 and for the period from January 28, 2010 through December 31, 2012 was $680,000, $1,027,500, and $2,550,000, respectively.

The Company accounts for corporate income taxes in accordance with ASC Topic 740 Income Taxes. Under ASC Topic 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, future tax benefits, such as those from net operating loss carry forwards, are not recognized to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as set forth below in the period that includes the enactment date.

The Company does not have any significant deferred tax assets or liabilities. As of June 2013, the Company no longer had any net operating loss carry forwards available to offset future taxable income of the Company. The Company is not current in filing its tax returns.

The Company has not filed tax returns since its inception.  The Company is currently working with an external tax firm to prepare past tax returns and does not believe that it will be exposed to any risk of penalty or forfeiture of NOLs.

 

F - 16

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NOTE 10. SHAREHOLDERS' DEFICIT

Common Stock

a) Effective January 28, 2010, Paradigm Oil & Gas Inc. (the "Company"), a Nevada corporation, entered into a Share exchange agreement with the shareholders of Integrated Oil and Gas Solutions Inc. (the "Acquired company") a Texas corporation, whereby the Company issued 4,200,000, US$.001 par value common shares to unrelated shareholders in exchange for their one hundred percent (100%) interest in all of the capital stock of the Acquired company The Acquired Company was a 100% subsidiary of the Company from the Acquisition Date until the Company sold the Acquired Company (see Note 3).

Prior to the Acquisition, there were 18,806 shares of the Company's common stock outstanding. Immediately following the Acquisition, there were 4,218,806 shares of common stock outstanding.

On the effective date of the acquisition, additional paid in capital was increased by $8,399,580. This was adjusted by $8,400,000 to record the basis in Integrated Oil and Gas Solutions Inc. An expense of $633,279 was then recorded to recognize the assumption of Paradigm’s liabilities assumed at the time of the acquisition.

b) On February 2, 2010, a convertible note payable of $360,000 was converted into common shares at $0.04 per share. 900,000 shares were issued to the convertible debenture holders.

On the effective date of the conversion, additional paid in capital was increased by $1,799,910. A loss of $1,440,000 was then recognized to match the conversion to the book value of the convertible note.

c) On September 28, 2010 convertible debentures in the amount of $734,918 were converted at $0.35 per share for a total of 209,977 Common Shares. Additional paid in capital increased by $692,902. The share price was $0.33 on the closing of this transaction, as a result a gain of $41,995 was recognized and recorded as a gain from issued shares on debt conversion.

 

F - 17

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d) During the year ended December 31, 2011, notes were converted into 1,588,597 common shares as follows:

Issue Date		Principal				Interest			Date		Amount				Price				# of Shares				Share PV				APIC
October 6, 2010		$	50,000			$	2,000		4/25/2011		$	15,000				1.487				10,087			$	1			$	14,999
									4/28/2011			15,000				1.249				12,010				1				14,999
									4/29/2011			12,000				1.249				9,608				1				11,999
									5/4/2011			10,000				1.212				8,251				1				9,999
November 18, 2010		$	40,000			$	1,600		5/25/2011		$	15,000				1.137				13,193			$	1			$	14,999
									6/1/2011			15,000				1.063				14,111				1				14,999
									6/3/2011			11,600				0.990				11,717				1				11,599
December 20, 2010		$	52,500			$	2,100		6/23/2011		$	15,000				0.702				21,368			$	2			$	14,998
									6/30/2011			17,500				0.653				26,799				3				17,497
									7/13/2011			12,000				0.571				21,016				2				11,998
									7/18/2011			10,100				0.528				19,129				2				10,098
January 28, 2011		$	35,000			$	1,400		8/5/2011		$	12,000				0.349				34,384			$	3			$	11,997
									8/10/2011			10,000				0.363				27,548				3				9,997
									8/25/2011			10,000				0.233				42,919				4				9,996
									9/13/2011			4,400				0.223				19,731				2				4,398
March 9, 2011		$	25,000			$	1,000		9/21/2011		$	10,000				0.151				66,225			$	7			$	9,993
									10/5/2011			16,000				0.142				112,676				11				15,989
May 11, 2011		$	32,500			$	1,300		11/10/2011		$	12,000				0.124				96,774			$	10			$	11,990
									11/23/2011			14,000				0.127				110,236				11				13,989
									12/7/2011			7,800				0.105				74,286				7				7,793
May 23, 2011		$	22,500			$	28		5/24/2011		$	7,500				1.280				5,859			$	1			$	7,499
									6/1/2011			7,500				0.900				8,333				1				7,499
									6/10/2011			7,528				0.738				10,201				1				7,527
July 11, 2011		$	45,000			$	-		8/19/2011		$	20,000				0.187				106,952			$	11			$	19,989
									9/26/2011			15,000				0.098				153,846				15				14,985
									12/19/2011			10,000				0.039				256,410				26				9,974
July 20, 2011 (partial conversion)		$	26,750			$	-		7/21/2011		$	26,750				0.181				147,464			$	15			$	26,735
July 20, 2011 (partial conversion)		$	26,750			$	-		7/21/2011		$	26,750				0.181				147,464			$	15			$	26,735
Total 2011 conversions		$	356,000			$	9,428				$	365,428								1,588,597			$	159			$	365,269

Upon the conversion of the above convertible notes to cash, the Company recorded a total loss of $311,703 during the year ended December 31, 2011.

 

F - 18

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e) During the year ended December 31, 2012, notes were converted into 10,040,565 common shares as follows:

2012
Issue Date		Principal				Interest			Date		Amount				Price				# of Shares				Share PV				APIC
July 7, 2011 (partial conversion)		$	10,000			$	-		12/3/2012		$	10,000				0.006				1,670,000			$	167			$	9,833
July 12, 2011 (partial conversion)		$	20,000			$	-		1/25/2012		$	8,500				0.039				217,949			$	22			$	8,478
									3/8/2012			8,000				0.023				341,880				34				7,966
									3/29/2012			3,500				0.010				345,168				34				3,466
July 20, 2011 (partial conversion)		$	25,340			$	-		1/31/2012		$	15,000				0.054				280,636			$	28			$	14,972
									3/20/2012			5,240				0.013				400,000				40				5,200
									7/20/2012			5,100				0.009				600,000				60				5,040
August 24, 2011		$	37,150			$	1,300		3/8/2012		$	12,000				0.040				300,000			$	30			$	11,970
									3/16/2012			5,000				0.018				277,778				28				4,972
									3/27/2012			5,000				0.018				277,778				28				4,972
									9/25/2012			14,000				0.026				538,461				54				13,946
									11/6/2012			2,450				0.010				305,000				30				2,420
December 16, 2011 (partial conversion)		$	38,596			$	-		1/31/2012		$	10,000				0.066				151,515			$	15			$	9,985
									3/15/2012			4,500				0.010				448,492				45				4,455
									4/2/2012			5,400				0.012				450,000				45				5,355
									5/2/2012			4,876				0.009				530,000				53				4,823
									8/30/2012			8,360				0.015				550,000				55				8,305
									11/8/2012			5,460				0.006				910,000				91				5,369
February 6, 2012 (partial conversion)		$	10,064			$	234		9/17/2012		$	6,800				0.009				800,000			$	80			$	6,720
									11/21/2012			3,498				0.007				645,908				65				3,433
Total 2012 conversions		$	141,150			$	1,534				$	142,684								10,040,565			$	1,004			$	141,680

As of December 31, 2012 and 2011, there were 32,547,968 and 7,307,403 Common Shares outstanding, respectively.

 

F - 19

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Preferred Stock

 

The Company is authorized to issue 10,000,000 preferred shares of the Company’s stock.  In 2012, the Company’s Board of Directors designated 1,000,000 shares of Series A Preferred Stock and 2,000,000 shares of Preferred B Stock.  In 2013, the Company’s Board of Directors designated 3,000,000 shares of Preferred C Stock. Holders of Series A Preferred Stock have 5,000 votes of common stock per share of Series A Preferred Stock held and may vote on any action requiring any class of shares to vote.  The rights of Series A Preferred Stock are not transferable except when foreclosed upon as collateral for a loan for the Company.  Any sale or foreclosure of Series A Preferred Stock will result in an automatic conversion at a rate of one share of Series A Preferred Stock equaling 5,000 shares of common stock.  Holders of Series B Preferred Stock shall be entitled to receive semi-annual dividends, payable on April 1 and October 1, at a rate of 14% per annum.  The Company will redeem the holders of the Series B Preferred Stock based upon One Dollar of value every 12 months until the entire value of $4.00 plus interest is paid to the holder of Series B Preferred Stock.  Holders of Series B Preferred Stock are entitled to the same voting rights as holders of common stock.  Upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the shares of Series B Preferred Stock shall be entitled to receive before any distribution or payment is made upon any shares or any other class of stock of the Company. Holders of Series C Preferred Stock shall be entitled to receive dividends at a rate of 10% per annum, payable in cash or in common shares.  Dividends on the Series C Preferred Stock shall be cumulative and shall accrue from the time of issuance. One year following the issuance, the holder of Series C Preferred Stock may, at the holder’s discretion, convert all or any portion of the shares of Series C Preferred Stock held by such person into a number of fully paid and non-assessable shares of common stock. Each share of Series C Preferred Stock may be converted into one share of common stock with the payment of 85% of the volume weighted average price of the last five trading days. Holders of Series C Preferred Stock have voting rights equal to the number of common shares that the Series C Preferred Stock is convertible into at that time.

As of December 31, 2012 and 2011, there were 1,000,000 and 0 Preferred Series A Shares outstanding, respectively.  There were no Preferred Series B or C Shares outstanding at December 31, 2012 or 2011.  Upon issuance, the Preferred Series B Shares will be classified on the consolidated balance sheets as a liability.  This has been determined using the guidance in ASC 480-10-25-4. The Preferred Series B Shares contain a provision that makes the shares mandatorily redeemable, which, in accordance with ASC 480-10-25-4 requires the shares to be classified as a liability. The Preferred Series C Shares contain a provision that makes the shares redeemable outside of the Company’s sole control, which, in accordance with ASC 480-10-S99 requires the shares to be classified as temporary equity.  The Preferred Series C Shares will be classified on the consolidated balance sheet as temporary equity upon issuance.

 

NOTE 11. NATURAL GAS AND OIL EXPLORATION RISK

Exploration Risk

The Company's future financial condition and results of operations will depend upon prices received for its natural gas and oil production and the cost of finding, acquiring, developing and producing reserves. Substantially all of its production is sold under various terms and arrangements at prevailing market prices. Prices for natural gas and oil are subject to fluctuations in response to changes in supply, market uncertainty and a variety of other factors beyond its control. Other factors that have a direct bearing on the Company's prospects are uncertainties inherent in estimating natural gas and oil reserves and future hydrocarbon production and cash flows, particularly with respect to wells that have not been fully tested and with wells having limited production histories; access to additional capital; changes in the price of natural gas and oil; availability and cost of services and equipment; and the presence of competitors with greater financial resources and capacity.

Distribution Risk

The Company is dependent on the operator to market any oil production from its wells and any subsequent production which may be received from other wells which may be successfully drilled on the Prospect. It relies on the operator's ability and expertise in the industry to successfully market the same. Prices at which the operator sells gas/oil both in intrastate and interstate commerce, will be subject to the availability of pipelines, demand and other factors beyond the control of the operator. The Company and the operator believe any oil produced can be readily sold to a number of buyers.

 

F - 20

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Foreign Operations Risk

The Company is exposed to foreign currency fluctuations, political risks, price controls and varying forms of fiscal regimes or changes thereto which may impair its ability to conduct profitable operations as it operates internationally and holds foreign denominated cash and other assets.

 

NOTE 12. CONTRACTUAL OBLIGATIONS, COMMITMENTS, AND CONTINGENCIES

From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.  However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters that may arise from time to time that may harm the Company’s business.

 

Other than routine litigation arising in the ordinary course of business that the Company does not expect, individually or in the aggregate, to have a material adverse effect on the Company, there are currently no pending legal proceedings.

 

NOTE 13. SUBSEQUENT EVENTS

The Company has performed an evaluation of subsequent events through the date the consolidated financial statements were issued. The evaluation has resulted in the following disclosures:

Subsequent to December 31, 2012, the Company entered into several Securities Purchase Agreements for the sale of short term convertible notes totaling $450,352. The notes bear annual interest of 5-12% and mature within 365 days after the issue date (maturity date). The notes plus interest can be converted in whole or in part to common shares at the holder's option at the later of the maturity date or the default date. The conversion price is calculated as 50-55% of the market price which is determined by the average of the lowest three closing prices for the Company’s stock during the ten days prior to conversion date. The Company evaluated the notes and determined that the conversion option does not constitute a derivative liability for financial reporting purposes.

In addition, the Company has settled $521,412 of convertible notes subsequent to December 31, 2012.

Common stock activity of the Company subsequent to December 31, 2012 is as follows:

		Number of shares
Common shares outstanding at December 31, 2012			32,547,968
Issuance of common stock for conversion of debt			47,041,394
Issuance of common stock for outside services			1,800,000
Issuance of common stock for employment services			6,950,000
Issuance of common stock for options exercised			532,294
Common shares outstanding at December 31, 2013			88,871,656
Issuance of common stock for conversion of debt			33,425,882
Issuance of common stock for outside services			5,450,000
Retirement of common stock			(3,000,000	)
Common shares outstanding at March 26, 2014			124,747,538

 

 

F - 21

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Series B Preferred Stock activity of the Company subsequent to December 31, 2012 is as follows:

		Number of shares
Preferred Series B shares outstanding at December 31, 2012			-
2013 activity			-
Preferred Series B shares outstanding at December 31, 2013			-
Issuance of Preferred B shares for acquisition of properties			550,000
Preferred Series B shares outstanding at March 26, 2014			550,000

 

On May 9, 2013, the Company formed Paradigm Pipeline Inc. as a wholly owned subsidiary of the Company.

On June 14, 2013, as part of the termination of Todd Violette, the Company entered into a convertible promissory note with Todd Violette, whereby the Company promised to pay a sum of $250,000.  The note has been fully paid to Todd Violette.  See Note 16 for further information regarding the termination.

On August 12, 2013, the Company entered into an agreement with IBC Funds, LLC to settle $67,304 of its debt. IBC Funds, LLC converted the $67,304 in exchange for 7,918,191 shares of the Company’s common stock.

On August 20, 2013, the Company acquired the Mina Travis Lease and the Perry Lease, which is partially owned by the Governor of the state of Texas, which sits on 252 acres of land and has several wells that are producing oil, in exchange for $25,000 and 350,000 shares of the Company’s Series B Preferred Stock at $1.00 per share. The 350,000 shares were issued to the stockholders of Lighthouse Petroleum, Inc. The Company acquired these leases from Lighthouse Petroleum Inc., whose CEO is Todd Violette, the former CEO of the Company.

On September 9, 2013, the Company sold certain production equipment for $40,000 and 2,500,000 shares of the Company’s common stock.

On September 25, 2013, the Company sold the Clark Lease to Triton Energy, LLC for $25,000.

On October 9, 2013, the Company’s Board of Directors approved a one-for-ten reverse stock split. The reverse stock split became effective on December 2, 2013. See Note 1 for treatment of the reverse stock split.

On October 18, 2013, the Company began drilling on the Perry Lease and was successful on both of the wells and is currently holding oil and gas reserve in four of the wells.

On November 18 and 19, 2013 the Company obtained Bonds P4 and P5 for Texas and Louisiana.

On December 10, 2013, the Company entered into an agreement with Plateau Energy, LLC whereby the Company acquired a 29.50% working interest in the Mina Travis No. 1 Well in exchange for 100,000 shares of the Company’s Series B Preferred Stock and a 20.836% working interest in the Lucy Lee No. 1 Well and the Lucy Lee SWD No. 2 in exchange for an additional 100,000 shares of the Company’s Series B Preferred Stock.

 

NOTE 14. SUPPLEMENTAL INFORMATION ON OIL AND GAS DATA (Unaudited)

The following tables set forth supplementary disclosures for the Company's oil and gas producing activities in accordance with ASC No. 932, Extractive Activities - Oil and Gas (ASC 932).

 

F - 22

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Capitalized Costs Relating to Oil and Gas Producing Activities:

										For the Period from
										January 28, 2010
		For the Year Ended				For the Year Ended				(Inception) through
		December 31, 2012				December 31, 2011				December 31, 2012
Capitalized costs:
Oil and gas properties		$	-			$	-			$	601,566
Total capitalized costs			-				-				601,566
Less: accumulated depreciation, depletion,
amortization and valuation allowance			-				-				-
Net Capitalized Costs		$	-			$	-			$	601,566

 

Costs Incurred in Oil and Gas Property Acquisition, Exploration, and Development Activities:

										For the Period from
										January 28, 2010
		For the Year Ended				For the Year Ended				(Inception) through
		December 31, 2012				December 31, 2011				December 31, 2012
Acquisition of properties		$	-			$	-			$	580,216
Exploration			-				-				-
Development			-				-				21,350
Total costs incurred		$	-			$	-			$	601,566

The Company did not hold any oil and gas reserves as of December 31, 2012 or 2011.

Results of Operations from Oil and Gas Producing Activities:

For the years ended December 31 and 2012, 2011 and for the period from January 28, 2010 (inception) through December 31, 2012, the Company spent $27,227, $288,130, and $438,077 on lease development activities, respectively.

 

NOTE 15. STOCK OPTIONS/STOCK-BASED COMPENSATION AND WARRANTS

The Company approved a stock option plan in October 2010 ("2010 Stock Option Plan") to provide incentives to employees, directors, officers, and consultants and under which 500,000 shares of common stock have been reserved for issuance. The options are non-statutory stock options and are valued at the fair market value of the stock on the date of grant. The stock subject to the option on the date of the grant and, in some cases, may not be less than 110% of such fair market value. The exercise price of non-statutory options may not be less than 100% of the fair market value of the stock on the date of grant. The options expire 5 years after the date of grant.

As of December 31, 2011, options to purchase 7,500 shares of the Company’s common stock had been granted.  Options to purchase an additional 21,000,000 shares were granted during the year ended December 31, 2012.  Options to purchase 10,000,000 of these shares were exercised the day they were granted and options to purchase 1,000,000 of these shares were forfeited.

 

F - 23

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The following table summarizes the Company’s stock option activities for the years ended December 31, 2012 and 2011 and for the period from January 28, 2010 (inception) through December 31, 2012:

										Weighted
						Weighted Average				Average Remaining				Average
		Shares				Exercise Price				Contractual Life				Intrinsic Value
Outstanding at inception (January 28, 2010)			-				-				-				-
Granted			15,000			$	0.30			5.00 years					-
Exercised			-				-
Forfeited/Expired			-				-
Outstanding at December 31, 2010			15,000			$	0.30			4.75 years					-
Granted			-				-
Exercised			-				-
Forfeited/Expired			(7,500	)		$	0.30
Outstanding at December 31, 2011			7,500			$	0.30			3.75 years					-
Granted			21,000,000			$	0.03			2.00 years
Exercised			(10,000,000	)		$	0.02			2.00 years
Forfeited/Expired			(1,000,000	)		$	0.06
Outstanding at December 31, 2012			10,007,500			$	0.03			1.44 years					-

 

During the year ended December 31, 2012, options to purchase 10,000,000 shares of the Company’s common stock were granted to the Company’s Chief Executive Officer, options to purchase 10,000,000 shares of the Company’s common stock were issued to Todd Violette (the former CEO of the Company), and options to purchase 1,000,000 shares of the Company’s common stock were issued to the Company’s Senior Executive.  The stock options granted to the Chief Executive Officer have a grant date fair value of $170,000, the stock options granted to the former CEO of the Company have a grant date fair value of $337,507, and the stock options granted to the Senior Executive have a grant date fair value of $64,000.  No options were granted during the year ended December 31, 2011.

The Company accounts for stock-based compensation under the provisions of FASB ASC 718-10-55. This statement requires the Company to record an expense associated with the fair value of stock-based compensation. The Company uses the Black- Scholes option valuation model to calculate stock-based compensation at the date of grant. Option pricing models require the input of highly subjective assumptions, including the expected price volatility.

The following table summarized the values from and assumptions for the Black-Scholes option pricing model for stock options granted during the years ended December 31, 2012 and 2011 and for the period from January 28, 2010 (inception) through December 31, 2012:

		2012				2011				2010
Weighted average grant date fair value per share		$	0.03			$	0.02			$	0.02
Weighted average risk-free interest rate			0.3	%			2.5	%			2.5	%
Expected life (in years)		2.0 years				5.0 years				5.0 years
Weighted average volatility			265	%			75	%			75	%
Expected dividends		$	-			$	-			$	-

 

A summary of the status of the Company's vested and non-vested shares at December 31, 2012 and 2011, and the weighted average grant date fair value is presented below:

						Weighted Average				Weighted Average
						Grant Date				Grant Date
		Shares				Fair Value per Share				Fair Value
Vested			10,007,500			$	0.030
Nonvested			-				-
Total			10,007,500			$	0.030			$	300,225

 

During the year ended December 31, 2011, options to purchase 7,500 shares of the Company’s common stock vested with a value of $10,500. During the year ended December 31, 2012, options to purchase 10,000,000 shares of the Company’s common stock vested with a value of $340,000.

 

NOTE 16. EMPLOYMENT AGREEMENTS

The President and CEO Vincent Vellardita has an employment agreement with the Company. The agreement provides for an annual salary of $150,000 per annum and a provision to purchase common stock and warrants of the Company. The employee is also entitled to receive an annual bonus based on net profits and royalty in all new projects started after the execution of the agreement. The agreement can be terminated with 30 days’ notice by the employee.  The contract has been renewed for another three years.

 

F - 24

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The former Senior Executive Terry Rutter had an employment agreement with the Company. The agreement provided for an annual salary of $48,000 and a provision to purchase warrants of the Company. The employee was also entitled to receive an annual royalty in all new projects started after the execution of the agreement. The agreement could be terminated with 30 days’ notice by the employee.  The agreement was terminated effective September 19, 2013.  The employee stayed on as an Independent Contractor until January 16, 2014 under the same terms.

A former President and CEO Todd Violette had an employment agreement with the Company as of December 31, 2012. The agreement provided for an annual salary of $240,000 per annum based on raising sufficient capital and a provision to be granted Series A Preferred Stock and to purchase common stock and warrants of the Company. The employee was also entitled to receive an annual bonus based on net profits and royalty in all new projects started after the execution of the agreement. The term of the agreement was for two years and could be terminated with 30 days’ notice by the employee.  The agreement was terminated effective June 14, 2013. The termination was amended with updated terms on June 18, 2013.  As part of the termination, 1,000,000 of the Company’s series A Preferred Stock was transferred from Todd Violette to Vincent Vellardita.

A former President and CEO, Ron Polli, had an employment agreement with the Company. The agreement provided for an annual salary of $60,000 per annum based on weeks worked and a provision to be granted options under a separate option agreement as disclosed in Note 15. The agreement could be terminated with 30 days’ notice by either party.  The agreement was terminated effective November 22, 2011.

 

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Paradigm Oil and Gas, Inc.
(an Exploration Stage Company)
Consolidated Balance Sheets
September 30, 2013
		September 30,  2013				December 31, 2012
		(Unaudited)				(Audited)
Assets
Current Assets:
Cash		$	43,794			$	3,642
Inventory			-				-
Total Current Assets			43,794				3,642
Texas Railroad Commission bond			-
Deposits			810				-
Property and equipment, net			18,988				40,000
Natural gas and oil properties			59,175				-
Total Assets		$	122,767			$	43,642
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable		$	179,498			$	26,921
Accrued wages (Note 2)			43,595				54,950
Accrued interest			31,569				43,105
Advances from shareholder			3,047				4,646
Notes payable (Note 4)			132,876				118,847
Short term convertible notes net of $162,852 and $76,331			-				-
in unamortized note payable discount			283,786				215,150
Total Current Liabilities			674,371				463,619
Long term convertible notes net of $60,714 and $82,142  in unamortized note payable discount			102,470				140,820
			102,470				140,820
Total Liabilities			776,841				604,439
Commitments and Contingencies
Shareholders' Deficit
Preferred stock Series A, $0.0001 par value, 1,000,000 shares authorized, 1,000,000 and 1,000,000 shares issued and outstanding as of September 30, 2013 and December 31, 2012.			100				100
Preferred stock Series B, $0.0001 par value, 1,000,000 shares authorized, 350,000 an -0-  shares issued and outstanding as of September 30, 2013 and December 31, 2012.			35				-
Common stock, $0.0001 par value, 500,000,000 shares authorized, 74,935,350 and 32,547,968  shares issued and outstanding as of September 30, 2013 and December 31, 2012			7,494				3,255
Additional paid-in capital			8,065,276				6,814,715
Accumulated deficit			(8,726,979	)			(7,378,888	)
Total Shareholders' Deficit			(654,074	)			(560,818	)
Total Liabilities and Shareholders’ Deficit		$	122,767			$	43,621

The accompanying notes are an integral part of these financial statements

 

 

F - 26

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Paradigm Oil and Gas, Inc.
(an Exploration Stage Company)
Statements of Operations
Unaudited
										For the Period from
		For the				For the				January 28, 2010
		Nine Months Ended				Nine Months Ended				(Inception) through
		September 30, 2013				September 30, 2012				September 30, 2013
Revenue						$	5,463			$	15,866
Field operation expenses:
Labor											242,417
Lease costs			21,599				3,766				65,741
Legal			-				-				14,000
Maintenance			-				-				50,356
Natural gas and oil exploration costs			-				-				58,905
Other field expenses			-				-				8,664
Travel			-				-				14,022
Utilities			-				-				5,571
Total field operation expenses			21,599				3,766				459,676
General and administrative expenses:
Advertising and promotion			18,958				-				31,828
Bad debts			-				-				87,374
Depreciation			21,012				21,012				64,721
Impairment			-				-				738,335
General and administrative			89,960				10,760				275,414
Interest			225,478				195,809				948,417
Management fees			-				-				154,802
Miscellaneous			-				-				95,277
Other office expenses			30,628				38,639				184,293
Payroll			808,088				141,438				905,314
Professional and consulting fees			188,181				388,317				2,017,065
Stock options			-				-				582,007
Total general expenses			1,382,305				795,975				6,084,847
Loss from operations			(1,403,904	)			(794,278	)			(6,528,657	)
Other (income) expense:
Sales of oil royalty lease interest			(65,000	)			-				(65,000	)
Assumption of liabilities in acquisition			-				-				633,279
Loss on disposition of subsidiary			9,132				42,613				51,745
Loss from shares issued on debt conversion, net			-				-				1,719,136
Net loss		$	(1,348,036	)		$	(836,891	)		$	(8,867,817	)
Net loss per common share - basic and diluted		$	(0.04	)		$	(0.06	)
Weighted average number of common shares outstanding -
basic and diluted			34,913,650				13,004,070

 

The accompanying notes are an integral part of these financial statements

 

F - 27

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Paradigm Oil and Gas, Inc.
(an Exploration Stage Company)
Statements of Cash Flows
Unaudited
										For the Period from
										January 28, 2010
		For the Nine Months				For the Nine Months				(Inception) through
		September 30, 2013				September 30, 2012				September 30,  2013
Operating Activities:
Net loss		$	(1,348,036	)		$	(836,891	)			(8,867,817	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			21,012				21,012				64,721
Impairment			-				-				738,335
Amortization of discount on convertible notes payable			186,805				149,489				841,467
Issuance of common stock for services			720,861				406,460				2,838,368
Issuance of preferred stock for services			-				100				100
Stock options vested			-				-				10,500
Issuance of notes payable for services			-				-				264,167
Interest expense treated as debt additions			160,998				52,350				213,348
Bad debt expense, net of recoveries			-				-				87,374
Transferred interest			-				2,350				-
Loss from shares issued on debt conversion			-				-				1,719,136
Loss on sale of Integrated Oil and Gas Solutions Inc.			-				-				42,613
Assumption of liabilities in acquisition			-				-				633,279
Change in operating assets and liabilities:			-				-				-
Employee advances			-				-				-
Deposits			-				-				(800	)
Inventory			-				6,904				(6,904	)
Texas Railroad Commission bond			-				-				(50,000	)
Accounts payable			(4,473	)			36,628				36,748
Accrued interest			(2,931	)			39,218				56,010
Accrued wages			145,695				-				200,645
Net cash used in operating activities			(120,069	)			(122,380	)			(1,178,710	)
Investing activities:
Proceeds from advances from shareholders			-				-				62,151
Repayments for advances from shareholders			-				-				(21,530	)
Note receivable			-				-				(87,374	)
Deposits			(810	)			800				(810	)
Furniture and fixtures			-				-				(24,352	)
Production equipment			-				-				(196,124	)
Purchases of natural gas and oil properties			(59,175	)			-				(119,202	)
Cash acquired in acquisition			-				-				121
Net cash provided by (used in) investing activities			(59,985	)			800				(387,120	)
Financing activities:
Proceeds from convertible notes			221,805				-				801,805
Proceeds from convertible debenture payable			-				-				734,918
Proceeds from short term loan			-				74,570				15,000
Repayments for short term loan			(1,599	)			-				(16,599	)
Proceeds from notes payable			-				-				30,500
Common stock issuance			-				44,000				44,000
Net cash provided by financing activities			220,206				118,570				1,609,624
Net change in cash			40,152				(3,010	)			43,794
Cash at beginning of the period			3,642				4,683				-
Cash at end of the period		$	43,794			$	1,673				43,794
Supplemental disclosure of cash flow information:
Assumption of accounts payable in acquisition		$	-			$	-				147,510
Assumption advances from shareholders in acquisition		$	-			$	-				40,025
Assumption of note payable in acquisition		$	-			$	-				85,864
Assumption of convertible debt in acquisition		$	-			$	-				360,000
Interest transferred to principal		$	-			$	-				11,146
Issuance of common stock for conversion of debt		$	305,025			$	142,367				(1,593,602	)
Discount on convertible notes		$	186,805			$	75,372				(791,707	)
Assignments of shareholder loans to convertible debt		$	-			$	-				76,000

 

The accompanying notes are an integral part of these financial statements

 

 

F - 28

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PARADIGM OIL AND GAS, INC.

(AN EXPLORATION STAGE COMPANY)

CONDENSED NOTES TO FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 AND THE

PERIOD FROM JANUARY 28, 2010 (INCEPTION) THROUGH SEPTEMBER 30, 2013

 

NOTE 1. ORGANIZATION AND BUSINESS ACTIVITIES

Organization

Paradigm Enterprises, Inc. (the "Company") was incorporated in the state of Nevada on July 15, 2002 to engage in the acquisition, exploration and development of oil and gas properties. On February 7, 2005 the Company changed its name to Paradigm Oil and Gas, Inc. Effective January 28, 2010 (the “Acquisition Date”), Paradigm Oil & Gas Inc. entered into a share exchange agreement with the shareholders of Integrated Oil and Gas Solutions Inc. (the "Acquired Company") a Texas corporation. The transaction has been accounted for as a reverse acquisition. The Acquisition Date is considered the inception date of the Company.

The consolidated financial statements include the accounts of Paradigm Oil and Gas, Inc. and its subsidiaries, Integrated Oil and Gas Solutions Inc. (Integrated was sold effective June 26, 2012), Paradigm Integrated Technology Solutions Inc., and Centurion Oil Services Inc. Subsequent to June 26, 2012, the consolidated financial statements include the accounts of Paradigm Oil and Gas, Inc. and its remaining subsidiaries, Paradigm Integrated Technology Solutions Inc., and Centurion Oil Services Inc.

The Company is considered an exploration stage company, as it has not generated significant revenues from its operations.

 

On October 9, 2013, the Company’s Board of Directors approved a one-for-ten reverse stock split. The reverse stock split became effective on December 2, 2013. Stock option agreements have been adjusted to reflect the split. An amount equal to the par value of the shares issued has been transferred from additional paid-in capital to the common stock account. All references to number of shares have been adjusted to reflect the stock split on a retroactive basis.

 

Reverse merger of Integrated Oil and Gas Solutions Inc.

On January 28, 2010, the Company entered into a share exchange agreement with the shareholders of the "Acquired Company" in exchange for all of the Acquired Company’s capital stock.

Paradigm issued 4,200,000 of its $.001 par value shares common shares representing 82% of the fully-diluted shares of the Company in exchange for 100% of the Acquired Company's outstanding shares. The Acquired Company was a wholly owned subsidiary of the Company from the Acquisition Date until the Company sold the Acquired Company (see Note 3).

The Acquired Company held 100% working interests in certain oil and gas leases along with certain oil and gas production equipment. On the Acquisition date, the total purchase price to acquire these assets amounted to $541,539. These costs were capitalized on the Acquired Company's books at cost as natural gas and oil properties, unproved properties.

Going Concern

These consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America with the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business rather than through a process of forced liquidation.

 

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The Company's significant operating losses raise substantial doubt about its ability to continue as a going concern. Inherent in the Company's business are various risks and uncertainties, including its limited operating history, historical operating losses, dependence upon strategic alliances, and the historical success rate of oil and gas exploration. Management's plan is to acquire interests in certain oil and gas properties with production and to rework existing wells to bring them on line for production.

As shown in the accompanying consolidated financial statements, the Company has incurred net losses of $1,348,036, $836,891, and $8,867,817 for the nine months ended September 30, 2013 and 2012, and for the period from January 28, 2010 (inception) through September 30, 2013 respectively.

The Company’s wells are now producing oil and gas but the Company will need to raise additional capital to increase the oil and gas production from its other wells that are not currently on line.  The Company may take on a joint venture partner or raise capital through their currency or sell some of the other wells and keep the proven ones.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recent accounting pronouncements

During the nine months ended September 30, 2013, there were several new accounting pronouncements issued by the Financial Accounting Standards Board (FASB). Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s financial position or operating results. The Company will monitor these emerging issues to assess any potential future impact on its consolidated financial statements.

Use of Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The oil and gas industry is subject, by its nature, to environmental hazards and clean-up costs. At this time, management knows of no substantial costs from environmental accidents or events for which the Company may be currently liable. In addition, the Company's oil and gas business makes it vulnerable to changes in prices of crude oil and natural gas. Such prices have been volatile in the past and can be expected to be volatile in the future.

Fair value of financial instruments

In accordance with the reporting requirements of Accounting Standards Codification ("ASC") Topic No. 825, Financial Instruments, (ASC 825) the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of those financial instruments.

The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at September 30, 2013 and 2012.

Principles of Consolidation

The consolidated financial statements for the nine months ended September 30, 2013 and 2012 include the accounts of Paradigm Oil and Gas, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

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Reclassifications

Certain amounts in the comparative consolidated financial statements have been reclassified from financial statements previously presented to conform to the current period presentation.

Cash

Cash consists of cash on deposit with high quality major financial institutions, and to date the Company has not experienced losses on any of its balances. The carrying amounts of cash approximate fair market value due to the liquidity of these deposits.  For purposes of the consolidated balance sheets and consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents. At September 30, 2013 and December 31, 2012, the Company had $43,794 and $3,642 in cash, respectively.

Property and equipment

The following table details the composition of property and equipment:

		September 30,				December 31,
		2013				2012
Production equipment		$	75,020			$	75,020
Furniture and equipment			-				-
Less accumulated depreciation			(56,032	)			(35,020	)
Property and equipment, net		$	18,988			$	40,000

 

Property and equipment are stated at the Company's cost and are depreciated on a straight line basis over five or seven years. Maintenance and repair costs are expensed when incurred while major improvements are capitalized.  Depreciation expense totaled $21,012 for the nine months ended September 30, 2013 and  2012,  and $64,721 for the period from January 28, 2010 (inception) through September 30, 2013.

Subsequent to December 31, 2012, the Company sold certain production equipment for $40,000.  In accordance with the guidance for the impairment of long-lived assets, the Company evaluated the equipment for recovery and in 2012 recorded an impairment charge of $121,105.

Income Taxes

The Company accounts for income taxes under the provisions of ASC Topic No. 740 , Income Taxes (ASC 740) which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The deferred tax assets generated by the Company have been fully reserved through a valuation allowance as the Company is not certain that it is more likely than not to be able to generate profitable operations in the near future.  See Note 9 for further discussion of deferred tax assets.

Stock-based Compensation

The Company records stock-based compensation in accordance with ASC Topic No. 718, Compensation - Stock Compensation (ASC 718), using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.

 

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Impairment of Long-Lived Assets

The Company reviews its long-lived assets to be held and used, including unproved oil and gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected undiscounted future cash flows is less than the carrying amount of the assets. In such circumstances, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

Revenue Recognition

The Company recognizes revenues in accordance with ASC 605, Revenue Recognition, and Staff Accounting Bulletin No 104. Accordingly all of the following criteria must be met for revenues to be recognized: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectability is reasonably assured. During 2013 and 2012, the Company’s revenues were the results of agreements with customers and revenues are generated upon performance of contracted services. Rates for services are based on negotiated rates with the Company’s customers and revenue is recognized when the services have been performed.

The Company uses the sales method of accounting for natural gas and oil revenues. Under this method, revenues are recognized upon the passage of title, net of royalties. Revenues from natural gas production are recorded using the sales method. When sales volumes exceed the Company's entitled share, an overproduced imbalance occurs. To the extent the overproduced imbalance exceeds the Company's share of the remaining estimated proved natural gas reserves for a given property, the Company records a liability. At September 30, 2013 and 2012, respectively, the Company had no overproduced imbalances.

Advertising Costs

Advertising costs are expensed when incurred.

Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the customer's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.

 

NOTE 2. RELATED PARTY TRANSACTIONS

A former Chief Executive Officer of the Company, Brian Kennedy, loaned the Company $76,546. The loan is interest free and has no formal terms of repayment.  During 2011, Kennedy loaned the Company an additional $8,000 and was repaid $4,000.  In addition, during 2011, $53,500 of the loan was transferred to another shareholder of the Company. As of September 30, 2013 the loan was paid in full.

On May 23, 2011, part of a shareholder loan in the amount of $22,500 was exchanged for a convertible note which was then converted between May 24, 2011 and June 10, 2011 into 24,393 common shares.

 

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On July 20, 2011 $53,500 of shareholder loans were exchanged for a convertible note which then was converted on July 21, 2011 into 294,928 common shares.

During 2011, notes receivable of $12,603 and $46,721 that were due from companies owned by shareholders of the Company were written off due to uncollectability.  $45,807 of this amount was originally loaned to a shareholder of the Company during 2010. Also during 2011, another note receivable of $28,050 that was due from an affiliated company of Brian Kennedy was written off due to uncollectability.

Management fees of $62,500 and $154,802 were paid to Brian Kennedy during the year ended December 31, 2011 and during the period from January 28, 2010 (inception) through December 31, 2012, respectively.

The Company was the guarantor of a loan made to a shareholder of the Company.  During 2011, payments to the shareholder of $116,724, as well as the long term convertible note, were the result of the guarantee made by the Company.

As of September 30, 2013 and December 31, 2012 short term convertible notes and accrued interest (net of $0 and $0 in unamortized note payable discount) of $5,189 and $38,080, respectively, were payable to Barclay Lyons, LLC.  Todd Violette, a former Chief Executive Officer of the Company, also serves as the Chief Executive Officer of Barclay Lyons, LLC.

Accrued wages to shareholders of the Company were $43,595 and $54,950 as of September 30, 2013 and December 31, 2012, respectively.

The Company sold a subsidiary, Integrated Oil and Gas Solutions Inc., for $500 on June 26, 2012 to Terry Rutter, who at the time was the Senior Executive of the Company.  The Company recognized a loss of $42,613 on the sale of the Acquired Company.

NOTE 3. CONVERTIBLE NOTES

The Company has entered into several Securities Purchase Agreements for the sale of short term convertible notes. The notes bear annual interest of 7-12% and mature within 365 days after the issue date (maturity date). The notes plus interest can be converted in whole or in part to common shares at the holder's option at the later of the maturity date or the default date. The conversion price is calculated as 50-55% of the market price which is determined by the average of the lowest three closing prices for the Company’s stock during the ten days prior to conversion date. The Company evaluated the notes and determined that the conversion option does not constitute a derivative liability for financial reporting purposes. If the note plus interest is not paid or converted on the maturity date, then default interest begins to accrue on the whole amount bearing annual interest of 22%.

Conversion Price During Major Announcements

For certain notes, in the event the Company (i) makes a public announcement that it intends to consolidate or merge with any other corporation (other than a merger in which the Company is the surviving or continuing corporation and its capital stock is unchanged) or sell or transfer all or substantially all of the assets of the Company or (ii) any person, group or entity (including the Company) publicly announces a tender offer to purchase 50% or more of the Company's common stock (or any other takeover scheme) (the date of the announcement referred to in clause (i) or (ii) is hereinafter referred to as the "Announcement Date"), then the Conversion Price shall, effective upon the Announcement Date and continuing through the Adjusted Conversion Price Termination Date (as defined below), be equal to the lower of (x) the Conversion Price which would have been applicable for a Conversion occurring on the Announcement Date and (y) the Conversion Price that would otherwise be in effect. From and after the Adjusted Conversion Price Termination Date, the Conversion Price shall be determined as set forth above. For purposes hereof, "Adjusted Conversion Price Termination Date" shall mean, with respect to any proposed transaction or tender offer (or takeover scheme) for which a public announcement as contemplated by this paragraph has been made, the date upon which the Company (in the case of clause (i) above) or the person, group or entity (in the case of clause (ii) above) consummates or publicly announces the termination or abandonment of the proposed transaction or tender offer (or takeover scheme) which caused this paragraph to become operative.  The Company does not anticipate that this provision will have a material effect on the Company’s financial statements.

 

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The Company may prepay the short term notes plus accrued interest at any time after 91 days after the issue date and ending up to 180 days after the issue date. The total amount calculated to be prepaid will bear an additional charge of 75% of the calculated prepaid amount. The Company is required at all times to have authorized and reserved from one to five times the number of shares that are actually issuable upon full conversion of the notes (based on the Conversion Price of the Notes in effect from time to time).  As of September 30, 2013 and December 31, 2012, respectively, 20,114,179 and 20,114,979 shares of the Company’s Common Stock were reserved for issuance of outstanding convertible notes.

In addition, the Company has entered into a Long Term Convertible Note on October 24, 2011 bearing annual interest of 4.75% which matures in 2015.  This note plus interest can be converted into common shares at the holder's option. The conversion price is calculated as the lesser of (i) $0.60, or (ii) 70% of the market price which is determined by averaging the lowest three day closing price over the last 21 trading day period ending one trading day prior to the day the conversion notice was sent by facsimile. The Company evaluated the note and determined that the conversion option does not constitute a derivative liability for financial reporting purposes. If the note plus interest is not paid or converted on the maturity, then default interest begins to accrue on the whole amount bearing annual interest of 18%.

If at any time that the note is outstanding (i) the daily volume weighted average price is below $0.02, (ii) the Company has not authorized or reserved enough shares of its common stock to account for the conversion of the note in full and the issuance of shares of common stock in accordance with its terms, or (iii) the holder is prohibited for any reason from converting the note, then the holder may elect, in its sole discretion, to convert any portion of the outstanding principal amount and accrued interest into common shares of the Company.

If, on the date the holder delivers a conversion notice to the Company, the applicable conversion price is below $0.03, the Company, within three days after receipt of the conversion notice, shall have the right to prepay the portion of the note that the holder elected to convert.  Any such prepayment shall be made in an amount equal to 120% of the principal amount plus accrued interest of the amount to be converted.

Per the provisions of the note, the Company may be in default of this note as the average volume weighted average price of the Company’s common stock was below $0.01 per share for three consecutive trading days during 2012 and 2013.

In conjunction with this note, the Company has also entered into an equity investment agreement whereby the holder may purchase up to $2,000,000 of the Company’s common stock at the sole discretion of the holder.  Under the agreement, 60% of any equity purchase will be made at 75% of the volume weighted average price on the day before the investment is made.  The remaining 40% of the equity purchase will be made at 100% of the volume weighted average price on the day before the investment is made.

At any time, in the holder’s sole discretion, the holder may purchase an additional note in the amount of $300,000, otherwise having the exact same terms as this debenture.  In addition, in the holder’s sole discretion, the holder may enter into a second equity investment agreement for $3,000,000, otherwise having the exact same terms as the equity investment agreement disclosed above.

Failure to Deliver Common Stock Prior to Deadline

Without in any way limiting the holder's right to pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the common stock issuable upon conversion of certain notes is more than three (3) business days after the deadline, the Company shall pay to the holder $2,000 per day in cash, for each day beyond the deadline that the Company fails to deliver such common stock. Such cash amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or, at the option of the holder (by written notice to the Company by the first day of the month following the month in which it has accrued), shall be added to the principal amount of this Note, in which event interest shall accrue thereon in accordance with the terms of this Note and such additional principal amount shall be convertible into common stock in accordance with the terms of this Note.

 

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NOTE 4. NOTE PAYABLE

The Company is indebted under a note payable to 1132559 Alberta Ltd, bearing annual interest of 7% and secured by 100% of the first proceeds of production under the Farmout and Option Agreement for the Sawn Lake Property. There are no fixed repayment terms. The Company may be in default of this note. In addition, at September 30, 2013, the Company is also indebted under a promissory note payable to Greystone Capital Partners LLC.  The note bears an annual interest rate of 9.875% and is payable semi-annually.

		September 30, 2013				December 31, 2012
1132559 Alberta Ltd		$	97,497			$	97,497
Greystone			35,379				21,350
Total		$	132,876			$	118,847

 

NOTE 5. INCOME TAXES

Income Tax Provision:

a) The provision for income taxes differs from the result which would be obtained by applying the statutory rate of 34% to income before income taxes.

		September 30, 2013				December 31, 2012
Loss before income taxes		$	(1,348,036	)		$	(2,019,450	)
Income tax benefit 34% (estimated)			(458,332	)			(686,613	)
Unrecognized benefit of operating loss carry forwards			458,332				686,613
Income tax benefit		$	-			$	-

 

b) Significant components of the Company's deferred income tax assets are as follows:

		September 30, 2013				December 31, 2012
Operating loss carry forwards		$	8,848,000			$	7,500,000
Statutory tax rate			34.0	%			34.0	%
Deferred tax asset			3,008,320				2,550,000
Valuation allowance			(3,008,320	)			(2,550,000	)
Net deferred tax assets		$	-			$	-

 

As of September 30, 2013, the Company has incurred operating losses of approximately $8,848,000 which, if unutilized, will expire through the year 2031. However, due to the change in control of the Company during June 2013, the Company does not have any significant NOL carry forwards as of the date of the change in control.  Future tax benefits existing at September 30, 2013, which may arise as a result of these losses, have been offset by a valuation allowance. The change in valuation allowance for the nine months ended September 30, 2013 and the year ended December 31, 2012 and for the period from January 28, 2010 through December 31, 2012 was $458,332, $680,000, and $3,008,000, respectively.

 

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The Company accounts for corporate income taxes in accordance with ASC Topic 740 Income Taxes. Under ASC Topic 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, future tax benefits, such as those from net operating loss carry forwards, are not recognized to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as set forth below in the period that includes the enactment date.

The Company does not have any significant deferred tax assets or liabilities. As of June 2013, the Company no longer had any net operating loss carry forwards available to offset future taxable income of the Company. The Company is not current in filing its tax returns.

The Company has not filed tax returns since its inception.  The Company is currently working with an external tax firm to prepare past tax returns and does not believe that it will be exposed to any risk of penalty or forfeiture of NOLs.

 

NOTE 6. SUBSEQUENT EVENTS

The Company has performed an evaluation of subsequent events through the date the consolidated financial statements were issued. The evaluation has resulted in the following disclosures:

Subsequent to September 30, 2013, the Company entered into several Securities Purchase Agreements for the sale of short term convertible notes totaling $579,514. The notes bear annual interest of 5-12% and mature within 365 days after the issue date (maturity date). The notes plus interest can be converted in whole or in part to common shares at the holder's option at the later of the maturity date or the default date. The conversion price is calculated as 50-55% of the market price which is determined by the average of the lowest three closing prices for the Company’s stock during the ten days prior to conversion date. The Company evaluated the notes and determined that the conversion option does not constitute a derivative liability for financial reporting purposes.

In addition, the Company has settled $260,246 of convertible notes subsequent to September 30, 2013.

Common stock activity of the Company subsequent to September 30, 2013 is as follows:

		Number of shares
Common shares outstanding at December 31, 2012			32,547,968
Issuance of common stock for conversion of debt			33,605,088
Issuance of common stock for outside services			1,800,000
Issuance of common stock for employment services			6,450,000
Issuance of common stock for options exercised			532,294
Common shares outstanding at December 31, 2013			74,935,350
Issuance of common stock for conversion of debt			46,862,188
Issuance of common stock for outside services			5,450,000
Retirement of common stock			(3,000,000	)
Common shares outstanding at March 26, 2014			124,747,538

 

Series B Preferred Stock activity of the Company subsequent to September 30, 2013 is as follows:

		Number of shares
Preferred Series B shares outstanding at September 30, 2013			350,000
2013 activity			-
Preferred Series B shares outstanding at December 31, 2013			350,000
Issuance of Preferred B shares for acquisition of properties			200,000
Preferred Series B shares outstanding at March 26, 2014			550,000

 

On October 9, 2013, the Company’s Board of Directors approved a one-for-ten reverse stock split. The reverse stock split became effective on December 2, 2013. See Note 1 for treatment of the reverse stock split.

On October 18, 2013, the Company began drilling on the Perry Lease and was successful on both of the wells and is currently holding oil and gas reserve in four of the wells.

On November 18 and 19, 2013 the Company obtained Bonds P4 and P5 for Texas and Louisiana.

On December 10, 2013, the Company entered into an agreement with Plateau Energy, LLC whereby the Company acquired a 29.50% working interest in the Mina Travis No. 1 Well in exchange for 100,000 shares of the Company’s Series B Preferred Stock and a 20.836% working interest in the Lucy Lee No. 1 Well and the Lucy Lee SWD No. 2 in exchange for an additional 100,000 shares of the Company’s Series B Preferred Stock.

 

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Item 14.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.  

None.

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

The following documents are filed as part of this report:

(1) Financial Statements

Consolidated Balance Sheets as of December 31, 2011 and 2012.

Consolidated Statements of Operations for the years December 31, 2011 and 2012.

Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2011 and 2012.

Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2012.

(2) Financial Statement Schedules

All schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.

(3) Exhibits

 

Exhibit No.		Description
3.1		Articles of Incorporation (Original)
3.2		Amended Articles of Incorporation
3.3		Amendment to the Articles
3.4		Bylaws

 

 

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  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	PARADIGM OIL AND GAS, INC.
Dated: April 02, 2014	By:	/ s/ Vince Vellardita
		Vince Vellardita
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

SIGNATURE		TITLE		DATE
/s/ Vince Vellardita		Chief Executive Officer and Director		April 02, 2014
Vince Vellardita		(Principal Executive Officer)

 

 

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