UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________________________________________________________

Form 10-Q

___________________________________________________________________________________________

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

For the quarterly period ended September 30, 2019

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

Commission file number 000-54639

CITADEL EXPLORATION, INC.

(Exact name of registrant as specified in its charter)
Nevada	27-1550482
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
417 31st Street, Unit A, Newport Beach, CA	92663
(Address of principal executive offices)	(Zip Code)
(949) 612-8040
(Registrant's telephone number, including area code)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 past 90 days.

Yes ☒ 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 (§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 ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”

“accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Yes ☐ No ☒

The number of shares of Common Stock, $0.001 par value, outstanding on November 19, 2019 was 48,956,151 shares.

CITADEL EXPLORATION, INC.

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

Index to Report on Form 10-Q

		Page No.
	PART I - FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4T.	Controls and Procedures	18
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Mine Safety Disclosures	20
Item 5.	Other Information	20
Item 6.	Exhibits	21
	Signature	22

 i

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

CITADEL EXPLORATION, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,			December 31,
	2019			2018
ASSETS
Current assets:
Cash	$	5,741		$	86,441
Accounts receivable		—			135,824
Prepaid expenses and other current assets		56,798			32,633
Total current assets		62,539			254,898
Long term assets Right-of-use asset		15,372			—
Deposits		35,100			35,100
Restricted cash		200,000			200,000
Oil and gas properties (successful efforts basis)      Proved, net		5,564,531			5,685,535
Unproved		—			1,172,034
Fixed asset, net		55,594			67,326
Total assets	$	5,933,136		$	7,414,893
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities	$	2,908,376		$	2,657,590
Accrued interest payable		661,460			390,224
Drilling obligation, net of discount of $0 and $42,000 as of September 30, 2019 and December 31, 2018 respectively		698,154			676,060
Notes payable, net of unamortized discount		2,444,457			2,353,003
Notes payable, related party		119,000			—
Operating lease liability		15,372			—
Production payment liability - related party		300,000			300,000
Total current liabilities		7,146,818			6,376,877
Asset retirement obligation		261,174			250,358
Total liabilities		7,407,992			6,627,235
Stockholders' equity(deficit)
Common stock, $0.001 par value, 300,000,000 shares authorized, 48,956,151and 45,000,004shares issued and outstanding as of September 30, 2019 and December 31, 2018 respectively		48,957			45,000
Series A Preferred stock, $20.00 par value, 500,000 shares authorized, 400,615 and 395,615 shares issued and outstanding as of September 30, 2019 and December 31, 2018 respectively		8,012,300			7,912,300
Additional paid-in capital		6,146,914			6,150,871
Accumulated deficit		(15,683,027	)		(13,320,513	)
Total stockholders' equity(deficit)		(1,474,856	)		787,658
Total liabilities and stockholders' equity(deficit)	$	5,933,136		$	7,414,893

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 -1-

CITADEL EXPLORATION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the three months						For the nine months
	ended						ended
	September 30,						September 30,
	2019			2018			2019			2018
Revenue	$	28,404		$	320,774		$	279,488		$	928,092
Operating expenses:
Lease operating expense		62,986			202,562			337,946			676,937
General and administrative		38,504			75,204			151,897			219,843
Depreciation, depletion and accretion		20,594			135,387			134,702			407,685
Professional fees		19,908			40,951			76,026			183,237
Executive compensation		90,000			180,000			390,000			540,000
Impairment of oil and gas properties		843,574			—			1,172,034			—
Total operating expenses		1,075,566			634,104			2,262,605			2,027,702
Other expenses:
Interest expense		(94,192	)		(110,210	)		(379,397	)		(256,763	)
Total other expenses		(94,192	)		(110,210	)		(379,397	)		(256,763	)
Loss before provision for income taxes		(1,141,354	)		(423,540	)		(2,362,514	)		(1,356,373	)
Income tax benefit		—			—			—			—
Net Loss	$	(1,141,354	)	$	(423,540	)	$	(2,362,514	)	$	(1,356,373	)
Series A preferred stock dividends		(201,954	)		(199,433	)		(597,468	)		(591,488	)
Net loss attributable to common stockholders	$	(1,343,308	)	$	(622,973	)	$	(2,959,982	)	$	(1,947,861	)
Weighted average number of common shares - outstanding - basic and diluted		48,956,151			45,000,000			48,956,151			44,907,286
Net loss per share – basic and diluted	$	(0.02	)	$	(0.01	)		(0.06	)	$	(0.04	)

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 -2-

CITADEL EXPLORATION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

Three Months Ended September 30, 2019 

									Additional					Total
	Common Stock				Preferred Stock				Paid-In		Accumulated			Equity
	Shares		Amount		Shares		Amount		Amount		Deficit			(Deficit)
Balance at June 30, 2019		48,956,151	$	48,957		400,615	$	8,012,300	$	6,146,914	$	(14,541,673	)	$	(333,502	)
Net loss		—		—		—		—		—		(1,141,354	)		(1,141,354	)
Balance at September 30, 2019		48,956,151	$	48,957		400,615	$	8,012,300	$	6,146,914	$	(15,683,027	)	$	(1,474,856	)

Nine Months Ended September 30, 2019

									Additional						Total
	Common Stock				Preferred Stock				Paid-In			Accumulated			Equity
	Shares		Amount		Shares		Amount		Amount			Deficit			(Deficit)
Balance at December 31, 2018		45,000,004	$	45,000		395,615	$	7,912,300	$	6,150,871		$	(13,320,513	)	$	787, 658
Common shares issued for special preferred stock dividend		3,956,147		3,957		—		—		(3,957	)		—			—
Preferred shares issued for cash		—		—		5,000		100,000		—			—			100,000
Net loss		—		—		—		—		—		$	(2,362,514	)	$	(2,362,514	)
Balance at September 30, 2019		48,956,151	$	48,957		400,615	$	8,012,300	$	6,146,914		$	(15,683,027	)	$	(1,474,856	)

Three Months Ended September 30, 2018 

									Additional
	Common Stock				Preferred Stock				Paid-In		Accumulated			Total
	Shares		Amount		Shares		Amount		Amount		Deficit			Equity
Balance at June 30, 2018		45,000,004	$	45,000		395,615	$	7,912,300	$	5,959,407	$	(11,721,322	)	$	2,195,385
Warrants issued on debt		—		—		—		—		55,421		—			55,421
Net loss		—		—		—		—		—		(423,540	)		(423,540	)
Balance at September 30, 2018		45,000,004	$	45,000		395,615	$	7,912,300	$	6,014,828	$	(12,144,862	)	$	1,827,266

Nine Months Ended September 30, 2018 

									Additional
	Common Stock				Preferred Stock				Paid-In		Accumulated			Total
	Shares		Amount		Shares		Amount		Amount		Deficit			Equity
Balance at December 31, 2017		44,449,742	$	44,450		394,365	$	7,887,300	$	5,691,239	$	(10,788,489	)	$	2,834,500
Common shares issued for services rendered		450,262		450		—		—		89,601		—			90,051
Common shares issued to settle bonus payable		100,000		100		—		—		19,900		—			20,000
Preferred shares issued for cash		—		—		1,250		25,000		—		—			25,000
Warrants issued on debt		—		—		—		—		214,088		—			214,088
Net loss		—		—		—		—		—	$	(1,356,373	)	$	(1,356,373	)
Balance at September 30, 2018		45,000,004	$	45,000		395,615	$	7,912,300	$	6,014,828	$	(12,144,862	)	$	1,827,266

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 -3-

CITADEL EXPLORATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)  

	For the nine months
	Ended
	September 30
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(2,362,514	)	$	(1,356,373	)
Adjustments to reconcile net loss to net cash used in operating activities
Impairment of oil and gas properties		1,172,034			—
Noncash operating lease expense		76,859			—
Depreciation, depletion and accretion		134,702			407,684
Stock based compensation expense		—			90,051
Amortization of debt discount		104,923			151,807
Changes in operating assets and liabilities:
Decrease in operating lease obligations		(76,859	)		—
Decrease (increase) in accounts receivable		135,824			(260,957	)
Increase in deposits		—			(25,000	)
Decrease in prepaid expenses and other current assets		50,026			33,337
Increase in accrued interest payable		271,236			100,557
Increase in accounts payable and accrued payables		286,339			329,857
Net cash used in operating activities		(207,430	)		(529,037	)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to oil and gas properties		(26,704	)		(1,383,024	)
Purchase of fixed assets		—			(6,749	)
Cash received from disposal of O&G asset		—			131,240
Net cash used in investing activities		(26,704	)		(1,258,533	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of costs		100,000			25,000
Proceeds from notes payable, related party		119,000			—
Proceeds from notes payable		—			1,420,612
Payments to drilling liability		(19,906	)		(62,258	)
Repayments of notes payable		(45,660	)		(60,506	)
Net cash provided by financing activities		153,434			1,322,848
Net decrease in cash and restricted cash		(80,700	)		(464,722	)
Cash and restricted cash at beginning of year		286,441			972,103
Cash and restricted cash at end of the period	$	205,741		$	507,381
Supplemental disclosures of cash flow information:
Income taxes paid	$	—		$	—
Interest paid	$	—		$	3,057
Non-cash investing and financing activities:
Reclass of inventory to O&G properties		—			20,107
Right-of-use asset and operating lease obligation recognized upon adoption of Topic 842		92,231			—
Shares issued to pay off bonus payable		—			20,000
Common shares issued for preferred dividends in 2019		3,957			—
Accrued interest payable rolled over to senior loan facility		—			229,388
Debt discount from warrants issued on debt		—			214,087
Asset retirement obligation		—			12,128
Non-cash addition of senior loan facility for payment of San Benito litigation		—			100,000
Insurance premium financing		74,191			70,744

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 -4-

CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The interim consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim consolidated financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2018 and notes thereto included in the Company’s 10-K annual report and all amendments. The Company follows the same accounting policies in the preparation of interim reports.

Results of operations for the interim period are not indicative of annual results.

Principles of consolidation

The consolidated financial statements include the accounts of Citadel Exploration, Inc., Citadel Exploration, LLC and Citadel Kern Bluff, LLC, the Company’s wholly owned subsidiaries.  All significant intercompany balances and transactions have been eliminated. Citadel Exploration, Inc., Citadel Exploration, LLC and Citadel Kern Bluff, LLC will be collectively referred herein to as “we”, “our or the “Company”.

Nature of operations

Currently, the Company is focused on the acquisition and development of oil and gas properties in California.  

Impairment

The Company evaluates the impairment of its proved oil and natural gas properties on a field-by-field basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying values of proved properties are reduced to fair value when the expected undiscounted future cash flows are less than net book value. The fair values of proved properties are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of proved properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate.

As of September 30, 2019, management decided to impair all unproved oil and gas properties. This decision was driven by the fact that the Company is currently in default on its senior secured loan, and as such the lender through court order has appointed a third-party trustee to oversee operations at the Kern Bluff Oil Field. Without operational control, management felt it was prudent to impair these unproved leases as the Company will not be in the position to renew leases and or develop the leases in the near term. Consequently, the Company recognized an impairment loss of $1,172,034 for the nine months ended September 30, 2019.

 -5-

CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Use of estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.

Fair value of financial instruments

The carrying value of the Company’s financial instruments, including cash, due to shareholders/related parties, accounts and other payables and notes payable approximate their fair values due to the immediate or short-term maturity of these instruments. It is management’s opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial instruments.

Cash and cash equivalents

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. The Company had no cash equivalents as of September 30, 2019 and December 31, 2018.

Earnings per share

The Company follows ASC Topic 260 to account for earnings per share. Basic earnings per common share (“EPS”) calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.

 -6-

CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition Policy

OnJanuary 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, and the series of related ASU’s that followed under ASC Topic 606 (collectively, “Topic 606”). Under Topic 606, revenue will generally be recognized upon delivery of our produced oil volumes to our customers. Our customer sales contract is only for oil as we do not produce any natural gas volumes for sale. Under Topic 606, each unit (barrel) of commodity product represents a performance obligation which is sold at variable prices, determinable on a daily basis. The pricing provisions of our contracts are primarily tied to market index with certain adjustments based on factors such as delivery, product quality and prevailing supply and demand conditions in geographic areas in which we operate. We will allocate the transaction price to the performance obligation and recognize revenue upon delivery of the commodity product when the customer obtains control. Control of our produced oil volumes passes to our customers when the oil is measured by a trucking oil ticket. The Company has no control over the commodities after that point and the measurement at those points dictates the amount on which the customer’s payment is based. Our oil revenue stream includes volumes burdened by royalty and other joint owner working interests. Our revenues are recorded and presented on our financial statements net of the royalty and other joint owner working interests. Our revenue stream does not include any payments for services or ancillary items other than the sale of oil. We record revenue in the month our production is delivered to the purchaser. However, settlement statements and payments for our oil sales may not be received for up to 60 days after the date production is delivered, and as a result, we are required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. We record any differences, which historically have not been significant, between the actual amounts ultimately received and the original estimates in the period they become finalized. Topic 606 will not change our pattern of timing of revenue recognition. We utilized the modified retrospective method for adoption of Topic 606, and in accordance with this method our consolidated financial statements for periods prior to January 1, 2018 were not materially affected or revised. The Company does not disaggregate revenue, as all revenue is generated from oil at one property located in California.

Recent pronouncements

In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) to increase the transparency and comparability about leases among entities. Additional ASUs have been issued subsequent to ASU 2016-02 to provide supplementary clarification and implementation guidance for leases related to, among other things, the application of certain practical expedients, the rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments. ASU 2016-02 and these additional ASUs are now codified as Accounting Standards Codification Standard 842 - “Leases” (“ASC 842”). ASC 842 supersedes the lease accounting guidance in Accounting Standards Codification 840 “Leases” (“ASC 840”) and requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. The Company elected to utilize the “package” of three expedients, as defined in ASC 842, which retain the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. The Company’s consolidated financial statements for the periods prior to the adoption of ASC 842 are not adjusted and are reported in accordance with the Company’s historical accounting policy. As of the date of implementation on January 1, 2019, the impact of the adoption of ASC 842 resulted in the recognition of a right of use asset and lease payable obligation on the Company’s consolidated balance sheet of approximately $92,231. As the right of use asset and the lease payable obligation were the same upon adoption of ASC 842, there was no cumulative effect impact on the Company’s retained earnings.

 -7-

CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 2 – GOING CONCERN

The accompanying unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Since its inception, the Company has been engaged substantially in financing activities and developing its business plan and incurring startup costs and expenses. As a result, the Company has experienced recurring losses resulting in an accumulated deficit and a working capital deficit as of September 30, 2019 of $15,683,027 and $7,084,279, respectively. In addition, the Company’s development activities since inception have been financially sustained through debt and equity financing. These factors raised substantial doubt as to the Company’s ability to continue as a going concern.

There can be no assurance that the Company will be successful to raise sufficient cash to operate over the 12 months immediately following the issuance of its financial reports.

The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital from the sale of common stock or debt and, ultimately, the achievement of significant operating revenues. These unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.

NOTE 3 – OIL AND GAS PROPERTIES

Oil and natural gas properties, buildings and equipment consist of the following:

	September 30, 2019			December 31, 2018
Oil and Natural Gas:
Proved properties	$	4,113,090		$	4,121,940
Unproved properties		—			1,172,034
Facilities		2,231,561			2,231,561
		6,344,651			7,525,535
Less - accumulated depletion		(780,120	)		(667,966	)
	$	5,564,531		$	6,857,569

For the nine months ended September 30, 2019 and September 30, 2018 total depletion expense amounted to $112,154 and $378,912 respectively.

During the nine months ending September 30, 2019, given the annual lease payments coupled with the Company being in default on its senior secured loan facility, the Company has decided to impair all remaining unproved properties. Consequently, the Company recognized an impairment loss of $1,172,034 of which $328,460 was recognized in the second quarter of 2019 and the remaining $843,574 was recognized during the three months ended September 30, 2019.

 -8-

CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 4 – CASH AND RESTRICTED CASH

Amounts in consolidated balance sheets included as cash and restricted cash on the Company’s consolidated statements of cash flows are as follows:

	September 30, 2019		December 31, 2018
Cash	$	5,741	$	86,441
Restricted cash – long term		200,000		200,000
Total cash and restricted cash	$	205,741	$	286,441

Restricted cash consists of one bond totaling $200,000 as of September 30, 2019. This bond was required in the normal course of business in the oil and gas industry. The bond totaling $200,000 was purchased in August 2015 following the acquisition of the Kern Bluff Oil Field. This was a blanket bond, which will cover 50 wells.

NOTE 5 – DEPOSITS

The Company had deposits of $35,100 for September 30, 2019 and December 31, 2018, of which $25,000 was a deposit in natural gas purchases and the remaining $10,100 was incurred for rental of office space.

NOTE 6 – NOTES PAYABLE

Notes payable consists of the following:

	September 30, 2019		December 31, 2018
Note payable to an entity for the financing of insurance premiums, unsecured; 7.99% interest, due March 2019		—		13,939
Note payable to an entity for the financing of insurance premiums, unsecured; 8.63% interest, due March 2020	$	52,232
				—
Senior Secured Facility Loan 10% interest; due March 31, 2019.		2,350,000		2,350,000
Unamortized debt discount		—		(62,924	)
3 Notes payable, related party, 15% simple interest, due November 16, 2019, February4, 2020, and March 23, 2020		119,000		—
Note payable to an entity for the financing of a company vehicle, secured; 4.95% interest, due October 2022		20,888		25,598
Note payable to an entity for the financing of a company vehicle, secured; 4.95% interest, due November 2022		21,337		26,390
Total – Notes Payable	$	2,563,457	$	2,353,003

 -9-

CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 6 – NOTES PAYABLE (CONTINUED)

In March of 2018, the Company closed on a $3,000,000 senior secured credit facility. The facility bears 10% interest and has a one-year term. For every two dollars drawn on the facility, the investor receives one five-year warrant to purchase common stock at a price of $0.10. The Company has drawn down $2,350,000 on the facility and issued 1,175,000 warrants. The warrants were valued using the relative fair value and the amount recorded as a debt discount amortized over the life of the line of credit using effective interest method. The unamortized debt discount as of December 31, 2018 of $62,973 was fully amortized during the nine months ended September 30, 2019. Future drawdowns are at the discretion of the lender. The senior secured facility is secured by a deed of trust on the Kern Bluff Oil Field. Proceeds from the first draw where used to retire the previous bridge loan and accrued interest. Subsequent draws were used for general corporate purposes. The facility required the Company to achieve $1,000,000 in EBITDA as of December 31, 2018, which it did not attain. As such, the Company was in default of the facility’s covenants as of January 1, 2019 requiring the Company to pay a default interest rate of 15%. As of September 30, 2019, the Company was in default on its loan. At this time, the Company has not been able to refinance the loan and remains in default.  On September 11, 2019 a court in Kern County, granted the lender’s request to appoint a third-party trustee to oversee the operations at the Kern Bluff Oil Field. Consequently, August’s 2019 gross production revenue receipts were turned over to the third-party trustee on September 15, 2019 amounting to $16,097. As of September 30, 2019, the net receivable from the third-party trustee amounted to $10,624 which is included in the consolidated balance sheet under prepaid expenses and other current assets.

NOTE 7 – STOCKHOLDERS’ EQUITY

The Company is authorized to issue 300,000,000 shares of its $0.001 par value common stock. 

The Company is authorized to issue 500,000 shares of Series A Convertible Participating Preferred Stock.

In January of 2019, we issued 3,956,147 shares of our common stock valued at $0.20 as a dividend payment on our Series A Preferred Stock.  

In March of 2019, we sold an additional 5,000 shares of Series A Convertible Participating Preferred Stock for cash proceeds of $100,000.

NOTE 8 – STOCK OPTIONS

The following is a summary of the status of all of the Company’s stock options as of December 31, 2018 and changes during the nine months ended September 30, 2019:

	Number of Options			Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Life (Years)
Outstanding at December 31, 2018		10,000,000		$	0.20	$	—		2.48
Exercisable at December 31, 2018		10,000,000		$	0.20	$	—		2.48
Expired at September 30, 2018		(4,000,000	)	$	0.20	$	—		—
Outstanding at September 30, 2019		6,000,000		$	0.21	$	—		2.93
Exercisable at September 30, 2019		6,000,000		$	0.21	$	—		2.93

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CITADEL EXPLORATION, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 9 – WARRANTS

The Company did not issue any new warrants during the nine months ended September 30, 2019. Warrant activity for the nine months ended September 30, 2019 is as follows:

	Number of Warrants		Weighted-Average Exercise Price		Weighted-Average Remaining Life (Years)
Outstanding at December 31, 2018		1,175,000	$	0.10		4.34
Granted		—	$	0.00		—
Exercised		—	$	0.00		—
Outstanding at September 30, 2019		1,175,000	$	0.10		3.60

NOTE 10 – RELATED PARTY TRANSACTIONS

During the period the Company did not have any purchases of equipment from related parties; historically the Company had purchased oil field equipment from one of its board members. As of September 30, 2019, and December 31, 2018, the Company had a production payment liability of $300,000 outstanding to a related party. The Company also has accrued interest related to a loan of $233,085 due to a related party. On May 20, 2019, the Company received a note payable in the amount of $50,000 with 15% interest, maturing on November 16, 2019. Consequently, the May 20, 2019 note is currently in default. On August 12, 2019, the Company received a note payable in the amount of $50,000 with 15% interest, maturing on February 4, 2020. On September 25, 2019, the Company received a note payable in the amount of $19,000 with 15% interest, maturing on March 23, 2020.

NOTE 11 – DRILLING OBLIGATION

The Company entered into a joint venture agreement with investors to drill two wells in the fourth quarter of 2017. The $700,000 liability has an 18% rate of return. The Company originally booked a debt discount of $126,000 on this obligation which was amortized over a period of 18 months. Amortization of debt discount for each of the nine-months ended September 30, 2019 and 2018 amounted to $42,000 and $63,000respectively.

NOTE 12 – SUBSEQUENT EVENTS

On October 22, 2019 the Company was loaned $50,000 by a related party in the form of a 180-day unsecured bridge loan bearing interest at 15%.

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements and involves risks and uncertainties that could materially affect expected results of operations, liquidity, cash flows, and business prospects. These statements include, among other things, statements regarding:

o exploration risks such as drilling unsuccessful wells;

o our ability to operate profitably;

o our ability to efficiently and effectively finance our operations;

o inability to achieve future sales levels or other operating results;

o inability to raise additional financing for working capital;

o inability to efficiently manage our operations;

o inability to hire or retain sufficient qualified operating field personnel;

o the inability of management to effectively implement our strategies and business plans;

o the unavailability of funds for capital expenditures and/or general working capital;

o deterioration in general or regional economic conditions;

o the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain;

o changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate;

o adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;

As well as other statements regarding our future operations, financial condition and prospects, and business strategies. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A and those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

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References in the following discussion and throughout this quarterly report to “we”, “our”, “us”, “Citadel”, “the Company”, and similar terms refer to Citadel Exploration, Inc. and its subsidiary, unless otherwise expressly stated or the context otherwise requires.

AVAILABLE INFORMATION

We file annual, quarterly and other reports and other information with the SEC. You can read these SEC filings and reports over the Internet at the SEC's website at www.sec.gov or on our website at www.citadelexploration.com. You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, NE, Washington, DC 20549 on official business days between the hours of 10:00 am and 3:00 pm. Please call the SEC at (800) SEC-0330 for further information on the operations of the public reference facilities. We will provide a copy of our annual report to security holders, including audited financial statements, at no charge upon receipt to of a written request to us at Citadel Exploration, Inc., 417 31^st Street, Unit A, Newport Beach, California 92663.

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

Overview

Citadel is an energy company engaged in the exploration and development of oil and natural gas properties. Our properties are located in the San Joaquin Basin of California. Subject to availability of capital, we strive to implement an accelerated development program utilizing capital resources, a regional operating focus, an experienced management and technical team, and enhanced recovery technologies to attempt to increase production and increase returns for our stockholders. Our corporate strategy is to build value in the Company through the acquisition of oil and gas leases with significant upside potential, successful exploration and exploitation and the efficient development of these assets.

Our revenues, profitability and future growth depend substantially on prevailing prices for oil and natural gas and our ability to find, develop and acquire oil and gas reserves that are economically recoverable.

Our Operations

Our principal strategy is to focus on the acquisition of oil and natural gas mineral leases that have known hydrocarbons or are in close proximity to known hydrocarbons that have been underdeveloped. Once acquired, we strive to implement an accelerated development program utilizing capital resources, a regional operating focus, an experienced management and technical team, and enhanced recovery technologies to attempt to increase production and increase returns for our stockholders. Our oil and natural gas acquisition and development activities are currently focused in the State of California.  

On July 31, 2015 Citadel acquired approximately 1,100 acres of leases, production facilities and equipment that encompassed the Kern Bluff Oil Field. As consideration for this acquisition Citadel issued 6,000,000 shares of common stock and paid $2,000,000 in cash. The transaction was financed via a $3,500,000 one-year term loan from Cibolo Creek Partners, of Midland Texas. In March of 2016, Cibolo Creek Partners converted the $3,500,000 term loan into Series A Convertible Participating Preferred Stock.

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In December of 2015, Citadel shifted its CAPEX focus to remediation of the existing acquired facilities. At the time of purchase, the oil at Kern Bluff was being processed by temporary facilities installed by the previous owner. As production increased in September, it quickly became apparent that these facilities were not capable of processing the additional volumes of oil and water being produced. The existing permanent facilities were built in the 1970’s by Gulf Oil and require extensive remediation including new pipe, valves, flanges and tank repair.

In July of 2016, Citadel completed its facility upgrades. The new facilities have production capacity of 500 BOPD. Citadel drilled three wells in June of 2016 and returned to production 9 idle wells.

 In December of 2017, Citadel completed the installation of a 25MM BTU steam generator. The oil at Kern Bluff is characterized as heavy oil, therefore requiring stimulation via steam injection. This steam generator has capacity of over 1,400 barrels of steam per day (BOSPD) which will allow the Company to steam approximately 50 wells per year.

In the first quarter of 2019, California experienced a spike in natural gas prices due to cold weather, and pipeline outages. As such the Company did not perform any cyclic steam injection during the quarter, this resulted in field wide production dropping to approximately 30-50 barrels of oil per day.

On May 1, 2019 the Company’s CEO and President tendered his resignation.

In the third quarter of 2019, the Company did not perform any cyclic steaming operations due to a lack of capital. As such field wide production has dropped to below 10 barrels per day.

On September 11, 2019 the court in Kern County, at the request of our senior secured lender, appointed a third-party trustee to oversee operations at the Kern Bluff Oil Field. The Trustee receives all cash related to the Company’s revenue and is responsible for all expenses related to the field. The Company continues to pursue several options to raise capital and meet its obligations under its senior secured loan. Until that time, the Company does not have control over operations, the receipt of revenues, or the payment of expenses at the oil field.

On September 12, 2019 James Borgna resigned from the Board of Directors at Citadel Exploration Inc.

Going Concern

The consolidated financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate the continuance of the Company as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As shown on the accompanying consolidated financial statements, the Company has incurred an accumulated deficit and working capital deficit in the amount of $15,683,027 and $7,084,279, respectively, as of September 30, 2019. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The future of the Company is dependent upon its ability to obtain financing and upon future profitable operations from the development of its oil and gas business opportunities.

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RESULTS OF OPERATIONS

Results of Operations for the Three and Nine Months Ended September 30, 2019 and September 30, 2018

During the three-month period ended September 30, 2019 and September 30, 2018, the Company generated $28,404 and $320,774, respectively, from the sale of oil. During the nine-month period ended September 30, 2019 and September 30, 2018, the Company generated $279,488 and $928,092, respectively, from the sale of oil. The decrease in revenue for the three and nine-months ending September 30, 2019 arose from the Company’s decision to not cyclic steam wells due to a lack of capital.

Operating expenses totaled $1,075,566 during the three-month period ended September 30, 2019 which was an increase of $441,462 over the three-month period ended September 30, 2018. Operating expenses totaled $2,262,605 during the nine-month period ended September 30, 2019 which was an increase of $234,903 over the nine-period ended September 30, 2018. Operating expenses consisted of lease operating expense, general and administrative costs, amortization and depreciation, professional fees, executive compensation, and impairment expenses. The majority of the increase was due to impairment charges. The Company elected to impair all unproved oil and gas properties as a consequence of being in default of its senior secured loan and its inability to pay annual rentals for those undeveloped leases.

General and administrative expenses decreased from $75,204 to $38,504 from the three-month period ended September 30, 2018 to the three-month period ended September 30, 2019. For the nine-month period ended September 30, 2019, general and administrative expenses decreased by $67,946 over the nine-month period ended September 30, 2018. This decrease for both three- and nine-month periods was primarily due to less marketing, meals and entertainment expenses.

Depreciation, depletion and amortization decreased from $407,685 to $134,702 for the nine-month period ended September 30, 2018 to September 30, 2019 and decreased from $135,387 to $20,594 for the three-month period ended September 30, 2018 to September 30, 2019 primarily due to a decrease in overall production.

Professional fees decreased from $40,951 to $19,908 from the three-month period ended September 30, 2018 to the three-month period ended September 30, 2019. For the nine-month period ended from September 30, 2018 to the nine-month period ended September 30, 2019, professional fees decreased from $183,237 to $76,026. The decrease for both three- and nine-month periods was primarily due to a reduction in legal costs, engineering services, and accounting services provided to the Company.

Executive compensation decreased from $180,000 to $90,000 for the three-month period ended September 30, 2018 to the three-month period ended September 30, 2019 due to the resignation of the Company’s CEO and President on May 1, 2019. For the nine-month period ended September 30, 2018 to the nine-month period ended September 30, 2019, professional fees decreased from $540,000 to $390,000.

Liquidity and Capital Resources

The Company does not currently have a capital budget as it does not have authority to operate the Kern Bluff Oil Field.

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As of September 30,2019, the Company had $62,539of current assets. The following table provides detailed information about the net cash flow for the nine months ended September 30, 2019 and September 30, 2018 as presented in this quarterly report. To date, we have financed our operations through the issuance of stock and borrowings from related parties and an unrelated third party.

The following table sets forth a summary of our cash flows for the nine months ended September 30, 2019 and 2018:

	Nine Months Ended September 30,
	2019			2018
Net cash used in operating activities	$	(207,430	)	$	(529,037	)
Net cash used in investing activities		(26,704	)		(1,258,533	)
Net cash provided by financing activities		153,434			1,322,848
Net change in cash and restricted cash		(80,700	)		(464,722	)
Cash and restricted cash, beginning of period		286,441			972,103
Cash and restricted cash, end of period	$	205,741		$	507,381

Operating activities

The net loss in the period was greater than the non-cash adjustments to reconcile the changes in the consolidated balance sheet and consolidated statement of operations, which is the reason cash used in operating activities was negative.

Investing activities

The net cash used in investing activities consisted of drilling expenses and facility upgrades on oil and gas properties of $26,704 on the Company’s properties.

Financing activities

The net cash provided by financing activities for the three- and nine-month period ended September 30, 2019, consisted of proceeds from three unsecured bridge loans from a related party, Round Rock Development Partners, L.P., totaling $119,000 and proceeds from preferred stock offering in the amount of $100,000.

The Company made payments of $45,660 in the nine-month period ended September 30, 2019 to auto loans and the financing of insurance premiums.

As of September 30, 2019, we continue to use traditional and/or debt financing as well as through the issuance of stock to provide the capital we need to run our business.

Without cash flow from operations we will require additional cash resources, including the sale of equity or debt securities, to meet our planned capital expenditures and working capital requirements for the next 12 months. We will require additional cash resources due to changed business conditions, implementation of our strategy to successfully develop our Kern Bluff Oil Field, and/or acquisitions we may decide to pursue. If our own financial resources and then current cash-flows from operations are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities will result in dilution to our stockholders. The incurrence of indebtedness will result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations or modify our plans to grow the business. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, will limit our ability to expand our business operations and could harm our overall business prospects.

 -16-

Our ability to obtain additional capital through additional equity and/or debt financing, and Joint Venture or Working Interest partnerships will also be important to our expansion plans. In the event we experience any significant problems assimilating acquired assets into our operations or cannot obtain the necessary capital to pursue our strategic plan, we may have to reduce the growth of our operations. This may materially impact our ability to increase revenue and develop our assets. 

Contractual Obligations

An operating lease for rental office space was entered into beginning March 1, 2013 for two years at $2,150 per month. The original lease was amended to include additional space at a price of $1,100 per month for the same term.  The original term of the lease expired on March 1, 2015. As such our office lease is now on a month to month basis at a rate of $3,000 per month.

Off-Balance Sheet Arrangements

As of the date of this report, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Operation Plan

Our plan is to focus on the acquisition and drilling of prospective oil and natural gas mineral leases. Once we have tested a prospect as productive, subject to availability of capital, we will implement a development program with a regional operating focus in order to increase production and increase returns for our stockholders. Exploration, acquisition and development activities are currently focused in California. Depending on availability of capital, and other constraints, our goal is to increase stockholder value by finding and developing oil and natural gas reserves at costs that provide an attractive rate of return on our investments.

We expect to achieve these results by:

• Investing capital in exploration and development drilling and in secondary and tertiary recovery of oil as well as natural gas;

• Using the latest technologies available to the oil and natural gas industry in our operations;

• Finding additional oil and natural gas reserves on the properties we acquire.

In addition to raising additional capital we plan to take on Joint Venture (JV) or Working Interest (WI) partners who may contribute to the capital costs of drilling and completion and then share in revenues derived from production. This economic strategy may allow us to utilize our own financial assets toward the growth of our leased acreage holdings, pursue the acquisition of strategic oil and gas producing properties or companies and generally expand our existing operations.

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Our future financial results will depend primarily on: (i) the ability to continue to source and screen potential projects; (ii) the ability to discover commercial quantities of natural gas and oil; (iii) the market price for oil and natural gas; and (iv) the ability to fully implement our exploration and development program, which is dependent on the availability of capital resources. There can be no assurance that we will be successful in any of these respects, that the prices of oil and gas prevailing at the time of production will be at a level allowing for profitable production, or that we will be able to obtain additional funding to increase our currently limited capital resources.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

This item is not applicable as we are currently considered a smaller reporting company.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, Philip McPherson, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based on that evaluation and assessment, Mr. Philip McPherson concluded that our disclosure controls and procedures are not designed at a reasonable assurance level and are not effective to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 -18-

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

 Various lawsuits, claims and other contingencies arise in the ordinary course of the Company’s business activities. While the ultimate outcome of the aforementioned contingencies are not determinable at this time, management believes that any liability or loss resulting therefrom will not materially affect the financial position, results of operations or cash flows of the Company.

Item 1A. Risk Factors.

Our significant business risks are described in Item 1A. to Part I of Form 10-K for the year ended December 31, 2018 (filed April 16, 2019) to which reference is made herein.

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

Stock Issuances pursuant to Subscription Agreements 

In March of 2017, the Company filed the appropriate paperwork with the State of Nevada, authorizing the issuance of up to 500,000 shares of Series A Preferred Stock, 500,000 shares of Series B Preferred Stock and 500,000 shares of Series C Preferred Stock. The Company also increased the authorized amount of common shares from 100,000,000 to 300,000,000. As of September 30, 2019, we have issued 400,615 of Series A Preferred Shares, and zero shares of Series B or C.

We believe that the issuance and sale of the above securities were exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2), Regulation D and/or Regulation S. The securities were issued directly by us and did not involve a public offering or general solicitation. The recipient of the securities was afforded an opportunity for effective access to files and records of our company that contained the relevant information needed to make her investment decision, including our financial statements and 34 Act reports. We reasonably believed that the recipient, immediately prior to issuing the securities, had such knowledge and experience in our financial and business matters that she was capable of evaluating the merits and risks of its investment. The recipient had the opportunity to speak with our management on several occasions prior to her investment decision. There were no commissions paid on the issuance and sale of the shares.

Option Grants

Our option grants are described in Form 10-K for the period ended December 31, 2018 to which reference is made herein.

Subsequent Stock Issuances

None.

Issuer Purchases of Equity Securities

We did not repurchase any of our equity securities from the time of our inception on November 6, 2006 through the period ended September 30, 2019.

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Item 3. Defaults Upon Senior Securities.

The Company is currently in default on its Senior Secured Lending Facility in the amount of $2,350,000. 

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

2012 Stock Incentive Plan

On September 1, 2012, we adopted the 2012 Stock Incentive Plan. We have reserved for issuance an aggregate of 10,000,000 shares of common stock under our 2012 Stock Incentive Plan. To date 10,000,000 options and no shares of common stock have been granted under this plan.

Our employment agreements with executive officers are described in Form 10-K for the year ended December 31, 2018 (filed April 16, 2019) to which reference is made herein.

 -20-

Item 6. Exhibits.

Exhibit No.	Description
10.4	2012 Stock Incentive Plan
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase
101.DEF*	XBRL Taxonomy Extension Definition Linkbase
101.LAB*	XBRL Taxonomy Extension Label Linkbase
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase

*       XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 -21-

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CITADEL EXPLORATION, INC.
Date: November 19, 2019	By:	/s/ Philip McPherson
		Philip McPherson
		Interim CEO & Chief Financial Officer
		(Principal Executive Officer and duly authorized signatory)

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