U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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 ☑☒ 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):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
☒
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.
In October 2016, we executed a sixth amendment to the 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 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 currentlyThe Company paid $2,115,000 toward the principal balance in compliance with the agreement, however the Agreement was extended 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.June 2017.
To mitigate our current financial situation, we are taking the following steps. We are actively meeting with investors for possible equity investments, including business combinations. We have filed a new shelf registration statement on Form S-3 that was effective August 15, 2016, to permit the future sale of equity securities, including a limited at the market (ATM) capital raise. The shelf registration statement will be effective for a period of three years from its effective date; provided, however, if the Company’s common stock is delisted from the NYSE American (formerly NYSE MKT) due to its non-compliance with continued listing requirements (see disclosures below), the Company will no longer be eligible to use Form S-3 and will be required to withdraw its shelf registration statement. We are investigating other sources of capital. As reported in Note 10 – Subsequent Events, on
On August 12, 2016, the Company entered into a binding Stock and Mineral Purchase agreementAgreement (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 pursuantequal to which19.9% 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 3, 2016, we soldthe Buyer purchased for gross proceeds of $398,053 paid in a private placement an aggregateconsideration of 884,564 shares of unregistered common stockstock. In December 2016, the Buyer purchased for gross proceeds of $393,054.$199,027 paid in consideration of 442,282 shares of unregistered common stock. The remaining 442,282 shares of the second tranche 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. The agreement has been verbally extended to August 31, 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 American (formerly NYSE MKT) that it was noncompliant with the NYSE American (formerly NYSE MKT) continued listing standards; specifically, Section 1003(a)(i) of the Company Guide related to financial impairment. The 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 submitted 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 American (formerly NYSE MKT) that it was noncompliant with the NYSE American (formerly 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 was given the opportunity to and submitted a supplement to the Plan to address how it intends to regain compliance with Section 1003(a)(ii). The Plan period to regain compliance with all of the continued listing standards by November 13, 2017, remain the same. The Company will be subject to periodic reviews by the Exchange. If 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. If our initiatives to regain compliance are not successful and the Company is delisted from the NYSE American (formerly NYSE MKT), it could have a significant adverse impact on our ability to raise additional capital.
Our warrants listed on the NYSE American (formerly NYSE MKT) as FPP WS expire March 23, 2018. If the warrants trade at sub-penny before that date, the NYSE will immediately suspend and move to delist the warrants.
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.
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) of the Company Guide related to financial impairment. The 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 submitted 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. If 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 during the plan period, NYSE Regulation staff will initiate delisting proceeding 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.
3.
Recently Issued Accounting Pronouncements
TheIn May 2014, the FASB issued ASU 2016-09 “Compensation – Stock Compensation” simplifyingAccounting Standards Update No. 2014-09, “Revenue from Contracts with Customers”. Under this new standard, revenue is recognized at the time goods or services are transferred to a customer for the amount of consideration the entity expects to be entitled in exchange for the specific goods or services. Additional disclosures will be required to describe the nature, amount, timing, and uncertainty of revenue and cash flows from contracts with customers. The Company currently follows the sales method of accounting for share-based payment transactions includingoil, NGL and natural gas production, which is generally consistent with the income tax consequences, classificationrevenue recognition provision of awards as either equity or liabilities and classification on the statements of cash flows. Under the new standard, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit onstandard. However, we are currently evaluating the statements of income. Under current GAAP, excess tax benefits are recognized in additional paid-in capital while tax deficiencies are recognized either as an offset to accumulated excess tax benefits,impact, if any, orthat this standard will have on our consolidated financial statements. Our evaluation process includes (i) review of revenue contracts and transactions and (ii) assessing the statements of income. The new accountingimpact this guidance is effective for annual periods beginning after December 15, 2016. Early adoption is permitted in any interim or annual period. Certain provisions require retrospective/modified retrospective transition while otherswill have on our processes and internal controls. This evaluation will continue throughout 2017, and we are to be applied prospectively. Management planscurrently planning to adopt ASU 2016-09 effectivethis new standard January 1, 2017. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
2018.
In February 2016, the FASB issued Update No. 2016-02, – Leases“Leases”, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This authoritative guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company is currently evaluating the provisions of this guidance and assessing its impact in relation to the Company's leases.
In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs", which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability, consistent with the presentation of a debt discount. The guidance is effective on a retrospective basis for annual periods beginning after December 15, 2015, including interim periods within that reporting period, with early adoption permitted. The Company adopted this accounting standard update as of January 1, 2016. The Company did not have any debt issuance costs at January 1,November 2016, and the adoption of the updated standard had no effect on our consolidated financial statements and related disclosures.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15 – Presentation2016-18, “Statement of Financial Statements – Going Concern that requires managementCash Flows: Restricted Cash”, to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continuerequire amounts generally described as a going concern within one year after the date that the entity’s financial statements are issued, or within one year after the date that the entity’s financial statements are availablerestricted cash and restricted cash equivalents to be issued,included with cash and to provide disclosurescash equivalents when certain criteria are met. Thisreconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for the annual period ending after December 15, 2016, and for annual periods2017, and interim periods thereafter. Early application is permitted.within those fiscal years, using a retrospective transition method to each period presented. The Company is currently evaluatingplans to adopt the provisionsnew standard December 31, 2017, and does not expect any impact on our consolidated statement of this guidance and assessing its impact.cash flows.
4. Oil and Natural Gas Properties
No wells were drilled or completed during the three or ninesix months ended SeptemberJune 30, 20162017 or 2015.2016.
In the three months ended June 30, 2017, the Company sold its net interest in the Hermes, Cronos and Mercury wells. These wells were not economic to our interests. We also sold our net interest in the unproved Bilbrey acreage that was held by production. The gross proceeds from the sale of our net interest in these properties was $2,145,000 and we recognized a gain of $2,030,477. We continue to evaluate our portfolio for other properties to divest in order to regain compliance with our bank’s debt covenants and with the NYSE American (formerly NYSE MKT).
On a quarterly basis, the Company compares our most recent engineering reports to currentforward strip pricing as of the end of the quarter and production to determine impairment charges, if needed, in order to write down the carrying value of certain properties to fair value. In order to determine the amounts of the impairment charges, the Company compares net capitalized costs of proved oil and natural gas properties to estimated undiscounted future net cash flows using management's expectations of economically recoverable proved reserves. If the net capitalized cost exceeds the undiscounted future net cash flows, the Company impairs the net cost basis down to the discounted future net cash flows, which is management's estimate of fair value. In order to determine the fair value, the Company estimates reserves, future operating and development costs, future commodity prices and a discounted cash flow model utilizing a 10 percent discount rate. The estimates used by management for the fair value measurements utilized in this review include significant unobservable inputs, and therefore, the fair value measurements are classified as Level 3 of the fair value hierarchy. Based on its current circumstances, the Company has not recorded any impairment charges during the ninethree or six months ended SeptemberJune 30, 2016.2017.
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 warrants outstanding with an exercise price of $4.00 at SeptemberJune 30, 20162017 and 2015.2016. The dilutive effect of the warrants for the three and nine months ended SeptemberJune 30, 20162017 and 20152016, is presented below.
| | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended June 30, | For the Six Months Ended June 30, |
| | | | | | | | | |
| | | |
| Net loss | $(630,299) | $(276,289) | $(2,078,259) | $(987,215) | |
| Net income (loss) | | $1,747,186 | $(587,433) | $1,338,135 | $(1,447,960) |
| | | |
| Weighted average common stock outstanding | 8,899,992 | 8,621,410 | 8,893,386 | 8,299,139 | 10,669,229 | 8,890,101 | 10,643,571 | 8,890,046 |
| Weighted average dilutive effect of stock warrants | - | - |
| Dilutive weighted average shares | 8,899,992 | 8,621,410 | 8,893,386 | 8,299,139 | 10,669,229 | 8,890,101 | 10,643,571 | 8,890,046 |
| | | |
| Loss per share: | | |
| Earnings (loss) per share: | | |
| Basic | $(0.07) | $(0.03) | $(0.23) | $(0.12) | $0.16 | $(0.07) | $0.13 | $(0.16) |
| Diluted | $(0.07) | $(0.03) | $(0.23) | $(0.12) | $0.16 | $(0.07) | $0.13 | $(0.16) |
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 September 30, 2016, or December 31, 2015.
For the three and ninesix months ended SeptemberJune 30, 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 ninesix months ended SeptemberJune 30, 2016. The rate forFor the three and six months ended SeptemberJune 30, 2015, was approximately 36% of book2017, the Company recognized $3,846 in state income before tax and approximates the statutory federal and state rates. Theexpense, which is less than 1% income tax rate. This rate for the nine months ended September 30, 2015, was 33% and differed slightlydiffers from the statutory federal and state ratesrate due primarily to permanent differences in book and taxablenet operating losses from prior years. The Company had no income related totax expense for the warrant modification expense and stock compensation expense.three or six months ended June 30, 2016.
The Company has a line of credit with a bank with a borrowing base of $5,500,000 at SeptemberJune 30, 2016,2017, 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 September 30, 2016, and December 31, 2015.2016. During the three months ended June 30, 2017, the company sold non-producing and non-economic assets in Lea County, New Mexico, and used $2,115,000 of the proceeds to pay toward the principal balance of our line of credit to cure our borrowing base deficiency. Our loan balance is $4,363,333 as of June 30, 2017. Although our borrowing base is $5,500,000, we cannot draw additional amounts on the line of credit while we remain in technical default on the loan. We plan to continue evaluating our portfolio for non-producing assets which can be liquidated to reduce debt further.
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 SeptemberJune 30, 2016,2017, 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 SeptemberJune 30, 2017, and December 31, 2016, and is in technical default of the agreement. 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 September 30, 2016, our loan balance is $6,478,333 and our borrowing base deficiency $978,333. Citibank is in a first lien position on all of our properties and assets.
In October 2016, we executed a sixth amendment to the 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 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 currentlyThe Company paid $2,115,000 toward the principal balance in compliance with the agreement, however the Agreement was extended 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.June 2017.
There were 7,177,010 warrants with an exercise price of $4.00 outstanding at SeptemberJune 30, 2016.2017. There have been no warrants issued or exercised during the ninethree and six months ended SeptemberJune 30, 2016.2017. The weighted average expected life of the warrants was 2.25 yearsless than one year at December 31, 2015, and was 1.50 years at SeptemberJune 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 immediatelythat vested in 2014 and 20,000 shares vested in 2015. An additionalover a three year period beginning on July 1, 2014. On January 1, 2016, 10,000 shares were vested and issued on January 1, 2016.issued. The remainingfinal 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 $13,750 was recognized as non-cash stock compensation expense during the ninesix months ended SeptemberJune 30, 2016. ThereMr. Roberson was no remaining future expense related to this stock grant after June 30, 2016.
No commodity positions were outstanding at September 30, 2016, or at December 31, 2015. On May 13, 2015, we entered into the following commodity positions to hedge our oil production price risk, effective from June 1, 2015, to December 31, 2015.
| Period | | |
| | | | | |
| NYMEX –WTI Collars October 1 – December 2015 | 200 | 18,400 | $55.00 | $70.00 |
The following table summarizes the change in fair valueawarded, as part of our commodity derivatives:
| | | |
| | Income Statement | Three Months Ended September 30, | Nine Months Ended September 30, |
| | Location | | | | |
| Derivatives not designated as hedging instruments | | | | | |
| | | | | | |
| Unrealized gain (loss) on commodity derivatives | Other Income (Expense) | $- | $167,000 | $- | $191,000 |
| | | | | |
| Realized gain (loss) on commodity derivatives | Other Income (Expense) | $- | $132,298 | $- | $157,532 |
Unrealized gainshis annual compensation, on his third anniversary date 5,000 shares, and losses, at fair value, are includedwill receive on our consolidated balance sheets as current or non-current assets or liabilities basedhis fourth anniversary date 6,000 shares, on the anticipated timing of cash settlements under the related contracts. Changes in the fair value of our commodity derivative contracts are recorded in earnings as they occurhis fifth anniversary date 7,000 shares, on his sixth anniversary date 8,000 shares, on his seventh anniversary date 9,000 shares, and included in other income (expense) on our consolidated statements of operations. We estimate the fair values of collar contracts based on the present value of the difference in exchange-quoted forward price curves and contractual settlement prices multiplied by notional quantities. We internally valued the option contracts using industry-standard option pricing models and observable market inputs. We use our internal valuations to determine the fair values of the contracts that are reflected on our consolidated balance sheets. Realized gains and losses are also included in other income (expense) on our consolidated statements of operations.
We are exposed to credit losses in the event of non-performanceeach annual anniversary date thereafter 10,000 shares. Mr. Roberson’s contract was extended by the counterparties on our commodity derivatives positions and have considered the exposure in our internal valuations. However, we do not anticipate non-performance by the counterparties over the term of the commodity derivatives positions.
To estimate the fair value of our commodity derivatives positions, we use market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputsCompensation Committee to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and attempt to use the best available information. We determine the fair value based upon the hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (LevelJuly 1, measurement) and lowest priority to unobservable inputs (Level 3 measurement). The three levels of fair value hierarchy are as follows:
●
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. At September 30, 2016, we had no Level 1 measurements.
●
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Our derivatives, which consist of commodity collars, are valued using commodity market data which is derived by combining raw inputs and quantitative models and processes to generate forward curves. Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level 2. At September 30, 2016, we had no Level 2 measurements.
●
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At September 30, 2016, we had no Level 3 measurements.
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 original closing date of September 30, 2016, was extended to November 3, 2016, by mutual consent. The Buyer will purchase in two equal tranches, a number ofpurchased newly-issued restricted 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 beshare. In 2016, the Buyer purchased the “Shares”). The first tranche was purchased on November 3, 2016, for gross proceeds of $398,053$597,080 paid in consideration of 884,5641,326,846 shares of unregistered common stock. The second tranche is expectedremaining 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 by December 31, 2016. The shares are restricted shares that are also not registered underissue the Securities Act of 1933, as amended (the “Securities Act”), and thereforestock was $11,807 for 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. Euro Pacific Capital, Inc. acted as the placement agent and garnered a fee of 5%. six months ended June 30, 2017.
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. The agreement has been verbally extended to August 31, 2017. As a contingencycondition 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 contingenciesconditions 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 will havehas been granted the right to nominate one member of the Board of Directors.
On July 20, 2017, the Company announced the sale of an additional 401 net acres of non-producing leasehold in Lea County, New Mexico, for $1,200,000. The Company used $1,000,000 of the proceeds to reduce our credit line with Citibank to $3,363,333 and the additional $200,000 was reserved for general corporate purposes.
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 incurredhad net lossesincome of $630,299 and $2,078,259$1,338,135 for the three and ninesix months ended SeptemberJune 30, 2016, respectively.2017, due to the sale of non-producing and non-economic assets in Lea County, New Mexico, but continue to have negative operating cash flow. We incurred a net loss of $1,447,960 for the six months ended June 30, 2016. We expect that the Company will continue to experience operating losses and negative cash flow for so long as commodity prices remain depressed. OurThe audit report of our independent registered public accountants covering 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 a new shelf registration statement on Form S-3 which was declared effective by the SEC on 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. The agreement has been verbally extended to August 31, 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 MKTAmerican (formerly NYSE MKT) that it was noncompliant with the NYSE MKTAmerican (formerly NYSE MKT) continued listing standards; specifically, Section 1003(a)(i) of the Company Guide related to financial impairment. The 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 submitted 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 American (formerly NYSE MKT) that it was noncompliant with the NYSE American (formerly 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 was given the opportunity to and submitted a supplement to the Plan to address how it intends to regain compliance with Section 1003(a)(ii). The Plan period to regain compliance with all of the continued listing standards by November 13, 2017, remain the same. The Company will be subject to periodic reviews by the Exchange. If 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,American (formerly NYSE MKT), it could have a significant adverse impact on our ability to raise additional capital.
During the three months ended June 30, 2017, the company sold non-producing and non-economic assets in Lea County, New Mexico, and used $2,115,000 of the proceeds to pay toward the principal balance of our line of credit to cure our borrowing base deficiency. Our loan balance is $4,363,333 as of June 30, 2017. We plan to continue evaluating our portfolio for non-producing assets which can be liquidated to reduce debt further.
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 June 30, 2017.
Results of Operations
Comparison of three months ended SeptemberJune 30, 2016,2017, to the three months ended SeptemberJune 30, 20152016
| | Quarter Ended September 30, | |
| | | | | |
| Revenue: | | |
| Oil sales | $564,496 | $842,066 | $789,683 | $700,516 |
| Natural gas sales | 70,993 | 90,548 | 91,292 | 50,519 |
| Total oil and natural gas sales | $635,489 | $932,614 | $880,975 | $751,035 |
| | | |
| Sales volumes: | | |
| Oil (Bbls) | 15,288 | 19,000 | 15,776 | 17,740 |
| Natural gas (Mcf) | 30,562 | 40,021 | 31,925 | 24,214 |
| Total (BOE) | 20,382 | 25,670 | 21,096 | 21,776 |
| | | |
| Average sales prices: | | |
| Oil ($/Bbl) | $36.92 | $44.32 | $50.06 | $39.49 |
| Natural gas ($/Mcf) | 2.32 | 2.26 | 2.86 | 2.09 |
| Total ($/BOE) | $31.18 | $36.33 | $41.76 | $34.49 |
| | | |
Costs and expenses ($/BOE) | | |
| Production expense (lifting costs) | $29.84 | $31.49 | $28.24 | $31.28 |
| Depletion and depreciation | 13.14 | 18.54 | 10.12 | 14.13 |
| Exploration expense | - | 0.10 | |
| Accretion of discount on asset retirement obligations | 1.37 | 1.01 | 1.23 | 1.24 |
| General and administrative | 15.86 | 12.07 | 13.27 | 13.29 |
| Total | $60.21 | $63.21 | $52.86 | $59.94 |
Oil and natural gas sales revenues decreased 32%increased 17% or $297,125$129,940 to $635,489$880,975 for the three months ended SeptemberJune 30, 2016,2017, from the comparable 20152016 period. Average oil sales prices decreased 17%increased 27% to $36.92$50.06 for the three months ended SeptemberJune 30, 2016,2017, compared to $44.32$39.49 for the period ended SeptemberJune 30, 2015.2016. Average natural gas sales prices increased 3%37% to $2.32$2.86 for the three months ended SeptemberJune 30, 2016,2017, compared to $2.26$2.09 for the period ended SeptemberJune 30, 2015.2016. Decreased oil and natural gas production accounted for a decrease in revenue of approximately $186,000. Lower$78,000. Increased natural gas production accounted for an increase in revenue of approximately $16,000. Higher commodity prices for oil and natural gas accounted for a decreasean increase in revenue of approximately $113,000 offset approximately $2,000 by higher commodity prices for natural gas.$192,000. We have temporarily suspended drilling and exploration activity due to low commodity prices and expect our volumes to decline in the coming quarters until drilling and exploration activities are re-established.
Production expense decreased 25%13% or $200,208$85,446 to $608,252$595,643 for the three months ended SeptemberJune 30, 2016,2017, from the comparable 20152016 period. This was primarily due to a decrease in non-criticalunexpected workover activity and production taxes.operating costs. Lifting costs per BOE decreased $1.65$3.04 to $29.84$28.24 for the 20162017 period compared to $31.49$31.28 for the three months ended SeptemberJune 30, 2015,2016, due mainly to lessdecreased workover activity and general decreases in costs 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 44%31% or $208,000$94,246 to $267,800$213,554 for the three months ended SeptemberJune 30, 2016,2017, versus $475,800$307,800 in the 20152016 comparable period. This was primarily due to a lower depletable base and lower production volumes during the three months ended SeptemberJune 30, 2016.2017.
General and administrative overhead costs increased 4%decreased 3% or $13,355$9,431 to $323,223$279,934 for the three months ended SeptemberJune 30, 2016,2017, from the three months ended SeptemberJune 30, 2015.2016. 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 income, net for the quarter ended June 30, 2017, was $1,966,472, which included gain on sale of oil and natural gas properties of $2,030,477. Other expense, net for the quarter ended SeptemberJune 30, 2016, was $64,656 compared to other income, net of $234,097 for the quarter ended September 30, 2015.$62,759. Interest expense was $64,819$64,277 and $65,392$63,542 for the three months ended SeptemberJune 30, 2017 and 2016, and 2015, respectively. A realized gain on commodity derivatives of $132,298 and an unrealized gain on commodity derivatives of $167,000 were reported in the three months ended September 30, 2015.
Results of Operations
Comparison of Nine Months Ended Septembersix months ended June 30, 20162017, to the Nine Months Ended Septembersix months ended June 30, 20152016
| | Nine Months Ended September 30, |
| | | |
| Revenues: | | |
| Oil sales | $1,782,213 | $2,900,750 |
| Natural gas sales | 173,050 | 269,350 |
| Total | $1,955,263 | $3,170,100 |
| | | |
| Sales volumes: | | |
| Oil (Bbls) | 50,230 | 60,768 |
| Natural gas (Mcf) | 84,633 | 102,903 |
| Total (BOE) | 64,336 | 77,919 |
| | | |
| Average sales prices | | |
| Oil ($/Bbl) | $35.48 | $47.73 |
| Natural gas ($/Mcf) | 2.04 | 2.62 |
| Total ($/BOE) | $30.39 | $40.68 |
| | | Six Months Ended June 30, |
| | | | |
| Revenue: | | |
| Oil sales | | $1,510,356 | $1,217,717 |
| Natural gas sales | | 185,347 | 102,057 |
| Total oil and natural gas sales | | $1,695,703 | $1,319,774 |
| | | |
| Sales volumes: | | |
| Oil (Bbls) | | 30,714 | 34,942 |
| Natural gas (Mcf) | | 61,925 | 54,071 |
| Total (BOE) | | 41,035 | 43,954 |
| | | |
| Average sales prices: | | |
| Oil ($/Bbl) | | $49.18 | $34.85 |
| Natural gas ($/Mcf) | | 2.99 | 1.89 |
| Total ($/BOE) | | $41.32 | $30.03 |
| | | |
| Costs and expenses ($/BOE) | | |
| Production expense (lifting costs) | $30.30 | $30.15 | $31.86 | $30.52 |
| Depletion and depreciation | 13.92 | 18.31 | 9.02 | 14.28 |
| Exploration expense | - | 0.23 | |
| Accretion of discount on asset retirement obligations | 1.27 | 1.01 | 1.27 | 1.23 |
| General and administrative | 15.36 | 12.41 | 13.74 | 15.12 |
| Total | $60.85 | $62.11 | $55.89 | $61.15 |
Oil and natural gas sales revenues decreased 38%increased 28% or $1,214,837$375,929 to $1,955,263$1,695,703 for the ninesix months ended SeptemberJune 30, 2017, from the comparable 2016 from $3,170,100period. Average oil sales prices increased 41% to $49.18 for the comparable 2015 period. An overall decrease in oil andsix months ended June 30, 2017, compared to $34.85 for the six months ended June 30, 2016. Average natural gas sales prices increased 58% to $2.99 for the six months ended June 30, 2017, compared to $1.89 for the six months ended June 30, 2016. Decreased oil production accounted for a decrease in revenue of approximately $551,000 while a decrease in$147,000, offset by higher natural gas production of approximately $15,000. Higher commodity prices for oil and natural gas commodity prices decreasedaccounted for an increase in revenue byof approximately $664,000. Sales volumes decreased 17% 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 $12.25 to $35.48 for the nine months ended September 30, 2016, compared to $47.73 for the nine months ended September 30, 2015. Average natural gas sales prices decreased 22% to $2.04 for the nine months ended September 30, 2016, compared to $2.62 for the nine months ended September 30, 2015.$508,000. We anticipate volumes to decrease in the coming quarters primarily due to suspension ofhave 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 17%3% or $399,607$33,846 to $1,949,616$1,307,518 for the ninesix months ended SeptemberJune 30, 2016,2017, 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 1%, from $30.15 to $30.30 for the 2016 period mainly due to additional costs incurred to settle asset retirement liabilities in the nine months ended September 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 37% to $895,400, compared to $1,426,400 for the comparable 2015 period. This was primarily due to a decrease in production.unexpected workover activity and operating costs. Lifting costs per BOE increased $1.34 to $31.86 for the 2017 period compared to $30.52 for the six months ended June 30, 2016, due mainly to increased workover activity and general increases in costs and lease operating expenses. We anticipate lease operating expenses to decline slightly over the following quarters due to a cessation of new well activity as a result of low commodity pricing.
Depletion and depreciation decreased 41% or $257,492 to $370,108 for the six months ended June 30, 2017, versus $627,600 in the 2016 comparable period. This was primarily due to a lower depletable base and lower production volumes during the six months ended June 30, 2017.
General and administrative overhead cost increased 2%costs decreased 15% or $21,523$100,860 to $988,025$563,942 for the ninesix months ended SeptemberJune 30, 2016,2017, from the ninesix months ended SeptemberJune 30, 2015.2016. This was primarily attributable primarily to an increasea decrease in salary expensessalaries and professional services. InAt this time, the coming quarters we anticipateCompany anticipates general and administrative expenses to remain stable or decrease slightly.slightly in the coming quarters.
Other income, net for the six months ended June 30, 2017, was $1,897,432, which included gain on sale of oil and natural gas properties of $2,030,477. Other expense, net for the ninesix months ended SeptemberJune 30, 2016, amounted to $190,143 compared to other income, net of $105,432 for the comparable 2015 period.was $125,487. Interest expense was $191,201$133,331 and $193,271$126,832 for the ninesix months ended SeptemberJune 30, 2017 and 2016, and 2015, respectively. A realized gain of $157,532 and an unrealized gain of $191,000 on commodity derivatives was reported during the nine months ended September 30, 2015. Warrant modification expense of $66,124 was reported during the nine months ended September 30, 2015.
Liquidity and Capital Resources
Cash flow used in operating activities was $862,342$402,843 for the ninesix months ended SeptemberJune 30, 2016,2017, as compared to $592,050$552,146 of cash flow provided byused in operating activities in the comparable 20152016 period. The decrease in cash flows fromused in operating activities was primarily due to a greater net loss.the increase in oil and natural gas revenue during the six months ended 2017.
Cash flow used inprovided by investing activities was $96,618$1,818,480 for the ninesix months ended SeptemberJune 30, 2016,2017, which included proceeds of $2,145,000 from the sale of oil and $226,233natural gas properties, offset by $326,520 in the comparable 2015 period due to fewer additions to oil and natural gas properties and equipmentequipment. Cash flow used in investing activities was $79,469 for the current period.six months ended June 30, 2016, due to additions to oil and natural gas properties and equipment.
Cash flow used in financing activities was $1,927,780 primarily due to payment of $2,115,000 principal on the long term debt that was partially offset by proceeds of $187,220 from the sale of common stock during the six months ended June 30, 2017. No cash flow was provided by or used in financing activities for the ninesix months ended SeptemberJune 30, 2016. Cash flow provided by financing activities for the nine months ended September 30, 2015, was $734,716 from the exercise of 734,716 of our outstanding publicly traded common stock purchase warrants at an exercise price of $1.00 per share during the temporary modification period commencing at the opening of trading on July 6, 2015, and ending at the close of trading on August 7, 2015.
We are out of compliance with the current ratio, leverage ratio, and interest coverage ratio required by our line of credit as of SeptemberJune 30, 2016,2017, and are in technical default of the agreement. In October 2016, we executed a sixth amendment to the 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 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 currentlyThe Company paid $2,115,000 toward the principal balance in compliance with the agreement, however the Agreement was extended 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.June 2017.
On May 11, 2016, the Company received notification from the NYSE MKTAmerican (formerly NYSE MKT) that it was noncompliant with the NYSE MKTAmerican (formerly NYSE MKT) continued listing standards; specifically, Section 1003(a)(i) of the Company Guide related to financial impairment. The 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 submitted 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 American (formerly NYSE MKT) that it was noncompliant with the NYSE American (formerly 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 was given the opportunity to and submitted a supplement to the Plan to address how it intends to regain compliance with Section 1003(a)(ii). The Plan period to regain compliance with all of the continued listing standards by November 13, 2017, remain the same. The Company will be subject to periodic reviews by the Exchange. If 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,American (formerly NYSE MKT), it could have a significant adverse impact on our ability to raise additional capital.
Subsequent Events.Events
On August 12, 2016,July 20, 2017, 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 original closing date of September 30, 2016, was extended to November 3, 2016, by mutual consent. The Buyer will purchase in two equal tranches, a number of 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”). The first tranche was purchased on November 3, 2016, for gross proceeds of $398,053 paid in consideration of 884,564 shares of unregistered common stock. The second tranche is expected to be purchased by December 31, 2016. The shares are 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. Euro Pacific Capital, Inc. acted as the placement agent and garnered a fee of 5%. The SMPA also granted to the Buyer 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. As a contingency of the purchase, all proceeds fromannounced the sale of the workingan additional 401 net acres of non-producing leasehold mineral interest must bein Lea County, New Mexico, for $1,200,000. The Company used to pay down the Company’s indebtedness owed to Citibank. Other contingencies 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 will have the right to nominate one member$1,000,000 of the Board of Directors.proceeds to reduce our credit line with Citibank to $3,363,333 and the additional $200,000 was reserved for general corporate purposes. We plan to continue evaluating our portfolio for non-producing assets which can be liquidated to reduce debt further.
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 SeptemberJune 30, 2017 or 2016. On May 13, 2015, we entered into a commodity derivative position effective June 1, 2015. The collars have 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 $157,532 and a net unrealized gain of $191,000 on commodity derivative transactions during the nine month period ending September 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 SeptemberJune 30, 2016,2017, 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 of Proceeds
None.None, except as previously disclosed on Current Reports on Form 8-K.
Item 3. Default Upon Senior Securities
Our line of credit is a senior secured credit facility and 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 SeptemberJune 30, 2016,2017, and is in technical default of the agreement. 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 September 30, 2016,December 31, 2017, our loan balance iswas $6,478,333 and our borrowing base deficiency was $978,333. The Company’s plansDuring the three months ended June 30, 2017, the Company sold non-producing and non-economic assets in Lea County, New Mexico, and used $2,115,000 of the proceeds to pay toward the principal balance of our line of credit to cure theour borrowing base deficiency are discussed in Note 2 – Liquidity and Going Concern.deficiency. Our loan balance was $4,363,333 as of June 30, 2017. We plan to continue evaluating our portfolio for non-producing assets which can be liquidated to reduce debt further.
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 extendedsupplemented 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 |
| | Description
|
| | Certifications of Chief Executive Officer |
| | Certifications of Chief Financial Officer |
| | Certification of Chief Executive Officer Pursuant to U.S.C. Section 1350 |
| | 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: NovemberAugust 14, 20162017
| By: | /s/ Roger D. Bryant
| |
| | | Roger D. Bryant | |
| | | Principal Executive Officer | |
| | | |
Date: November 14, 2016 | | /s/ Phillip H. Roberson
| |
| | Phillip H. Roberson
| |
| | Principal Financial Officer | |
| | | |
| | | | |
Date: August 14, 2017
| By: | /s/ Phillip H. Roberson
| |
| | Phillip H. Roberson | |
| | Principal Financial Officer | |