UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

[X]

QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-53923

CARDINAL ENERGY GROUP, INC.

(Exact name of registrant as specified in its charter)

NEVADA

(State or other jurisdiction of incorporation or organization)

500 Chestnut Street, Suite 1615

Abilene, TX 79602

(Address of principal executive offices, including zip code)

(325) 762-2112

(Registrant’s, telephone number, including area code)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.

YES [X] NO [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (SS 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES [ ] NO [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer	[ ]	Accelerated Filer	[ ]
Non-accelerated Filer	[ ]	Smaller Reporting Company	[X]
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES [ ] NO [X]

As of July 21, 2017 there were 983,376,477 shares outstanding of Registrant’s Common Stock (par value $0.00001 per share).

CARDINAL ENERGY GROUP, INC.

For the Quarter Ended June 30, 2016

TABLE OF CONTENTS

		Page
	*PART I - FINANCIAL INFORMATION*

Item 1.	Financial Statements.	F-1

	Condensed Consolidated Balance Sheets (Unaudited)	F-1
	Condensed Consolidated Statements of Operations and Other Comprehensive Loss (Unaudited)	F-2
	Condensed Consolidated Statements of Cash Flows (Unaudited)	F-3
	Notes to Condensed Consolidated Financial Statements (Unaudited)	F-4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	3

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	9

Item 4.	Controls and Procedures.	9

	*PART II - OTHER INFORMATION*

Item 1.	Legal Proceedings.	9

Item 1A.	Risk Factors.	12

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	12

Item 3.	Default upon Senior Securities

Item 6.	Exhibits.	13

Signatures		14

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Cardinal Energy Group, Inc.

Condensed Consolidated Balance Sheets

	June 30, 2016			December 31, 2015
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash	$	584		$	24,155
Accounts receivable - related party		180,612			180,712
Marketable securities		18,480			30,800
Other current assets		575			-
Total Current Assets		200,252			235,667

PROPERTY AND EQUIPMENT, net		68,671			244,078

OIL AND GAS PROPERTIES (full cost method)
Unproved properties		306,220			310,226

OTHER ASSETS
Note receivable		30,000			-
Deposits and deferred charges		54,600			56,100

TOTAL ASSETS	$	659,743		$	846,071

LIABILITIES AND STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES
Accounts payable and accrued expenses	$	1,299,091		$	908,066
Current portion of long term senior secured convertible promissory note		4,500,000			4,500,000
Convertible notes, net of debt discount and debt issuance cost of $36,162 and $144,885 respectively		1,466,780			1,044,102
Loan payable, net of debt discount of $0 and $39,910, respectively		152,211			116,433
Derivative liability		6,038,713			2,355,580
Equipment purchase contracts payable - current portion		15,505			13,721
Total Current Liabilities		13,472,300			8,937,902

LONG-TERM LIABILITIES
Convertible notes, net of debt discount and debt issuance cost of $0 and $58,403, respectively		-			82,317
Equipment purchase contracts payable		34,946			42,505
Asset retirement obligation		99,698			96,063

Total Long-Term Liabilities		134,644			220,885

TOTAL LIABILITIES		13,606,944			9,158,787

Commitments and contingencies		-			-

STOCKHOLDERS’ DEFICIT

Series A Preferred stock, 10,000,000 shares authorized at par value of $0.00001; 1,000,000 shares issued and outstanding		10			10
Common stock, 100,000,000 shares authorized at par value of $0.00001; 86,479,557 and 84,374,961 shares issued; and 83,379,557 and 81,274,961 shares outstanding, respectively		834			813
Additional paid-in capital		9,864,798			9,841,715
Treasury stock		(2,013,380	)		(2,013,380	)
Accumulated other comprehensive loss		(2,186,800	)		(2,186,800	)
Accumulated deficit		(18,612,663	)		(13,955,074	)

TOTAL STOCKHOLDERS’ DEFICIT		(12,947,201	)		(8,312,716	)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	659,743		$	846,071

The accompanying notes are an integral part of these unaudited condensed consolidated financial statement.

F-1

Cardinal Energy Group, Inc.

Condensed Consolidated Statements of Operations and Other Comprehensive Loss

(Unaudited)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015

REVENUES
Oil and gas revenues	$	5,447		$	16,165		$	6,863		$	38,628
Operating income from escrowed property - related party		-			250,000			-			250,000
Related party income from contract development operations		12,800			394,279			31,391			411,779

Total Revenues from Operations		18,248			660,444			38,255			700,407

COSTS & OPERATING EXPENSES
Operating and production costs		5,614			17,820			14,821			54,962
Costs of contract development operations		-			91,472			753			119,280
Depreciation and amortization		32,676			20,115			43,521			40,070
General and administrative		152,284			435,245			266,663			857,498

Total Operating Expenses		190,574			564,652			325,758			1,071,810

OPERATING INCOME (LOSS)		(172,327	)		95,792			(287,504	)		(371,403	)

OTHER INCOME (EXPENSES)
Other income		2,944			-			5,514			-
Investment revenue - related party		-			5,676			-			12,994
Realized loss on available for sale securities		(12,320	)					(12,320	)		-
Gain on sale of property and equipment		-			-			4,546			930
Amortization of debt discount		(48,117	)		(311,960	)		(184,193	)		(393,198	)
Interest expense, net		(240,172	)		(453,063	)		(484,320	)		(1,115,846	)
Gain (loss) on change in the fair value of derivative liability		3,175,029			392,908			(3,699,313	)		131,957

Total Other Income (Expenses)		2,877,365			(366,439	)		(4,370,085	)		(1,363,163	)

NET INCOME (LOSS)	$	2,705,038		$	(270,647	)	$	(4,657,589	)	$	(1,734,566	)

OTHER COMPREHENSIVE LOSS
Change in value of investments		(15,400	)		(46,200	)		-			(7,700	)

NET COMPREHENSIVE INCOME (LOSS)	$	2,689,638		$	(316,847	)	$	(4,657,589	)	$	(1,742,266	)

Income (Loss) per share of common stock (basic and diluted)	$	0.03		$	(0.01	)	$	(0.06	)	$	(0.05	)

Weighted average shares outstanding		83,379,557			35,503,761			82,801,371			35,424,897

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

F-2

Cardinal Energy Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For the Six Months Ended
	June 30,
	2016			2015

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss	$	(4,657,589	)	$	(1,734,566	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		35,780			34,070
Amortization of debt discount and prepaid debt issuance cost		208,235			863,632
Accretion expense		7,741			6,000
Stock based compensation		-			44,000
Stock issued for services		-			132,285
Stock cancelled on services		-			(15,666	)
Gain (loss) on change in fair value of derivative liability		3,699,313			(131,957	)
Non-cash interest expense, defaults fees and charges included in principal amount of notes		188,085			321,277
Gain on sale of property and equipment		(4,546	)		(931	)
Realized loss on available for sale securities		12,320			-
Rent income		(4,645	)		-
Stock issued for interest expense		-			119,500
Changes in operating assets and liabilities:
Accounts receivable - related party		100			(59,182	)
Accounts receivable		-			(1,061	)
Other current assets		(575	)		(66,700	)
Other assets		1,500			13,726
Accounts payable and accrued expenses		390,925			(164,645	)

Net Cash Used in Operating Activities		(123,357	)		(640,218	)

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment		114,173			-
Purchase of property and equipment		-			(8,610	)
Purchase of oil and gas properties		-			(870	)
Sale of oil and gas properties		-			50,000

Net Cash Provided by Investing Activities		114,173			40,520

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable -equipment		(1,130	)		(8,327	)
Net proceeds from convertible notes payable		-			739,622
Repayment of convertible notes and loans payable		(13,257	)		(15,000	)

Net Cash (Used in) Provided by Financing Activities		(14,387	)		716,295

NET INCREASE (DECREASE) IN CASH		(23,571	)		116,597
CASH AT BEGINNING OF PERIOD		24,155			115,398

CASH AT END OF PERIOD	$	584		$	231,995

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

CASH PAID FOR:
Interest	$	1,348		$	18,134
Income Taxes	$	-		$	-

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain on available-for-sale-securities	$	-		$	7,700
Derivative liability on convertible notes payable and warrants at inception	$	-		$	1,150,547
ARO adjustment related to assets sold	$	-		$	78,152
Common stock issued for conversion of debt	$	6,924		$	99,014
Loan extension fees	$	-		$	71,429
Original issue discount on convertible note payable	$	-		$	96,600
Reversal of derivative liability and debt discount on convertible notes payable	$	-		$	131,902
Extinguishment of derivative liability	$	16,180		$	-
Note receivable in connection with the sale of property and equipment	$	30,000		$	-

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

F-3

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at June 30, 2016, and for all periods presented herein, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s December 31, 2015 audited consolidated financial statements. The results of operations for the periods ended June 30, 2016 and 2015 are not necessarily indicative of the operating results for the full year.

Nature of Operations and Organization

Cardinal Energy Group, Inc. (the “Company”) was incorporated in the state of Nevada on June 19, 2007 under the name Koko, Ltd. for the purpose of developing, manufacturing and selling of a steak timer. On September 28, 2012, the Company changed the focus of its business when it acquired all of the ownership interests of Cardinal Energy Group, LLC, an Ohio limited liability company which was engaged in the business of acquiring, exploring, developing and operating oil and gas leases. The Company changed its name to Cardinal Energy Group, Inc. on October 10, 2012 in connection with this acquisition. On June 10, 2015 the Company moved its executive offices from Dublin, Ohio to Abilene, Texas. In February 2016, the Company closed its Abilene, Texas office and relocated their executive offices to Upper Arlington, Ohio.

The Company has been engaged in the development, exploitation and production of crude oil and natural gas. The Company sells its oil and gas products to domestic purchasers of oil & gas production. Its operations were focused in the states of California, Ohio and Texas during 2012 and 2013. In 2014, management decided to focus its oil and gas operations entirely within the state of Texas. The Company established a regional operations office in Albany, Texas and retained the services of operating personnel with ties to the exploration and development of oil and gas fields in Texas. On February 12, 2016 the Company sold its regional operating complex located in Albany, Texas to a local oil and gas well plugging and abandonment services company for a total consideration of $130,000. In connection with the sale the Company took back a $30,000 note which drew interest at 5% per annum from the buyer. The Company entered into a Settlement and Mutual Release Agreement with the buyer concerning the note in October 2016 (see Note 11).

The recoverability of the capitalized exploration and development costs for these properties is dependent upon the existence of economically recoverable reserves, the Company’s ability to obtain the necessary financing to complete exploration and development, future positive cash flows from production activities and/or proceeds from the disposition of one or more of such properties.

On April 30, 2015 the Company formed High Performance Energy Fund Corporation, a Delaware corporation (“High Performance”), for the purposes of identifying, developing and financing new prospective oil and gas properties. High Performance is a wholly-owned subsidiary of the Company.

Basis of Presentation and Use of Estimates

These financial statements have been prepared in accordance with accounting principles generally accepted in United States of America which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures of revenues and expenses for the reported year. Actual results may differ from those estimates. Included in these estimates are assumptions about collection of accounts receivable, impairment of oil and gas properties, useful life of property and equipment, amounts and timing of closure obligations, assumptions used to calculate fair value of stocks and warrants granted, stock based compensation, beneficial conversion of convertible notes payable, deferred income tax asset valuation allowances, and valuation of derivative liabilities.

F-4

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Oil and Gas Properties

The Company follows the full cost method of accounting for its oil and natural gas properties, whereby all costs incurred in connection with the acquisition, exploration for and development of petroleum and natural gas reserves are capitalized. Such costs include lease acquisition, geological and geophysical activities, rentals on non-producing leases, drilling, completing and equipping of oil and gas wells and administrative costs directly attributable to those activities and asset retirement costs. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized to income.

Depletion and depreciation of proved oil and gas properties is calculated on the units-of-production method based upon estimates of proved reserves. Such calculations include the estimated future costs to develop proved reserves. Oil and gas reserves are converted to a common unit of measure based on the energy content of 6,000 cubic feet of gas to one barrel of oil. Costs of unevaluated properties are not included in the costs subject to depletion. These costs are assessed periodically for impairment. As of June 30, 2016 and December 31, 2015 there were no proved reserves.

In light of the precipitous fall in crude oil prices during the year 2014-2015 time period and the relatively small production volumes from the Company’s leases we elected to reduce the carrying value of our oil and gas properties during the fourth quarter of 2015. This reduction to the estimated net recoverable values of our oil and gas properties is reflected in the financial statements as a charge to impairment expense on the income statement for the year ended December 31, 2015.

In December of 2015 the Company employed the services of Bullet Development, a respected oil and gas development firm headquartered in Abilene, Texas, to assess the value and potential development options for its remaining oil and gas properties in north-central Texas, namely the Company-operated Powers-Sanders and Dawson-Conway leases and our non-operating working interest in the Fortune Prospect. Based on the results of the study and the recommendations from Bullet Development we have determined that the best course of action would be to sell our interests in the leases to interested local parties. Accordingly, the Company has held discussions with multiple parties who are interested in acquiring the properties. In the case of the Powers-Sanders leases at least one oil and gas firm has expressed an interest in acquiring the leases in order to exploit some shallow oil reservoirs believed to be present under the properties. In the case of the Dawson-Conway leases initial discussions have occurred between the Company and two interested parties. One of the parties is the operator of adjoining leases and is interested in acquiring one or more of the leases in order to include the Dawson-Conway leases into a “master water flood project” for all of the surrounding leases.

Principles of Consolidation

Our unaudited condensed consolidated financial statements include the accounts of subsidiaries in which a controlling interest is held. All intercompany transactions have been eliminated. Undivided interests in oil and gas exploration and production joint ventures are consolidated on a proportionate basis. Investments in entities without a controlling interest are accounted for by the equity method or cost basis. The equity method is used to account for investments in non-controlled entities when the Company has the ability to exercise significant influence over operating and financial policies. In applying the equity method of accounting, the investments are initially recognized at cost, and subsequently adjusted for the Company’s proportionate share of earnings, losses and distributions. The cost method is used when the Company does not have the ability to exert significant influence.

F-5

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Asset Retirement Obligation

The Company follows FASB ASC 410, Asset Retirement and Environmental Obligations which requires entities to record the fair value of a liability for asset retirement obligations (“ARO”) and recorded a corresponding increase in the carrying amount of the related long-lived asset. The asset retirement obligation primarily relates to the abandonment of oil and gas properties. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of oil and gas properties and is depleted over the useful life of the asset. The settlement date fair value is discounted at our credit adjusted risk-free rate in determining the abandonment liability. The abandonment liability is accreted with the passage of time to its expected settlement fair value. Revisions to such estimates are recorded as adjustments to ARO are charged to operations in the period in which they become known. At the time the abandonment cost is incurred, the Company is required to recognize a gain or loss if the actual costs do not equal the estimated costs included in ARO. The ARO is based upon numerous estimates and assumptions, including future abandonment costs, future recoverable quantities of oil and gas, future inflation rates, and the credit adjusted risk free interest rate. Different, but equally valid, assumptions and judgments could lead to significantly different results. Future geopolitical, regulatory, technological, contractual, legal and environmental changes could also impact future ARO cost estimates. Because of the intrinsic uncertainties present when estimating asset retirement costs as well as asset retirement settlement dates, our ARO estimates are subject to ongoing volatility. The ARO was $99,698 and $96,063 as of June 30, 2016 and December 31, 2015, respectively. The Company accreted $7,741 and $6,000 to ARO during the quarters ended June 30, 2016 and 2015, respectively.

Derivative Liabilities

The Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with Accounting Standards Codification topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”) as well as related interpretations of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.

The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then that the related fair value is reclassified to equity. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.

ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional.

The Company marks to market the fair value of the embedded derivative convertible notes and derivative warrants at each balance sheet date and records the change in the fair value of the embedded derivative convertible notes and derivative warrants as other income or expense in the consolidated statements of operations.

F-6

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The Company estimates fair values of derivative financial instruments using the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our common stock.

Revenue and Cost Recognition

The Company uses the sales method to account for sales of crude oil and natural gas. Under this method, revenues are recognized based on actual volumes of oil and gas sold to purchasers. The volumes sold may differ from the volumes to which the Company is entitled based on its interest in the properties. These differences create imbalances which are recognized as a liability or as an asset only when the imbalance exceeds the estimate of remaining reserves. For the periods ending June 30, 2016 and December 31, 2015 there were no such differences.

The Company has agreed with the Bradford JV and Keystone Energy, LLC to provide drilling, infrastructure and work-over services to support the development of oil leases in Texas. The revenue and costs arising from the drilling and other services are matched and recorded as income and expense as each project is completed in accordance with their agreement, effectively recognizing income on the percentage of completion.

Costs associated with the production of oil and gas (sometimes referred to as “lifting costs”) are expensed in the period incurred.

Accounts Receivable

Uncollectible accounts receivable are charged directly against earnings when they are determined to be uncollectible. Use of this method does not result in a material difference from the valuation method required by generally accepted accounting principles. At June 30, 2016 and December 31, 2015, no reserve for doubtful accounts was required.

Reclassification of Prior Year Presentation

Certain reclassifications have been made to conform the prior period data to the current presentations. These reclassifications had no effect on the reported results.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments are to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. The Company reclassified debt issuance cost of $3,431 and $26,275 from assets to liabilities and netted off with the related loans in the liabilities as of June 30, 2016 and December 31, 2015, respectively.

New Accounting Pronouncements

Management has considered all recent accounting pronouncements issued since the last audit of our consolidated financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s unaudited condensed consolidated financial statements.

F-7

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 2 - GOING CONCERN

The Company’s unaudited condensed consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and the liquidation of liabilities in the normal course of business. As reflected in the unaudited condensed consolidated financial statements, the Company had an accumulated deficit of $18,612,663 at June 30, 2016, a net loss of $4,657,589 and net cash used in operating activities of $123,357 for the six months ended June 30, 2016. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company has historically utilized production revenues and the proceeds from the private sales of common stock and convertible debt instruments to fund its operating expenses. The Company’s negative cash flows from operations, working capital deficit, and its projected costs of capital improvements for oil and gas wells raise substantial doubt about its ability to continue as a going concern. The Company has not yet established an adequate ongoing source of revenues sufficient to cover its operating costs and to allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

In order to continue as a going concern, develop a reliable source of revenues, and achieve a profitable level of operations the Company will need, among other things, additional capital resources. Management’s plans to continue as a going concern include raising additional capital through increased sales of oil and gas, providing additional contract drilling and operating services for the development of proven undeveloped shallow oil projects and by the sale of debt and equity securities in both public and private transactions. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described above, restructuring its current debt and eventually securing additional sources of financing and attaining consistent profitable operations. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. These unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.

The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of June 30, 2016 and December 31, 2015. As required by ASC 820, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between fair value hierarchy levels for the periods reported herein.

The carrying amounts reported in the balance sheets for cash, accounts receivable, loans payable, and accounts payable and accrued expenses, approximate their fair market value based on the short-term maturity of these instruments. The following table presents assets and liabilities that are measured and recognized at fair value as of June 30, 2016 and December 31, 2015, on a recurring basis:

Assets and liabilities at fair value on a recurring basis at June 30, 2016:

	Level 1		Level 2		Level 3		Total
Assets
Marketable securities	$	18,480	$	-	$	-	$	18,480
Total	$	18,480		-		-	$	18,480
Liabilities
Derivative liability	$	-	$	-	$	6,038,713	$	6,038,713
Total	$	-	$	-	$	6,038,713	$	6,038,713

F-8

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Assets and liabilities at fair value on a recurring basis at December 31, 2015:

	Level 1		Level 2		Level 3		Total
Assets
Marketable securities	$	30,800	$	-	$	-	$	30,800
Total	$	30,800		-		-	$	30,800
Liabilities
Derivative liability	$	-	$	-	$	2,355,580	$	2,355,580
Total	$	-	$	-	$	2,355,580	$	2,355,580

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of June 30, 2016:

Balance, December 31, 2015	$	2,355,580
Initial fair value of debt derivatives at note issuances		-
Extinguished derivative liability		(16,180	)
Change in fair value of derivative liabilities		3,699,313
Balance, June 30, 2016	$	6,038,713

Net loss for the period included in earnings relating to the liabilities held at June 30, 2016	$	3,699,313

The carrying value of short term financial instruments including cash, accounts payable, accrued expenses and short-term borrowings approximate fair value due to the short period of maturity for these instruments. The long-term debentures payable approximates fair value since the related rates of interest approximate current market rates.

NOTE 4 - PROPERTY AND EQUIPMENT

The following is a summary of property and equipment - at cost, less accumulated depreciation as of June 30, 2016 and December 31, 2015:

	June 30, 2016			December 31, 2015
	(Unaudited)
Office equipment	$	63,235		$	63,235
Computer hardware and software		26,652			26,652
Leasehold improvements		3,630			25,453
Transportation equipment		94,020			132,622
Building		-			110,699
		187,537			358,661
Less: accumulated depreciation		(118,866	)		(114,583	)

	$	68,671		$	244,078

Depreciation expense for the six months ended June 30, 2016 and 2015 amounted to $35,780 and $34,070, respectively.

In the first quarter of fiscal 2016, the Company sold its regional operations facility in Albany, Texas with a net book value worth approximately $123,000 to a third party for a sales price of approximately $130,000. In the first quarter of fiscal 2016, the Company also sold various pieces of transportation equipment with a net book value worth approximately $16,000 to a third party for a sales price of approximately $16,000. The depreciation expense related to the sold facility and transportation equipment amounted to approximately $1,200 which is included in the $35,780 above. As a result, the Company realized a gain, net of recording, legal and other transaction costs, on sale of property and equipment of $4,546 during the six months ended June 30, 2016.

F-9

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 5 - RELATED PARTY TRANSACTIONS

The Company, through its wholly owned subsidiary, CEGX of Texas, LLC has entered into Contract Operating Agreements with Bradford JV and Keystone Energy, LLC. Under the terms of these agreements, the Company has agreed to perform routine and major operations, marketing services, accounting services, reporting services and other administrative services on behalf of the Bradford JV as necessary to operate Bradford JV’s oil and gas operations on the Bradford “A” and Bradford “B” leases located in Shackelford County, Texas.

In June 2016, Keystone Energy, LLC, elected not to exercise their option to acquire the remaining interest in the Bradford JV under the Participation Interest Purchase and Sale Agreement (the “PIPSA”) dated in June 2015. In June 2016, the Company following the expiration of the 365-day escrow period pursuant to PIPSA and upon payment of $100 by the Company to Keystone Energy, LLC, reacquired its 20 participation interests in Bradford JV.

The Company has determined that the agreements and the Company’s participation in the Bradford Joint Venture created a related party relationship and as such has reported the billed revenues of $31,391 and $411,779 during the six months ended June 30, 2016 and 2015, respectively and the related accounts receivable of $180,612 and $180,712 at June 30, 2016 and December 31, 2015, respectively as related party transactions in the unaudited condensed consolidated financial statements. Related party payables are nil at June 30, 2016 and December 31, 2015.

NOTE 6 - SENIOR SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE

Senior secured convertible notes payable consisted of the following:

	June 30, 2016		December 31, 2015
	(Unaudited)
12% Senior secured convertible notes payable, net	$	4,500,000	$	4,500,000

In March 2014, the Company issued senior secured convertible promissory notes in an aggregate principal amount of $3,225,000 (the “Senior Secured Convertible Notes”) together with common stock purchase warrants (the “Warrants”) to purchase an aggregate of 1,290,000 shares of the Company’s common stock at an exercise price of $1.00 per share as part of a private placement offering. The Senior Secured Convertible Notes bear interest at a rate of 12.0% per annum until they mature on December 15, 2015 or are converted. The note is secured by senior secured interest in the assets of the Company’s working interest in the Dawson-Conway Lease, Powers-Sanders Lease, and Stroebel-Broyles Lease and a pledge of a number of shares of restricted Stock (the “Stock Coverage”) whose value based on the bid price of the Stock is twice (or 200%) the amount in outstanding and unpaid principal and interest of the Notes.

During fiscal 2014, the Company issued additional Senior Secured Convertible Notes in an aggregate principal amount of $1,275,000 together with common stock purchase warrants (the “Warrants”) to purchase an aggregate of 510,000 shares of the Company’s common stock at an exercise price of $1.00 per share as part of the same private placement offering. The remaining $500,000 of principal available under the facility was not secured during the fourth quarter of 2014 and the offering of units was closed during February 2015.

As of June 30, 2016 and December 31, 2015, accrued interest amounted to $810,000 and $540,000 respectively and was included in accounts payable and accrued expenses as reflected in the condensed consolidated balance sheet.

In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of nil of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature.

The Company has held several telephone conference calls with the noteholders and has been in continuous contact with Syndicated Capital, the placement agent for the Notes, to discuss plans to either bring the interest payments to a current status or to restructure the unpaid interest and principal outstanding into common and or preferred equity securities of the Company. To date, the noteholders have elected not to exercise their rights to trigger certain default provisions under the senior secured promissory notes.

F-10

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 6 - SENIOR SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)

The net proceeds from the borrowing were used primarily to acquire selected oil and gas properties in Texas, to fund the Company’s well workover and drilling programs, to purchase and equip a regional office, to purchase various well testing and production equipment, to fund lease operating expenses and to retire short-term debt.

In July2015 the Company identified embedded derivatives related to the theoretical default of the Senior Secured Convertible Promissory Notes. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company to record the fair value of the derivatives as of the inception date of the Senior Secured Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date (see Note 8).

NOTE 7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE

Loan Payable

Loan payable outstanding consisted the following:

	June 30, 2016		December 31, 2015
	(Unaudited)
Loan payable obtained in November 2015 of $172,800 payable over 273 days beginning on November 18, 2015 with daily payments of $633. Debt discount and debt issuance cost of $0 and $39,910 amounted on June 30, 2016 and December 31, 2015, respectively.	$	152,211	$	116,433

Such loan was obtained in connection with a Revenue Based Factoring Agreement executed in November 2015 whereby the Company sells, assigns, and transfers all of the Company’s future receipts, accounts and contract rights and other obligations arising from or relating to payment of monies from customers in the ordinary course of the Company’s business, until such time the loan amount has been paid off by the Company. On March 18, 2016 the Company received notice from counsel representing Power Up Lending Group, Ltd. that it was in default under the terms of the November 12, 2015 Revenue Based Factoring Agreement. The Company recorded default interest charges of $7,500 and amortized debt discount and prepaid issuance cost of $39,910 during the six months ended June 30, 2016. As of the date of the filing of this report there has been no further developments.

Notes Payable

Equipment purchase contracts payable:

Between June 2014 and September 2014, the Company issued notes payable in the aggregate amount of $100,285 in connection with the acquisition of three pieces of transportation equipment. The notes payable bear interest ranging approximately from 9% to 10% per annum and are secured by a lien on the transportation equipment. The notes are payable in 60 equal monthly payments.

During fiscal 2015, the Company sold one piece of transportation equipment. The Company used the sales proceeds to pay off the remaining balance of the note of approximately $25,000.

Notes payable — short and long term portion consisted of the following:

	June 30, 2016			December 31, 2015
	(Unaudited)
Total notes payable	$	50,451		$	56,226
Less: current portion – equipment purchase contract payable		(15,505	)		(13,721	)
Long term portion – equipment purchase contract payable	$	34,946		$	42,505

F-11

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)

Convertible notes payable

Convertible notes payable outstanding are summarized in the following table:

	June 30, 2016			December 31, 2015
	(Unaudited)
Amount of principal and interest including default interest and penalties under the 6% convertible promissory notes net of debt discount of $0 and $0 at June 30, 2016 and December 31, 2015, respectively, issued during fiscal 2014	$	478,382		$	431,092

Amount of principal and interest including default interest and penalties under the various 8% convertible promissory notes net of debt discount of $0 and $0 at June 30, 2016 and December 31, 2015, respectively, issued during fiscal 2014		10,283			9,184

Amount of principal and interest including default interest and penalties under the various 8% convertible promissory notes net of debt discount and debt issuance cost of $3,508 and $43,408 at June 30, 2016 and December 31, 2015, respectively, issued during fiscal 2015		58,042			11,564

Amount of principal and interest including default interest and penalties under the various 10% convertible promissory notes net of debt discount of $0 and $2,857 at June 30, 2016 and December 31, 2015, respectively, issued during fiscal 2015		161,297			95,622

Amount of principal and interest including default interest and penalties under the various 12% convertible promissory notes net of debt discount of $32,654 and $157,023 at June 30, 2016 and December 31, 2015, respectively, issued during fiscal 2015		758,776			578,957
Total principal and interest including default interest and penalties		1,466,780			1,126,419
Less : Current portion of convertible notes		(1,466,780	)		(1,044,102	)
Total long-term portion of convertible notes	$	-		$	82,317

Convertible Note issued on September 22, 2014:

On September 22, 2014, the Company issued a 6% short term convertible promissory note payable of $340,000 to an unrelated entity. Under the terms of the note, the Company received $250,000. The Company paid $10,000 as a commission related to this credit facility. The repayment of the note is due 180 days after the funds were received. The repayment is subject to the convertible features of the note. The creditor has a conversion option allowing it to choose to receive repayment of the stated principal either in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash, the Company is required to pay principal of $340,000. During April 2015, the Company completed an agreement to extend the repayment date to May 10, 2015 and issued 250,000 shares of common stock valued at $55,000 during year 2015 as interest expense. On May 10, 2015, the noteholder agreed to extend the due date for another 45 days and the Company issued 250,000 shares of common stock valued at $52,500 as consideration during the year 2015 as interest expense.

At the option of the note holder, the Company may repay the note by issuing restricted common stock based upon a valuation formula, which includes a calculation based upon 75% of an average of the lowest 3-day closing price during the immediate 20 days prior to the date of the conversion notice. The note was issued with an original issue discount of $90,000 and the Company recorded it as prepaid debt issuance cost which was amortized over the term of the note. In conjunction with the issuance of this convertible promissory note, the Company issued an aggregate of 250,000 Class C detachable warrants exercisable three years from the date of issuance with an initial exercise price of $1.00 per share.

F-12

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)

During the year ended December 31, 2015, the Company extended the repayment date on three occasions and issued common stock to the note holder as consideration for the extension concessions. The Company issued 250,000 shares on May 5, 2015 and an additional 250,000 shares on May 28, 2015. The shares were valued based upon an agreed formula consistent with the conversion terms applied to the embedded derivative. The 500,000 shares of common stock was valued at $107,500 which was charged to interest during the year 2015. The Company has completed a third extension, for which it paid $5,000 for legal fees incurred by the note holder. The note is currently in default and the Company and the note holder have agreed to arbitration in 2016.

Convertible Note issued on December 23, 2014:

On December 23, 2014, the Company issued an 8% short term convertible promissory note payable of $110,000 to an unrelated entity. Under the terms of the note, the Company received $95,000. The Company paid $5,000 as a legal fees related to this credit facility. The repayment of the note was due one year after the funds were received. The repayment is subject to the convertible features of the note. The creditor has a conversion option allowing it to choose to receive repayment of the stated principal either in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash, the Company is required to pay principal of $120,000 on or before 180 days from the execution of the agreement. At the option of the note holder, the Company may repay the note by issuing restricted common stock based upon the conversion term, which includes a calculation based upon a 40% discount to the lowest closing price during the immediate 20 days prior to the date of the conversion notice. This note is currently past due.

Convertible Note issued on January 12, 2015:

On January 12, 2015, the Company issued a 10% one year promissory note payable of $100,000, due on January 12, 2016, with an unrelated entity. Under the terms of the note, the Company received $90,000 and was charged an original issue discount of $5,000. The Company was also charged $5,000 as legal fees related to this credit facility. The repayment, if not completed within 180 days may, at the option of the note holder, be repaid in common stock of the Company. After 180 days, the creditor will have a conversion option allowing it to choose to receive repayment of the stated principal and interest either in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash, during the 180 day prepayment period, the repayment will be $120% of the principal and any accrued interest. At the option of the note holder, the Company may repay the note by issuing restricted common stock based upon the conversion term, which includes a calculation based upon a 35% discount to the lowest closing price during the immediate 15 days prior to the date of the conversion notice. This note is currently past due.

Convertible Note issued on January 16, 2015:

On January 16, 2015, the Company issued an 8% short-term promissory note payable of $114,000, due on October 13, 2015, with an unrelated entity. Under the terms of the note, the Company received $110,000 and was charged an original issue discount of $4,000. The repayment, if not completed within 180 days may, at the option of the note holder, be repaid in common stock of the Company. After 180 days, the creditor will have a conversion option allowing it to choose to receive repayment of the stated principal and interest either in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash, during the 180 day prepayment period, the repayment will be 130% of the principal and any accrued interest. At the option of the note holder, the Company may repay the note by issuing restricted common stock based upon the conversion term, which includes a calculation based upon a 35% discount of the average of the lowest three trading price during the 10 days prior to the date of the conversion notice. This note was fully paid in year 2015.

F-13

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)

Convertible Note issued on January 22, 2015:

On January 22, 2015, the Company issued a two-year 12% convertible promissory note payable of $55,000 with an unrelated entity. Under the terms of the note, the Company received $50,000. The repayment of the note is due on or before January 28, 2017, 2 years after the funds were received. The repayment is subject to the convertible features of the note. The creditor has a conversion option allowing it to choose to receive repayment of the stated principal either in cash or, at the creditor’s option, in the Company’s restricted common stock. At the option of the note holder, the Company may repay the note by issuing restricted common stock based upon a conversion term, which includes a calculation based upon 60% of the lowest closing price during the immediate 25 days prior to the calculation of the conversion notice. The note was issued with an original issue discount of $5,000 and the Company recorded it as prepaid debt issuance cost which is amortized over the term of the note. Conversion price of this convertible note shall equal to the lesser of (a) $0.50 or (b) 60% of the lowest trade occurring during the 25 consecutive trading days immediately preceding the applicable conversion date on which the holder elects to convert all or part of this note.

Convertible Note issued on January 28, 2015:

On January 28, 2015, the Company issued a two-year 12% convertible promissory note payable of $55,000, due on January 28, 2017 with an unrelated entity. Under the terms of the note, the Company received $50,000 and was charged an original issue discount of $5,000. The repayment, if not completed within 180 days may, at the option of the note holder, be repaid in common stock of the Company. After 180 days, the creditor will have a conversion option allowing it to choose to receive repayment of the stated principal and interest either in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash, during the initial 90 days, the repayment will be 120% of the principal and any accrued interest. During the succeeding 90 day prepayment period, the repayment will be 130% of the principal and any accrued interest. Conversion price of this convertible note shall equal the lesser of (a) $0.365 or (b) 60% of the lowest trade occurring during the 25 consecutive trading days immediately preceding the applicable conversion date on which the note holder elects to convert all or part of this note.

Convertible Note issued on March 18, 2015:

On March 18, 2015, the Company issued a two-year 8% convertible promissory note payable of $60,000, due on March 18, 2017 with an unrelated entity. Under the terms of the note, the Company received $54,000 and was charged an original issue discount of $6,000. The repayment, if not completed within 180 days may, at the option of the note holder, be repaid in common stock of the Company. After 180 days, the creditor will have a conversion option allowing it to choose to receive repayment of the stated principal and interest either in cash or, at the creditor’s option, in the Company’s common stock. If paid in cash, during the initial 90 days, the repayment will be 115% of the principal and accrued interest. During the succeeding 90 day prepayment period, the repayment will be $130% of the principal and any accrued interest. If the creditor elects to convert the note to common stock, the conversion feature allows for a valuation of the stock based upon a 35% discount to the average of the lowest three trading prices during the 10 days preceding the conversion date. This note was fully paid in year 2015.

Convertible Note issued on March 18, 2015 and August 27, 2015:

Between March 18, 2015 and August 27, 2015, the Company issued two year 12% convertible promissory notes payable for a total of $85,000 with an unrelated entity. Under the terms of the note, the Company received $72,500. The repayment of the notes are both due on or before March 18, 2017. The repayment is subject to the convertible features of the note. The creditor has a conversion option allowing it to choose to receive repayment of the stated principal with accrued interest. At the option of the note holder, the Company may repay the note by issuing restricted common stock based upon the conversion term, which includes a calculation based upon the lesser of a) $0.30 or b) 60% of the lowest closing price during the immediate 25 days prior to the date of the conversion notice. The note was issued with an original issue discount of $8,500 and a charge for legal fees of $4,000. The Company recorded the costs as prepaid debt issuance cost which is amortized over the term of the note.

F-14

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)

Convertible Note issued on April 6, 2015:

On April 6, 2015, the Company issued a nine-month 10% convertible promissory note payable of $60,000, due on January 6, 2016 with an unrelated entity. Under the terms of the note, the Company received $54,750 and was charged an original issue discount of $5,250. The repayment, if not completed within 180 days may, at the option of the note holder, be repaid in common stock of the Company. After 180 days, the creditor will have a conversion option allowing it to choose to receive repayment of the stated principal and interest either in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash, during the initial 180 days, the repayment will be calculated based upon the period paid, with prepayment terms requiring 125% to 150% of the principal and any accrued interest. At the option of the note holder, the Company may repay the note by issuing restricted common stock based upon the conversion term, which includes a calculation based upon 55% of the lowest two closing price during the immediate 25 days prior to the date of the conversion notice. This note is currently past due.

Convertible Note issued on May 1, 2015:

On May 1, 2015, the Company issued a nine-month 8% convertible promissory note payable of $59,000, due February 6, 2016 with an unrelated entity. Under the terms of the note, the Company received $55,000 and was charged prepaid loan costs of $4,000. The repayment, if not completed within 180 days may, at the option of the note holder, be repaid in common stock of the Company. After 180 days, the creditor will have a conversion option allowing it to choose to receive repayment of the stated principal and interest either in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash, during the initial 180 days, the repayment will be calculated based upon the period paid, with prepayment terms requiring 115% to 130% of the principal and any accrued interest. If the creditor elects to convert the note to common stock, the conversion feature allows for a valuation of the stock based upon a 35% discount to the average of the lowest three trading prices during the 10 days preceding the conversion date. This note was fully paid in year 2015.

Convertible Note issued on May 8, 2015:

On May 8, 2015, the Company issued a ten-month 12 % convertible promissory note payable of $145,000 to an unrelated entity upon the assignment of a total of $145,000 of 8% convertible notes issued in fiscal 2013 whereby the previous noteholders entered into an assignment agreement and assigned their debts to this unrelated entity. The repayment of the note is due on or before March 8, 2016, ten months after the issue date of the note. The repayment is subject to the convertible features of the note. The creditor has a conversion obligation allowing it to convert the notes during the pendency of the note, but repayment in cash is not expected. At the option of the note holder, the Company may repay the note by issuing restricted common stock based upon a valuation formula, which includes a calculation based upon lesser of a) $0.40 or b) 70% of the lowest volume weighted average price (“VWAP”) during the immediate 10 days prior to the date of the conversion notice. This note is currently past due. On November 25, 2015, the conversion price was changed to lesser of a) $0.40 or b) 60% of the lowest trading value during the 20 days immediately preceding the conversion. This note is currently past due.

Convertible Note issued on May 21, 2015:

On May 21, 2015, the Company issued a ten-month 12% convertible promissory note payable of $110,000 with an unrelated entity. Under the terms of the note, the Company received $100,000. The repayment of the note is due on or before March 8, 2016, ten months after the issue date of the note. The repayment is subject to the convertible features of the note. The creditor has a conversion option allowing it to choose to receive repayment of the stated principal with accrued interest. The note is to be repaid either in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash the principal repayment is to be $110,000 (including an original issue discount of $10,000) and the interest after the initial 90 days is to be 12%. At the option of the note holder, the Company may repay the note by issuing restricted common stock based upon the conversion terms, which includes a calculation based upon lesser of a) $0.40 or b) 70% of the lowest volume weighted average price (“VWAP”) during the immediate 10 days prior to the date of the conversion notice. The original issue discount of $10,000 has been recorded as prepaid debt issuance cost along with legal and commission expenses of $11,350. The prepaid debt issuance costs will be amortized over the term of the note. This note is currently past due. On November 25, 2015, the conversion price was changed to lesser of a) $0.40 or b) 60% of the lowest trading value during the 20 days immediately preceding the conversion. This note is currently past due.

F-15

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 7 - LOAN PAYABLE, NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)

Convertible Note issued on June 2, 2015:

On June 2, 2015, the Company issued a twelve-month 12% convertible promissory note payable of $121,000 with an unrelated entity. Under the terms of the note, the Company received $100,000. The repayment of the note is due on or before June 2, 2016, one year after the issue date of the note. The repayment is subject to the convertible features of the note. The creditor has a conversion option allowing it to choose to receive repayment of the stated principal with accrued interest (12%). The note is to be repaid either in cash or, at the creditor’s option, in the Company’s restricted common stock. If paid in cash the principal repayment is to be $121,000 (including an original issue discount of $10,000 and professional fees of $11,000) and the interest after the initial 90 days is to be 12%. At the option of the note holder, the Company may repay the note by issuing common stock based upon the conversion terms, which includes a calculation based upon 70% of the lowest trade price during the immediate 15 days prior to the date of the conversion notice. The original issue discount of $10,000 and the $11,000 legal fees have been recorded as prepaid debt issuance cost which is amortized over the term of the note. This note is currently past due.

Convertible Note issued on July 17, 2015

On July 17, 2015, the Company issued a twelve-month an 8% convertible note to an unrelated party with a face amount of $57,500. The note contains an original issue discount of $5,000 and bears interest on the face amount at the rate of 8% per annum. The note is due on July 17, 2016 and includes a convertible feature that allows the note holder to be paid in common stock of the Company. Any shares converted by the note holder will be valued at 60% of the lowest trading value during the 20 days immediately preceding the conversion. The note may be prepaid within 90 days of issuance at 110% of the principal amount plus accrued interest, and at 120% of principal plus accrued interest if prepaid after 90 days from the date of issuance but before 180 days of such date. The note may not be prepaid after 180 days. In the event of a default under the note, interest accrues at the rate of 24% per annum. In the event the Company fails to deliver shares of its common stock upon conversion within the time frames provided for in the note, the Company is subject to a $250 penalty per day increasing to $500 per day beginning on the 10th day after the prescribed delivery date. Further, in the event the Company is no longer current in its SEC filings for a period of six months or more, the conversion price shall be the lowest closing bid price during the delinquency period. This note is currently past due.

Common stock issued to convert convertible notes payable

During the six months ended June 30, 2016, the Company issued 2,104,596 shares of common stock, valued at $6,924 for the conversion of a convertible note payable and accrued interest pursuant to the conversion terms of the note payable.

Debt Discounts

In connection with the convertible promissory notes issued in fiscal 2015, the convertible notes were considered to have an embedded beneficial conversion feature (BCF) because the effective conversion price was less than the fair value of the Company’s common stock in accordance with ASC 470-20-25. Therefore the portion of proceeds allocated to the convertible notes of $931,181 was determined to be the value of the beneficial conversion feature and was recorded as a debt discount and is being amortized over the term of the notes. For the six months ended June 30, 2016 and 2015 the Company recognized $168,325 and $863,632, respectively of amortization of debt discount and prepaid debt issuance cost.

F-16

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 8 - DERIVATIVE LIABILITIES

The Company evaluated whether or not the convertible promissory notes contain embedded conversion features, which meet the definition of derivatives under ASC 815 and related interpretations. The Company determined that the terms of the notes issued in fiscal 2014 and 2015 (see Note 7) include a variable conversion price based on the closing bid prices of the Company’s common stock which cause the embedded conversion options to be accounted for as derivative liabilities. Additionally, the Company determined that the terms of the warrants granted on September 22, 2014 in connection with the issuance of a convertible note and warrants granted on February 25, 2015 to the note holder of the Senior Secured convertible note include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging - Contracts in an Entity’s Own Stock”, the embedded conversion options and the warrants were accounted for as derivative liabilities at the date of issuance and adjusted to fair value through earnings at each reporting date In accordance with ASC 815, the Company has bifurcated the conversion feature of the convertible notes, along with the free-standing warrant derivative instruments and recorded derivative liabilities on their issuance date. The Company uses the Black-Scholes option pricing model to value the derivative liabilities.

The notes issued in fiscal 2015 were discounted in an aggregate amount of $931,181 based on the valuations and the Company recognized an additional derivative expense included in interest expense of $2,577,683 upon initial recording of the derivative liabilities during year 2015. The total debt discount of $931,181 from the valuation of the derivatives are being amortized over the terms of the note. These derivative liabilities are then revalued on each reporting date. The gain (loss) resulting from the decrease (increase) in fair value of these convertible instruments was ($3,699,313) and $131,957 for the six months ended June 30, 2016 and 2015, respectively. During the six months ended June 30, 2016 and 2015, the Company reclassified $16,180 and $0, respectively, to paid-in capital due to the conversion of convertible notes into common stock. At June 30, 2016 and December 31, 2015, the Company recorded derivative liabilities of $6,038,713 and $2,355,580, respectively.

The following table summarizes the values of certain assumptions used by the Company’s custom model to estimate the fair value of the derivative liabilities as of June 30, 2016:

	June 30, 2016
Stock price	$	0.005
Strike price ranging from	$	0.001 to 1.00
Remaining contractual term (years)		0.01 to 3.75 years
Volatility		320	%
Risk-free rate		0.20% to 0.45	%
Dividend yield		0.0	%

NOTE 9 - STOCKHOLDERS’ DEFICIT

Common Stock

During the six months ended June 30, 2016, the Company issued 2,104,596 shares of common stock for the conversion of convertible notes payable and accrued interest thereon at a value of $6,924 pursuant to the conversion terms of the notes.

As of June 30, 2016 the Company reported 83,379,557 shares of common stock outstanding.

Preferred Stock

As of June 30, 2016 and December 31, 2015 the Company reported 1,000,000 shares of Series A preferred stock outstanding.

F-17

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 9 - STOCKHOLDERS’ DEFICIT (continued)

Common stock Warrants

Changes in stock purchase warrants during the six months ended June 30, 2016 are as follows:

			Weighted Average		Aggregate				Weighted Average
	Number of		Exercise		Intrinsic				Remaining
	Warrants		Price		Value		Exercisable		Life
Outstanding, December 31, 2015		2,500,000	$	1.00	$	-		2,500,000	$	3.60
Issued		-		-		-		-		-
Exercised		-		-		-		-		-
Cancelled										-
Outstanding, June 30, 2016		2,500,000		1.00		-		2,500,000		3.10 years
Exercisable, June 30, 2016		2,500,000	$	1.00	$	-		2,500,000		3.10 years

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Borets USA, Inc. f/k/a Borets-Weatherford US, Inc. v. Cardinal Energy Group, Inc. (Case No. 2015-028, 259th Judicial District Shackelford County, Texas).

On March 2, 2015 Borets filed a lawsuit against the Company claiming damages totaling $90,615 in damages for unpaid invoices for services rendered to the Company. On March 18th 2015, the Company filed an Original Answer and Counterclaim against Borets. The original answer set forth a general denial, certain specific denials, a verified denial denying the account amount and affirmative defenses of failure of consideration and offset. The counterclaim contains a cause of action for breach of contract and seeks $150,000 in damages. Borets has filed a Motion for Summary Judgment seeking to dispose of the counterclaim on behalf of the Company. No hearing has been set on the motion and the Company will prepare a response if in fact a hearing date is obtained. As of the date of this report, discovery is ongoing.

CEGX of Texas, LLC v. Scott Miller, Miller Energy Services, Inc. and US Fuels, Inc. (Case No. CV1543707 91st Judicial Court Eastland County, Texas).

The lawsuit was filed on May 22, 2015. The lawsuit alleges a cause of action against the above named defendants for breach of contract, breach of fiduciary duty and fraud. This lawsuit concerns the sale of the Company’s property (the Stroebel-Broyles leases in Eastland County, Texas) by Mr. Miller. Mr. Miller indicated that no one would pay anything for the property, and we agreed to assign the property for no cash consideration. We subsequently determined that Mr. Miller sold the property for $30,000 and pocketed all of the funds from the sale. Answers have been filed by each of the defendants. The Company is now in the process of filing a Motion for Summary Judgment in favor of the Company.

CEGX of Texas, LLC v. P.I.D. Drilling, Inc. (Case No. 2015-062 259th Judicial District Shackelford County, Texas).

This lawsuit was filed by the Company on June 10, 2015 and contains causes of action for breach of contract and also requests an accounting. The lawsuit is claiming damages for overcharges by PID and also asking that PID be removed as operator after a vote by the non-operating working interest owners. As of the date of this report an answer has been filed on behalf of PID and the parties have entered into settlement discussions. If the settlement discussions fail the Company is prepared to request a trial date.

F-18

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)

Cardinal Energy Group, Inc. v. HLA Interests, LLC, Phillip Allen, SEDCO Operating, LLC (“SEDCO”) , ERCO Holdings, Ltd (“ERCO”),Caleb David Elks, and Michael Cies D/B/A Terlingua Oil Associates, Case No. 2015-059 (District Court of Shackelford County, Texas, 259 ^th Judicial District) .

The Company filed this lawsuit against the corporate defendants and the individual members in their personal capacity on June 3, 2015. The lawsuit stems from a Working Interest Purchase Agreement that the Company entered into on July 3, 2013 with Defendant HLA Interests (an oil and gas management company that owns and controls existing oil fields in Texas), pursuant to which the Company agreed to purchase from HLA Interests its 85% working interest in 5 oil and gas leases known as the Dawson-Conway Leases (the “Leases”) in Shackelford County, Texas (the “Agreement”). The Company was fraudulently induced to enter into the Agreement by the defendants, who knew that 3 of the 5 leases had expired prior to executing the Agreement. The Company agreed to pay $400,000 to HLA Interests for its complete working interest in the 5 Leases, which HLA Interests represented to be 85%. The Company executed a Note for payment of the $400,000 purchase price, pursuant to which the entire principal balance was to be paid within 24 months of the date that the Agreement was executed. HLA Interests acquired title to the 5 Leases by Assignment of Oil and Gas Leases dated December 1, 2011 from Defendant ERCO, as Assignor, to HLA Interests recorded in Volume 552, Page 343 of the Official Records of Shackelford County, Texas (the “ERCO Assignment”). The ERCO Assignment purported to convey to HLA Interests 85% of 75% net revenue interest on the 5 Leases. Defendant SEDCO was the operator of the 5 Leases.

Defendants HLA, its Managing Member, Allen, SEDCO, ERCO and Elks all made false representations with the intent to fraudulently induce the Company into entering into the Agreement. Specifically, prior to entering into the Agreement with the Company, Defendants HLA Interests and Allen knew that at least 3 of the 5 Leases had expired and that the Company would only be purchasing 2 active Leases. Defendants SEDCO, as the Operator of the 5 Leases, ERCO, as an assignor of the remaining 15% working interest in the 5 Leases, and Elks (SEDCO’s Chief Operating Officer and the Managing Member of ERCO) also all knew that 3 of the Leases had expired and that Defendant HLA did not own a working interest in them free and clear as represented to the Company. All of the Defendants intentionally failed to disclose this material information to the Company so as to fraudulently induce the Company into entering into the Agreement.

As a direct result of relying upon Defendants HLA, Allen, SEDCO, ERCO and Elk’s intentional and material misrepresentations and intentional failures to disclose the material facts, the Company suffered damages for which it seeks recovery in this lawsuit. Further, the false, misleading, and deceptive acts of these Defendants in misrepresenting the true legal status of title to the 5 Leases and the actual working interests prior to the execution of the Agreement, the Operating Agreement, and the March 11, 2014 Assignment are violations of Texas’ Deceptive Trade Practices Act.

Finally, Defendant Terlingua entered into a Master Land Services Contract with the Company in or about June 2013, whereby Terlingua agree to provide due diligence services to the Company in furtherance of the Company entering into the Agreement with Defendants HLA Interests, SEDCO, and ERCO. Pursuant to the Master Land Services Contract, Terlingua agreed to investigate titles and the oil and gas records to determine the actual legal status of the ownership interests in the 5 Leases, and advise the Company of same. Terlingua breached its obligations under the Master Land Services Agreement by failing to perform its due diligence investigation of the titles and working interests in the 5 Leases in a good and workmanlike manner, and failing to discover that at least 3 of the 5 Leases had expired and that the Company would only be purchasing 2 active Leases. As a result of all of this, the Company filed a lawsuit asserting claims for breach of contract against Defendants HLA, SEDCO, ERCO, and Cies/Terlingua; Money had and Received against Defendants HLA, SEDCO, and Cies/Terlingua; Fraud and Fraud by Non-Disclosure against Defendants HLA, Allen, SEDCO, ERCO, and Elks; and Deceptive Trade Practices against Defendants HLA, SEDCO, and ERCO.

On August 5, 2015, the Company was granted a Partial Default Judgment for the following:

HLA Interests, LLC: Judgment on our causes of action for breach of contract, money had and received, fraud, fraud by non-disclosure and deceptive trade practices;

Phillip Allen: Judgment on our causes of action for fraud, and fraud by non-disclosure;

F-19

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)

Sedco Operating, LLC: Judgment on our causes of action for breach of contract, money had and received, fraud, fraud by non-disclosure and deceptive trade practices; and

Judgment against Erco Holdings, Ltd. for causes of action for breach of contract, fraud, fraud by non-disclosure and deceptive trade practices.

The Company’s out-of-pocket damages as a result of the claims asserted in this lawsuit have been calculated at $1,735,765. Adding the claims for attorneys’ fees, and other damages, including punitive damages as a result of the intentional fraudulent conduct, the Company’s damages exceed $2,000,000. The Company was finally able to obtain service on Elks. As of now, Elks, Cies, Erco and Sedco have now filed answers. A hearing and/or trial will be required to obtain damages against Sedco and Erco.

At present, we are in the process of attempting to obtain a damages judgment as against Phillip Allen individually and as HLA Interests, LLC. The Company has reached out to all of the parties involved requesting they contact us to enter into settlement discussions on this matter. In addition, we have forwarded discovery to the various defendants and are awaiting responses to same. As of the date of this report we have received no responses from any of the defendants in regards to settlement and the Company’s attorneys are now working with the trial court’s coordinator to set a date for trial.

Edward A. Mitchell v. Cardinal Energy Group, Inc. and Timothy W. Crawford (Case No. 15CV-04-3538, Franklin County Common Pleas Court)

Mr. Mitchell filed suit on April 27, 2015, claiming to be owed 200,000 shares of stock that he earned during his brief tenure as Controller of the Company, as well as additional compensation to which he claims he’s entitled. The Company denies the claims, and filed a counterclaim to recover damages caused by Mitchell during his tenure for failure to perform his duties and to recover unauthorized reimbursements he improperly issued. Trial was originally scheduled for April 24, 2016. The Company recorded $5,500 in accrued expenses during the fourth quarter of 2015 which represents the amount most likely the Company would pay to settle this lawsuit. The original trial date of April 24, 2016 was officially continued, and a new date had been set for late June 2017. Counsel for the Company scheduled depositions of Mr. Mitchell and Cardinal personnel in July and August of 2016. In June of 2017 the parties agreed in principle to enter into a settlement agreement under which the Company will pay Mr. Mitchell a total of $20,000 in four installments to settle all outstanding claims. We expect the Final Settlement Agreement and Release to be executed by both parties and filed with the Court in early July 1, 2017.

Terrance J. Dunne v. Cardinal Energy Group, Inc. (Case No. 14-02-04417-2, Spokane County Superior Court of Washington)

On November 10, 2014, Mr. Dunne filed a suit in Spokane County Superior Court of Washington and alleged the Company owes him $6,000 for services rendered plus an additional $27,480 for the difference in value of stock that was given to him as compensation. The Company filed an Answer and a Motion to dismiss based on lack of jurisdiction and subsequently the hearing was cancelled. Thereafter plaintiff’s counsel did nothing to move this matter forward and a month before the original trial date, indicated that if the Company would agree to a continuance, plaintiff would agree to arbitrate. A continuance was entered and a new trial date established (March 27, 2017). Plaintiff’ counsel did not move the matter to arbitration and yet again, did nothing to forward Mr. Dunne’s case and in the process missed several key dates in the court’s scheduling order.

On January 26, 2017, the Company moved for an order to show cause as to why plaintiff’s case should not be dismissed. On February, 17, 2017, the court granted the Company’s motion and issue and order to show cause. The Court also ordered plaintiff and his counsel to pay Cardinal for the costs associated with the show cause motion. On March 10, 2017, heard countervailing arguments regarding dismissal. The court determined that dismissal was too harsh, ordered the parties to arbitrate, and awarded monetary sanctions against plaintiff and his counsel in the Company’s favor. On May 17, 2017, the court ordered the plaintiff to pay the Company an additional $5,000 no later than June 1, 2017 in attorney’s fees and costs or else the Company may stipulate to the entry of judgement against plaintiff for $5,000 plus $1,780 in additional attorney’s fees.

F-20

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)

Iconic Holdings, LLC v. Cardinal Energy Group, Inc. (Case No. 37-2016-00006021-CU-BC-CTL San Diego County Superior Court)

On March 1, 2016 Iconic Holdings filed suit in San Diego County Superior Court alleging that the Company was in default on a convertible promissory note and claiming that the Company owes $167,478 in unpaid principal and interest. The Company believes that remaining outstanding principal under the note is $35,000. The Company retained counsel to answer the claims. The suit was stayed pursuant to an arbitration provision in the operative Note Purchase Agreement. The parties entered into a Settlement Agreement and Release on December 15, 2016 whereupon the Company agreed to pay Iconic $60,000 in two $30,000 installments to settle the dispute between the parties. On February 3, 2017 a request for dismissal was filed with the Court by the Plaintiff’s attorneys.

Tonaquint Arbitration

On September 11, 2015 Tonaquint, Inc. (“Tonaquint”) filed for arbitration under a Securities Purchase Agreement and Convertible Promissory Note, claiming that the Company is in default for failing to deliver all earned shares, failing to satisfy the remaining balance of the note and failing to maintain adequate stock reserves. The Company has answered, denying the claims and asserting that Company has satisfied its obligations with respect to the Tonaquint Note. Arbitration was scheduled for February 2016 in Salt Lake City, Utah.

After conducting discovery, the parties agreed to settle the issues outstanding prior to the scheduled arbitration hearing. On February 4, 2016 the Company agreed to judgment in the amount of $432,674.41 plus interest at 22% per year (included in convertible notes payable as of December 31, 2015 and June 30, 2016) and agreed to the entry of summary judgment in Tonaquint’s favor as requested in Tonaquint’s motion. Tonaquint agreed to accept payment from the Company in the amount of $250,000 as full and complete satisfaction of the arbitration award but only so long as the Company paid the settlement amount on or before the settlement payment due date of March 12, 2016. The Company failed to make the required scheduled payment and on March 24, 2016 the Third Judicial District Court of Salt Lake County, Utah issued judgement in favor of Tonaquint, Inc. in the aforementioned $432,674.41 amount.

The Company believes that its claims and defenses in the above cases where it is a defendant are substantial for the reasons discussed above. Litigation is, however, inherently unpredictable. The outcome of lawsuits is subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss is complex. Consequently, we are unable to estimate the range of reasonably possible loss. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies heavily on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.

The Company has potential contingent liabilities arising in the ordinary course of business. Matters that are probable of unfavorable outcomes to the Company and which can be reasonably estimated are accrued. Such accruals are based the Company’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. To date no litigation has been filed in connection with any of these matters. The Company’s counsel believes that the claims against the Company are groundless and any damages which may arise from these matters will not be material. Thus there are no contingencies or additional litigation that requires accrual or disclosure as of June 30, 2016.

F-21

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 11 - SUBSEQUENT EVENTS

During August and September 2016, the Company issued notes payable in the aggregate amount of $75,000. The repayment of the notes is due one year after the date of issuance. In connection with these notes, the Company issued 75,000 of the Company’s Series A Preferred Stock as payment for interest. The Company recorded the 75,000 Series A Preferred Stock as debt discount and was valued at $75,000 which will be amortized over the term of the respective notes.

In October 2016, the Company entered into a Settlement and Mutual Release Agreement (the “Agreement”) with the borrower and issuer of a February 2016 promissory note in the principal amount of $30,000 held by the Company. The borrower agreed to pay the Company the $30,000 in regular monthly installments of $5,000 with the first payment starting in October 2016 and the remaining monthly payments of $5,000 on or before the 15^th of each successive month from November 2016 through March 2017. In March 2017, this note receivable was fully paid off by the borrower (see Note 1).

On December 1, 2016, the Company entered into a First Settlement Agreement and Stipulation (“First Settlement Agreement”) with Rockwell Capital Partners, Inc., a Delaware corporation (“Rockwell”). Under the First Settlement Agreement, Rockwell acquired outstanding liabilities of the Company in the principal amount of not less than the claim amount of $123,980. The Company shall issue shares of the Company’s common stock in one or more tranches subject to adjustment and ownership limitations as defined in the First Settlement Agreement, sufficient to satisfy the claim amount at a 50% discount of the lowest trading price during the 15 consecutive days starting on the day of the share request. Between December 2016 and January 2017, in connection with the First Settlement Agreement, the Company issued an aggregate of 254,508,000 shares of the Company’s common stock to Rockwell for the payment of $123,980 claim amount.

On January 24, 2017, the Company entered into a Second Settlement Agreement and Stipulation (“Second Settlement Agreement”) with Rockwell. Under the Second Settlement Agreement, Rockwell acquired outstanding liabilities of the Company in the principal amount of not less than the claim amount of $158,419. The Company shall issue shares of the Company’s common stock in one or more tranches subject to adjustment and ownership limitations as defined in the Second Settlement Agreement, sufficient to satisfy the claim amount at a 50% discount of the lowest trading price during the 45 consecutive days starting on the day of the share request. Between January 2017 and February 2017, in connection with the Second Settlement Agreement, the Company issued an aggregate of 326,838,920 shares of the Company’s common stock to Rockwell for the payment of $158,419 claim amount.

On February 21, 2017, the Company entered into a Third Settlement Agreement and Stipulation (“Third Settlement Agreement”) with Rockwell. Under the Third Settlement Agreement, Rockwell acquired outstanding liabilities of the Company in the principal amount of not less than the claim amount of $125,938. The Company shall issue shares of the Company’s common stock in one or more tranches subject to adjustment and ownership limitations as defined in the Third Settlement Agreement, sufficient to satisfy the claim amount at a 50% discount of the lowest trading price during the 60 consecutive days starting on the day of the share request. Between February 2017 and March 2017, in connection with the Third Settlement Agreement, the Company issued an aggregate of 268,600,000 shares of the Company’s common stock to Rockwell for the payment of $105,260 claim amount leaving a balance of $20,678.

On March 30, 2017, the Company filed with the Nevada Secretary of State an amendment to the Certificate of Designation for the Company’s Series A Preferred Stock via an Amended and Restated Certificate of Designation of Series A Preferred Stock (the “Amendment”) pursuant to which (i) the number of shares of authorized Series A Preferred Stock was increased from 1,000,000 shares to 10,000,000 shares, (ii) the capital raise required by the Company prior to the Series A Preferred Stock being automatically converted was increased from $5,000,000 to $10,000,000; (iii) the percentage of common stock of the Company into which the Series A Preferred Stock is convertible was reduced from 15% to 10% and (iv) the time in which the Series A Preferred Stock can be converted was changed from being at any time during the three years after issuance to any time from the date that is six months after issuance until three years after issuance.

Also on March 30, 2017, the Company filed three additional Certificates of Designation with the Nevada Secretary of State to designate (i) the Series B Preferred Stock; (ii) the Series C Preferred Stock; and (iii) the Series D Preferred Stock, in each case of the Company.

F-22

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 11 - SUBSEQUENT EVENTS (continued)

Series B Preferred Stock

There are 1,000,000 shares of Series B Preferred Stock authorized. No dividends are payable on the shares of Series B Preferred Stock. The Series B Preferred Stock has no right to vote on any matter submitted to the shareholders of the Company for a vote, provided, however, that as long as any shares of Series B Preferred Stock are outstanding, the vote of at least 51% of the then-outstanding shares of the Series B Preferred Stock is required to (a) alter or change adversely the powers, preferences or rights given to the Series B Preferred Stock or to amend the Certificate of Designation for the Series B Preferred Stock, (b) amend the Articles of Incorporation of the Company (the “Articles”) or other charter documents in any manner that adversely affects any rights of the holders of the Series B Preferred Stock, (c) increase the number of authorized shares of Series B Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.

All of the shares of Series B Preferred Stock issued and outstanding at any time are convertible from time to time at the option of each holder thereof, at any time from six months after the date of issuance of the applicable shares of Series B Preferred Stock until the three year anniversary thereof, for no consideration to be paid, into shares of Common Stock equal to 10% of the issued and outstanding shares of Common Stock as of the date of conversion, with any debt or equity of the Company that is convertible into shares of Common Stock being included in such calculation on an as-converted basis, with any other any debt or equity of the Corporation which is convertible into a percentage of the Common Stock being deemed converted immediately prior to the conversion of the Series B Preferred Stock, with each share of Series B Preferred Stock being convertible into a pro-rata portion of the total 10% of Common Stock.

All shares of Series B Preferred Stock will be automatically converted into Common Stock on the date that is six months after the Company has completed one or more raises of capital following the date that the Certificate of Designation was filed with the Secretary of State of the State of Nevada (through the issuance of any equity securities of the Company) which collectively result in total capital raised and received by the Company of at least $10,000,000.

The conversion of the Series B Preferred Stock is subject to a limitation that the holder does not have the right to convert any portion of the Series B Preferred Stock to the extent that after giving effect to such conversion, the holder (together with the holder’s affiliates and any persons acting as a group together with such parties) would beneficially own in excess of the 4.99% of the Common Stock, provided, however, that this limitation may be waived by the holder.

Series C Preferred Stock

There are 4,500,000 shares of Series C Preferred Stock authorized. The Series C Preferred Stock has a “Stated Value” of $1.00 per share. Each share of Series C Preferred Stock is entitled to receive an annual dividend, payable semi-annually in arrears, in an amount equal to 10% of the Stated Value, prior and in preference to any declaration or payment of any dividend on the Common Stock (the “Series C Dividend”). The Series C Dividend is cumulative and may be paid or accrued by the Company, in its sole discretion. Any holder of the Series C Preferred Stock may elect to have all accrued but unpaid Series C Dividends be paid to them in cash prior to any conversion of the applicable shares of Series C Preferred Stock, as discussed below. At the option of the Company, the Series C Dividend may be deferred until the expiration of the 36-month period commencing on the issuance date of the applicable share(s) of Series C Preferred Stock, at which time all accrued but unpaid Dividends on such shares will be paid on a cumulative basis.

The Series C Preferred Stock has no right to vote on any matter submitted to the shareholders of the Company for a vote, provided, however, that as long as any shares of Series C Preferred Stock are outstanding, the vote of at least 51% of the then-outstanding shares of the Series C Preferred Stock is required to (a) alter or change adversely the powers, preferences or rights given to the Series C Preferred Stock or to amend the Certificate of Designation for the Series C Preferred Stock, (b) amend the Articles or other charter documents in any manner that adversely affects any rights of the holders of the Series C Preferred Stock, (c) increase the number of authorized shares of Series C Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.

F-23

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 11 - SUBSEQUENT EVENTS (continued)

All of the shares of Series C Preferred Stock issued and outstanding at any time are convertible from time to time at the option of each holder thereof, at any time from six months after the date of issuance of the applicable shares of Series C Preferred Stock until the three year anniversary thereof, for no consideration to be paid, into shares of Common Stock equal to 10% of the issued and outstanding shares of Common Stock as of the date of conversion, with any debt or equity of the Company that is convertible into shares of Common Stock being included in such calculation on an as-converted basis, with any other any debt or equity of the Corporation which is convertible into a percentage of the Common Stock being deemed converted immediately prior to the conversion of the Series C Preferred Stock, with each share of Series C Preferred Stock being convertible into a pro-rata portion of the total 10% of Common Stock.

The conversion of the Series C Preferred Stock is subject to a limitation that the holder does not have the right to convert any portion of the Series C Preferred Stock to the extent that after giving effect to such conversion, the holder (together with the holder’s affiliates and any persons acting as a group together with such parties) would beneficially own in excess of the 4.99% of the Common Stock, provided, however, that this limitation may be waived by the holder.

At any time that is six months following the earlier of (i) the date that the Company has completed one or more raises of capital following the date of issuance of the applicable shares of Series C Preferred Stock (through the issuance of any equity securities of the Company) which collectively result in total capital raised and received by the Company of at least $10,000,000 and (ii) the date that the Company’s securities have been listed for trading on the New York Stock Exchange or the NASDAQ exchange, the Company has the right to require the holders of the Series C Preferred Stock to elect to either (A) convert their shares of Series C Preferred Stock into shares of Common Stock, or (B) cause the Company to redeem such holder’s shares of Series C Preferred Stock (and if the holder does not make an election then option (A) is deemed to be elected). The redemption price per share is the Stated Value increased by 10% for each full year from the issuance date to the date of redemption (and a proportionate amount of 10% for any partial years).

Series D Preferred Stock

There are 4,600,000 shares of Series D Preferred Stock authorized. The Series D Preferred Stock has a “Stated Value” of $1.00 per share. Each share of Series D Preferred Stock is entitled to receive an annual dividend, payable semi-annually in arrears, in an amount equal to 5% of the Stated Value, prior and in preference to any declaration or payment of any dividend on the Common Stock (the “Series D Dividend”). The Series D Dividend is cumulative and may be paid or accrued by the Company, in its sole discretion. Any holder of the Series D Preferred Stock may elect to have all accrued but unpaid Series D Dividends be paid to them in cash prior to any conversion of the applicable shares of Series D Preferred Stock, as discussed below. At the option of the Company, the Series D Dividend may be deferred until the expiration of the 36-month period commencing on the issuance date of the applicable share(s) of Series D Preferred Stock, at which time all accrued but unpaid Series D Dividends on such shares will be paid on a cumulative basis.

The Series D Preferred Stock has no right to vote on any matter submitted to the shareholders of the Company for a vote, provided, however, that as long as any shares of Series D Preferred Stock are outstanding, the vote of at least 51% of the then-outstanding shares of the Series D Preferred Stock is required to (a) alter or change adversely the powers, preferences or rights given to the Series D Preferred Stock or to amend the Certificate of Designation for the Series D Preferred Stock, (b) amend the Articles or other charter documents in any manner that adversely affects any rights of the holders of the Series D Preferred Stock, (c) increase the number of authorized shares of Series D Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.

All of the shares of Series D Preferred Stock issued and outstanding at any time are convertible from time to time at the option of each holder thereof, at any time from six months after the date of issuance of the applicable shares of Series D Preferred Stock until the three year anniversary thereof, for no consideration to be paid, into shares of Common Stock equal to 55% of the issued and outstanding shares of Common Stock as of the date of conversion, with any debt or equity of the Company that is convertible into shares of Common Stock being included in such calculation on an as-converted basis, with any other any debt or equity of the Corporation which is convertible into a percentage of the Common Stock being deemed converted immediately prior to the conversion of the Series D Preferred Stock, with each share of Series D Preferred Stock being convertible into a pro-rata portion of the total 55% of Common Stock.

F-24

Cardinal Energy Group, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2016

NOTE 11 - SUBSEQUENT EVENTS (continued)

The conversion of the Series D Preferred Stock is subject to a limitation that the holder does not have the right to convert any portion of the Series D Preferred Stock to the extent that after giving effect to such conversion, the holder (together with the holder’s affiliates and any persons acting as a group together with such parties) would beneficially own in excess of the 4.99% of the Common Stock, provided, however, that this limitation may be waived by the holder.

At any time that is six months following the earlier of (i) the date that the Company has completed one or more raises of capital following the date of issuance of the applicable shares of Series D Preferred Stock (through the issuance of any equity securities of the Company) which collectively result in total capital raised and received by the Company of at least $10,000,000 and (ii) the date that the Company’s securities have been listed for trading on the New York Stock Exchange or the NASDAQ exchange, the Company has the right to require the holders of the Series D Preferred Stock to elect to either (A) convert their shares of Series D Preferred Stock into shares of Common Stock, or (B) cause the Company to redeem such holder’s shares of Series D Preferred Stock (and if the holder does not make an election then option (A) is deemed to be elected). The redemption price per share is the Stated Value plus any accrued and unpaid Series D Dividends.

In April 2017, the Company entered into a twelve month advisory agreement with a consultant to perform advisory services related to capital market, other financial service matters and investor relations services. As compensation for such services, the Company issued 50,000,000 shares of the Company’s common stock upon execution of this agreement. Additionally, in April 2017, the Company issued a promissory note to the same consultant for $10,000 which bears interest at 10% per annum and due on demand.

On April 18, 2017, the Company and EOI Eagle Operating, Inc. (“Eagle”) executed an agreement to acquire the assets of Eagle. The Company issued 1,000,000 shares of Series B preferred stock and a note for $250,000 to acquire the assets which include two service rigs, leasehold interests in several oil and gas leases in central Texas, miscellaneous oil field equipment and an operating yard and facility located in Graham, Texas.

F-25

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This section of the quarterly report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results of our predictions.

This discussion relates to Cardinal Energy Group, Inc. and its consolidated subsidiaries and should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included under Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q, as well as our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with the SEC on March 30, 2016.

We are engaged in the business of acquiring, developing and operating oil and gas leases. These operations are primarily focused on properties in which we hold a leasehold interest. We may however, from time to time, offer our drilling and field development and production services to third parties. We may offer these services to other oil and gas companies on a fee basis or we may offer such services in connection with the offering of participation interests in Development Drilling Programs to accredited private investors.

We are focused on growth via the development of shallow proven undeveloped reserves in or adjacent to currently producing fields, exploiting untapped “behind the pipe” reserves by recompleting existing well bores in zones overlying currently producing formations and by the selected application of water flood and other secondary recovery techniques to mature but marginally producing fields throughout northcentral Texas. We may enter into agreements with mid-sized and independent oil and natural gas companies to drill wells and own interests in oil and natural gas properties. We also may drill and own interests without such strategic partners. The Company differentiates itself in the marketplace by focusing on smaller older oil and gas properties that have been allowed to deplete because of either multiple changes in ownership or due to a lack of capital required to maintain production rates. We have focused our operations in Shackelford County in north-central Texas. These properties feature simple well completions which typically produce from relatively shallow (in most cases from 400 ft. to 2,000 ft. below the surface) reservoirs. In most instances these properties have been overlooked by the “major” and “mid-major” players in the industry due to their geographic location relative to other existing oil and gas properties (absence of potential operating synergies) and/or because the required costs to optimize production levels is not compatible with their internal cost structure.

As of December 31, 2015 the Company held interests 1,313 gross acres (887 net acres) of undeveloped oil and gas leases in north-central Texas. All acreage is held pursuant to leases that have been extended as long as the properties produce a minimum quantity of crude oil and natural gas, a term referred to in the industry as “held by production”. Our net acreage total consists of the following interests; a 100% working interest (75%-77.5% net revenue interest) in the Dawson-Conway leases; a 100% working interest (80% net revenue interest) in the Powers-Sanders leases; a 43.75% working interest (32.375% net revenue interest) in the Fortune prospect and by virtue of the Company’s acquisition of units in the Bradford JV an effective 18.75% working interest (15.0% net revenue interest) in the Bradford “A” and Bradford “B” leases. All of these interests, with the exception our initial 85% working interest in the Dawson-Conway leases, were acquired during 2014. Cardinal is the operator for all of the leases with the exception of the Fortune prospect.

Our oil and gas leases were classified as unproved properties at June 30, 2016 due to the limited quantities of oil and gas produced during the 2013 through 2015 time frame. In light of the precipitous fall in crude oil prices during year 2014-2015 time frame and the relatively small production volumes from the Company’s leases we elected to reduce the carrying value of our oil and gas properties during the fourth quarter of 2015. This reduction to the estimated net recoverable values of our oil and gas properties is reflected in the financial statements as an impairment charge of $2,654,824 on our statement of operations for the year ended December 31, 2015.

Recent Developments

On June 12, 2015, the Company, and each of the other beneficial owners of seventy-three (73) participation interests (“Participation Interests”) in the Bradford JV (collectively, the “Sellers”) sold to a third party their Participation Interests in certain oil and gas leases, along with the associated contracts and real property interests necessary and useful in the ownership and operation thereof, all situated in Shackelford County, Texas (the “Oil and Gas Leasehold”), (ii) the oil and gas wells located on the Oil and Gas Leasehold, along with the associated fixtures and personal property, including hydrocarbons produced therefrom (the “Wells”), and (iii) the rights to that certain Farmout Agreement between CEGX and Bluff Creek Petroleum, LLC for a total consideration of $1,825,000. Concurrent with the sale of the Participation Interests, the purchaser entered into an Operating Agreement with CEGX to conduct the drilling operations and related activities necessary to develop the properties. Throughout 2015 and into the first quarter of 2016 the Company has worked with representatives of the purchaser to design and install a pilot water flood program on the Bradford “A” and Bradford “B” leases. However, due to delays in receiving funding from the purchaser work was sporadic and finally ground to a halt in the second half of 2016. We still anticipate that the Bradford “A” and Bradford “B” leases will become important producing properties once we complete the full implementation of the water flood enhanced oil recovery project. We currently estimate that it will require an additional $300,000 to complete the drilling and completion of producing, injector and source water wells and to finish the acidizing and down-hole pump repairs required to fully implement the water flood program.

Accordingly, the Company has held discussions with several parties who are interested in acquiring the properties. In the case of the Powers-Sanders leases at least one oil and gas firm has expressed an interest in acquiring the leases in order to exploit some shallow oil reservoirs believed to be present under the properties. In the case of the Dawson-Conway leases initial discussions have occurred between the Company and two interested parties. One of the parties is the operator of adjoining leases and is interested in acquiring one or more of the leases in order to include the Dawson-Conway leases into a “master water flood project” for all of the surrounding leases. Accordingly, the Company has held discussions with several parties who are interested in acquiring the properties.

On February 12, 2016 the Company sold its regional operating complex located in Albany, Texas to a local oil and gas well plugging and abandonment services company for a total consideration of $130,000. In connection with the sale the Company took back a $30,000 note which draws interest at 5% per annum and which was paid off in March 2017.

On June 12, 2016 the Company, following the expiration of the 365-day “Escrow Period” per the terms of the Participation Interest Purchase Agreement (“PIPA”) between and among the Bradford JV participation interests and Keystone Energy, LLC and CEGX of Texas, LLC and upon payment of $100 to Keystone Energy, LLC pursuant to Section 5 of the PIPA, re-acquired its 20 participation interests in the Bradford JV. The Company will now move forward to secure financing necessary to complete the implementation of the water flood program required to fully complete the development of the Bradford “A” and Bradford “B” leases.

We have nominal revenues, have recorded losses since inception, have been issued a going concern opinion by our auditors and currently rely upon the sale of our debt and equity securities to fund operations. We may enter into agreements with major and independent oil and natural gas companies and other investees to drill and own interests in oil and natural gas properties. We also may drill and own interests without such strategic partners. We may sell all or a portion of our prospect interests or may retain a working or “carried” interest in the prospects and participate in the drilling and development of the properties. We have no current plans to change our core business activities. In April of 2017 we acquired the operating assets of EOI Eagle Operating, Inc. a privately held oil and gas company headquartered in Frisco, Texas in exchange for 1,000,000 shares of the Company’s Series B preferred stock and a note for $250,000. We may however continue to pursue combinations with one or more privately or publicly held oil and gas companies in order to exploit acquisition and development opportunities in the domestic oil and gas industry.

Financial Overview

The following reflects how we intend to spend our capital over the next twelve months:

Acquisition of LeasesTWTW	$	400,000

Drilling and Well Workovers	$	1,315,000
Lease Operating Costs	$	175,000
General and Administrative Expenses	$	800,000

Currently, we do not have sufficient cash flows from currently producing properties to fully fund our proposed budget and maintain operations for the current year. Accordingly, we will have to raise additional capital through either the sale of interests in selected oil and gas properties, accessing bank financing facilities, the sale of debt and/or equity securities in both public and private transactions or via a combination of these and other sources.

Results of Operations

The results discussed below are for the three and six month periods ended June 30, 2016 and June 30, 2015, respectively.

Oil and Gas and Other Operating Revenues

For the three months ended June 30, 2016 oil and gas revenues decreased to $5,447 compared to $16,165 for the three months ended June 30, 2015. For the six months ended June 30, 2016 oil and gas revenues totaled $6,863 compared to $38,628 for the comparable period of 2015. The decreases primarily reflect lower production volumes from the Powers-Sanders leases and the Fortune prospect in Texas.

The Company recognized revenues from contract development operations totaling $12,800 during the quarter ended June 30, 2016 versus $394,279 during the second quarter of 2015 for services performed pursuant to the drilling, development and production services agreement between the Company and the Bradford JV. For the six months ended June 30, 2016 contract development revenues were $31,391 versus $411,779 during the first six months of 2015. The decreases reflect the lower level of development activity at the Bradford “A” and Bradford “B” leases due in part to the timing of the drilling of wells and hook-up of production facilities and due partially to the lack of funding from the purchaser of the participation interests in the Bradford JV.

Operating and Production Costs

For the three months ended June 30, 2016 operating, production and contract development costs decreased to $5,614 compared to $109,292 for the three months ended June 30, 2015. For the six months ended June 30, 2016 operating, production and contract development costs decreased to $15,574 versus the $174,242 recorded during the first six months of 2015. The decreases reflect a shift in company focus from the remediation of older wells to development drilling on our recently acquired oil and gas leases and a slow-down in contract development operations at the Bradford “A” and Bradford “B” leases due to reduced development activity and a lack of funding.

General and Administrative Expenses

For the three months ended June 30, 2016 general and administrative expenses decreased to $152,284 compared to $435,245 for the three months ended June 30, 2015. For the six months ended June 30, 2016 general and administrative expenses decreased to $266,663 compared to $857,498 recorded during the first six months of 2015. The decreases reflect lower compensation expense as the Company reduced the number of full-time employees required to administer our portfolio of operating assets and lower head office expenses as we reduced home office staff levels, mothballed our executive offices in Abilene and reduced travel related costs required to manage our investor relations, marketing and SEC reporting activities.

Depreciation and Amortization

For the three months ended June 30, 2016 depreciation and amortization expense increased to $32,676 compared to $20,115 for the three months ended June 30, 2015. For the six months ended June 30, 2016 depreciation and amortization expenses totaled $43,521 compared with $40,070 recorded during the first six months of 2015. The increases primarily reflect the write-downs to office equipment and leasehold improvements as the result of the closings of our operations and corporate offices in Texas.

Other Expenses / (Income)

Other income for the three months ended June 30, 2016 totaled $2,877,365 compared to $366,439 in other expenses for the three months ended June 30, 2015. Interest expense decreased to $288,289 versus $765,023 for the comparable period of 2015. For the six months ended June 30, 2016 other expenses totaled $4,370,085 of which $668,513 reflects interest expense while the comparable period of 2015 included $1,363,163 of other expenses of which $1,509,044 reflected interest expense.

During the three months ended June 30, 2016 the Company recorded a gain of $3,175,029 related to the change in the fair value of derivative liabilities, while the Company recorded losses on the change in the fair value of derivative liabilities totaling $3,699,313 during the six months ended June 30, 2016. The Company recorded gains on derivative liabilities in the corresponding periods of 2015 of $392,908 and $131,957, respectively.

Net Loss

For the three months ended June 30, 2016 our net income was $2,705,038 compared to a net loss of $270,647 for the three months ended June 30, 2015. The improvement was primarily due to gains recorded on the change in the fair value of debt related derivative liabilities and lower interest related costs (interest and debt discount amortization), partially offset by an operating loss in the current period and translates into to earnings of $0.03 per share (basic and diluted) in 2016 compared to a loss of $0.01 per share (basic and diluted) in 2015.

For the six months ended June 30, 2016 our net loss was $4,657,589 compared to a net loss of $1,734,565 for the six months ended June 30, 2015. The increase was due to the aforementioned $3,699,313 in losses related to the change in the fair value of derivative liabilities partially offset by lower interest related costs and a narrower operating loss in the current period and translates into a loss of $0.06 per share (basic and diluted) in 2016 compared to a loss of $0.05 per share (basic and diluted) in 2015.

Financial Condition, Liquidity and Capital Resources

We continue to incur operating expenses in excess of net revenue and will require capital infusions to sustain our operations until operating results improve.

Capital Resources and Liquidity

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its operational requirements. As of June 30, 2016 our current assets were $200,252 and our current liabilities were $13,472,300 resulting in negative working capital of $13,272,048 compared to a working capital deficit of $8,702,235 at December 31, 2015. At June 30, 2016, we had cash on hand of $584 which is not sufficient to meet our operating needs for the next twelve months. Because we operate in a cash intensive industry we anticipate the need to raise additional capital on a continuous basis.

The Company utilized the proceeds from the sale of its Albany, Texas regional operations office plus the proceeds from the sale of surplus rolling stock and support equipment to replenish working capital. The Company has reduced the number of full-time employees and closed its corporate headquarters in Abilene, Texas in order to conserve cash. The Company is in discussions with several of its current creditors seeking to restructure the payment terms of its various debt obligations. Such negotiations among other items include the lowering of applicable interest rates, extensions to the maturity dates and the conversion of the outstanding principal and interest balances in to equity (common and or preferred) securities of the Company. The Company has also approached other lenders seeking to secure new sources of capital to either retire existing debt or to provide additional capital to support operations. We are currently in the initial stages of a capital raise involving the issuance of a new series of Preferred Shares of the Company via a private placement with “Accredited Investors” which is designed to provide working capital, retire some of the Company’s convertible notes and the capital necessary to acquire and develop our portfolio of oil and gas properties. We recently completed the purchase of several oil and gas leases in north-central Texas plus two oil and gas service rigs and related equipment and field facilities from a privately held oil and gas company and plan to hire its CEO to assume the role of the Chief Operating Officer for Cardinal to manage the day to day operating and development activities of the Company.

Our current level of negative working capital when coupled with the timing of proceeds from asset sales and debt offerings may result in short-term liquidity imbalances until cash flows from operating activities turn consistently positive.

We used cash in operations of $123,357 during the six months ended June 30, 2016 compared to $640,218 during the six months ended June 30, 2015. The decrease was due primarily to a smaller loss from operations as a result of lower lease operating, production and development expenses, and lower administrative and general expenses due to staff reductions and lower stock based compensation to employees and consultants partially offset by lower oil and gas sales revenues due primarily to lower production volumes.

We generated $114,173 of cash from investing activities during the six months ended June 30, 2016 compared to $40,500 during the six months ended June 30, 2015. In 2016, the cash was generated from the sale of our regional operations office in Albany, Texas and the sale of surplus equipment. In 2015 we generated cash from the sale of oil and gas properties, property and equipment.

We used $14,387 of net cash from financing activities during the six months ended June 30, 2016 compared to $716,295 provided during the same period in 2015. Funds provided in 2015 came primarily from the issuance of short-term and long-term notes with maturities ranging from 180 days to two years. Funds used in the current period reflect the repayment of convertible notes and loans payable.

Critical Accounting Policies and Estimates

We prepared our financial statements and the accompanying notes in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions about future events that affect the reported amounts in the financial statements and the accompanying notes. We identified certain accounting policies as critical based on, among other things, their impact on the portrayal of our financial condition, results of operations, or liquidity and the degree of difficulty, subjectivity, and complexity in their deployment. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. Management routinely discusses the development, selection, and disclosure of each of the critical accounting policies. The following is a discussion of our most critical accounting policies.

Oil and Gas Properties

We follow the full cost method of accounting for our oil and natural gas properties, whereby all costs incurred in connection with the acquisition, exploration for and development of petroleum and natural gas reserves are capitalized. Such costs include lease acquisition, geological and geophysical activities, rentals on non-producing leases, drilling, completing and equipping of oil and gas wells and administrative costs directly attributable to those activities and asset retirement costs. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capital costs and proved reserves of oil and gas, in which case the gain or loss is recognized to income.

In light of the precipitous fall in crude oil prices during the 2014-2015 time frame and the relatively small production volumes from the Company’s leases we elected to reduce the carrying value of our oil and gas properties during the fourth quarter of 2015. This reduction to the estimated net recoverable values of our oil and gas properties is reflected in the financial statements as a charge to impairment expense on the income statement for the year ended December 31, 2015.

Asset Retirement Obligation

We follow FASB ASC 410, Asset Retirement and Environmental Obligations which requires entities to record the fair value of a liability for asset retirement obligations (“ARO”) and recorded a corresponding increase in the carrying amount of the related long-lived asset. The asset retirement obligation primarily relates to the abandonment of oil and gas properties. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of oil and gas properties and is depleted over the useful life of the asset. The settlement date fair value is discounted at our credit adjusted risk-free rate in determining the abandonment liability. The abandonment liability is accreted with the passage of time to its expected settlement fair value. Revisions to such estimates are recorded as adjustments to ARO are charged to operations in the period in which they become known. At the time the abandonment cost is incurred, the Company is required to recognize a gain or loss if the actual costs do not equal the estimated costs included in ARO. The ARO is based upon numerous estimates and assumptions, including future abandonment costs, future recoverable quantities of oil and gas, future inflation rates, and the credit adjusted risk free interest rate. Different, but equally valid, assumptions and judgments could lead to significantly different results. Future geopolitical, regulatory, technological, contractual, legal and environmental changes could also impact future ARO cost estimates. Because of the intrinsic uncertainties present when estimating asset retirement costs as well as asset retirement settlement dates, our ARO estimates are subject to ongoing volatility.

Derivative Liabilities

New Accounting Pronouncements

Off-Balance Sheet Arrangements

Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO, to allow timely decisions regarding required disclosure. Management, with the participation of our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2016. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were ineffective as of June 30, 2016 due to an insufficient number of qualified accounting personnel governing the financial close and reporting process, the lack of an appropriate segregation of duties and the absence of a functioning audit committee. For additional details please refer to Management’s Annual Report on Internal Control over Financial Reporting disclosed in Item 9A of the Company’s Annual Report on Form 10-K filed on March 30, 2016.

Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

Changes in Internal Control

There were no changes identified in connection with our internal control over financial reporting during the three months ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Borets USA, Inc. f/k/a Borets-Weatherford US, Inc. v. Cardinal Energy Group, Inc. (Case No. 2015-028, 259th Judicial District Shackelford County, Texas).

CEGX of Texas, LLC v. Scott Miller, Miller Energy Services, Inc. and US Fuels, Inc. (Case No. CV1543707 91st Judicial Court Eastland County, Texas).

CEGX of Texas, LLC v. P.I.D. Drilling, Inc. (Case No. 2015-062 259th Judicial District Shackelford County, Texas).

Cardinal Energy Group, Inc. 10-Q