U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ]☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitionthe definitions of “large accelerated filer”,filer,” “accelerated filer” and, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act (checkAct. (Check one):
Item 1. Financial Statements
FieldPoint Petroleum Corporation (the “Company”, “FieldPoint”, “our”, or “we”) is incorporated under the laws of the state of Colorado. The Company is engaged in the acquisition, operation and development of oil and natural gas properties, which are located in Louisiana, New Mexico, Oklahoma, Texas, and Wyoming.
The condensed consolidated financial statements included herein 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 U.S. generally accepted accounting principles have been condensed or omitted. However, in the opinion of management, all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the financial position and results of operations for the periods presented have been made. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Form 10-K filing for the year ended December 31, 2015.2016.
Our ability to continue as a “going concern” is dependent on many factors, including, among other things, our ability to comply with the covenants in our existing debt agreements, our ability to cure any defaults that occur under our debt agreements or to obtain waivers or forbearances with respect to any such defaults, and our ability to pay, retire, amend, replace or refinance our indebtedness as defaults occur or as interest and principal payments come due. Our ability to continue as a going concern is also dependent on raising additional capital to fund our operations and ultimately on generating future profitable operations. While we are actively involved in seeking new sources of working capital, there can be no assurance that we will be able to raise sufficient additional capital or to have positive cash flow from operations to address all of our cash flow needs. Additional capital could be on terms that are highly dilutive to our shareholders. If we are not able to find alternative sources of cash or generate positive cash flow from operations, our business and shareholders may be materially and adversely affected.
Basic earnings per share are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share take common stock equivalents (such as options and warrants) into consideration using the treasury stock method. The Company had 7,177,010 and 7,911,726 warrants outstanding with an exercise price of $4.00 at June 30, 2016March 31, 2017 and 2015, respectively.2016. The dilutive effect of the warrants for the three and six months ended June 30,March 31, 2017 and 2016, and 2015 is presented below.
6.
6. Income Taxes
In November 2015, the FASB issued Accounting Standards Update No. 2015-17 – Balance Sheet Classification of Deferred Taxes that simplifies the presentation of deferred income taxes on the balance sheet. Under the new standard, deferred tax assets and liabilities are classified as noncurrent on the balance sheet. This new update is effective for financial statements issued for fiscal years beginning after December 15, 2016 (and interim periods within those fiscal years), with early adoption permitted and allows prospective or retrospective application. The Company adopted this accounting standard update prospectively as of January 1, 2016. The adoption of this standard had no impact on the consolidated balance sheet as of June 30, 2016, or December 31, 2015.
For the three and six months ended June 30,March 31, 2017 and 2016, the Company’s deferred tax assets were reduced in full by a valuation allowance due to our determination that it is more likely than not that some or all of the deferred tax assets will not be realized in the future. As a result, the Company has not recognized an income tax benefit associated with its net loss for the three or six months ended June 30,March 31, 2017 or 2016. For the three and six months ended June 30, 2015, the tax provision is approximately 29% and 32%, respectively, of book income before tax. The rate for the three months ended June 30, 2015, differed slightly from the statutory federal and state rates due primarily to permanent differences in book and taxable income related to the warrant modification expense. The rate for the six months ended June 30, 2015, differed slightly from the statutory federal and state rates due primarily to permanent differences in book and taxable income related to the warrant modification expense and stock compensation expense.
The Company has a line of credit with a bank with a borrowing base of $5,500,000 at June 30, 2016,March 31, 2017, and December 31, 2015.2016. The amount outstanding under this line of credit was $6,478,333 which is $978,333 over the borrowing base at June 30, 2016,March 31, 2017, and December 31, 2015.2016. The Company’s plans to cure the borrowing base deficiency are discussed in Note 2 - Liquidity and Going Concern.
The sixth amendment to the original loan agreement requires quarterly interest-only payments until maturity on October 18, 2016.January 1, 2018. The interest rate is based on a LIBOR or Prime option. The Prime option provides for the interest rate to be prime plus a margin ranging between 1.75% and 2.25% and the LIBOR option to be the 3-month LIBOR rate plus a margin ranging between 2.75% and 3.25%, both depending on the borrowing base usage. Currently, we have elected the LIBOR interest rate option in which our interest rate was approximately 4% as of June 30, 2016,March 31, 2017, and December 31, 2015,2016, respectively. The commitment fee is .50% of the unused borrowing base. Citibank is in a first lien position on all our properties and assets.
The line of credit provides for certain financial covenants and ratios which include a current ratio that cannot be less than 1.10:1.00, a leverage ratio that cannot be more than 3.50:1.00, and an interest coverage ratio that cannot be less than 3.50:1.00. The Company is out of compliance with all three ratios as of June 30,March 31, 2017, and December 31, 2016, and is in technical default of the agreement. We continue to negotiate with Citibank for an amended credit agreement and waiver of covenants that they may not grant. Unless and until such amendment or waiver is granted, Citibank could require us to pay off the note and we would need to secure alternative financing in the debt or equity market which, may or may not be available on reasonable terms. Citibank is in a first lien position on all of our properties.
AsIn October 2016, we executed a result ofsixth amendment to the redetermination oforiginal loan agreement, which provides for Citibank’s forbearance from exercising remedies relating to the credit base,current defaults including the Company hadprincipal payment deficiencies. The Forbearance Agreement runs through January 1, 2018, and requires that we make a borrowing base deficiency in$500,000 loan principal pay down by September 30, 2017, and adhere to other requirements including weekly cash balance reports, quarterly operating reports, monthly accounts payable reports and that we pay all associated legal expenses. Furthermore, under the agreement Citibank may sweep any excess cash balances exceeding a net amount of $1,495,000 on December 1, 2015. As an election under$800,000 less equity offering proceeds, which will be applied towards the Loan Agreement, the Company agreed to pay and cure the deficiency in three equal monthly installments of $498,333 each, due on December 31, 2015, January 31, 2016 and February 29, 2016. We made our first required deficiency payment in the amount of $516,667 on December 29, 2015. However, we did not make the required deficiency payments in January or February 2016. As of June 30, 2016, our loan balance is $6,478,333 and our borrowing base deficiency $978,333.outstanding principal balance.
There were 7,177,010 warrants with an exercise price of $4.00 outstanding at June 30, 2016.March 31, 2017. There have been no warrants issued or exercised during the sixthree months ended June 30, 2016.March 31, 2017. The weighted average expected life of the warrants was 2.25 years1.00 year at DecemberMarch 31, 2015, and was 1.75 years at June 30, 2016.2017.
As a signing bonus to his “at will” employment agreement, Phillip Roberson, as President and CFO, is entitled to receivereceived a total of 50,000 shares of common stock, of which 10,000 shares were immediately vested in 2014 and 20,000 shares vested in 2015. An additional 10,000 shares were vested and issued on January 1, 2016. The remaining 10,000 shares vested at the last six-month anniversary date on July 1, 2016. The fair value of this stock grant was $275,000 on July 1, 2014, of which $6,875 and $13,750 was recognized as non-cash stock compensation expense during the three and six months ended June 30, 2016, respectively. There is no remaining future expense relatedMarch 31, 2016. The signing bonus grant was fully vested on July 1, 2016. Mr. Roberson will be entitled to this stock grant after June 30, 2016.
receive, as part of his annual compensation, on his third anniversary date 5,000 shares, on his fourth anniversary date 6,000 shares, on his fifth anniversary date 7,000 shares, on his sixth anniversary date 8,000 shares, on his seventh anniversary date 9,000 shares, and each annual anniversary date thereafter 10,000 shares.
9. Subsequent EventsOn February 5, 2016, the Company filed Form S-3 Registration Statement Under the Securities Act of 1933 with the Securities and Exchange Commission in anticipation of an at the market (ATM) offering. The Form S-3 was effective August 15, 2016, allowing the Company to offer and sell from time to time up to $20,000,000 of its shares of common stock, par value $0.01, warrants, convertible debt securities, debt securities, right or units or any combination of these securities, in one or more transactions on terms to be determined at the time of sale.
On August 12, 2016, the Company entered into a binding agreementStock and Mineral Purchase Agreement (the “SMPA”) with HFT Enterprises, LLC (the “Buyer”) in order to provide liquidity to the Company. The closing date will be on or before September 30, 2016. The Buyer will purchase in two equal tranches, a number ofpurchased newly-issued shares of common stock of the Company equal to 19.9% of the total number of issued and outstanding shares of the Company, as measured on the date of the Agreement, for a price of $0.45 per share (theshare. In November 2016, the Buyer purchased for gross proceeds of $398,053 paid in consideration of 884,564 shares of unregistered common stock. In December 2016, the Buyer purchased for gross proceeds of $199,027 paid in consideration of 442,282 shares of unregistered common stock. The remaining 442,282 shares were purchased in January 2017, for gross proceeds of $199,027 paid in consideration of 442,282 shares of unregistered common stock. Costs incurred by the Company to be purchased,issue the “Shares”). The first tranche will be purchased atstock was $11,807 for the closing date and the second tranche will be purchased by Decemberquarter ended March 31, 2016.2017. The shares will beare restricted shares that are also not registered under the Securities Act of 1933, as amended (the “Securities Act”), and therefore the Buyer must hold the Shares indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. Also on
The SMPA also granted to the Closing Date,Buyer, a related party after the Company will grantpurchase of the stock discussed above, the right to purchase an undivided 100% working interest on or before December 31, 2016, in the Company'sCompany’s Elkhorn and JC Kinney leases in the Big Muddy Oil Field in Converse County, Wyoming for a purchase price of $430,000. The SMPA was amended on January 9, 2017, to add the right to the Buyer to purchase an undivided 100% of working interest in the mineral lease covering the Quinoco Sulimar Field in Chaves County, New Mexico, in lieu of the Wyoming property, for a purchase price to be determined. Additionally, it extended the purchase date of either property to on or before April 1, 2017. The Board of Directors voted March 24, 2017, to extend the agreement for the Quinoco Sulimar Field only to June 30, 2017. As a contingencycondition of the purchase, all proceeds from the sale of the Lease Interestworking interest must be used to pay down the Company'sCompany’s indebtedness owed to Citibank. Other contingenciesconditions include the requirement that Citibank will have agreed with the Company that they willto extend the maturity date on the Company'sCompany’s current indebtedness owed until December 31, 2017, with interest payments due only and no principal payments due during such period.which was accomplished in the Forbearance Agreement discussed above. Also, the Buyer will havehas been granted the right to nominate one member of the Board of Directors.
On April 28, 2017, the Company received notification from the NYSE MKT that it was noncompliant with the NYSE MKT continued listing standards; specifically, Section 1003(a)(ii) of the Company Guide. The Company’s stockholders’ equity has been below the $2.0 million threshold required for listed companies that have reported losses from continuing operations in two of its three most recently completed fiscal years (Section 1003(a)(i)) and is now below the $4.0 million threshold required for listed companies that have reported losses from continuing operations in three of its four most recent fiscal years (Section 1003(a)(ii)).
The Company has previously submitted a plan to the Exchange to regain compliance with Section 1003(a)(i) by November 13, 2017, which plan has been accepted by the Exchange. The Company is now required to supplement the plan no later than May 30, 2017, to address how it intends to regain compliance with Section 1003(a)(ii). If the supplemented Plan is accepted, the Company may be able to continue its listing but will be subject to periodic reviews by the Exchange. If the supplemented plan is not accepted or if it is accepted but the Company is not in compliance with the continued listing standards by November 13, 2017, or if the Company does not make progress consistent with the Plan, the Exchange will initiate delisting procedures as appropriate.
PART I
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company’s Condensed Consolidated Financial Statements, and respective notes thereto, included elsewhere herein. The information below should not be construed to imply that the results discussed herein will necessarily continue into the future or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of the management of FieldPoint Petroleum Corporation.
General
FieldPoint Petroleum Corporation derives its revenues from its operating activities including sales of oil and natural gas and operating oil and natural gas properties. The Company's capital for investment in producing oil and natural gas properties has been provided by cash flow from operating activities and from bank financing. The Company categorizes its operating expenses into the categories of production expenses and other expenses.
The Company has temporarily suspended drilling and exploration activities due to low commodity prices and has no near-term plans at this time to drill a fourth well in the East Lusk field in New Mexico or continue development of the Taylor Serbin field. Furthermore, we plan to limit any remedial work that does not increase production and reduce general and administrative costs as much as possible until commodity pricing improves. As we are out of compliance with our revolving line of credit and may have our borrowing base has been decreased, we do not expect to reinstate our drilling programs until commodity prices and our cash flow improve.
Going concern
We have incurred net losses of $587,433$409,051 and $1,447,960$860,527 for the three and six months ended June 30,March 31, 2017 and 2016, respectively. We expect that the Company will continue to experience operating losses and negative cash flow for so long as commodity prices remain depressed. Our financial statements for the fiscal years ended December 31, 20152016 and 2014,2015, include an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern. The financial statements have been prepared "assuming that the Company will continue as a going concern." Our ability to continue as a going concern is dependent on raising additional capital to fund our operations and ultimately on generating future profitable operations. We have filed an amendeda new shelf registration statement on Form S-3 that is not yetwhich was declared effective and, pending approval by the SEC thison August 15, 2016, which will permit the future sale of equity securities, including a limited at the market (ATM) capital raise. We are investigating other sources of capital. There can be no assurance that we will be able to raise sufficient additional capital or have positive cash flow from operations to address all of our cash flow needs. If we are not able to find alternative sources of cash or generate positive cash flow from operations, our business and shareholders may be materially and adversely affected.
On August 12, 2016, the Company entered into a binding Stock and Mineral Purchase Agreement (the “SMPA”) with HFT Enterprises, LLC (the “Buyer”) in order to provide liquidity to the Company. The Buyer purchased newly-issued shares of common stock of the Company equal to 19.9% of the total number of issued and outstanding shares of the Company, as measured on the date of the Agreement, for a price of $0.45 per share (the shares to be purchased, the “Shares”). In November 2016, the Buyer purchased for gross proceeds of $398,053 paid in consideration of 884,564 shares of unregistered common stock. In December 2016, the Buyer purchased for gross proceeds of $199,027 paid in consideration of 442,282 shares of unregistered common stock. The remaining 442,282 shares were purchased in January 2017, for gross proceeds of $199,027 paid in consideration of 442,282 shares of unregistered common stock. Euro Pacific Capital, Inc. acted as the placement agent and garnered a fee of 5%.
The SMPA also granted to the Buyer, a related party after the purchase of the stock discussed above, the right to purchase an undivided 100% working interest on or before December 31, 2016, in the Company’s Elkhorn and JC Kinney leases in the Big Muddy Oil Field in Converse County, Wyoming for a purchase price of $430,000. The SMPA was amended on January 9, 2017, to add the right to the Buyer to purchase an undivided 100% of working interest in the mineral lease covering the Quinoco Sulimar Field in Chaves County, New Mexico, in lieu of the Wyoming property, for a purchase price to be determined. Additionally, it extended the purchase date of either property to on or before April 1, 2017. The Board of Directors voted March 24, 2017, to extend the agreement for the Quinoco Sulimar Field only to June 30, 2017. As a condition of the purchase, all proceeds from the sale of the working interest must be used to pay down the Company’s indebtedness owed to Citibank. Other conditions include the requirement that Citibank will have agreed to extend the maturity date on the Company’s current indebtedness owed until December 31, 2017, which was accomplished in the Forbearance Agreement discussed above. Also, the Buyer has been granted the right to nominate one member of the Board of Directors.
On May 11, 2016, the Company received notification from the NYSE MKT that it was noncompliant with the NYSE MKT continued listing standards; specifically, Section 1003(a)(i) of the Company Guide related to financial impairment. The Company's stockholders'Company’s stockholders’ equity is below the $2.0 million threshold required for listed companies that have reported losses from continuing operations in two of its three most recently completed fiscal years.The Company had 30 days to submitsubmitted a plan to regain compliance; whereupon NYSE Regulation reviewed the plan and determined to accept it, as supplemented, and granted a plan period through November 13, 2017, to regain compliance, the targeted completion date. NYSE Regulation staff will review the Company periodically for compliance with the initiatives outlined in the plan.
Additionally, on April 28, 2017, the Company received notification from the NYSE MKT that it was noncompliant with the NYSE MKT continued listing standards; specifically, Section 1003(a)(ii) of the Company Guide. The Company’s stockholders’ equity has been below the $2.0 million threshold required for listed companies that have reported losses from continuing operations in two of its three most recently completed fiscal years (Section 1003(a)(i)) and is now below the $4.0 million threshold required for listed companies that have reported losses from continuing operations in three of its four most recent fiscal years (Section 1003(a)(ii)). The Company is now required to supplement the plan to regain compliance no later than May 30, 2017 to address how it intends to regain compliance with Section 1003(a)(ii). If the supplemented plan is accepted, the Company may be able to continue its listing but will be subject to periodic reviews by the Exchange. If the supplemented plan is not accepted or if it is accepted but the Company is not in compliance with the continued listing standards by the targeted completion date of November 13, 2017, or if the Company does not make progress consistent with the plan duringPlan, the plan period, NYSE Regulation staffExchange will initiate delisting proceedingprocedures as appropriate. If our initiatives to regain compliance are not successful and the Company is delisted from the NYSE MKT, it could have a significant adverse impact on our ability to raise additional capital.
The Company’s plans to mitigate our current financial situation and more details about the SMPA are discussed in Note 2 - Liquidity and Going Concern in the financial statements for the quarter ended March 31, 2017.
Results of Operations
Comparison of three months ended June 30, 2016,March 31, 2017, to the three months ended June 30, 2015March 31, 2016
| | | |
| | | | | |
| Revenue: | | |
| Oil sales | $700,516 | $1,064,687 | $720,673 | $517,201 |
| Natural gas sales | 50,519 | 82,442 | 94,055 | 51,538 |
| Total oil and natural gas sales | $751,035 | $1,147,129 | $814,728 | $568,739 |
| | | |
| Sales volumes: | | |
| Oil (Bbls) | 17,740 | 20,074 | 14,938 | 17,202 |
| Natural gas (Mcf) | 24,214 | 28,549 | 30,001 | 29,857 |
| Total (BOE) | 21,776 | 24,832 | 19,938 | 22,179 |
| | | |
| Average sales prices: | | |
| Oil ($/Bbl) | $39.49 | $53.04 | $48.24 | $30.07 |
| Natural gas ($/Mcf) | 2.09 | 2.89 | 3.14 | 1.73 |
| Total ($/BOE) | $34.49 | $46.20 | $40.86 | $25.64 |
| | | |
Costs and expenses ($/BOE) | | |
| Production expense (lifting costs) | $31.28 | $29.05 | $35.71 | $29.77 |
| Depletion and depreciation | 14.13 | 17.87 | 7.85 | 14.42 |
| Accretion of discount on asset retirement obligations | 1.24 | 1.09 | 1.30 | 1.22 |
| General and administrative | 13.29 | 11.41 | 14.24 | 16.93 |
| Total | $59.94 | $59.42 | $59.10 | $62.34 |
Oil and natural gas sales revenues decreased 35%increased 43% or $396,094$245,989 to $751,035$814,728 for the three months ended June 30, 2016,March 31, 2017, from the comparable 20152016 period. Average oil sales prices decreased 26%increased 60% to $39.49$48.24 for the three months ended June 30, 2016,March 31, 2017, compared to $53.04$30.07 for the period ended June 30, 2015.March 31, 2016. Average natural gas sales prices decreased 28%increased 82% to $2.09$3.14 for the three months ended June 30, 2016,March 31, 2017, compared to $2.89$1.73 for the period ended June 30, 2015.March 31, 2016. Decreased oil and natural gas production accounted for a decrease in revenue of approximately $136,000. Lower$68,000. Higher commodity prices for oil and natural gas accounted for a decreasean increase in revenue of approximately $260,000.$314,000. We have temporarily suspended drilling and exploration activity due to low commodity prices and expect our volumes to decline in the coming quarters unless or until drilling and exploration activities are re-established.
Production expense decreased 6%increased 8% or $40,281$51,600 to $681,089$711,875 for the three months ended June 30, 2016,March 31, 2017, from the comparable 20152016 period. This was primarily due to a decreasean increase in non-criticalunexpected workover activity, operating costs and production taxes. Lifting costs per BOE increased $2.23$5.94 to $31.28$35.71 for the 20162017 period compared to $29.05$29.77 for the three months ended June 30, 2015,March 31, 2016, due mainly to additionalincreased workover activity and general increases in costs incurred to settle asset retirement liabilities in the three months ended June 30, 2016.and lease operating expenses. We anticipate lease operating expenses to remain stabledecline slightly over the following quarters due to a cessation of new well activity as a result of low commodity pricing.
Depletion and depreciation decreased 31%51% or $136,000$163,246 to $307,800$156,554 for the three months ended June 30, 2016,March 31, 2017, versus $443,800$319,800 in the 20152016 comparable period. This was primarily due to a lower depletable base and lower production volumes during the three months ended June 30, 2016.March 31, 2017.
General and administrative overhead costs increased 2%decreased 24% or $6,058$91,429 to $289,365$284,008 for the three months ended June 30, 2016,March 31, 2017, from the three months ended June 30, 2015.March 31, 2016. This was primarily attributable to an increasea decrease in consultingsalaries and professional services. At this time, the Company anticipates general and administrative expenses to remain stable or decrease slightly in the coming quarters.
Other expense, net for the quarter ended June 30, 2016,March 31, 2017, was $62,759$69,040 compared to other expense, net of $71,962$62,728 for the quarter ended June 30, 2015. The net decrease in otherMarch 31, 2016. Interest expense was primarily due to the warrant modification expense of $66,124 offset by a realized gain on commodity derivatives of $25,234$69,054 and an unrealized gain on commodity derivatives of $24,000 in$62,840 for the three months ended June 30, 2015.
Results of Operations
Comparison of Six Months Ended June 30,March 31, 2017 and 2016, to the Six Months Ended June 30, 2015
| | Six Months Ended June 30, |
| | | |
| Revenues: | | |
| Oil sales | $1,217,717 | $2,058,684 |
| Natural gas sales | 102,057 | 178,802 |
| Total | $1,319,774 | $2,237,486 |
| | | |
| Sales volumes: | | |
| Oil (Bbls) | 34,942 | 41,768 |
| Natural gas (Mcf) | 54,071 | 62,882 |
| Total (BOE) | 43,954 | 52,248 |
| | | |
| Average sales prices | | |
| Oil ($/Bbl) | $34.85 | $49.29 |
| Natural gas ($/Mcf) | 1.89 | 2.84 |
| Total ($/BOE) | $30.03 | $42.82 |
| Costs and expenses ($/BOE) | | |
| Production expense (lifting costs) | $30.52 | $29.49 |
| Depletion and depreciation | 14.28 | 18.19 |
| Exploration expense | - | 0.30 |
| Accretion of discount on asset retirement obligations | 1.23 | 1.01 |
| General and administrative | 15.12 | 12.57 |
| Total | $61.15 | $61.56 |
Oil and natural gas sales revenues decreased 41% or $917,712 to $1,319,774 for the six months ended June 30, 2016, from $2,237,486 for the comparable 2015 period. An overall decrease in oil and natural gas production accounted for a decrease in revenue of approximately $362,000 while a decrease in oil and natural gas commodity prices decreased revenue by approximately $556,000. Sales volumes decreased 16% on a BOE basis primarily due to production depletion which was not replaced due to a cessation of drilling activity. Average oil sales prices decreased $14.44 to $34.85 for the six months ended June 30, 2016, compared to $49.29 for the six months ended June 30, 2015. Average natural gas sales prices decreased 34% to $1.89 for the six months ended June 30, 2016, compared to $2.84 for the six months ended June 30, 2015. We anticipate volumes to decrease in the coming quarters primarily due to suspension of drilling and exploration activity due to low commodity prices and expect our volumes to decline in the coming quarters unless or until drilling and exploration activities are re-established.
Production expense decreased 13% or $199,399 to $1,341,364 for the six months ended June 30, 2016, from the comparable 2015 period. This was primarily due to a general decrease in workover and remedial activity and generally lower costs and lease operating expenses. Lifting costs per BOE increased 3%, from $29.49 to $30.52 for the 2016 period mainly due to additional costs incurred to settle asset retirement liabilities in the six months ended June 30, 2016. We anticipate lease operating expenses to remain stable over the following quarters due to a continued decrease of workover and remedial activity.
Depletion and depreciation expense decreased 34% to $627,600, compared to $950,600 for the comparable 2015 period. This was primarily due to a decrease in production.
General and administrative overhead cost increased 1% or $8,168 to $664,802 for the six months ended June 30, 2016, from the six months ended June 30, 2015. This was attributable primarily to an increase in salary expenses and professional services. In the coming quarters we anticipate general and administrative expenses to remain stable or decrease slightly.
Other expense, net for the six months ended June 30, 2016, amounted to $125,487 compared to other expense, net of $128,665 for the comparable 2015 period. A realized gain of $25,234 and an unrealized gain of $24,000 on commodity derivatives was reported during the six months ended June 30, 2015. Warrant modification expense of $66,124 was reported during the six months ended June 30, 2015.respectively.
Liquidity and Capital Resources
Cash flow used in operating activities was $552,146$67,811 for the sixthree months ended June 30, 2016,March 31, 2017, as compared to $247,122$342,345 of cash flow provided byused in operating activities in the comparable 20152016 period. The decrease in cash flows from operating activities was primarily due to a greatersmaller net loss.
loss in 2017.
Cash flow used in investing activities was $79,469$262,148 for the sixthree months ended June 30, 2016,March 31, 2017, and $109,278$60,257 in the comparable 20152016 period due to fewermore additions to oil and natural gas properties and equipment in the current period.
Cash flow was provided by financing activities due to the net proceeds of $187,220 from the issuance of 442,282 shares of unregistered stock during the three months ended March 31, 2017. No cash flow was provided by or used in financing activities for the sixthree months ended June 30, 2015 orMarch 31, 2016.
We are out of compliance with the current ratio, leverage ratio, and interest coverage ratio required by our line of credit as of June 30, 2016,March 31, 2017, and are in technical default of the agreement. We continueIn October 2016, we executed a sixth amendment to negotiate withthe original loan agreement, which provides for Citibank’s forbearance from exercising remedies relating to the current defaults including the principal payment deficiencies. The Forbearance Agreement runs through January 1, 2018, and requires that we make a $500,000 loan principal pay down by September 30, 2017, and adhere to other requirements including weekly cash balance reports, quarterly operating reports, monthly accounts payable reports and pay all associated legal expenses. Furthermore, under the agreement Citibank for an amended credit agreement and waivermay sweep any excess cash balances exceeding a net amount of covenants that they may not grant. Unless and until such amendment or waiver is granted, Citibank could require us to pay off$800,000 less equity offering proceeds, which will be applied towards the note and we would need to secure alternative financing in the debt or equity market which, may or may not be available on reasonable terms. Citibank is in a first lien position on all of our properties.outstanding principal balance.
On May 11, 2016, the Company received notification from the NYSE MKT that it was noncompliant with the NYSE MKT continued listing standards; specifically, Section 1003(a)(i) of the Company Guide related to financial impairment. The Company's stockholders'Company’s stockholders’ equity is below the $2.0 million threshold required for listed companies that have reported losses from continuing operations in two of its three most recently completed fiscal years. The Company had 30 days to submitsubmitted a plan to regain compliance; whereupon NYSE Regulation reviewed the plan and determined to accept it, as supplemented, and granted a plan period through November 13, 2017, to regain compliance, the targeted completion date. NYSE Regulation staff will review the Company periodically for compliance with the initiatives outlined in the plan.
Additionally, on April 28, 2017, the Company received notification from the NYSE MKT that it was noncompliant with the NYSE MKT continued listing standards; specifically, Section 1003(a)(ii) of the Company Guide. The Company’s stockholders’ equity has been below the $2.0 million threshold required for listed companies that have reported losses from continuing operations in two of its three most recently completed fiscal years (Section 1003(a)(i)) and is now below the $4.0 million threshold required for listed companies that have reported losses from continuing operations in three of its four most recent fiscal years (Section 1003(a)(ii)). The Company is now required to supplement the plan to regain compliance no later than May 30, 2017 to address how it intends to regain compliance with Section 1003(a)(ii). If the supplemented plan is accepted, the Company may be able to continue its listing but will be subject to periodic reviews by the Exchange. If the supplemented plan is not accepted or if it is accepted but the Company is not in compliance with the continued listing standards by the targeted completion date of November 13, 2017, or if the Company does not make progress consistent with the plan duringPlan, the plan period, NYSE Regulation staffExchange will initiate delisting proceedingprocedures as appropriate. If our initiatives to regain compliance are not successful and the Company is delisted from the NYSE MKT, it could have a significant adverse impact on our ability to raise additional capital.
Subsequent Events
On April 28, 2017, the Company received notification from the NYSE MKT that it was noncompliant with the NYSE MKT continued listing standards; specifically, Section 1003(a)(ii) of the Company Guide. The Company’s stockholders’ equity has been below the $2.0 million threshold required for listed companies that have reported losses from continuing operations in two of its three most recently completed fiscal years (Section 1003(a)(i)) and is now below the $4.0 million threshold required for listed companies that have reported losses from continuing operations in three of its four most recent fiscal years (Section 1003(a)(ii)).
The Company has previously submitted a plan to the Exchange to regain compliance with Section 1003(a)(i) by November 13, 2017, which plan has been accepted by the Exchange. The Company is now required to supplement the plan no later than May 30, 2017, to address how it intends to regain compliance with Section 1003(a)(ii). If the supplemented Plan is accepted, the Company may be able to continue its listing but will be subject to periodic reviews by the Exchange. If the supplemented plan is not accepted or if it is accepted but the Company is not in compliance with the continued listing standards by November 13, 2017, or if the Company does not make progress consistent with the Plan, the Exchange will initiate delisting procedures as appropriate.
PART I
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We periodically enter into certain commodity price risk management transactions to manage our exposure to oil and natural gas price volatility. These transactions may take the form of futures contracts, swaps or options. All data relating to our derivative positions is presented in accordance with authoritative guidance. Accordingly, unrealized gains and losses related to the change in fair value of derivative contracts that qualify and are designated as cash flow hedges are recorded as other comprehensive income or loss and such amounts are reclassified to oil and natural gas sales revenues as the associated production occurs. Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at fair value in the consolidated balance sheet, and the associated unrealized gains and losses are recorded as current expense or income in the consolidated statement of operations. While such derivative contracts do not qualify for hedge accounting, management believes these contracts can be utilized as an effective component of commodity price risk management activities. There were no commodity positions open at June 30,March 31, 2017 or 2016. On May 13, 2015, we entered into a commodity derivative position effective June 1, 2015. The collars had a floor of $55.00 per barrel and a ceiling of $70.00 for 200 barrels of oil per day from June 1, 2015, to December 31, 2015. We had a realized gain of $25,234 and a net unrealized gain of $24,000 on commodity derivative transactions during the six months ended June 30, 2015.
PART I
Item 4. CONTROLS AND PROCEDURES
a)
Disclosure Controls and Procedures
Our Principal Executive Officer, Roger D. Bryant, and our Principal Financial Officer, Phillip H. Roberson, have established and are currently maintaining disclosure controls and procedures for the Company. The disclosure controls and procedures have been designed to provide reasonable assurance that the information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure.
The Principal Executive Officer and the Principal Financial Officer conducted a review and evaluation of the effectiveness of the Company’s disclosure controls and procedures and have concluded, based on their evaluation as of the end of the period covered by this Report, that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed 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 rules and forms of the SEC and to ensure that information required to be disclosed by the Company is accumulated and communicated to management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure and we refer you to Exchange Act Rule 13a-15(e).
b)
Changes in Internal Control over Financial Reporting
There have been no changes to the Company’s system of internal controls over financial reporting during the quarter ended June 30, 2016,March 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s system of controls over financial reporting. As part of a continuing effort to improve the Company’s business processes, management is evaluating its internal controls and may update certain controls to accommodate any modifications to its business processes or accounting procedures.
c)
Limitations of Any Internal Control Design
Our principal executive and financial officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive and financial officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the 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. Because of 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 the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
None.
Item 2. Unregistered Sales of Equity Securities and Use ofProceeds
None.None, except as previously disclosed on Current Reports on Form 8-K.
Item 3. Default Upon Senior Securities
Our line of credit provides for certain financial covenants and ratios which include a current ratio that cannot be less than 1.10:1.00, a leverage ratio that cannot be more than 3.50:1.00, and an interest coverage ratio that cannot be less than 3.50:1.00. The Company is out of compliance with all three ratios as of June 30, 2016,March 31, 2017, and is in technical default of the agreement. We continue to negotiate with Citibank for an amended credit agreement and waiver of covenants that they may not grant. Unless and until such amendment or waiver is granted, Citibank could require us to pay off the note and we would need to secure alternative financing in the debt or equity market which, may or may not be available on reasonable terms. Citibank is in a first lien position on all of our properties.
As a result of the redetermination of the credit base, the Company had a borrowing base deficiency in the amount of $1,495,000 on December 1, 2015. As an election under the Loan Agreement, the Company agreed to pay and cure the deficiency in three equal monthly installments of $498,333 each, due on December 31, 2015, January 31, 2016 and February 29, 2016. We made our first required deficiency payment in the amount of $516,667 on December 29, 2015. However, we did not make the required deficiency payments in January or February 2016. As of June 30, 2016,March 31, 2017, our loan balance is $6,478,333 and our borrowing base deficiency $978,333. The Company’s plans to cure the borrowing base deficiency are discussed in Note 2 – Liquidity and Going Concern.
In October 2016, we executed a sixth amendment to the original loan agreement, which provides for Citibank’s forbearance from exercising remedies relating the current defaults including the principal payment deficiencies. The Forbearance Agreement runs through January 1, 2018, and requires that we make a $500,000 loan principal pay down by September 30, 2017, and adhere to other requirements including weekly cash balance reports, quarterly operating reports, monthly accounts payable reports and that we pay all associated legal expenses. Furthermore, under the agreement Citibank may sweep any excess cash balances exceeding a net amount of $800,000 less equity offering proceeds, which will be applied towards the outstanding principal balance. We are currently in compliance with the agreement, however the Agreement was supplemented by a closing letter agreement to allow the Company time to pay the associated legal costs and solidify the Deposit/Withdraw at Custodian Agreements (“DEWAC”) as provided for in the Forbearance Agreement. Citibank is in a first lien position on all of our properties and assets.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
| Exhibits | Exhibits
|
| | | |
| 31.1 | Certifications of Chief Executive Officer |
| 31.2 | Certifications of Chief Financial Officer |
| 32.1 | Certification of Chief Executive Officer Pursuant to U.S.C. Section 1350 |
| 32.2 | Certification of Chief Financial Officer Pursuant to U.S.C. Section 1350 |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Schema Document |
| 101.CAL | XBRL Calculation Linkbase Document |
| 101.LAB | XBRL Label Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
| 101.DEF | XBRL Definition Linkbase Document |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | |
Date: AugustMay 15, 20162017
| By: | /s/ Roger D. Bryant
| |
| | | Roger D. Bryant Principal | |
| | Executive Officer | |
| | |
| | | | |
Date: AugustMay 15, 20162017
| By:
| /s/ Phillip H. Roberson
| |
| | | Phillip H. Roberson Principal Financial Officer | |
| | | Principal Financial Officer | |