Results of Operations
The following provides selected financial information and averages for the three and nine months ended September 30, 2016 and 2015:
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Three months ended
September 30,
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Nine months ended
September 30,
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2016
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2015
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2016
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2015
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Revenue
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Crude Oil
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$
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41,839
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$
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$
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41,839
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$
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1,328
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Natural Gas
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33,328
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33,328
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NGLs
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11,990
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11,990
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Total revenue
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$
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87,157
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$
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$
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87,157
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$
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1,328
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Total production expense(1)
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$
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64,716
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$
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12,971
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$
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70,309
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$
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19,907
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Gross profit (loss)
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$
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22,441
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$
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(12,971
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)
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$
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16,848
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$
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(18,579
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)
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Depletion expense
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$
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23,525
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$
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$
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23,525
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$
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9,898
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Sales volume(2)
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Oil (Bbls)
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1,016
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1,016
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36
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Natural Gas (Mcfs)
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14,158
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14,158
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NGLs (Bbls)
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779
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779
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BOE
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4,155
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4,155
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36
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Average sales price(3)
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Oil (per Bbl)
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$
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41.18
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$
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$
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41.18
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$
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36
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Natural Gas (per Mcf)
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$
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2.35
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$
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$
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2.35
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$
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NGLs (per Bbl)
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$
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15.39
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$
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$
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15.39
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$
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BOE
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$
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20.98
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$
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$
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20.98
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$
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36
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Average per BOE
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Production expense
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$
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15.57
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$
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$
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16.92
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$
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544.50
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Gross profit (loss)
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$
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5.40
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$
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$
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4.05
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$
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(508.18
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)
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Depletion expense
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$
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5.66
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$
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$
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5.66
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$
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270.73
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(1)
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Overall
lifting cost (oil and gas production costs, including production taxes).
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(2)
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Estimates
of volumes are inherent in reported volumes to coincide with revenue accruals as a result of the timing of sales information reporting by third party
operators.
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(3)
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Averages
calculated based upon non-rounded figures.
Three Months Ended September 30, 2016 Compared to September 30, 2015
Overview:
Our net loss for the three months ended September 30, 2016 was $1,152,045, or $0.05 per share, compared to net
loss of $298,251 or
$0.02 per share for the three months ended September 30, 2015. The increase in net loss of $853,794 in the 2016 period resulted primarily from an increase in general and administrative expenses
of $713,794, and an increase in interest expense of $78,952.
Revenues:
Crude oil and natural gas sales revenue was $87,157 for the three months ended September 30, 2016, compared to
sales revenue of $nil
for the three months ended September 30, 2015. The increase in crude oil and natural gas sales revenue in the 2016 period resulted from our acquisition of the PDC assets in June 2016 and the
revenue from the vertical wells located on that property. Our Buck Peak prospect wells remained off-line during the third quarter of 2016.
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Table of Contents
Volumes and Prices:
Crude oil and natural gas sales volumes increased 4,155 bbls or 100% for the three months ended
September 30, 2016,
compared to the three months ended September 30, 2015, as we had no production in the prior period. The increase in crude oil and natural gas sales volumes in the 2016 period resulted from our
acquisition of the PDC assets in June 2016.
Production Expense:
Production expense is comprised of the following items:
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Three months ended
September 30,
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2016
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2015
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Lease operating costs
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$
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34,923
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$
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12,971
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Production taxes
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5,453
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Transportation and other costs
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24,340
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Total
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$
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64,716
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$
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12,971
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Total
production expense increased $51,745 or 399% for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015. The increase in
lease operating costs relates primarily to the acquisition of the PDC assets.
Routine
lease operating expense ("LOE"), consisting of field personnel, fuel/power, chemicals, disposal, transportation and other costs, per BOE was $14.26 and $nil for the three months
ended September 30, 2016 and 2015, respectively.
General and administrative expenses:
We incurred general and administrative expenses of $980,870 during the three months ended
September 30,
2016 compared to $267,076 in the three months ended September 30, 2015, representing an increase of $713,794, or 267%. This increase in the current period is primarily attributable to an
increase in share-based compensation expense of $298,185 (a non-cash expense), to $378,870, as compared to $80,685 in the prior period; an increase in salary and wage expense of $123,305, or 132%,
primarily related to the hiring of new employees; an increase in professional services fees of $171,607, or 110%, relating to our status as a public company; directors fees; and an increase in
insurance costs of $33,191, or 1,265%. Since the beginning of 2016, we have added to our personnel to assist in managing our recently-acquired properties and anticipated drilling programs.
Depreciation, depletion, amortization, and accretion:
Depreciation, depletion, amortization, and accretion
increased $38,058 or 3,784% to $39,064 for the three months ended September 30, 2016, compared to $1,006 for the three months ended September 30, 2015. The increase relates primarily to
higher depletion expense and increased accretion of our asset retirement obligations for the third quarter of 2016.
Loss on impairment of oil and gas properties:
Impairment expense increased to $9,841 or 100% for the three months ended
September 30, 2016,
compared to $nil for the three months ended September 30, 2015.
Interest income (expense):
During the three months ended September 30, 2016, we recognized interest income of $33 compared
to $7 in the three
months ended September 30, 2015. During the three months ended September 30, 2016, we recognized interest expense of $96,157 compared to $17,205 in the three months ended
September 30, 2015, an increase of 459%. The increased interest expense recognized in the current period relates to the higher outstanding balance on our initial line of credit, which totaled
$5.0 million as of September 30, 2016.
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Table of Contents
Nine Months Ended September 30, 2016 Compared to September 30, 2015
Overview:
Our net loss for the nine months ended September 30, 2016 was $2,793,052, or $0.13 per share, compared to a net
loss of $755,016 or
$0.04 per share for the nine months ended September 30, 2015. The increase in net loss of $2,038,036 in the 2016 period resulted primarily from an increase in general and administrative
expenses of $1,840,202, and to a lesser extent, an increase in interest expense of $125,109.
Revenues:
Crude oil and natural gas sales revenue was $87,157 for the nine months ended September 30, 2016, compared to
$1,328 for the nine
months ended September 30, 2015. The increase in crude oil and natural gas sales revenue in the 2016 period resulted from our acquisition of the PDC assets in June 2016. Our Buck Peak prospect
wells remained off-line during the third quarter of 2016.
Volumes and Prices:
Crude oil and natural gas sales volumes increased 4,155 Bbls or 11,453% for the nine months ended
September 30, 2016,
compared to the nine months ended September 30, 2015. The increase in crude oil and natural gas sales volumes in the 2016 period resulted from our acquisition of the PDC assets in June 2016.
Production Expense:
Production expense is comprised of the following items:
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Nine months ended
September 30,
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2016
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2015
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Lease operating costs
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$
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34,844
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$
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19,862
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Production taxes
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10,925
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(11
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)
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Transportation and other costs
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24,540
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56
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Total
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$
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70,309
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$
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19,907
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Total
production expense increased $50,402, or 253%, for the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015. The increase in
lease operating costs relates primarily to our operation of the wells we acquired from PDC, partially offset by keeping our Buck Peak wells offline during the first nine months of 2016.
Routine
lease operating expense ("LOE"), consisting of field personnel, fuel/power, chemicals, disposal, transportation and other costs per BOE was $14.29 and $544.80 for the nine months
ended September 30, 2016 and 2015, respectively.
General and administrative expenses:
We incurred general and administrative expenses of $2,535,789 during the nine months ended
September 30,
2016 compared to $695,587 in the nine months ended September 30, 2015, representing an increase of $1,840,202 or 265%. This increase is primarily attributable to an increase in total share
based compensation expense to $1,093,854 in the current period as compared to $80,685 in the same 2015 period, an increase of $1,013,169; an increase in salary and wage expense of $270,104, or 124%,
primarily related to the hiring of new employees; and an increase in professional services fees of $349,356, or 107%, related to our status as a public company; and increases in insurance costs of
$63,146, or 176%.
Depreciation, depletion, amortization, and accretion:
Depreciation, depletion, amortization, and accretion increased $30,510 or
236% to $43,425 for
the nine months ended September 30, 2016, compared to $12,915 for the nine months ended September 30, 2015. The increase resulted primarily from increased depletion expense and accretion
of our asset retirement obligations related to the newly acquired wells.
Loss on impairment of oil and gas properties:
Impairment expense increased $26,880 or 100% for the nine months ended
September 30, 2016,
compared to $nil for the nine months ended
21
Table of Contents
September 30,
2015. This increase is attributable to additional impairment on our Buck Peak prospect wells.
Interest income (expense):
During the nine months ended September 30, 2016, we recognized interest income of $534 compared
to $9 in the nine
months ended September 30, 2015. During the nine months ended September 30, 2016, we recognized interest expense of $153,053 compared to $27,944 in the nine months ended
September 30, 2015, an increase of 448%. The interest expense recognized in the current period relates to the accrued interest on the outstanding balance on our initial line of credit.
Liquidity and Capital Resources
Overview
To date, we have generated essentially all of our capital resources through the sale of common stock, prospect fees received from working
interest partners, drilling advances from working interest partners, and advances under our lines of credit. During the nine months ended September 30, 2016, we received $95,000 in proceeds
from the sale of our common stock through a private placement and borrowed approximately $3.9 million under our initial line of credit. To date, we have generated nominal cash from operations
and negative cash flows from operating activities.
We
have fully drawn our initial line of credit with Providence, and as of November 14, 2016, we have $5.0 million of principal plus accrued interest of approximately
$250,000 outstanding. On October 13, 2016, we entered into a Revolving Line of Credit Facility Agreement (the "supplemental line of credit") with Providence Energy Partners III, LP ("PEP
III"), which is an affiliate of Providence by virtue of having some common management personnel. The supplemental line of credit permits us to borrow up to $10.0 million to pay costs associated
with our acquisition and development of oil and gas properties in the Wattenberg Field. Interest accrues at the rate of 8% per year and monthly interest-only payments are due beginning upon the
advancement of funds under the supplemental line of credit and monthly thereafter. All principal and accrued interest under the supplemental line of credit is due and payable on April 13, 2017.
As of November 16, 2016, we have $1.87 million of principal plus accrued interest outstanding against our supplemental line of credit.
Beginning
June 30, 2016, we began generating revenue and cash flow from the 34 currently producing wells we acquired as part of the PDC assets. These well produce approximately
62.5 BOE/D, net to our interest. We also expect to begin recognizing revenue from our non-operated Jacobucci pad properties in the second quarter of 2017. We anticipate that oil produced from our
Wattenberg properties,
including the PDC assets, will be sold at spot prices to third-parties, minus a discount from the current WTI price.
Our
lines of credit provide us capital to pay for development and additional drilling and leasing activities. The amount we invest in development, drilling, and leasing activities
depends on, among other factors, opportunities presented to us and the success of any fundraising efforts. The most significant of our future capital requirements include (i) costs to drill or
participate in additional wells; (ii) costs to acquire additional acreage that we may identify in the Southern Core area or other areas that we may identify; (iii) approximately $200,000
per month for salaries and other corporate overhead; and (iv) legal and accounting fees associated with our status as a public company required to file reports with the SEC. We anticipate
funding these projected capital requirements with cash on hand, revenue from operations, proceeds from the sale of common stock, and/or the supplemental line of credit.
Working Capital
As of September 30, 2016, we had negative working capital of $(85,594), comprised of current assets of $2,285,904 and current liabilities
of $2,371,498. Working capital decreased by $3,197,083 from
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Table of Contents
December 31,
2015, due to cash used in operations and the acquisition of crude oil and natural gas properties and related assets. Our supplemental line of credit, cash on hand, and anticipated
revenue from our producing wells provide us with additional liquidity to operate our business, and we believe that we have sufficient liquidity and capital for the next 12 months. On
August 12, 2016, we filed a registration statement on Form S-1 with the SEC, through which we are seeking to raise up to $27 million. If we are unsuccessful in raising additional working
capital, we may have to reduce or abandon planned drilling projects and other acquisitions.
During
the nine months ended September 30, 2016 we sold 95,000 shares of our common stock through a private placement for proceeds of $95,000. During the nine months ended
September 30, 2016 we borrowed $3,937,815 against our initial line of credit on various dates to pay for our share of our acquisitions of crude oil and natural gas properties and to fund
general and administrative expenses related to the acquisition. Subsequent to September 30, 2016, we have borrowed $1.87 million against our supplemental line of credit to pay costs and
expenses in connection with our development and acquisition of oil and gas properties.
Cash Flows
Nine months ended September 30, 2016 compared to September 30, 2015
Operating Activities
Net
cash used in operating activities during the nine months ended September 30, 2016 was $403,569 compared to $631,876 during the nine months ended
September 30, 2015, representing a decrease of $228,307. A significant increase in our net loss for the 2016 period and an increase in prepaid expenses were partially offset by non-cash expense
of $1.1 million from share based compensation, and a significant increase in accounts payable, among other items.
Investing Activities
Net
cash used in investing activities during the nine months ended September 30, 2016 was $5,544,069 compared to $938,471 during the nine months ended
September 30, 2015, representing an increase of $4,605,598. During the 2016 period, we recorded net acquisitions of $3,399,783 related to the acquisition of crude oil and natural gas
properties, including the acquisition of the PDC Assets for $2,260,890; additions of $16,417 in furniture, fixtures and equipment; and development of crude oil and natural gas properties of
$2,127,869. During the 2015 period, we recorded net acquisitions of $806,416 related to the acquisition of crude oil and natural gas properties in our Todd Creek Farms prospect, $nil in additions of
furniture, fixtures and equipment, and $132,055 for our share of the development of our properties.
Financing Activities
During
the nine months ended September 30, 2016, we borrowed $3,937,815 on the initial line of credit from Providence, compared to borrowing on the initial line
of credit of $1,890,000 during the nine months ended September 30, 2015. As of September 30, 2016, the initial line of credit was fully drawn. Subsequent to September 30, 2016, we
have borrowed an additional $1,870,000 under the supplemental line of credit.
During
the nine months ended September 30, 2016, we sold 95,000 shares of our common stock at $1.00 per share for gross proceeds of $95,000. During the nine months ended
September 30, 2015, we sold 340,000 shares of our common stock at $1.00 per share for gross proceeds of $340,000, less offering costs of $325,425 pursuant to our public offering.
Off-Balance Sheet Arrangements
We have no significant off balance sheet transactions, arrangements or obligations.
23
Table of Contents
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
This report contains or incorporates by reference "forward-looking statements," as that term is used in federal securities laws, about our
financial condition, results of operations, and business. These statements include, among others:
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Statements about our anticipated operated and non-operated drilling programs, the cost and feasibility related to such, receipt of permits or
other regulatory approvals, and plans for the development of our properties;
-
-
Statements concerning the benefits or outcomes that we expect from our business activities and certain transactions that we contemplate or have
completed, such as the receipt of proceeds, increased revenues, decreased expenses and avoided expenses and expenditures; and
-
-
Other statements of expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical
facts.
The
words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "will," "would" and similar words or expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these identifying words. Forward-looking statements and information are necessarily based upon a number of estimates and assumptions
that, while considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties, risks and contingencies, and there can be no assurance that
such statements and information will prove to be accurate. Therefore, actual results and future events could differ materially from those anticipated in such statements and information. We caution you
not to put undue reliance on these statements, which speak only as of the date of this report. Further, the information contained in this document or incorporated herein by reference is a statement of
our present intention and is based on present facts and assumptions, and may change at any time and without notice, based on changes in such facts or assumptions. Readers should not place undue
reliance on forward-looking statements.
The
important factors that could affect the accuracy of forward-looking statements and prevent us from achieving our stated goals and objectives include, but are not limited
to:
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-
Changes in the general economy affecting the disposable income of the public;
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-
Changes in environmental law, including federal, state and local legislation;
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-
Changes in drilling requirements imposed by state or local laws or regulations;
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Terrorist activities within and outside the United States;
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-
Technological changes in the crude oil and natural gas industry;
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-
Acts and omissions of third parties over which we have no control;
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-
Changes in operating, exploration, development or overhead costs;
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-
Inflation and the costs of goods or services used in our operation;
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-
Access and availability of materials, equipment, supplies, labor and supervision, power, and water;
-
-
Interpretation of drill hole results and the uncertainty of reserve estimates;
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-
The availability of sufficient pipeline and other transportation facilities to carry our production and the impact of these facilities on
price;
-
-
The level of demand for the production of crude oil and natural gas;
-
-
Changes in our business strategy;
24
Table of Contents
-
-
Potential failure to achieve production from development drilling projects; and
-
-
Capital expenditures.
Those
factors discussed above, elsewhere in this report, and in other reports filed with the Securities and Exchange Commission are difficult to predict and expressly qualify all
subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. In light of these risks, uncertainties and assumptions, the forward-looking events discussed
may not occur. We do not have any intention or obligation to update forward-looking statements included in this report after the date
of this report, except as required by law. The preceding outlines some of the risks and uncertainties that may affect our forward-looking statements.