DIVERSIFIED RESOURCES, INC. (OTCMKTS:DDRI) Files An 8-K Other Events

DIVERSIFIED RESOURCES, INC. (OTCMKTS:DDRI) Files An 8-K Other Events

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Item 8.01 Other Events

Attached are:
The Company’s unaudited financial statements for the
three and six months ended April 30, 2017; and
Information concerning the Company’s officers, directors
and principal shareholders.
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
Date: June 15, 2017
DIVERSIFIED RESOURCES, INC.
By:
/s/ Paul Laird
Paul Laird, Chief Executive Officer
FINANCIAL STATEMENTS
Diversified Resources, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
April 30,
October 31,
ASSETS
CURRENT ASSETS
Cash
$
289,057
$
197,389
Accounts receivable, trade
1,281,793
1,543,652
Prepaid assets
119,752
73,857
Accrued revenue
210,952
470,494
Total current assets
1,901,554
2,285,392
LONG-LIVED ASSETS
Property and Equipment, net of accumulated depreciation
and
amortization of $1,730,897 and $1,456,242
7,303,775
8,807,447
Bonds and deposits
160,000
160,897
Oil and gas properties – proved developed (successful
efforts method)
net of accumulated depletion and impairment of
$2,690,921 and $2,690,921
1,215,294
1,215,294
Oil and gas properties – proved undeveloped (successful
efforts method)
1,241,722
1,241,724
Oil and gas properties – unproved (successful efforts
method)
2,932,730
2,932,730
Land and other equipment
214,088
340,257
Goodwill
4,464,221
4,735,139
Total assets
$
19,433,384
$
21,718,878
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
$
1,977,962
$
1,726,042
Accounts payable, related party
463,432
400,845
Current portion of notes payable
3,983,066
1,384,191
Note payable related party
107,070
107,070
Accrued interest, related party
31,390
26,081
Accrued liability
110,698
441,744
Line of credit
119,014
174,862
Accrued expenses
488,335
609,570
Total current liabilities
7,280,968
4,870,408
LONG TERM LIABILITIES
Long term debt, notes payable
4,206,630
8,622,519
Drilling fund
748,895
Asset retirement obligation
375,858
362,350
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS’ EQUITY
Preferred stock, $0.001 par value 50,000,000 shares
authorized
Common stock, $0.001 par value, 450,000,000 shares
authorized,
42,305,352 and 44,883,462 shares issued and outstanding
in 2017 and 2016, respectively
42,305
44,884
Additional paid in capital
20,090,444
20,087,866
Accumulated deficit
(13,311,716
)
(12,269,149
)
Total stockholders’ equity
6,821,033
7,863,601
Total liabilities and stockholders’ equity
$
19,433,384
$
21,718,878
See accompanying notes to the consolidated financial
statements.
Diversified Resources, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
April 30,
April 30,
Operating revenues
Oil and gas sales
$
13,645
$
81,498
Oilfield and construction services
2,821,028
3,771,190
Revenue – other
3,229
59,700
Total operating revenue
2,837,902
3,912,388
Cost of services
Subcontractor expenses
788,931
811,365
Field payroll
842,302
1,894,998
Fuel expenses
103,821
207,466
Equipment rental
227,283
119,026
Material
18,070
249,040
Total cost of services
1,980,407
3,281,895
Gross margin
857,495
630,493
Operating expenses
Lease operating expenses
37,095
144,839
General and administrative
831,982
1,008,224
Legal expense
750,000
Insurance expense
106,767
339,134
Depreciation and depletion expense
234,246
533,057
Production tax and royalty expense
27,869
13,324
Accretion expense
9,360
8,736
Total operating expenses
1,247,319
2,797,314
(Loss) from operations
(389,824
)
(2,166,821
)
Other income (expense)
Loss on sale of assets
(3,389
)
Interest expense
(49,501
)
(45,081
)
Other income (expense), net
(52,890
)
(45,081
)
Net (loss)
$
(442,714
)
$
(2,211,902
)
Net (loss) per common share
Basic and diluted
$
(0.01
)
$
(0.06
)
Weighted average shares outstanding
Basic and diluted
42,137,988
39,733,808
See accompanying notes to the consolidated financial
statements.
Diversified Resources, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
April 30,
April 30,
Operating revenues
Oil and gas sales
$
57,433
$
116,046
Oilfield and construction services
6,033,653
3,771,190
Revenue – other
7,672
59,700
Total operating revenue
6,098,758
3,946,936
Cost of services
Subcontractor expenses
1,932,084
811,365
Field payroll
1,688,668
1,894,998
Fuel expenses
235,871
207,466
Equipment rental
442,543
119,026
Material
84,305
249,040
Total cost of services
4,383,471
3,281,895
Gross margin
1,715,287
665,041
Operating expenses
Lease operating expenses
135,258
226,527
General and administrative
1,695,365
1,285,285
Legal expense
750,000
Insurance expense
222,946
339,134
Depreciation and depletion expense
520,743
615,337
Production tax and royalty expense
39,530
21,566
Accretion expense
13,508
22,060
Total operating expenses
2,627,350
3,259,909
(Loss) from operations
(912,063
)
(2,594,868
)
Other income (expense)
Loss on disposition of assets
(31,041
)
Interest expense
(102,551
)
(103,864
)
Other income (expense), net
(133,592
)
(103,864
)
Net (loss)
$
(1,045,655
)
$
(2,698,732
)
Net (loss) per common share
Basic and diluted
$
(0.02
)
$
(0.08
)
Weighted average shares outstanding
Basic and diluted
44,670,277
32,707,725
See accompanying notes to the financial statements.
Diversified Resources, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
April 30,
April 30,
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating
activities
$
(143,263
)
$
563,287
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for purchase of property and equipment
(121,753
)
Proceeds from sale of assets
655,164
Net cash provided by (used in) investing
activities
655,164
(121,753
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from drilling fund
500,000
Proceeds from notes payable
60,000
Payments on notes payable
(920,234
)
Net cash provided by (used in) financing
activities
(420,233
)
60,000
INCREASE IN CASH
91,668
501,534
BEGINNING BALANCE
197,389
21,706
ENDING BALANCE
$
289,057
$
523,240
Cash paid for income taxes
$
$
Cash paid for interest
$
102,551
$
103,864
Non-cash investing and financing activities:
Acquisition of Diversified Energy Services, Inc.:
Common stock issued
10,016,355
Notes payable issued
2,000,000
See accompanying notes to the consolidated financial
statements.
DIVERSIFIED RESOURCES INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
April 30, 2017
NOTE 1 BASIS OF PRESENTATION
The interim consolidated financial statements of
Diversified Resources, Inc. (“we”, “us”, “our”,
“Diversified”, or the “Company”) are unaudited
and contain all adjustments (consisting primarily of
normal recurring accruals) necessary for a fair
presentation of the results for the interim periods
presented. Results for interim periods are not
necessarily indicative of results to be expected for
a full year or for previously reported periods due in
part, but not limited to, interest rates, drilling
risks, geological risks, the timing of acquisitions,
and our ability to obtain additional capital. The
accompanying consolidated financial statements have
been prepared in accordance with accounting
principles generally accepted in the United States of
America.
The consolidated financial statements of the Company
have been prepared in accordance with US GAAP.
Certain information relating to our organization and
footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been
condensed or omitted in accordance with GAAP.
The results of operations presented in this quarterly
report are not necessarily indicative of the results
of operations that may be expected for any future
periods. In the opinion of management, all
adjustments which are of a normal recurring nature
considered necessary for a fair presentation have
been made in the accompanying unaudited financial
statements.
NOTE 2 ORGANIZATION AND GOING CONCERN
Diversified Resources Inc. (“the Company”) was
incorporated in the State of Nevada on March 19, 2009
to pursue mineral extraction in the United States.
Effective November 21, 2013 we acquired 100% of the
outstanding shares of Natural Resource Group, Inc. in
exchange for 14,558,150 shares of our common stock.
In connection with this acquisition, the then
President of the Company sold 2,680,033 shares of the
Company’s common stock to the Company for nominal
consideration. The shares purchased from the
President were returned to the status of authorized
but unissued shares. Additionally, the former
principals of the Company assumed all of the debts of
the Company at the date of the exchange.
On October 14, 2014, the Company acquired
approximately 98% of the outstanding shares of BIYA
Operators, Inc. (“BIYA”) an independent oil and gas
company. BIYA has oil and gas leases in the Horseshoe
Gallop field in San Juan County, New Mexico covering
approximately 10,100 acres and 48 producing wells.
The majority of the leased acreage and producing
wells are on Mountain Ute tribal land and are leased
under an operating agreement with the tribe, which
commenced on April 15, 2008.
On February 1, 2016, we acquired 100% of the
outstanding shares of Diversified Energy Services,
Inc. (“DESI”), a holding company comprised of three
oilfield services companies.
As shown in the accompanying financial statements,
the Company has incurred significant operating losses
since inception, has an accumulated deficit of
($13,311,716) and has negative working capital of
$5,379,415 at April 30, 2017. As of April 30, 2017,
the Company has limited financial resources. These
factors raise substantial doubt about the Company’s
ability to continue as a going concern. The
Company’s ability to achieve and maintain
profitability and positive cash flow is dependent
upon its ability to locate profitable mineral
properties, generate revenue from planned business
operations, and control exploration costs. Management
plans to fund its future operations through joint
ventures, cash flow from commercial production and
oilfield and construction services. However, there is
no assurance that the Company will be able to obtain
additional financing from investors or private
lenders, or that additional commercial production can
be attained.
The financial statements do not include any
adjustments to reflect the possible future effects on
the recoverability and classification of assets or
the amounts and classification of liabilities that
may result from the possible inability of the Company
to continue as a going concern.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated unaudited financial
statements include the accounts of Diversified
Resources, Inc. and its wholly owned subsidiaries,
Natural Resource Group, Inc., BIYA Operators, Inc.
and Diversified Energy Services, Inc. Any
inter-company accounts and transactions have been
eliminated.
Nature of Operations
Our subsidiaries NRG and BIYA have oil and gas
producing properties in Colorado and New Mexico,
respectively. DESI offers a full range of services
to the Rocky Mountain energy and construction
industries and is dedicated to becoming the “one
call, last call” solution to a full range of oil
field service needs. DESI offers Crane Service,
Well Site Construction, Materials Handling and
Disposal, Trucking Services, Equipment Operation,
and Rigging to the energy industry in the Denver
Julesburg Basin, the Rockies and San Juan basin in
New Mexico. These services are primarily provided
using DESI’s fleet of equipment.
Cash and cash equivalents
The Company considers all liquid investments with a
maturity of three months or less from the date of
purchase that are readily convertible into cash to
be cash equivalents. The Company holds only cash as
of April 30, 2017.
Use of estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts of
assets and liabilities and 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. Estimates of
oil and gas reserve quantities provide the basis
for the calculation of depletion, depreciation, and
amortization, and impairment, each of which
represents a significant component of the financial
statements. Actual results could differ from those
estimates.
Revenue Recognition
We recognize oil and gas revenue from interests in
producing wells as the oil and gas is sold. Revenue
from the purchase, transportation, and sale of
natural gas is recognized upon completion of the
sale and when transported volumes are delivered. We
recognize revenue related to gas balancing
agreements based on the sales method. Our net
imbalance position at April 30, 2017 and October
31, 2016 was immaterial.
We recognize revenue when services are performed,
collection of the relevant receivables is probable,
persuasive evidence of an arrangement exists and
the price is fixed or determinable. DESI prices
services by the hour, day, or project depending on
the type of service performed.
Accounts Receivable and Allowance for Doubtful
Accounts
Our credit terms for our billings is net 30 days.
Accounts receivables are determined to be past due
if payments are not made in accordance with the
terms and an allowance is recorded for accounts
when there are indicators that the receivables may
not be recovered. Customary collection efforts are
initiated and receivables are written off when we
determine they are not collectible and abandon
these collection efforts.
We evaluate the past due accounts to setup an
allowance for doubtful accounts on a regular basis
for adequacy based upon our periodic review of the
collectability of the receivables in light of
historical experience, adverse situations that may
affect our customers’ ability to pay, estimated
value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently
subjective, as it requires estimates that are
susceptible to significant revision as more
information becomes available.
Accounting for Oil and Gas Activities
Successful Efforts Method We account for crude oil
and natural gas properties under the successful
efforts method of accounting. Under this method,
costs to acquire mineral interests in crude oil and
natural gas properties, drill and equip exploratory
wells that find proved reserves, and drill and
equip development wells are capitalized.
Capitalized costs of producing crude oil and
natural gas properties, along with support
equipment and facilities, are amortized to expense
by the unit-of-production method based on proved
crude oil and natural gas reserves on a
field-by-field basis, as estimated by our qualified
petroleum engineers. Upon sale or retirement
of depreciable or depletable property, the cost and
related accumulated depreciation, depletion and
amortization amounts are eliminated from the
accounts and the resulting gain or loss is
recognized. Repairs and maintenance are expensed as
incurred. Assets are grouped in accordance with the
Extractive Industries – Oil and Gas Topic of the
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”). The
basis for grouping is a reasonable aggregation of
properties with a common geological structural
feature or stratigraphic condition, such as a
reservoir or field.
Depreciation, depletion and amortization of the
cost of proved oil and gas properties are
calculated using the unit-of-production
method. The reserve base used to calculate
depreciation, depletion and amortization (“DDA”)
for leasehold acquisition costs and the cost to
acquire proved properties is the sum of proved
developed reserves and proved undeveloped reserves.
With respect to lease and well equipment costs,
which include development costs and successful
exploration drilling costs, the reserve base
includes only proved developed reserves. Estimated
future dismantlement, restoration and abandonment
costs, net of salvage values, are taken into
account.
Impairments – Long-lived assets, which include
property, plant and equipment, and purchased
intangibles subject to amortization with finite
lives, are evaluated whenever events or changes
in circumstances (“triggering events”) indicate
that the carrying value of certain long-lived
assets may not be recoverable. Long-lived assets
are reviewed for impairment upon the occurrence
of a triggering event. An impairment loss is
recorded in the period in which it is determined
that the carrying amount of a long-lived asset is
not recoverable. The determination of
recoverability is made based upon the estimated
undiscounted future net cash flows of assets
grouped at the lowest level for which there are
identifiable cash flows independent of the cash
flows of other groups of assets with such cash
flows to be realized over the estimated remaining
useful life of the primary asset within the asset
group, excluding interest expense. The Company
determined the lowest level of identifiable cash
flows that are independent of other asset groups
to be at the reporting unit level, which consists
of well servicing, fluid servicing, completion
and remedial services and contract drilling. If
the estimated undiscounted future net cash flows
are less than the carrying amount of the related
assets, an impairment loss is determined by
comparing the fair value with the carrying value
of the related assets.
Proved Property Impairment We review individually
significant proved oil and gas properties and
other long-lived assets for impairment at least
annually at year-end, or quarterly when events
and circumstances indicate a decline in the
recoverability of the carrying values of such
properties, such as a negative revision of
reserves estimates or sustained decrease in
commodity prices. We estimate undiscounted future
cash flows expected in connection with the
properties and compare such future cash flows to
the carrying amount of the properties to
determine if the carrying amount is recoverable.
When the carrying amount of a property exceeds
its estimated undiscounted future cash flows, the
carrying amount is reduced to estimated fair
value.
Unproved Property Impairment Our unproved
properties consist of leasehold costs and
allocated value to probable and possible reserves
from acquisitions. We assess individually
significant unproved properties for impairment on
a quarterly basis and recognize a loss at the
time of impairment by providing an impairment
charge. In determining whether a significant
unproved property is impaired we consider
numerous factors including, but not limited to,
current exploration plans, favorable or
unfavorable exploration activity on the property
being evaluated and/or adjacent properties, our
geologists’ evaluation of the property, and the
remaining months in the lease term for the
property.
Exploration Costs Geological and geophysical
costs, delay rentals, amortization of unproved
leasehold costs, and costs to drill wells that do
not find proved reserves are expensed as oil and
gas exploration. We carry the costs of an
exploratory well as an asset, if the well finds a
sufficient quantity of reserves to justify its
capitalization as a producing well and as long as
we are making sufficient progress assessing the
reserves and the economic and operating viability
of the well. We did not incur any geological and
geophysical costs for the three or six months
ended April 31, 2017 and 2016.
Asset Retirement Obligations Asset retirement
obligations (“ARO”) consist of estimated costs
of dismantlement, removal, site reclamation and
similar activities associated with our oil and
gas properties. We recognize the fair value of a
liability for an ARO in the period in which it is
incurred when we have an existing legal
obligation associated with the retirement of our
oil and gas properties that can reasonably be
estimated with the associated asset retirement
cost capitalized as part of the carrying cost of
the oil and gas asset. The asset retirement cost
is determined at current costs and is inflated
into future dollars using an inflation rate that
is based on the consumer price index. The future
projected cash flows are then discounted to their
present value using a credit-adjusted risk-free
rate. After initial recording, the liability is
increased for the passage of time, with the
increase being reflected as accretion expense and
included in our DDA expense in the statement of
operations. Subsequent adjustments in the cost
estimate are reflected in the liability and the
amounts continue to be amortized over the useful
life of the related long-lived asset.
The following table reconciles the asset
retirement obligation for three months ended
April 30, 2017 and year ended October 31, 2016:
Asset retirement obligation as of beginning
of period
$
362,350
$
321,101
Liabilities added
Liabilities settled
Revision of estimated obligation
Accretion expense on discounted obligation
13,508
41,249
Asset retirement obligation as of end of
period
$
375,858
$
362,350
Property and Equipment
Property and equipment are stated at cost,
expenditures for repairs and maintenance are
charged to expense as incurred and additions
and improvements that significantly extend the
lives of the assets are capitalized. Upon sale
or other retirement of depreciable property,
the cost and accumulated depreciation and
amortization are removed from the related
accounts and any gain or loss is reflected in
operations. All property and equipment are
depreciated or amortized (to the extent of
estimated salvage values) on the straight-line
method and the estimated useful lives of the
assets are as follows:
Heavy Equipment
3-15 years
Furniture and fixture
3-5 years
Vehicles
3-7 years
The components of a well servicing rig
generally require replacement or refurbishment
during the well servicing rig’s life and are
depreciated over their estimated useful lives,
which ranges from 3 to 15 years. The costs of
the original components of a purchased or
acquired well servicing rig are not maintained
separately from the base rig.
Income Taxes
We account for income taxes in accordance with
Accounting Standards Codification (“ASC”)
Topic 740, Income Taxes. Under this standard,
deferred tax liabilities and assets are
determined based on the difference between the
financial statement and tax bases of assets and
liabilities using the enacted tax rates in
effect for the year in which the differences
are expected to reverse. Deferred tax assets
are reduced by a valuation allowance when we
cannot make the determination that it is more
likely than not that some portion or all of the
related tax asset will be realized. Interest
and penalties on tax deficiencies recognized in
accordance with accounting standards are
classified as income taxes in accordance with
ASC Topic 740-10-50-19. We follow ASC 740-10-05
Accounting for Uncertainty in Income Taxes
which prescribes a threshold and a measurement
attribute for the financial statement
recognition and measurement of tax positions
taken or expected to be taken on a tax return.
For those benefits to be recognized, a tax
position must be more-likely-than-not to be
sustained upon examination by taxing
authorities. The amount recognized is measured
as the largest amount of benefit that is
greater than 50 percent likely of being
realized upon ultimate settlement.
Contingent Liabilities
The Company records contingent liabilities when
the amounts were incurred and determined to be
probable. Otherwise the Company will disclose
the matter(s) and provide a range or best
estimate of the contingency in the notes to the
financial statements.
Loss Per Share
The Company computes net loss per share in
accordance with ASC Topic 260, “Earnings per
Share,” Under the provisions of the standard,
basic and diluted net loss per share is
computed by dividing the net loss available to
common stockholders for the period by the
weighted average number of shares of common
stock outstanding during the period. During
periods when losses occur, common stock
equivalents, if any, are not considered in the
computation as their effect would be
anti-dilutive.
Concentration of Credit Risk
Financial instruments that potentially subject
the Company to concentrations of credit risk
consist primarily of cash equivalents and
accounts receivable. The Companies places its
cash equivalents with a high credit quality
financial institution. The Company periodically
maintains cash balances at a commercial bank in
excess of the Federal Deposit Insurance
Corporation insurance limit of $250,000.
Major Customers
As of April 30, 2017, three customers each
comprised more than 10% of the Company’s
accounts receivable balance; at approximately
17%, 11% and 11%, respectively. Revenues from
these customers represented 35%, 24% and 14% of
the total revenues, respectively, for the six
months ended April 30, 2017. No other customer
exceeded 10% of total revenues for the six
months ended April 30, 2017.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02
“Leases (Topic 842)”, which requires a lessee
to record a right-of-use asset and a lease
liability on the balance sheet for all leases
with terms longer than 12 months. Leases will
be classified as either finance or operating,
with classification affecting the pattern of
expense recognition in the income statement.
The new standard is effective for fiscal years
beginning after December 15, 2018, including
interim periods within those fiscal years. A
modified retrospective transition approach is
required for capital and operating leases
existing at, or entered into after, the
beginning of the earliest comparative period
presented in the financial statements. We are
currently evaluating the impact of our pending
adoption of the new standard on our
consolidated financial statements.
In August 2016, the FASB issued Accounting
Standards Update No. 2016-15, Statement of
Cash Flows (“ASU 2016-15”), which is
intended to reduce diversity in practice in
how certain transactions are classified in
the statement of cash flows. ASU 2016-15 is
effective for fiscal years beginning after
December 15, 2017, including interim periods
within those years. The adoption of this
guidance will not impact the Company’s
financial position or results of operations
but could result in presentation changes on
its statement of cash flows.
The Company does not believe that any other
recently issued or proposed accounting
pronouncements will have a material impact on
its financial position, results of operations
or cash flows.
Segment Disclosure
FASB Codification Topic 280, Segment
Reporting, establishes standards for
reporting financial and descriptive
information about an enterprise’s reportable
segments. The Company has two reportable
segments: Exploration and Production (EP) and
the Services division. The segments are
determined based on several factors,
including the nature of product and service.
Refer to Note 1 for a description of the
various services performed by the Company.
Prior to the February 1, 2016, the Company
only had one reporting segment.
An operating segment’s performance is
evaluated based on its pre-tax operating
contribution, or segment income. Segment
income is defined as oil and gas sales and
service revenue less cost of sales and
services, and segment selling, general and
administrative expenses.
Selected Financial Data;
Three months
ended
Six months
ended
April 30,
April 30,
Sales
Oil and Gas
$
13,645
$
57,433
Oilfield Services
2,824,257
6,041,325
Total Sales
$
2,837,902
$
6,098,758
Segment income (loss) and
reconciliation before tax
Oil and Gas
$
(64,359
)
$
(160,342
)
Oilfield Services
503,129
912,604
Total segment income (loss)
$
438,770
$
752,262
Reconciling items
General and administrative
$
831,982
$
1,695,365
Interest
49,501
102,551
Net loss
$
(442,714
)
$
(1,045,655
)
Total assets
Oil and Gas
$
7,476,581
$
7,476,581
Oilfield Services
11,956,803
11,956,803
$
19,433,381
$
19,433,381
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the
following:
April 30,
October 31,
Heavy equipment
$
6,136,933
$
7,316,088
Pickup trucks
794,790
844,494
Other property and equipment
2,317,037
2,443,364
9,248,760
10,603,946
Less accumulated depreciation and
amortization
(1,730,897
)
(1,456,242
)
Property and equipment, net
$
7,517,863
$
9,147,704
NOTE 5 PARTICIPATION AGREEMENT
In January 2012, the Company entered into a
participation agreement with a
nonaffiliated company whereby the
nonaffiliated company would advance up to
$350,000 to conduct additional development
of the underlying leases at the Garcia
Field and drill and complete three
additional wells on the acreage. As of
October 31, 2016, $248,895 was due on the
note. In 2017, this note was converted into
a 1% overriding royalty interest in the 640
acre field and conversion of the principle
into the drilling program that provides
revenue sharing and 140% return on the
contributed amount with no maturity date.
See Note 14 for further details of the
drilling fund.
NOTE 6 NOTES PAYABLE RELATED PARTY
In December 2010, the Company entered into
a purchase and sale agreement to acquire
certain oil and gas assets located in
Adams, Broomfield, Huerfano, Las Animas,
Morgan and Weld counties, Colorado. The
Company issued 2,500,000 shares of its
$0.01 par value common stock and a
promissory note for $360,000 bearing
interest at 10% with an original maturity
date of March 1, 2011. The shares were
valued at $1 per share based on sales of
the Company’s common stock to
third-parties. The promissory note is
collateralized by the property and
equipment transferred and was subsequently
subrogated to a convertible promissory note
on April 12, 2012 and matures on December
2017. The balance on the note is $107,070
at April 30, 2017 with interest accrued in
the amount of $31,400.
In February 2016, the Company entered into
a purchase and sales agreement to acquired
DESI. As part of the purchase price, the
Company issued an unsecured note for
$2,000,000, to one of the owners of DESI,
bearing interest at 2% with a maturity date
of February 2018. Effective May 1, 2017,
the Company divested and sold one of the
subsidiary of DESI to its previous owner.
As part of the sale the previous owner
forgave the unsecured note issued above.
See Note 15 for further details.
NOTE 7 LONG TERM DEBT AND NOTES PAYABLES
Convertible Promissory NoteOn
October 14, 2014, the Company acquired
approximately 98% of the outstanding shares
of BIYA Operators, Inc. (“BIYA”) an
independent oil and gas company. The
Company issued a promissory note in the
principal amount of approximately
$1,860,000 (subject to adjustment for
unknown liabilities). The note will be
effective when certain leases covering
Indian tribal lands have been issued. The
note is in arbitration for deduction in the
principle balance related to undisclosed
royalties, other liabilities, costs related
to undisclosed spills and contamination and
for the related lost production and revenue
In May 2012 BIYA entered into a settlement
agreement with a previous partner for $1.2
million. The amount is non-interest bearing
and has a minimum monthly payment of
$10,000, plus one third of BIYA’s net
profits, as defined in the agreement. On
April 1, 2015, the agreement was amended,
where the balance due will bear interest at
6% a year and has a fixed monthly payment
of $5,500 until paid in full. The balance
due was $486,161 at April 30, 2017.
Secured NotesIn 2015, the Company
issued secured notes in the principal
amounts of $1,250,000, bearing interest at
12% payable quarterly beginning June 1,
2015 with a two year maturity date. In
January 2016, the Company issued secured
notes in the principal amounts of $200,000,
bearing interest at 12% payable quarterly
beginning January 2016 with a two-year
maturity date. The notes are collateralized
by a first priority deed of trust on
certain producing wells and their spacing
units located in the Horseshoe Gallup
Field. The notes and any interest
outstanding may be converted, one time
only, for new securities offered by the
Company. The notes guarantee one year of
interest which would be due even upon
prepayment of the notes during the first
year. The lenders received two year
warrants which entitles the holders to
purchase up to 360,000 shares of the
Company’s common stock at a price of $0.80
and $1.50 per common share, valued at
approximately $126,000 at October 31, 2015,
using the Black Scholes method. The value
of the warrants has been recorded as
discount on the note and a credit to
additional paid in capital. The company
recorded accretion of the discount in the
amount of $18,000 for three months ended
April 30, 2017. The secured notes had
accrued interest payable of approximately
$242,383 at April 30, 2017. As of April 30,
2017, secured notes totaling $650,000 are
in default. None of the defaulted notes
have been called by the lenders as of June
15, 2017.
In October 2016, the Company settled a
lawsuit, to the terms of the settlement,
the Company agreed to pay the plaintiffs
$1,050,000 plus interest at 8% per year.
The amount due the plaintiffs is payable
between October 1, 2016 and December 31,
2019 with the first payment due October 1,
2016. The balance due was $838,500 at April
30, 2017. See note 12 for further details.
Installment LoanThe Company entered
into an installment loan on July 4, 2013
bearing interest of 5.39%. The loan is
payable in monthly installments of $464
over 48 months commencing August 4, 2013.
The loan is collateralized by a vehicle. On
July 5, 2015, the Company entered into
installment loans bearing interest of
3.62%. The loans are payable in monthly
installments of $2,118 over 48 months. The
loans are collateralized by two vehicles.
The Company entered into various
installment loans in 2014 and 2015 bearing
interest ranging from 0% to 4.5%. The loans
are payable in monthly installments ranging
from $715 and $4,000 over 36 to 60 months.
The loans are collateralized by heavy
equipment, trucks and vehicles. On August
15, 2015, the Company entered into
installment loans bearing interest of 4.5%.
The loans are payable in monthly
installments of $38,000 over 48 months and
are collateralized by heavy equipment and
trucks.
The following summarizes the notes
payable at:
April 30,
October 31,
Convertible promissory note
$
$
248,895
BIYA note
A
1,860,000
1,860,000
BIYA settlement
486,161
486,161
Convertible promissory notes
1,450,000
1,450,000
Discount on convertible promissory
notes
(18,000
)
(54,000
)
DESI note
B
2,000,000
2,000,000
DESI settlement
838,458
1,050,000
Installment loan
1,573,077
2,965,598
8,189,696
10,006,710
Less current portion
3,983,066
(1,384,191
)
$
4,206,630
$
8,622,519
A See Note 7 for further details
B See Note 6 for further details
NOTE 9 INCOME TAXES
No provision was made for federal income
tax for the three and six months ended
April 30, 2017 and 2016, since the
Company had net operating losses.
NOTE 10 STOCKHOLDERS’ EQUITY
The Company is authorized to issue
450,000,000 common shares of par value at
$0.001 and 50,000,000 preferred shares of
par value at $0.001. As of April 30,
2017, 42,305,352 shares of common stock
were issued and outstanding. During the
three months ended April 30, 2017, the
Company sold 1 million shares as part of
the sale of 20 units in Santa Fe
Production Fund, LLC, see Note 14 for
further details.
In October 2016, the Company Issued
warrants to purchase 3,276,551 restricted
shares of the Company’s common stock.
The warrants can be exercised any time on
or before January 1, 2027 at a price of
$.05 per share. See Note 12 for further
details.
NOTE 11 RELATED PARTY TRANSACTIONS
Natural Resource Group, Inc. has a lease
for office space in Littleton, Colorado,
with Spotswood Properties, LLC, a
Colorado limited liability company
(“Spotswood”), and an affiliate of the
president, effective January 1, 2009, for
a three-year term. Commencing January1,
2010 the Company entered into a new lease
for office space for a 3 year period
ending January1, 2013. The lease provides
for the payment of $2,667 per month plus
utilities and other incidentals. The
president of the Company owns 50% of
Spotswood. The Company is of the opinion
that the terms of the lease are no less
favorable than could be obtained from an
unaffiliated party. Spotswood was paid
$14,000 and $5,333 for the three and six
months ended April 30, 2017, respectively
and $2,667 and $13,333 for the three and
six months ended April 30, 2016,
respectively. The Company is currently
leasing the office space on a month to
month basis under the same terms and
conditions as the lease that expired
January 31, 2013. The Company had accrued
rent payable of $5,334 to Sportswood at
April 30, 2017.
The Company paid a director and
shareholder $7,577 during the three and
six months ended April 30, 2017 and
$37,799 and $69,049 during the three and
six months ended April 30, 2016,
respectively for financial public
relations consulting.
The Company paid the President’s brother
$20,892 and $42,527 during the three
months ended April 30, 2017, respectively
and $18,163 and $35,558 during the three
months ended April 30, 2016, respectively
for landman services.
Loan Guaranty
In 2015, one of the DESI’s subsidiaries
financed some of the heavy equipment and
trucks as described in Note 4. Under the
terms of the agreement the loan was
guaranteed by then owners and current
employee and shareholders of the Company.
NOTE 12 COMMITMENTS AND CONTINGENCIES
LegalThe Company is subject to
legal proceedings, claims and
liabilities which arise in the ordinary
course of business. The Company accrues
for losses associated with legal claims
when such losses are probable and can
be reasonably estimated. These accruals
are adjusted as additional information
becomes available or circumstances
change. Legal fees are charged to
expense as they are incurred.
In March 2016 Gilbert Bernal and two
companies he controls (collectively,
the “Plaintiffs”) filed a lawsuit
against us in the District Court of
Weld County, Colorado. In their
lawsuit, Plaintiffs claim that:
1.
Bernal had an ownership
interest in Ultra Energy
Solutions and Vinco Logistics,
two of the three entities that
combined to form Diversified
Energy Services.
2.
Bernal never consented to the
transfer of his interest in
Ultra Energy Solutions and
Vinco Logistics to Diversified
Energy Services.
3.
Diversified Energy Services has
possession of equipment owned
by the Plaintiffs and has
ignored Plaintiffs demand to
return the equipment to the
Plaintiffs.
Diversified Energy Services has refused
to repay approximately $1.3 million
loaned to Ultra Energy Solutions and
Vinco Logistics by the Plaintiffs.
In October 2016, the Company and the
Plaintiffs settled the lawsuit. to the
terms of the settlement, the Company
agreed to:
1.
Pay the Plaintiffs $1,050,000
plus interest at 8% per year.
The amount due the Plaintiffs
is payable between October 1,
2016 and December 31, 2019 with
the first payment due October
1, 2016.
2.
Return equipment to the
Plaintiffs.
3.
Issue Mr. Bernal warrants to
purchase 3,276,551 restricted
shares of the Company’s common
stock. The warrants can be
exercised any time on or before
January 1, 2027 at a price of
$.05 per share.
In the event of default all amounts
remaining unpaid will be immediately
due and payable and the interest rate
will increase to 18%. For the interest
rate to remain at 8%, the Company is
required to make the following
payments:
no less than $100,000 by
December 31, 2017;
no less than $100,000 by
December 31, 2018; and
the balance of $107,995 by
December 31, 2019.
If the Company fails to make any of
these payments the interest rate will
retroactively increase to:
14% for the period between
October 1, 2016 through July 1,
2019; and
16% after July 1, 2019.
In the event the interest rate
increases, the remaining payments to
the Plaintiffs will be adjusted and all
amounts payable to the Plaintiffs will
be due on October 1, 2020.
EnvironmentalThe Company accrues
for losses associated with
environmental remediation obligations
when such losses are probable and can
be reasonably estimated. These accruals
are adjusted as additional information
becomes available or circumstances
change. Costs of future expenditures
for environmental remediation
obligations are not discounted to their
present value. Recoveries of
environmental remediation costs from
other parties are recorded at their
undiscounted value as assets when their
receipt is deemed probable.
Concentration The Company sells
production to a small number of
customers, as is customary in the
industry. Yet, based on the current
demand for oil and natural gas, the
availability of other buyers, and the
Company having the option to sell to
other buyers if conditions so warrant,
the Company believes that its oil and
gas production can be sold in the
market in the event that it is not sold
to the Company’s existing customers.
However, in some circumstances, a
change in customers may entail
significant transition costs and/or
shutting in or curtailing production
for weeks or even months during the
transition to a new customer.
The Company is subject to various
federal, state and local environmental
laws and regulations that establish
standards and requirements for the
protection of the environment. The
Company cannot predict the future
impact of such standards and
requirements, which are subject to
change and can have retroactive
effectiveness. The Company continues to
monitor the status of these laws and
regulations. Management believes that
the likelihood of any of these items
resulting in a material adverse impact
to the Company’s financial position,
liquidity, capital resources or future
results of operations is remote.
Currently, the Company has not been
fined, cited or notified of any
environmental violations that would
have a material adverse effect upon
its financial position, liquidity or
capital resources. However,
management does recognize that by the
very nature of its business, material
costs could be incurred in the near
term to bring the Company into total
compliance. The amount of such future
expenditures is not determinable due
to several factors, including the
unknown magnitude of possible
contamination, the unknown timing and
extent of the corrective actions
which may be required, the
determination of the Company’s
liability in proportion to other
responsible parties and the extent to
which such expenditures are
recoverable from insurance or
indemnification.
NOTE 13 ACQUISITION
On February 1, 2016, the Company
acquired 100% of the outstanding
shares of DESI, a holding company
comprised of three oilfield services
companies, for 20,032,710 restricted
shares of our common stock having a
value of approximately $10,016,356, a
promissory note in the principal
amount of approximately $2,000,000
and the assumption of DESI’s
liabilities in the approximate amount
of $4,162,900 (subject to adjustment
for unknown liabilities). As a
result, we recorded goodwill of
$3,984,695. The note bears interest
at 2% a year and is payable in
February 2018.
DESI provides a wide range of
services, including Crane and
Rigging, Trucking Various Materials,
Custom Fabrication, Well Site
Construction; including Land
cleaning/leveling/grading, Excavation
and backfill, Access roads, Pad
construction, Tank battery
installation teardown, and
replacement etc, Well Site
Supervision, Pipeline Construction,
Pressure Testing, Fencing,
Environmental Remediation and
Equipment Rental. DESI’s operations
are concentrated in northern Colorado
and Wyoming.
The consolidated pro forma results of
operations as if the acquisition had
occurred at the beginning of the last
fiscal year and the beginning of this
fiscal year are as follows:
The consolidated unaudited pro forma
operating revenue and net loss for
the twelve months ended October 31,
2015 is $22.6 million and ($2.5)
million, respectively, resulting in
loss per share of $0.06. The
consolidated unaudited pro forma
operating revenue and net loss for
the three months ended April 31, 2016
is $4.7 million and ($1.4) million,
respectively, resulting in loss per
share of $0.04.
The Company has included the results
of DESI’s operations in its
consolidated financial statements
beginning on February 1, 2016. Fair
values of the assets acquired and
liabilities assumed in the
acquisition of DESI are summarized
below:
Current assets, including cash
and cash equivalents of
$503,389
$
3,906,845
Property, plant and equipment
8,270,765
Bonds and other assets
16,000
Total assets acquired
12,196,610
Current liabilities
(1,487,535
)
Long-term liabilities
(3,156,940
)
Net assets acquired
7,552,135
Goodwill
4,464,221
Net consideration
$
12,016,356
The amounts shown above are
considered preliminary and are
subject to change once the Company
receives certain information it
believes is necessary to finalize its
determination of the fair value of
assets acquired and liabilities
assumed under the acquisition method.
Thus, these amounts are subject to
refinement, and additional
adjustments to record fair value of
all assets acquired and liabilities
assumed may be required.
NOTE 14 DRILLING FUND
In February 2017, the Company created
Santa Fe Production Fund, LLC (SPD”)
for the purpose of offering units of
production payment interest and
common stocks in the Company. The
Company offered up to 100 units at
$25,000 per unit, each unit is
comprised on the following detachable
components:
$35,000 Production Payment
Interest in current and
future New Mexico production
50,000 shares of common stock
The production payment interest is
an economic interest assigned to
SPD by Diversified Resources in
certain oil and gas wells located
in San Juan County, New Mexico.
Each unit’s production payment
interest will be paid from SPD.
Payments will be allocated
according to each member’s pro
rata percentage ownership interest.
The definition of the production
payment interest is 50% of gross
monthly production revenues, after
the deduction of taxes, royalties,
transportation and lease operating
expenses. No general corporate or
GA expenses will be deducted. The
production payment will end when
the investors have received $35,000
for each unit purchased. Once that
140% threshold has been reached for
all investors, SPD will be
terminated and the unit investors
will cease having any economic
interest in any future production
and related payments.
On March 24, 2017, the Company
signed a subscription agreement
with ERG Diversified, LLC
(“ERG”).


About DIVERSIFIED RESOURCES, INC. (OTCMKTS:DDRI)

Diversified Resources, Inc. is an oil and gas operator. The Company holds interests in Natural Resource Group, Inc. (NRG). NRG’s interests include the Garcia Field, the Denver-Julesburg Basin and the Horseshoe-Gallup Field. The Garcia Field is located in Las Animas County approximately 10 miles from Trinidad, Colorado. The Garcia Field property includes leases covering approximately 4,600 gross acres; over four wells that produce natural gas and naturals gas liquids; a refrigeration/compression plant, which separates natural gas liquids from gas produced from the wells, and also an injection well. The Denver-Julesburg Basin property includes leases covering approximately 1,400 gross acres; over three shut-in wells, and approximately three producing oil and gas wells. The Horseshoe-Gallup Field includes over 50 producing oil and gas wells; leases covering approximately 10,000 gross and net acres, and miscellaneous equipment.

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