UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
| T | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: March 31, 2007 |
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to _________ |
Commission file number: 0-49837
| WESTSIDE ENERGY CORPORATION |
| (Exact name of small business issuer as specified in its charter) |
| Nevada | 88-0349241 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 3131 Turtle Creek Blvd, Ste 1300, Dallas, TX | 75219 |
| (Address of principal executive officer) | (Zip Code) |
| 214/522-8990 |
| (Issuer’s telephone number) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No T
The number of shares of common stock, $.01 par value, outstanding as of May 16, 2007: 21,476,526 shares
Transitional Small Business Disclosure Format (check one): Yes o No T
WESTSIDE ENERGY CORPORATION
PERIOD ENDED MARCH 31, 2007
INDEX
| PART I. FINANCIAL INFORMATION | Page | ||
| 1 | |||
| Financial statements of Westside Energy Corporation: | 1 | ||
| 1 | |||
| 2 | |||
| 3 | |||
| 4 | |||
| 7 | |||
| 12 | |||
| PART II. OTHER INFORMATION | 12 | ||
| 12 | |||
| 12 | |||
| 13 | |||
| 13 | |||
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(unaudited)
| March 31, 2007 | December 31, 2006 | |||||||
ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 14,826,264 | $ | 5,003,803 | ||||
| Certificates of deposit and escrow account | 27,887 | 27,887 | ||||||
| Marketable securities | - | 425,000 | ||||||
| Accounts receivable | 4,432,502 | 5,189,504 | ||||||
| Derivative asset | - | 169,885 | ||||||
| Prepaid assets | 9,946 | 122,914 | ||||||
| Total current assets | 19,296,599 | 10,938,993 | ||||||
| Oil and gas properties, using successful efforts accounting | ||||||||
| Proved properties | 28,268,404 | 23,681,084 | ||||||
| Unproved properties | 8,419,772 | 10,319,150 | ||||||
| Accumulated depreciation, depletion and amortization | (11,673,530 | ) | (10,851,176 | ) | ||||
| Net oil and gas properties | 25,014,646 | 23,149,058 | ||||||
| Deferred financing costs | 325,007 | 265,907 | ||||||
| Property and equipment net of accumulated depreciation of $102,941 | 140,037 | 150,322 | ||||||
| TOTAL ASSETS | $ | 44,776,289 | $ | 34,504,280 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 6,876,418 | $ | 7,171,069 | ||||
| Short term portion of debt - related party | - | - | ||||||
| Short term portion of debt | - | 3,997,500 | ||||||
| Derivative liability | 183,521 | - | ||||||
| Total current liabilities | 7,059,939 | 11,168,569 | ||||||
| Non-current liabilities | ||||||||
| Asset retirement obligations | 166,503 | 153,487 | ||||||
Long term portion of debt - related party, net of discount of $269,206 and $0, respectively. | 24,730,794 | - | ||||||
| Long term portion of debt, net of discount of $0 and $404,325, respectively. | - | 7,609,057 | ||||||
| TOTAL LIABILITIES | 31,957,236 | 18,931,113 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred stock, $.01 par value, 10,000 shares authorized, none issued and outstanding | - | - | ||||||
| Common stock, $.01 par value, 50,000 shares authorized, 21,466,526 and 21,461,909 shares issued and outstanding | 214,665 | 214,619 | ||||||
| Additional paid in capital | 34,567,080 | 34,501,241 | ||||||
| Accumulated comprehensive income (loss) | (183,521 | ) | 169,885 | |||||
| Accumulated deficit | (21,779,171 | ) | (19,312,578 | ) | ||||
| TOTAL STOCKHOLDERS' EQUITY | 12,819,053 | 15,573,167 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 44,776,289 | $ | 34,504,280 | ||||
See accompanying notes to consolidated financial statements.
WESTSIDE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended March 31, | ||||||||
2007 | 2006 | |||||||
Revenues | ||||||||
| Oil & Gas Sales | $ | 915,227 | $ | 352,401 | ||||
Expenses | ||||||||
| Production | 498,015 | 250,268 | ||||||
| Exploration | - | 65 | ||||||
| General and administrative | 1,016,224 | 1,442,402 | ||||||
| Depreciation, depletion, and amortization | 841,651 | 175,062 | ||||||
| Total Expenses | 2,355,890 | 1,867,797 | ||||||
Loss from operations | (1,440,663 | ) | (1,515,396 | ) | ||||
Other Income (Expense) | ||||||||
| Interest income | 30,203 | 76,854 | ||||||
| Interest expense | (1,056,133 | ) | (40,793 | ) | ||||
| Total Other Income [Expense] | (1,025,930 | ) | 36,061 | |||||
| NET LOSS | $ | (2,466,593 | ) | $ | (1,479,335 | ) | ||
| Other comprehensive loss: | ||||||||
| Unrealized loss on derivative instruments | (353,406 | ) | (110,932 | ) | ||||
| Total comprehensive loss | $ | (2,819,999 | ) | $ | (1,590,267 | ) | ||
| Basic and diluted loss per common share | $ | (0.11 | ) | $ | (0.07 | ) | ||
| Weighted average common shares outstanding | 21,458,798 | 20,398,211 | ||||||
See accompanying notes to consolidated financial statements.
WESTSIDE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Three months ended March 31, | ||||||||
| 2007 | 2006 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (2,466,593 | ) | $ | (1,479,335 | ) | ||
| Adjustments to reconcile: | ||||||||
| Stock for services | 66,068 | 60,939 | ||||||
| Depreciation, depletion and amortization | 835,790 | 204,183 | ||||||
| Amortization of discount on note and deferred financing costs. | 676,093 | 8,687 | ||||||
| Amortization of deferred transaction charges | - | 5,535 | ||||||
| Changes in : | ||||||||
| Accounts receivable | 757,001 | (1,501,180 | ) | |||||
| Prepaid assets | 112,968 | (448,389 | ) | |||||
| Deferred transactions charges | (328,213 | ) | - | |||||
| Accounts payable and accrued expenses | (300,763 | ) | 1,263,287 | |||||
| NET CASH USED IN OPERATING ACTIVITIES | (647,649 | ) | (1,886,273 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash acquired on acquisition of EBS | - | 955,774 | ||||||
| Advances to EBS | - | (3,644,754 | ) | |||||
| Proceeds from sale of marketable securities | 425,000 | 525,000 | ||||||
| Capital expenditures for oil and gas properties | (2,959,803 | ) | (2,894,142 | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | (2,534,803 | ) | (5,058,122 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from loan - related party | 25,000,000 | 5,210,000 | ||||||
| Proceeds from sale of common stock, net | 15,795 | 9,678,293 | ||||||
| Payments on note | (12,010,882 | ) | - | |||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 13,004,913 | 14,888,293 | ||||||
| NET CHANGE IN CASH | 9,822,461 | 7,943,898 | ||||||
| CASH BALANCES | ||||||||
| Beginning of period | 5,003,803 | 604,411 | ||||||
| End of period | $ | 14,826,264 | $ | 8,548,309 | ||||
| SUPPLEMENTAL CASH FLOW DISCLOSURES | ||||||||
| Cash paid for interest | $ | 385,901 | $ | - | ||||
| Cash paid for income taxes | - | - | ||||||
| NON CASH DISCLOSURES | ||||||||
| Discount on note payable | $ | 269,206 | $ | 182,000 | ||||
| Change in derivative liability | $ | 294,453 | $ | (110,932 | ) | |||
| Stocks issued for deferred stock compensation | $ | 57,460 | $ | 31,666 | ||||
| Stock issued for debt | $ | - | $ | 20,000 | ||||
| Asset retirement obligation incurred | $ | 13,016 | $ | - | ||||
See accompanying notes to consolidated financial statements.
WESTSIDE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Westside Energy Corporation (“Westside”), have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in Westside's latest annual report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal year 2006, as reported in Form 10-KSB, have been omitted.
The consolidated financial statements reflect the accounts of Westside, including its wholly-owned subsidiaries from March 15, 2006, the date of the acquisition of EBS discussed in Note 7. Significant inter-company accounts and transactions have been eliminated.
NOTE 2 - STOCK-BASED COMPENSATION
On January 1, 2006, Westside adopted SFAS No. 123(R), "Share-Based Payment”. SFAS 123(R) replaced SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123 are no longer an alternative to financial statement recognition. Westside adopted SFAS 123(R) using the modified prospective method which requires the application of the accounting standard as of January 1, 2006.
Prior to 2006, Westside began issuing common stock to employees as compensation. Westside recorded as compensation expense the fair value of such shares as calculated pursuant to Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation, recognized over the related service period. Westside has no option plans for its employees. Westside accounts for stock-based compensation issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF No. 96-18, “Accounting for Equity Investments That Are Issued to Non-Employees for Acquiring, or in Conjunction with Selling Goods or Services”. For expensing purposes, the value of common stock issued to non-employees and consultants is determined based on the fair value of the services received or the fair value of the equity instruments issued, whichever value is more reliably measurable.
NOTE 3 - CONCENTRATION OF RISK
At March 31, 2007, Westside's cash in financial institutions exceeded the federally insured deposits limit by $14,476,264.
NOTE 4 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On March 17, 2006, Westside entered into swap agreements in order to provide a measure of stability to Westside's cash flows due to volatile oil and gas prices and to manage the exposure to commodity price risk.
SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of each derivative is recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. To make this determination, management formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the item, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives that are designated as cash-flow hedges to specific cash flows associated with assets and liabilities on the balance sheet or to specific forecasted transactions.
Westside also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting cash flows of hedged items. A derivative that is highly effective and that is designated and qualifies as a cash-flow hedge has its changes in fair value recorded in other comprehensive income to the extent that the derivative is effective as a hedge. Any other changes determined to be ineffective do not qualify for cash-flow hedge accounting and are reported currently in earnings.
Westside discontinues cash-flow hedge accounting when it is determined that the derivative is no longer effective in offsetting cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is redesignated as a non-hedging instrument because it is unlikely that a forecasted transaction will occur, or management determines that designation of the derivative as a cash-flow hedge instrument is no longer appropriate. In situations in which cash-flow hedge accounting is discontinued, Westside continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings.
When the criteria for cash-flow hedge accounting are not met, realized gains and losses (i.e., cash settlements) are recorded in other income and expense in the Statements of Operations. Similarly, changes in the fair value of the derivative instruments are recorded as unrealized gains or losses in the Statements of Operations. In contrast, cash settlements for derivative instruments that qualify for hedge accounting are recorded as additions to or reductions of oil and gas revenues while changes in fair value of cash flow hedges are recognized, to the extent the hedge is effective, in other comprehensive income until the hedged item is recognized in earnings.
Based on the above, management has determined that the swaps qualify for cash-flow hedge accounting treatment. For the period ended March 31, 2007, Westside recognized a derivative liability of $183,521 with the change in fair value reflected in accumulated comprehensive loss.
NOTE 5 – LONG TERM DEBT – RELATED PARTY
On March 27, 2007, Westside closed a $25 million senior secured loan from four entities managed by Wellington Management Company, LLP to replace the credit facility previously provided by GasRock Capital, LLC. Two of the lending entities are among the largest institutional holders of the Company’s outstanding shares.
As a result of this new loan agreement all previously deferred financing costs and original issue discounts associated with the loan provided by Gas Rock Capital, LLC of $670,231 have been recorded in the current period as a component of interest expense.
The new loan arrangement was provided by four private investment funds managed by Wellington Management, LLC, the largest beneficial holder of our outstanding common stock. The new loan arrangement:
| · | provided $25 million in funds, which were advanced in their entirety upon completion of the new loan arrangement; |
| · | is secured by a first lien on all of the oil and gas properties comprising our Southeast and Southwest Programs; |
| · | grants to the lenders the right to receive a lien in any and all of the proceeds received upon the sale of a property comprising our North Program or any subsequent property acquired with such proceeds; |
| · | bears annual interest at 10.0%, or (in the case of default) 12.0% annually; |
| · | grants to the lenders a three percent (3.0%) overriding royalty interest (proportionately reduced to our working interest) in all oil and gas produced from the properties now comprising our Southeast and Southwest Programs; |
| · | contains limiting operating covenants; |
| · | contains events of default arising from failure to timely repay principal and interest or comply with certain covenants; and |
| · | requires the repayment of the outstanding balance of the loan in March 2009. |
Westside has recorded a discount of $271,861 related to the conveyance of the overriding royalty interest discussed above. As of March 31, 2007, $2,655 of this discount has been amortized as a component of interest expense. Westside incurred fees and other costs directly associated with this loan agreement of $328,213, These fees have been recorded as deferred financing costs. As of March 31, 2007, $3,206 of these deferred financing costs has been amortized as a component of interest expense. Both the discount and deferred financing costs are being amortized over the expected term of the note using the effective interest method.
Westside analyzed these instruments for derivative accounting consideration under SFAS 133 and EITF 00−19 and determined that derivative accounting is not applicable.
NOTE 6 – EQUITY
Westside had the following equity transactions for the three-month period ended March 31, 2007:
| · | 10,000 warrants were exercised for proceeds of $5,000. |
| · | 7,950 shares of common stock were issued for current and future services to be earned evenly over the next three years. Westside recognized $76,863 in expenses during the first quarter for the amortization of shares issued for future compensation. |
| · | An employee who had previously been issued shares resigned form Westside resulting in the cancellation 13,333 shares previously issued for future services. |
NOTE 7 - PURCHASE OF EBS OIL AND GAS PARTNERS PRODUCTION COMPANY, L.P.
On March 15, 2006, Westside acquired EBS Oil and Gas Partners Production Company, L.P. and EBS Oil and Gas Partners Operating Company, L.P. (collectively "EBS"). The acquired EBS assets consist (in part) of rights in approximately 9,837 gross acres and an approximately one-sixth interest in Tri-County Gathering, a pipeline system serving part of the Barnett Shale area. The interest in the pipeline system was sold in November 2006 for $5,000,000.
The purchase price for the Equity Interests consisted of an initial purchase price paid at closing (the "Initial Purchase Price") and additional consideration to be paid after closing (the "Additional Consideration"). The Initial Purchase Price was set at $9,804,839, subject to certain adjustments. The adjustments included a reduction in the Initial Purchase Price for all debt owed by EBS, including (a) indebtedness in the approximate amount of $5,850,000 owed by EBS to Westside, and (b) indebtedness in the approximate amount of $1,600,000 owed by EBS to a third party. After making adjustments, Westside paid in cash at the closing approximately $151,000 to the Class B partners of EBS and an EBS payable in the amount of approximately $294,000, and Westside received a credit in the approximate amount of $1,700,000 against the future payment of the Additional Consideration. Funding for the cash paid at the closing and the retirement of the Third Party Loan was provided from Westside's available cash and by GasRock Capital LLC ("GasRock") pursuant to an Advancing Term Credit Agreement (the "Credit Agreement"). The additional consideration was resolved and finalized in 2006.
The following unaudited pro forma information assumes the acquisition of EBS occurred as of January 1, 2006. The pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the period presented.
Three month period ended March 31, 2006:
As Reported | Pro- Forma | |||||||
| Revenues | $ | 352,401 | $ | 1,021,222 | ||||
| Net Loss | $ | (1,479,335 | ) | $ | (1,519,191 | ) | ||
| Loss Per Share | $ | (0.07 | ) | $ | (0.07 | ) | ||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
General
Westside Energy Corporation is an independent natural gas and oil exploration and production company based in Dallas, Texas with operations in the Barnett Shale in the Fort Worth Basin located in north central Texas. We have been successful in identifying and acquiring acreage positions where vertical and horizontal drilling, advanced fracture stimulation and enhanced recovery technologies create the possibility of economically developing and producing natural gas and oil reserves from the Barnett Shale. We have assembled a portfolio of large, predominantly undeveloped leasehold interests in the Barnett Shale, which we believe positions us for significant long-term growth in proved natural gas and oil reserves and production. As of March 31, 2007, we owned natural gas and oil leasehold interests in approximately 76,733 gross (67,184 net) acres, approximately 96% of which are undeveloped. In addition, we owned working interests in 45 gross (15 net) wells in the Barnett Shale. We incorporated under Nevada law in November 1995 as "Eventemp Corporation," a company with activities related to the automotive industry. Following several years of business inactivity, we entered the natural gas and oil industry in February 2004 and in the following month changed our name to "Westside Energy Corporation." There can be no assurance that we will be successful in our exploration, development and production activities. The oil and gas business involves numerous risks, the principal ones of which are described in the section captioned "RISK FACTORS" in our Annual Report on Form 10-KSB for the year ended December 31, 2006.
Listed below are key Company events that have occurred in 2007 to date:
| * | We completed our first horizontal Hill County well, the Primula #1H well, in which we own a 50% interest. This well tested at a gross initial rate of 2.1 million cubic feet per day from its 1,600' productive horizontal section. |
| * | We spud our second horizontal well in Hill County, the Ellison Estate #1H, in which we own a 50% interest. This well was recently fracture stimulated and is currently flowing back natural gas and completion fluids. |
| * | The Fortenberry #2H horizontal well, in which we own a 37.5% interest, reached its target depth and was cased. This well was recently completed and is currently flowing back completion fluids and hydrocarbons at a rate of 982 MCF/D and 82 BO/D on a 33/64-inch choke. |
| * | We entered into a new loan arrangement to replace our existing credit facility provided by GasRock Capital LLC. The new loan arrangement was provided by four private investment funds managed by Wellington Management, LLC, the largest beneficial holder of our outstanding common stock. For more information about this loan arrangement, see the subsection captioned “Liquidity and Capital Resources” below. |
| * | We finalized our 2007 project budget in the amount of $15 million. This budget, primarily for activities in Hill County, is allocated as follows ($ millions): |
| Drilling: | $12 | for 8 gross / 4 net wells. | |
| Leasehold: | 2 | for acreage additions and renewals. | |
| Seismic: | 1 | for 3-D data over 12,000 gross acres. | |
| Total: | $15 |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Report. In addition to historical information, the discussion in this Report contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated by these forward-looking statements due to factors including, but not limited to, those factors set forth elsewhere in this Report and in the section captioned "RISK FACTORS" in our Annual Report on Form 10-KSB for the year ended December 31, 2006.
Results of Operations
Financial results for the three-month period ended March 31, 2007 are not directly comparable to financial results for the three-month period ended March 31, 2006. The completion of the EBS acquisition near the end of the first quarter of 2006 did not greatly affect the financial results for that quarter, but did greatly affected the financial results for subsequent quarters, including the first quarter of 2007.
Quarter Ended March 31, 2007 Compared to the Quarter Ended March 31, 2006
Revenues. Revenues from sales of oil and natural gas were $915,227 in the first quarter of 2007 as compared to $352,401 in the first quarter of 2006. This increase in revenues reflects the impact of higher sales volumes and prices for both oil and gas. Oil sales volumes increased from an average of 27 to 43 barrels per day, and average oil sales prices increased from $60.00 to $60.97 per barrel. Natural gas sales increased from an average of 466 to 1,230 thousand cubic feet (MCF) per day while average natural gas sales prices increased from $5.60 to $6.15 per MCF.
Expenses. Operating expenses increased to $2,355,890 in the first quarter of 2007 from $1,867,797 for the first quarter of 2006. This significant increase reflects the impact on expenses of higher oil and gas sales volumes in the first quarter of 2007 and increases in staff after the first quarter of 2006. Production expenses were $498,015 in the first quarter of 2007 as compared to $250,268 in the first quarter of 2006, reflecting increased production operations activities associated with the substantial increase in sales volumes as well as higher oil and gas severance taxes due to both higher volumes and prices. General and administrative expenses decreased to $1,016,224 in the first quarter of 2007 from $1,442,402 in the first quarter of 2006 primarily as a result of lower stock compensation expenses.
Depreciation, Depletion and Amortization. Depreciation, depletion and amortization costs increased to $841,651 in the first quarter of 2007 from $175,062 in the first quarter of 2006, reflecting the impact of the substantial increase in volumes of oil and natural gas produced and sold and the expensing of capitalized costs on a units-of-production basis.
Operating Loss. As a result of the above described revenues and expenses, we incurred an operating loss of $1,440,663 in the first quarter of 2007 as compared to an operating loss of $1,515,396 in the first quarter of 2006.
Other Income (Expense). Other income and expense items in the first quarter of 2007 included $30,203 in interest income and $1,056,133 in interest expense. The first quarter of 2006 results included $76,854 in interest income and $40,793 in interest expense. Interest expense increased in 2007 as a result of borrowings under the GasRock and Wellington credit facilities.
Net Loss. We incurred a net loss of $2,466,593, or $0.11 per share, for the quarter ended March 31, 2007 as compared to a net loss of $1,479,335, or $0.07 per share, for the quarter ended March 31, 2006.
Liquidity and Capital Resources
Cash and Cash Equivalents. As of March 31, 2007, we had cash, cash equivalents and marketable securities of approximately $14.9 million, representing an increase of $9.4 million from March 31, 2006.
Hedging. Under our senior secured credit facility, we were required to hedge a substantial portion of our reserves. In March 2006, we entered into swap contracts covering approximately 75% of our projected production through March 2008 from our proved developed producing reserves estimated as of December 31, 2005 based on a report prepared by LaRoche Petroleum Consultants, Ltd., a third-party engineering firm. The prices stated in the swap contracts were $8.05 per MMBtu for natural gas and $66.15 per barrel for oil. In the first quarter of 2007, we added additional hedge positons, extending from February 2007 to December 2008. The prices stated in these swap contracts was $7.45 per MMBtu of natural gas and $55.50 per barrel of oil.
Senior Secured Financing. In March 2006, we entered into a $45 million senior secured revolving credit facility with GasRock Capital LLC (“GasRock”). In connection with our acquisition of EBS Oil and Gas Partners Production Company L.P. and its affiliated operations company, we borrowed approximately $5.3 million under the GasRock credit facility for payments at closing, approximately $1.6 million to discharge certain of the acquired companies' indebtedness, and amounts for reimbursement of costs related to previous drilling and future development drilling. Subsequently, we borrowed an additional amount of approximately $10 million under the GasRock credit facility. During March 2007, we entered into a new loan arrangement to replace the GasRock facility, which was paid off and terminated. The new loan arrangement was provided by four private investment funds managed by Wellington Management, LLC, the largest beneficial holder of our outstanding common stock. The new loan arrangement:
| * | provided $25 million in funds, which were advanced in their entirety upon completion of the new loan arrangement; |
| * | is secured by a first lien on all of the oil and gas properties comprising our Southeast and Southwest Programs; |
| * | grants to the lenders the right to receive a lien in any and all of the proceeds received upon the sale of a property comprising our North Program or any subsequent property acquired with such proceeds; |
| * | bears annual interest at 10.0%, or (in the case of default) 12.0% annually; |
| * | grants to the lenders a three percent (3.0%) overriding royalty interest (proportionately reduced to our working interest) in all oil and gas produced from the properties now comprising our Southeast and Southwest Programs; |
| * | contains limiting operating covenants; |
| * | contains events of default arising from failure to timely repay principal and interest or comply with certain covenants; and |
| * | requires the repayment of the outstanding balance of the loan in March 2009. |
We continually evaluate our capital needs and compare them to our capital resources. Our budgeted project expenditures for 2007 are approximately $15.0 million and are to be used primarily for drilling and development of our properties. We expect to fund these expenditures from available cash and revenue generated during 2007 and, if necessary, from additional borrowings. The level of project expenditures is largely discretionary and the amount of funds devoted to any activity may increase or decrease depending on available opportunities, commodity prices, cash flows, development results and other considerations.
We believe that our available cash and access to additional borrowings will be sufficient to enable us to pursue our business plans for the next 12 months.
Critical Accounting Policies and Estimates
Our discussion of our financial condition and results of operations is based on the information reported in our financial statements. The preparation of our financial statements requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities as of the date of our financial statements. We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, weather, politics, global economics, mechanical problems, general business conditions and other factors. Our significant accounting policies are detailed in the footnotes to our financial statements included in this Quarterly Report. We have outlined below certain of these policies that have particular importance to the reporting of our financial condition and results of operations and that require the application of significant judgment by our management.
Key Definitions - Proved Oil and Natural Gas Reserves
Proved reserves, as defined by the SEC, are the estimated quantities of crude oil, condensate, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty are recoverable in future years from known reservoirs under existing economic and operating conditions. Valuations include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. Prices do not include the effect of derivative instruments, if any, entered into by us.
Proved developed reserves are those reserves expected to be recovered through existing equipment and operating methods. Additional oil and gas volumes expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included as proved developed reserves only after testing of a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.
Proved undeveloped reserves are those reserves that are expected to be recovered from new wells on non-drilled acreage, or from existing wells where a relatively major expenditure is required for re-completion. Reserves on non-drilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other non-drilled units are claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation.
Estimation of Reserves
Volumes of reserves are estimates that, by their nature, are subject to revision. The estimates are made using all available geological and reservoir data as well as production performance data. There are numerous uncertainties in estimating crude oil and natural gas reserve quantities, projecting future production rates and projecting the timing of future development expenditures. Natural gas and oil reserve engineering must be recognized as a subjective process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact way. Estimates of independent engineers that we use may differ from those of other engineers. The accuracy of any reserve estimate is a function of the quantity and quality of available data and of engineering and geological interpretation and judgment. Accordingly, future estimates are subject to change as additional information becomes available.
Revenue Recognition
We record natural gas and oil revenues using the entitlement method of accounting for production, in which any excess amount received by us above our share of production is treated as a liability. If we receive less than our share of production, the underproduction is recorded as an asset. We did not have an imbalance position relative to volumes or values at March 31, 2007.
Successful Efforts Accounting
We utilize the successful efforts method to account for our natural gas and oil operations. Under this method, all costs associated with natural gas and oil lease acquisitions, successful exploratory wells and all development wells are capitalized and amortized on a unit-of-production basis over the remaining life of proved developed reserves and proved reserves on a lease basis. Unproved leasehold costs are capitalized pending the results of exploration efforts. Exploration costs, including geological and geophysical expenses, exploratory dry holes and delay rentals, are expensed when incurred.
Impairment of Properties
We review our proved properties for potential impairment at the lease level when management determines that events or circumstances indicate that the recorded carrying value of any of the properties may not be recoverable. Such events include a projection of future natural gas and oil reserves that will be produced from a lease, the timing of this future production, future costs to produce the natural gas and oil, and future inflation levels. If the carrying amount of an asset exceeds the sum of the undiscounted estimated future net cash flows, we recognize impairment expense equal to the difference between the carrying value and the fair market value of the asset, which is estimated to be the expected present value of future net cash flows from proved reserves, without the application of any estimate of risk. We cannot predict the amount of impairment charges that may be recorded in the future. Unproved leasehold costs are reviewed periodically and a loss is recognized to the extent, if any, that the cost of a property has been impaired.
Stock-Based Compensation
Compensation expense has been recorded for common stock grants based on the fair value of the common stock on the measurement date. Statement of Financial Accounting Standards No. 123R, "Share-Based Payments," or "SFAS No. 123R," establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods and services. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires that the fair value of such equity instruments be recognized as expense in the historical financial statements as services are performed. SFAS No. 123R was effective for us as of the beginning of 2006 and has had no impact on our financial statements, because the only equity compensation that we have previously made is in the form of grants of common stock, which are recorded at fair value.
Forward-Looking Statements
Statements in the preceding discussion relating to future plans, projections, events, or conditions are forward-looking statements. Actual results, including production growth and capital spending, could differ materially due to changes in long-term oil or gas prices or other changes in market conditions affecting the oil and gas industry; political events or disturbances; severe weather events; reservoir performance; changes in OPEC quotas; timely completion of development projects; changes in technical or operating conditions; and other factors including those discussed herein and in the section captioned "RISK FACTORS" in our Annual Report on Form 10-KSB for the year ended December 31, 2006.
ITEM 3. CONTROLS AND PROCEDURES
We conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the "Exchange Act")). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-QSB were effective at a reasonable assurance level to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Our internal controls over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act) have improved significantly during the last two years. The improvements include the expansion of the Board of Director's on March 31, 2005 to include three independent directors, each of whom was appointed a member of the Audit Committee, and the addition to staff of a Chief Financial Officer/Principal Accounting Officer and a Controller. Systems improvements include the installation of a more robust accounting system specifically designed to meet the needs of an oil and gas company. The Audit Committee members were actively involved in reviews of the financial statements for each of the quarters since March 2005. The Chairman of the Audit Committee met with our independent auditors in May 2005, and the independent auditors met with the full Audit Committee on March 28, 2006 and March 29, 2007. The addition of a Chief Financial Officer has allowed us to enhance controls over the authorization, recording, processing and reporting of transactions. Additional accounting staff, including a Controller, joined us as a result of the EBS transaction, enhancing our ability to segregate duties and improve our internal controls. Management does not expect that our disclosure controls and procedures will prevent or detect all errors or fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, but not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not now a party to any legal proceeding requiring disclosure in accordance with the rules of the U.S. Securities and Exchange Commission. In the future, we may become involved in various legal proceedings from time to time, either as a plaintiff or as a defendant, and either in or outside the normal course of business. We are not now in a position to determine when (if ever) such a legal proceeding may arise. If we ever become involved in a legal proceeding, our financial condition, operations, or cash flows could be materially and adversely affected, depending on the facts and circumstances relating to such proceeding.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During March 2007, a stockholder of ours exercised warrants issued during the second quarter of 2004 to purchase 10,000 shares of our common stock at a per-share price of $.50. The issuance of the common stock is claimed to be exempt pursuant to Rule 506 of Regulation D under the Securities Act of 1933 (the "Act"). No advertising or general solicitation was employed in offering these securities. The offering and sale were made only to an accredited investor, and subsequent transfers were restricted in accordance with the requirements of the Act.
ITEM 6. EXHIBITS
(a) The following exhibits are filed with this Quarterly Report or are incorporated herein by reference:
Exhibit
Number Description
| 23.01 | Consent of LaRoche Petroleum Consultants, Ltd. |
| Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. |
| Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. |
| Certification Pursuant to 18 U.S.C. Section 1350, as pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Certification Pursuant to 18 U.S.C. Section 1350, as pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| WESTSIDE ENERGY CORPORATION | |||
| (Registrant) | |||
| By: | /s/ Douglas G. Manner | ||
| Douglas G. Manner, | |||
| Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| By: | /s/ Sean J. Austin | ||
| Sean J. Austin, | |||
| Vice President and Chief Financial Officer | |||
| (Principal Financial Officer and Principal Accounting Officer) | |||
May 21, 2007
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