SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2007
| ¨ | 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 001-32497
DUNE ENERGY, INC.
(Exact name of small business as specified in its charter)
| Delaware | 95-4737507 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
Two Shell Plaza, 777 Walker Street, Suite 2450, Houston, Texas 77002
(Address of principal executive offices)
(713) 229-6300
(Issuer’s telephone number, including area code)
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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 77,941,679 shares of Common Stock, $.001 per share, as of August 1, 2007.
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements.
Dune Energy, Inc.
Consolidated Balance Sheets
(Unaudited)
| June 30, 2007 | December 31, 2006 | |||||||
| (As adjusted) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 83,580,682 | $ | 3,574,705 | ||||
Accounts receivable, net of reserve for doubtful accounts of $396,629 and $0 | 14,775,134 | 3,849,929 | ||||||
Other current assets | 4,538,132 | 132,272 | ||||||
Total current assets | 102,893,948 | 7,556,906 | ||||||
Oil and gas properties, using successful efforts accounting – proved properties | 468,732,319 | 84,912,754 | ||||||
Less accumulated depreciation, depletion, amortization and impairment | (47,151,788 | ) | (39,032,744 | ) | ||||
Net oil and gas properties | 421,580,531 | 45,880,010 | ||||||
Property and equipment, net of accumulated depreciation of $44,687 and $16,721 | 2,081,281 | 46,046 | ||||||
Deferred financing costs, net of accumulated amortization of $722,405 and $310,711 | 29,769,174 | 1,181,554 | ||||||
Deposit - related party | 500,000 | 500,000 | ||||||
Other assets | 3,120,572 | 500,000 | ||||||
TOTAL ASSETS | $ | 559,945,506 | $ | 55,664,516 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 42,859,011 | $ | 4,685,398 | ||||
Accounts payable and accrued liabilities - related party | 404,265 | — | ||||||
Other current liabilities | 1,227,231 | — | ||||||
Current portion of long-term debt | 328,537 | 4,786,000 | ||||||
Total current liabilities | 44,819,044 | 9,471,398 | ||||||
Long-term debt | 300,000,000 | 27,815,223 | ||||||
Long-term debt - related party | — | 27,423,932 | ||||||
Other long-term liabilities | 11,646,944 | 1,397,649 | ||||||
Total liabilities | 356,465,988 | 66,108,202 | ||||||
Convertible preferred stock, liquidation preference of $1,000 per share, 216,000 shares issued and outstanding | 216,000,000 | — | ||||||
Commitments and contingencies | — | — | ||||||
STOCKHOLDERS’ DEFICIT | ||||||||
Preferred stock, $.001 par value, 1,000,000 shares authorized, no shares issued and outstanding | — | — | ||||||
Common stock, $.001 par value, 200,000,000 shares authorized, 77,941,679 and 59,430,172 shares issued and outstanding | 77,942 | 59,430 | ||||||
Additional paid-in capital | 70,416,001 | 43,585,518 | ||||||
Unrealized gain on hedge contracts | 1,816,564 | — | ||||||
Accumulated deficit | (84,830,989 | ) | (54,088,634 | ) | ||||
Total stockholders’ deficit | (12,520,482 | ) | (10,443,686 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 559,945,506 | $ | 55,664,516 | ||||
See notes to consolidated financial statements.
Dune Energy, Inc.
Consolidated Statements of Operations
(Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| (As adjusted) | (As adjusted) | |||||||||||||||
Revenues | $ | 14,012,386 | $ | 1,236,471 | $ | 17,006,800 | $ | 2,537,291 | ||||||||
Operating expenses: | ||||||||||||||||
General and administrative expense | 7,817,984 | 1,478,925 | 9,559,356 | 2,777,109 | ||||||||||||
Direct operating expense | 6,895,752 | 366,689 | 7,744,025 | 718,373 | ||||||||||||
Exploration costs | 40,782 | 25,121 | 340,939 | 643,619 | ||||||||||||
Accretion expense | 258,042 | 2,059 | 266,530 | 4,058 | ||||||||||||
Depletion, depreciation and amortization | 6,545,161 | 821,294 | 8,147,013 | 1,645,351 | ||||||||||||
Bad debt expense | — | — | 396,629 | — | ||||||||||||
Loss on impairment of assets | — | — | 3,192,250 | — | ||||||||||||
Total operating expense | 21,557,721 | 2,694,088 | 29,646,742 | 5,788,510 | ||||||||||||
Operating loss | (7,545,335 | ) | (1,457,617 | ) | (12,639,942 | ) | (3,251,219 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest income | 496,531 | 62,442 | 528,076 | 159,953 | ||||||||||||
Interest expense | (8,956,484 | ) | (923,860 | ) | (10,954,229 | ) | (1,963,563 | ) | ||||||||
Amortization of deferred financing costs | (5,335,221 | ) | (221,406 | ) | (5,576,322 | ) | (437,338 | ) | ||||||||
Other expense | — | (347,748 | ) | — | (347,748 | ) | ||||||||||
Gain (loss) on derivative liabilities | (890,572 | ) | 517,751 | (2,099,938 | ) | 545,268 | ||||||||||
Total other income (expense) | (14,685,746 | ) | (912,821 | ) | (18,102,413 | ) | (2,043,428 | ) | ||||||||
Net loss | $ | (22,231,081 | ) | $ | (2,370,438 | ) | $ | (30,742,355 | ) | $ | (5,294,647 | ) | ||||
Other comprehensive income – unrealized gain on hedge contracts | 1,816,564 | — | 1,816,564 | — | ||||||||||||
Total comprehensive loss | $ | (20,414,517 | ) | $ | (2,370,438 | ) | $ | (28,925,791 | ) | $ | (5,294,647 | ) | ||||
Net loss per share: | ||||||||||||||||
Basic and diluted | $ | (0.31 | ) | $ | (0.04 | ) | $ | (0.47 | ) | $ | (0.09 | ) | ||||
Weighted average shares outstanding: | ||||||||||||||||
Basic and diluted | 72,633,713 | 59,332,266 | 65,922,049 | 57,746,885 | ||||||||||||
See notes to consolidated financial statements.
2
Dune Energy, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| Six months ended June 30, 2007 | Six months ended June 30, 2006 | |||||||
| (As adjusted) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (30,742,355 | ) | $ | (5,294,647 | ) | ||
Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
Exploration expense | 340,939 | 643,619 | ||||||
Depletion, depreciation and amortization | 8,147,013 | 1,645,351 | ||||||
Amortization of long-term debt issuance costs | 5,576,322 | 437,338 | ||||||
Stock-based compensation | 6,156,745 | 1,007,826 | ||||||
Accretion of asset retirement obligation | 266,530 | 4,058 | ||||||
Loss on derivative mark-to-market adjustment | 2,099,938 | (545,268 | ) | |||||
Bad debt expense | 396,629 | — | ||||||
Impairment of long lived assets | 3,192,250 | — | ||||||
Changes in: | ||||||||
Accounts receivable | 6,359,467 | 63,995 | ||||||
Prepaid and other assets | 27,566 | (589,188 | ) | |||||
Accounts payable and accrued liabilities | 6,182,808 | (714,908 | ) | |||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 8,003,852 | (3,341,824 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of Goldking, net of $1,155,720 cash received | (310,977,851 | ) | — | |||||
Investment in proved and unproved properties | (38,113,170 | ) | (11,790,274 | ) | ||||
Purchase of furniture and fixtures | (181,162 | ) | (21,533 | ) | ||||
Increase in other assets | (8,683 | ) | — | |||||
NET CASH USED IN INVESTING ACTIVITIES | (349,280,866 | ) | (11,811,807 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from convertible preferred stock | 216,000,000 | — | ||||||
Proceeds from long-term debt | 371,470,080 | — | ||||||
Proceeds from sale of common stock | — | 22,103,232 | ||||||
Proceeds from exercise of options | — | 100,000 | ||||||
Payment of long-term debt issuance cost | (34,163,943 | ) | (103,333 | ) | ||||
Payments on long-term debt | (103,539,178 | ) | (8,500,000 | ) | ||||
Payment on long-term debt – related parties | (27,831,115 | ) | — | |||||
Payment on short-term debt | (652,853 | ) | — | |||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 421,282,991 | 13,599,899 | ||||||
NET CHANGE IN CASH BALANCE | 80,005,977 | (1,553,732 | ) | |||||
Cash balance at beginning of period | 3,574,705 | 3,754,120 | ||||||
Cash balance at end of period | $ | 83,580,682 | $ | 2,200,388 | ||||
SUPPLEMENTAL DISCLOSURES | ||||||||
Interest paid | $ | 3,319,257 | $ | 1,294,792 | ||||
Income taxes paid | — | — | ||||||
NON-CASH DISCLOSURES | ||||||||
Common stock issued for conversion of debt | $ | 2,692,250 | $ | — | ||||
Common stock issued for acquisition of Goldking | 18,000,000 | — | ||||||
See notes to consolidated financial statements.
3
DUNE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Dune Energy, Inc. is an independent oil and gas exploration and production company incorporated in Delaware. Our oil and gas properties are located in north Texas and the onshore and coastal regions of the Gulf Coast.
We prepared these financial statements according to the instructions for Form 10-Q. Therefore, the financial statements do not include all disclosures required by generally accepted accounting principles. However, we have recorded all transactions and adjustments necessary to fairly present the financial statements included in this Form 10-Q. The adjustments made are normal and recurring. The following notes describe only the material changes in accounting policies, account details or financial statement notes during the first six months of 2007. Therefore, please read these financial statements and notes to the financial statements together with the audited financial statements and notes to financial statements in our 2006 Form 10-KSB/A. The income statements for the three and six months ended June 30, 2007, cannot necessarily be used to project results for the full year. We have made certain reclassifications to prior year financial statements in order to conform to current year presentations.
On May 15, 2007, Dune completed the purchase of all of the issued and outstanding shares of common stock of Goldking Energy Corporation pursuant to a Stock Purchase and Sale Agreement (“SPSA”) dated effective April 13, 2007 with Goldking Energy Holdings, L.P. The accompanying consolidated financial statements include all activity for Goldking Energy Corporation from May 15, 2007 (date of acquisition). See Note 4 for discusssion of the Goldking acquisition.
Successful efforts method of accounting
Oil and gas exploration and production companies choose one of two acceptable accounting methods, successful efforts or full cost. The most significant difference between the two methods relates to the accounting treatment of drilling costs for unsuccessful exploration wells (“dry holes”) and exploration costs. With the acquisition of Goldking Energy Corporation, we elected to switch from full cost to successful efforts method of accounting for our investments in oil and gas properties, effective January 1, 2007.
Under the successful efforts method, exploration costs and dry hole costs (the primary uncertainty affecting this method) are recognized as expenses when incurred and the costs of successful exploration wells are capitalized as oil and gas properties. Entities that follow the full cost method capitalize all drilling and exploration costs including dry hole costs into one pool of total oil and gas property costs. We believe that, in light of the Goldking acquisition and our increased level of exploration and development activities, the successful efforts method of accounting provides a better matching of expenses to the period in which oil and gas production is realized. As a result, we believe that the change in accounting method was appropriate.
The calculation of depreciation, depletion and amortization of capitalized costs under the successful efforts method of accounting differs from the full cost method in that the successful efforts method requires us to calculate depreciation, depletion and amortization expense on individual properties rather than one pool of costs. In addition, under the successful efforts method, we assess our properties individually for impairment compared to one pool of costs under the full cost method.
The change in accounting method constituted a “Change in Accounting Principle,” requiring that all prior period financial statements be adjusted to reflect the results and balances that would have been reported had we been following the successful efforts method of accounting from our inception. The cumulative effect of the change in accounting method as of December 31, 2006 was to reduce the balance of our net investment in oil and gas properties and retained earnings at those dates by $4,805,966. The change in accounting method resulted in an increase in the net loss of $324,635 and $203,938 for the three months ended June 30, 2007 and 2006, respectively and an increase in the net loss of $983,133 and $1,138,041 for the six months ended June 30, 2007 and 2006, respectively. There was no material impact on earnings per share (basic and diluted) for these respective periods (see Note 8 – “Adjustment to Financial Statements-Successful Efforts” of our Notes to Consolidated Financial Statements). The change in method of accounting had no impact on cash or working capital.
Depreciation, Depletion and Amortization of Oil and Gas Properties
The application of the unit-of-production method of depreciation, depletion and amortization of oil and gas properties under the successful efforts method of accounting is applied pursuant to the simple multiplication of units produced by the costs per unit. The cost per unit is calculated by dividing the total costs associated with a property by the estimated proved oil and gas reserves on that property. The volumes or units produced and asset costs are known and while the proved reserves have a high probability of recoverability, they are based on estimates that are subject to some variability.
4
Impairment of Assets
Oil and Gas Properties
Like depreciation, depletion and amortization, we test for impairment of our properties based on estimates of proved reserves. Proved oil and gas properties held and used by us are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. We estimate the future undiscounted cash flows of the affected properties to judge the recoverability of the carrying amounts. Initially this analysis is based on proved reserves. However, when we believe that a property contains oil and gas reserves that do not meet the defined parameters of proved reserves, an appropriately risk adjusted amount of these reserves may be included in the impairment evaluation. These reserves are subject to much greater risk of ultimate recovery. An asset would be impaired if the undiscounted cash flows were less than its carrying value. Impairments are measured by the amount by which the carrying value exceeds its fair value.
Impairment analysis is performed on an ongoing basis. In addition to using estimates of oil and gas reserve volumes in conducting impairment analysis, it is also necessary to estimate future oil and gas prices. The impairment evaluation triggers include a significant long-term decrease in current and projected prices, or reserve volumes, an accumulation of project costs significantly in excess of the amount originally expected, and historical and current negative operating losses. Although we evaluate future oil and gas prices as part of the impairment analysis, we do not view short-term decreases in prices, even if significant, as impairment triggering events.
Long-lived assets
As with oil and gas properties, Dune reviews other long-lived assets for impairment when events and circumstances indicate a decline in the recoverability of the carrying value of such properties. Upon the evaluation of Dune’s investment in the 8% Convertible Secured Debentures issued by American Natural Energy Corporation (“ANEC”), Dune elected in the first quarter of 2007 to establish a reserve for uncollectible accounts due to ANEC’s financial situation. As a result, Dune recorded a loss on impairment of assets of $3,192,250 for the six months ended June 30, 2007.
NOTE 2 — DEBT FINANCING
On September 26, 2006, Dune amended and restated the credit agreement with Standard Bank Plc, as administrative agent, Standard Americas Inc., as collateral agent, and the lenders described therein, dated as of November 17, 2005. The amended credit agreement provided for a credit commitment of up to $50 million. During the first quarter of 2007, the lenders advanced an additional $6,449,080 of their commitment to Dune. Of the amount funded in the first quarter, $1.2 million was treated as bridge loans. The bridge loans totaled $4.5 million at March 31, 2007. Unless earlier payment was required, loans made by the lenders had to be repaid on or before August 14, 2009, provided, however, that all bridge loans were repaid on or before March 26, 2007. Dune requested and received an extension of the bridge loan repayment requirement through April 16, 2007. This loan was refinanced on April 16, 2007.
On April 13, 2007, Dune amended and restated the Amended and Restated Credit Agreement with D.B. Zwirn Special Opportunities Fund, L.P., as administrative agent, and the lenders described therein and party thereto, dated as of September 26, 2006 (the “Original Amended Credit Agreement”). They amended and restated the Original Amended Credit Agreement by means of an Amended and Restated Credit Agreement (the “Credit Agreement”), dated effective as of April 13, 2007, among us, Jefferies Funding LLC, (“Jefferies Funding”) as administrative agent, and the lenders named therein and party thereto (the “Lenders”). Subject to numerous conditions precedent and covenants, the Credit Agreement provided for a credit commitment of up to $65.0 million (the “Commitment”)
On April 16, 2007, the Lenders purchased the loans outstanding under the Original Amended Credit Agreement and advanced the remainder of the Commitment to Dune under the Credit Agreement. Funds borrowed by Dune under the Commitment were used to (i) pay the $15 million Earnest Money deposit to the Shareholder pursuant to the SPSA (see NOTE 4) and (ii) fund certain fees and expenses incurred by Dune in connection with our entering into the Credit Agreement and the proposed acquisition of the issued and outstanding shares of common stock of Goldking Energy Corporation. The remaining borrowed funds were utilized by Dune to carry out our intended plan of operations and for our working capital needs, subject to the terms of the Credit Agreement.
Some of the principal changes between the Original Amended Credit Agreement and the Credit Agreement included (a) increased borrowings at closing that allowed Dune to pay a $15 million Earnest Money deposit to the Shareholder, that allowed Dune to pay for the costs of the Goldking Energy Corporation acquisition and the Credit Agreement, and that provided additional working capital to us, (b) no provisions for additional borrowings after closing of the acquisition, (c) revision of the applicable interest rates and the financial covenants and (d) terms that require the Credit Agreement to be repaid with the proceeds from the issuance of the Senior Secured Notes (defined below) and the Preferred Stock (see NOTE 3).
5
Subject to various prepayment requirements under the Credit Agreement, loans made by the Lenders pursuant to the Credit Agreement were to be repaid on or before May 13, 2008. Under the Credit Agreement, interest on all loans accrued at a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall be equal at all times to the higher of (a) the rate of interest announced publicly by Citibank, N.A., from time to time, as its base rate and (b) 0.5% per annum plus the Federal Funds Effective Rate (the “Base Rate”) plus 5.75% until July 12, 2007, then at the Base Rate plus 6.25% from July 13,2007 until October 10, 2007, then at the Base Rate plus 6.75% from October 11, 2007 until January 8, 2008 and then at the Base Rate plus 7.25% from January 9, 2008 until May 13, 2008. All Loans under the Credit Agreement are secured by a security interest in, and the first lien on, substantially all of Dune’s assets.
We also further amended our Amended and Restated Term Loan Agreement (as amended and restated, the “Loan Agreement), with our majority shareholder, Itera Holdings BV (“Itera”), pursuant to the terms and conditions of the Lockup Letter and Agreement Regarding Subordinated Indebtedness, dated as of April 13, 2007 (the “Letter Agreement”). In accordance with the Letter Agreement, Itera agreed to a lock up of our common stock, any other equity security of Dune and any security convertible into common stock owned or held by Itera for a period commending on the date of the Letter Agreement and terminating upon the repayment of our indebtedness, obligations and liabilities under the Credit Agreement (the “Senior Debt”), provided that if the Senior Debt is paid in full contemporaneously with the closing, the lockup will continue until the date that is 90 days after closing. In addition to the foregoing, pursuant to the Letter Agreement, we may not pay or make any cash payment of any kind, whether principal or interest, under the Loan Agreement until all our Senior Debt is paid in full, unless otherwise agreed to in wiring by the Lenders.
On May 15, 2007, Dune Energy, Inc.fully discharged all of our obligations to Jefferies Funding under the Credit Agreement. The total amount repaid by us in satisfaction of our obligations was $65,758,333, representing the full outstanding commitment of $65 million under the Credit Facility plus accrued interest in the amount of $758,833. We repaid such amounts from the net proceeds from the $516 million Offering of Debt and Equity Securities as discussed below.
On May 15, 2007, we also discharged in full, all of our obligations to Itera Holdings BV (“Itera”), under that Amended and Restated Term Loan Agreement dated as of August 31, 2006 (the “Amended Term Loan”) and evidenced by that certain Amended and Restated Subordinated Convertible Note of even date therewith in the outstanding aggregate principal amount of $25 million (the “Amended Note”). The total amount repaid to Itera by us was $27,831,115, representing the outstanding principal amount under the Amended Note plus accrued interest in the amount of $2,831,115. Such amounts were repaid from the net proceeds from the $516 million Offering of Debt and Equity Securities.
On May 15, 2007, we entered into a credit agreement among us, each of our subsidiaries named therein as borrowers, each of our subsidiaries named therein as guarantors, certain lenders and Wells Fargo Foothill, Inc. (“Wells Fargo”), as arranger and administrative agent (the “WF Agreement”). Subject to the satisfaction of a Borrowing Base formula (based on the proved producing and non-producing reserves of Dune and our operating subsidiaries), numerous conditions precedent and covenants, the WF Agreement provides for a revolving credit commitment of up to $20 million, which may be extended up to $40 million upon request by us so long as no Default or Event of Default exists or would exist at time of such request (the “Revolver Commitment”), with a sub-limit of $20 million for issuance of letters of credit. Unless earlier payment is required under the WF Agreement, Advances under the Revolver Commitment must be paid on or before May 15, 2010. Under the WF Agreement, interest on advances accrues at either Wells Fargo’s Base Rate or the LIBOR rate, at our option, plus an applicable margin ranging from 0.25% to 2.0% based upon the ratio of outstanding advances and letters of credit usage under the WF Agreement to the Borrowing Base or Revolver Commitment, whichever is less. With respect to letters of credit issued under the credit agreement, fees accrue at a rate equal to the applicable margin for any LIBOR rate advances multiplied by the daily balance of the undrawn amount of all outstanding letters of credit. On May 15, 2007, we utilized approximately $5.2 million for the issuance of standby letters of credit by a Wells Fargo affiliate in substitution for outstanding letters of credit assumed under the Goldking acquisition. Additional standby letters of credit totaling $4.0 million were issued June 11, 2007 yielding a total of $9.2 million issued at June 30, 2007.
As security for our obligations under the WF Agreement, we and certain of our operating subsidiaries granted Wells Fargo a security interest in and a first lien on, all of our existing and after-acquired assets including, without limitation, the oil and gas properties and rights that we acquired in the Goldking acquisition. In addition, two of our subsidiaries, Dune Operating Company and Dune Properties Inc. (f/k/a Goldking Energy Corporation), have each guaranteed our obligations.
On May 15, 2007, we sold to Jefferies & Company, Inc. (the “Initial Purchaser”) $300 million aggregate principal amount of our 10 1/2% Senior Secured Notes due 2012 (“Senior Secured Notes”) at a purchase price of $288 million. Net proceeds from the sale of the Senior Secured Notes together with the net proceeds from the sale of our 10% Senior Redeemable Convertible Preferred Stock were used primarily to acquire all of the issued and outstanding capital stock of Goldking Energy Corporation, to discharge outstanding indebtedness and for general working capital.
6
The Senior Secured Notes, bearing interest at the rate of 10 1/2 % per annum, were issued under that certain indenture, dated May 15, 2007, among us, the guarantors named therein, and The Bank of New York Trust Company NA, as trustee (the “Indenture”). The Indenture contains customary representations and warranties on our part as well as typical restrictive covenants whereby we have agreed, among other things, to limitations to incurrence of additional indebtedness, declaration of dividends, issuance of capital stock, sale of assets and corporate reorganizations, as well as impairment of collateral securing our obligations under the Senior Secured Notes.
The Senior Secured Notes are subject to redemption by Dune (i) prior to June 1, 2010, in connection with equity offerings at a repurchase price equal to 110.5% of the aggregate principal amount plus accrued interest for up to 35% of the outstanding principal amount of the Senior Secured Notes, (ii) during twelve-month period beginning June 1, 2010, at a repurchase price equal to 105.25% of the aggregate principal amount plus accrued interest, and (iii) after June 1, 2011, at a repurchase price equal to 100% of the aggregate principal amount plus accrued interest. Holders of the Senior Secured Notes may put such notes to us for repurchase, at a repurchase price of 101% of the principal amount plus accrued interest, upon a change in control as defined in the Indenture.
The Senior Secured Notes are secured by a lien on substantially all of Dune’s assets, including without limitation, those oil and gas leasehold interests located in Texas and Louisiana held by our operating subsidiaries, all as more particularly described in that security agreement with the Initial Purchaser executed by us on May 15, 2007 (the “Security Agreement”). The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by each of our existing and future domestic subsidiaries.
The collateral securing the Senior Secured Notes is subject to, and made subordinate to, the lien granted to Wells Fargo under the WF Agreement, as evidenced by that certain Intercreditor Agreement of even date therewith between the Initial Purchaser, The Bank of New York Trust Company, NA, Wells Fargo Foothill, Inc. and us, among others (the “Intercreditor Agreement”).
Associated with the Senior Secured Notes and the Convertible Preferred Stock, Dune incurred deferred financing costs of $34,163,943 during the first six months of 2007. As a result of the refinancing, Dune was required to expense $4,542,177. Combined with the monthly amortization expense of $1,034,145, total amortization of deferred financing costs for the six months ended June 30, 2007 amounted to $5,576,322.
NOTE 3 — CONVERTIBLE PREFERRED STOCK
During the quarter ended June 30, 2007, we sold to Jefferies & Company, Inc. (the “Initial Purchaser”) pursuant to the Purchase Agreement dated May 1, 2007 between us and the Initial Purchaser, among others (the “Purchase Agreement”), 216,000 shares of our 10% Senior Redeemable Convertible Preferred Stock (“Preferred Stock”) for gross proceeds of $216 million. As provided in the Certificate of Designations, the Preferred Stock has a liquidation preference of $1,000 per share and pays a dividend at a rate of 10% per annum, payable quarterly, at the option of Dune, in additional shares of Preferred Stock, shares of Dune’s common stock (subject to the satisfaction of certain conditions) or cash. The Preferred Stock is initially convertible into 72 million shares of our common stock, based on an initial conversion price of $3.00 per share of the common stock. There is a one-time test for adjustment of the conversion price and the dividend rate, effective as of May 1, 2008, based upon a specified average trading price of our common stock for the 30 trading days up to and including April 30, 2008. If we meet or exceed this target, there will be no adjustment. In addition, the conversion price of the Preferred Stock will be subject to adjustment pursuant to customary anti-dilution provisions and may also be adjusted upon the occurrence of a fundamental change. The Preferred Stock is redeemable at the option of the holder on December 1, 2012 or upon a change of control. In the event we fail to redeem shares of Preferred Stock “put” to Dune by a holder, then the conversion price shall be lowered and the dividend rate increased. After December 1, 2012, Dune may redeem shares of Preferred Stock. Holders converting Preferred Stock prior to June 1, 2010 will be entitled to receive a certain make whole premium.
Net proceeds from the sale of the Preferred Stock together with the net proceeds from the sale of our Senior Secured Notes were used primarily to acquire all of the issued and outstanding capital stock of Goldking Energy Corporation, to discharge outstanding indebtedness and for general working capital.
7
NOTE 4 — ACQUISITION
On May 15, 2007 (the “Closing Date”), we completed our purchase of all of the issued and outstanding shares of common stock of Goldking Energy Corporation pursuant to that certain stock purchase and sale agreement (“SPSA”) dated effective April 13, 2007 with Goldking Energy Holdings, L.P. (the “Shareholder”).
Assets of Goldking Energy Corporation acquired by us include leases covering approximately 65,000 net acres of producing and non-producing properties located onshore the Louisiana and Texas Gulf Coast, and consist of interests in 23 fields and 136 producing wells. As of December 31, 2006, these properties had independently engineered proved reserves of 112.4 billion cubic feet equivalent (“Bcfe”), consisting, by category, of 48.5 Bcfe of proved developed producing, 28.8 Bcfe of proved developed non-producing, and 35.1 Bcfe of proved undeveloped reserves. Approximately 56% of the total proved reserves is natural gas. Also included in these assets is a sizeable 3-D seismic library covering several of the major fields.
The purchase price was $328,500,000, paid as follows: (a) $310,500,000 in cash and (b) 10,055,866 shares of our common stock, representing shares having a value of $18,000,000 based on the closing price for our common stock on the American Stock Exchange on April 13, 2007. The cash portion of the purchase price was financed from the net proceeds of the $516 million offering of debt and equity securities. The shares were not registered under state or federal securities laws as of the closing; however, on the Closing Date we entered into a registration rights agreement with the Shareholder, pursuant to which we agreed to file a registration statement covering the shares for resale within 90 days from the Closing Date, and to cause such registration statement to become effective within 180 days following the Closing Date. Failure by us to timely file and/or have declared effective such registration statement will result in the imposition of certain penalties, in either cash or additional shares of our common stock. We incurred additional costs of $1,633,571 related to the acquisition.
The acquisition has been accounted for in accordance with the provisions of Statement of Financial Standards (“SFAS”) No. 141, “Business Combinations.” The total purchase price was allocated to the net tangible assets based on the estimated fair values. No goodwill was recorded as there was no excess of the purchase price over the net tangible assets. The preliminary allocation of the purchase price was based upon valuation data as of May 15, 2007 and the estimates and assumptions are subject to change. The initial purchase price allocation may be adjusted within one year of the effective date of the acquisition for changes in estimates of the fair value of assets acquired and liabilities assumed based on the results of the purchase price allocation process. The preliminary allocation of the purchase price is as follows:
Assets: | ||||
Cash and equivalents | $ | 1,155,720 | ||
Accounts receivable | 17,681,299 | |||
Other current assets | 3,954,840 | |||
Oil and natural gas properties | 346,047,337 | |||
Other assets | 4,739,050 | |||
Liabilities: | ||||
Accounts payable and accrued liabilities | (32,192,616 | ) | ||
Current maturities of long-term debt | (981,390 | ) | ||
Other liabilities | (10,270,669 | ) | ||
| $ | 330,133,571 | |||
8
The following unaudited pro forma information assumes the acquisition of Goldking Energy Corporation occurred as of the beginning of each period. The pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the period presented.
| As Reported | Pro-Forma | |||||||
Three months ended June 30, 2007 | ||||||||
Revenues | $ | 14,012,386 | $ | 24,437,474 | ||||
Net Loss | (22,231,081 | ) | (17,914,151 | ) | ||||
Loss Per Share | (0.31 | ) | (0.23 | ) | ||||
Three months ended June 30, 2006 | ||||||||
Revenues | $ | 1,236,471 | $ | 24,938,888 | ||||
Net Loss | (2,370,438 | ) | (10,774,654 | ) | ||||
Loss Per Share | (0.04 | ) | (0.16 | ) | ||||
Six months ended June 30, 2007 | ||||||||
Revenues | $ | 17,006,800 | $ | 45,283,655 | ||||
Net Loss | (30,742,355 | ) | (43,697,079 | ) | ||||
Loss Per Share | (0.47 | ) | (0.59 | ) | ||||
Six months ended June 30, 2006 | ||||||||
Revenues | $ | 2,537,291 | $ | 48,808,639 | ||||
Net Loss | (5,294,647 | ) | (19,536,337 | ) | ||||
Loss Per Share | (0.09 | ) | (0.29 | ) | ||||
NOTE 5 — COMMON STOCK
On February 1, 2006, Dune sold a total of 9,000,000 shares of common stock at a price of $2.65 per share in a private equity offering. Gross proceeds raised in the offering were $23,850,000. From the gross proceeds, Dune paid the investment bankers a placement agent fee of $1,192,500 (5% of the gross proceeds), a financial advisory fee of $477,000 (2% of the gross proceeds) and expenses of $104,184, of which $26,916 had been prepaid as of December 31, 2005. Dune also issued a warrant exercisable for up to 900,000 shares of its common stock at an exercise price of $2.65 per share. Pursuant to rights granted by Dune to investors in the February offering, Dune was required to file a registration statement covering all shares purchased and to have such registration statement declared effective June 1, 2006. Because such registration statement was not declared effective by the SEC until July 5, 2006, Dune was required to pay to the investors a registration failure penalty equal to one and one-half percent (1.5%) of their aggregate investment for each 30-day period beyond June 1, 2006. This resulted in Dune paying investors in the February offering an aggregate of $395,168 of which $347,748 was recorded in the six months ended June 30, 2006.
On January 24, 2007, Dune granted stock options for services, exercisable in the aggregate, for up to 500,000 shares of common stock to 6 non-employee directors and its president. Such options vested immediately, expire in five years and are exercisable at $1.94 per share. The weighted average fair value of the options was $1.57. Variables used in the Black-Scholes option-pricing model include (1) risk-free interest rate of 4.4%, (2) expected option life is the actual remaining life of the options, (3) expected volatility is 112% and (4) zero expected dividends.
During the six months ended June 30, 2007, Dune acquired 8% Convertible Secured Debentures issued by American Natural Energy Corp. (“ANEC”), in the aggregate principal amount of $4,895,000. As consideration for the debentures, Dune issued a total of 1,380,641 shares of common stock valued at $1.95 per share, for aggregate consideration of $2,692,250 or 55% of the principal face amount of the debentures acquired by Dune. Due to the poor financial condition of ANEC, Dune elected to establish an impairment of assets for the entire balance tendered of $2,692,250 along with the prior year’s balance of $500,000. Also, Dune elected to establish a reserve for doubtful accounts related to the revenue receivable from ANEC of $396,629.
On April 12, 2007, our board of directors approved the grant of five-year stock options for services to two individuals unaffiliated with Dune, to purchase up to an aggregate of 500,000 shares of our common stock, at an exercise price of $1.87 (the closing share price on such date). The options vested upon the successful completion of the Goldking acquisition on May 15, 2007. Holders of the options were also granted certain piggy-back registration rights.
On April 17, 2007, we entered into four new employment agreements (collectively, the “Employment Agreements”), pursuant to which we: (a) engaged James A. Watt to serve as our President and Chief Executive Officer, (b) engaged Frank T. Smith, Jr. to
9
serve as Senior Vice President and Chief Financial Officer and (c) extended and modified our employment arrangements with each of Alan Gaines and Amiel David. Under the new Employment Agreements, Mr. Gaines will continue to serve as our Chairman and consented to no longer serve as Chief Executive Officer and Dr. David agreed to resign as President and Chief Operating Officer and to serve as Senior Advisor to our Board of Directors. We also entered into restricted stock agreements with each of the foregoing individuals, pursuant to which we issued 7,075,000 shares of our common stock.
On May 15, 2007, as partial consideration for all the outstanding shares of capital stock of Goldking Energy Corporation, Dune issued 10,055,866 shares of our common stock having a value of $18,000,000 based on the closing price for our common stock on the American Stock Exchange on April 13, 2007.
NOTE 6 — HEDGING
Hedging Arrangements
In accordance with a requirement of the WF Agreement, we and our operating subsidiaries also entered into a Swap Agreement (“Swap Agreement”) with Wells Fargo. The WF Agreement provides that we put in place, on a rolling six month basis, separate swap hedges, as adjusted from time to time as specified therein, with respect to notional volumes of not less than 50% and not more than 80% of the estimated aggregate production from (i) Proved Developed Producing Reserves (as defined in the WF Agreement) and (ii) estimated drilling by us and our subsidiaries with respect to each of crude oil and natural gas.
10
In addition to the Swap Agreement, Wells Fargo assumed the rights, liabilities, duties and obligations of Goldking under seven prior crude oil and five prior natural gas hedging arrangements between Goldking and various other banking institutions. These hedging arrangements consist of three fixed swaps, one swap and cap, seven collars and one three-way collar and are summarized as follows:
DUNE ENERGY, INC.
Current Hedge Positions
Crude Trade Details
Instrument | Beg. Date | Ending Date | Floor | Ceiling | Fixed | Total Bbls 2007 | Bbl/d | Total Bbls 2008 | Bbl/d | Total Bbls 2009 | Bbl/d | Total Volumes | |||||||||||||||
Collar | Jan-07 | Dec-07 | $ | 55.00 | $ | 65.25 | 60,000 | 326 | — | — | 60,000 | ||||||||||||||||
Collar | Jan-07 | Dec-07 | $ | 65.00 | $ | 94.60 | 18,000 | 98 | — | — | 18,000 | ||||||||||||||||
Collar | Jan-08 | Dec-08 | $ | 65.00 | $ | 89.10 | — | 96,000 | 262 | — | 96,000 | ||||||||||||||||
Collar | Jan-09 | Dec-09 | $ | 55.00 | $ | 60.95 | — | — | 264,000 | 723 | 264,000 | ||||||||||||||||
Puts | Jan-07 | Dec-07 | $ | 65.00 | 78,000 | 424 | — | — | 78,000 | ||||||||||||||||||
Puts | Jan-08 | Dec-08 | $ | 65.00 | — | 120,000 | 328 | — | 120,000 | ||||||||||||||||||
Swap | Jan-07 | Dec-07 | $ | 69.05 | 66,000 | 359 | — | — | 66,000 | ||||||||||||||||||
Swap | Jan-08 | Dec-08 | $ | 69.60 | — | 120,000 | 328 | — | 120,000 | ||||||||||||||||||
Swap/Cap | Jan-07 | Dec-09 | $ | 72.50 | $ | 60.00 | 12,900 | 70 | 16,800 | 46 | 10,080 | 28 | 39,780 | ||||||||||||||
| 234,900 | 1,277 | 352,800 | 964 | 274,080 | 751 | 861,780 | |||||||||||||||||||||
| Days | 184 | 366 | 365 | ||||||||||||||||||||||||
| Hedged Daily Production | 1,277 | 964 | 751 | ||||||||||||||||||||||||
| Natural Gas Trade Details | |||||||||||||||||||||||||||
Instrument | Beg. Date | Ending Date | Floor | Ceiling | Fixed | Total Mmbtu 2007 | Mmbtu/d | Total Mmbtu 2008 | Mmbtu/d | Total Mmbtu 2009 | Mmbtu/d | ||||||||||||||||
Collar | Jan-07 | Dec-07 | $ | 8.50 | $ | 10.85 | 360,000 | 1,957 | — | — | 360,000 | ||||||||||||||||
Collar | Jan-08 | Dec-08 | $ | 8.00 | $ | 10.50 | — | 480,000 | 1,311 | — | 480,000 | ||||||||||||||||
Collar | Jan-09 | Dec-09 | $ | 7.25 | $ | 8.77 | — | — | 1,680,000 | 4,603 | 1,680,000 | ||||||||||||||||
Puts | Feb-07 | Jan-08 | $ | 3.75 | 60,000 | 326 | 10,000 | 27 | — | 70,000 | |||||||||||||||||
Puts | Jan-07 | Dec-07 | $ | 8.50 | 360,000 | 1,957 | — | — | 360,000 | ||||||||||||||||||
Puts | Jan-08 | Dec-08 | $ | 8.50 | — | 720,000 | 1,967 | — | 720,000 | ||||||||||||||||||
Swap | Jan-07 | Dec-07 | $ | 7.94 | 720,000 | 3,913 | — | — | 720,000 | ||||||||||||||||||
Swap | Jan-08 | Dec-08 | $ | 8.14 | — | 960,000 | 2,623 | — | 960,000 | ||||||||||||||||||
3-Way Collar | Jan-07 | Dec-09 | $ | 6.62 | 94,500 | 514 | 165,000 | 451 | 123,000 | 337 | 382,500 | ||||||||||||||||
| $ | 13.35 | $ | 6.62 | 283,500 | 1,541 | 495,000 | 1,352 | 369,000 | 1,011 | 1,147,500 | |||||||||||||||||
| 1,878,000 | 10,208 | 2,830,000 | 7,731 | 2,172,000 | 5,951 | 6,880,000 | |||||||||||||||||||||
| Days | 184 | 366 | 365 | ||||||||||||||||||||||||
| Hedged Daily Production | 10,208 | 7,731 | 5,951 | ||||||||||||||||||||||||
Dune hedges a portion of forecasted crude oil and natural gas production volumes with derivative instruments. Dune uses various derivative instruments in connection with anticipated crude oil and natural gas sales to minimize the impact of commodity price fluctuations. The instruments include fixed price swaps, put options and costless collars. A collar is a combination of a purchased put option and sold call option. Dune accounts for its production hedge derivative instruments as defined in Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (herein referred as “SFAS 133”). Under SFAS 133, all derivatives are recorded at fair value on the balance sheet.
Those derivatives designated as cash flow hedges that meet certain requirements are granted hedge accounting treatment. Generally, utilizing cash flow hedge accounting, all periodic changes in fair value of the derivatives designated as hedges that are considered to be effective, as defined, are recorded in “Unrealized gain on hedge contracts” until the underlying production is sold and delivered. At June 30, 2007, unrealized gain on hedge contracts was $1,816,564.
Dune is exposed to the risk that periodic changes will not be effective, as defined, or that the derivatives will no longer qualify for hedge accounting. Ineffectiveness, as defined, results when the change in the total fair value of the derivative instrument is greater than the change in the value of Dune’s expected future cash receipt for sale of production. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is recorded to “gain (loss) on derivative liabilities” in the
11
statement of operations. Likewise, if a hedge ceases to qualify for hedge accounting, those periodic changes in the fair value of derivative instruments are recorded to “gain (loss) on derivative liabilities” in the statement of operations in the period of the change. For the six months ended June 30, 2007 and 2006, Dune recorded a loss of $2,099,938 and gain of $545,268 on the derivatives, respectively.
NOTE 7 — COMMITMENTS AND CONTINGENCIES
Dune and its subsidiaries are involved in litigation in the ordinary course of business. These proceedings are subject to the uncertainties inherent in any litigation. Dune is defending itself vigorously in all such matters and does not believe that the ultimate disposition of such proceedings will have a material adverse effect on its consolidated financial position, results of operations or liquidity.
During 2006, EOG Resources, Inc. (“EOG”) stated its intent to exercise a preferential right to purchase certain interests in the Wieting Gas Unit at Chocolate Bayou Field, Brazoria County, Texas, which, Goldking acquired from EnerVest Energy, L.P during 2005. Dune believes it is likely that any dispute on this matter will be resolved among Dune, EOG and EnerVest. If unsuccessful however, Dune may be required to assign its interest in the Wieting Gas Unit to EOG in return for an allocated portion of the purchase price, which is not anticipated to exceed $720,000, minus any net proceeds received from these interests after the July 1, 2005 effective date of purchase by Goldking. In this event it is likely that Dune will seek additional compensation from EnerVest for its handling of this matter.
NOTE 8 — ADJUSTMENT TO FINANCIAL STATEMENTS – SUCCESSFUL EFFORTS
As a result of our election to change our method of accounting for investments in oil and gas properties, adjustments have been made to the financial statements of prior periods as required by SFAS No. 154,Accounting Changes and Error Corrections. The effects of the change as it relates to financial data for the periods presented are displayed:
Dune Energy, Inc.
Consolidated Balance Sheet
December 31, 2006
(Unaudited)
| As Previously Reported Under Full Cost | As Reported Under Successful Efforts | Effect of Change | |||||||||
ASSETS | |||||||||||
Current assets | $ | 7,556,906 | $ | 7,556,906 | $ | — | |||||
Property and equipment | 46,046 | 46,046 | — | ||||||||
Oil and gas properties, net | 41,074,044 | 45,880,010 | 4,805,966 | ||||||||
Other non-current assets | 2,181,554 | 2,181,554 | — | ||||||||
TOTAL ASSETS | $ | 50,858,550 | $ | 55,664,516 | $ | 4,805,966 | |||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||||||
Current liabilities | $ | 9,471,398 | $ | 9,471,398 | $ | — | |||||
Total non-current liabilities | 56,636,804 | 56,636,804 | — | ||||||||
Total liabilities | 66,108,202 | 66,108,202 | — | ||||||||
STOCKHOLDERS’ DEFICIT | |||||||||||
Common stock | 59,430 | 59,430 | — | ||||||||
Additional paid-in capital | 43,585,518 | 43,585,518 | — | ||||||||
Accumulated deficit | (58,894,600 | ) | (54,088,634 | ) | 4,805,966 | ||||||
Total stockholders’ deficit | (15,249,652 | ) | (10,443,686 | ) | 4,805,966 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 50,858,550 | $ | 55,664,516 | $ | 4,805,966 | |||||
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Dune Energy, Inc.
Consolidated Balance Sheet
June 30, 2007
(Unaudited)
| As Previously Reported Under Full Cost | As Reported Under Successful Efforts | Effect of Change | ||||||||||
ASSETS | ||||||||||||
Current assets | $ | 102,893,948 | $ | 102,893,948 | $ | — | ||||||
Property and equipment | 2,081,281 | 2,081,281 | — | |||||||||
Oil and gas properties, net | 422,563,664 | 421,580,531 | (983,133 | ) | ||||||||
Other non-current assets | 33,389,746 | 33,389,746 | — | |||||||||
TOTAL ASSETS | $ | 560,928,639 | $ | 559,945,506 | $ | (983,133 | ) | |||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||||
Current liabilities | $ | 44,819,044 | $ | 44,819,044 | $ | — | ||||||
Total non-current liabilities | 311,646,944 | 311,646,944 | — | |||||||||
Total liabilities | 356,465,988 | 356,465,988 | — | |||||||||
Convertible preferred stock | 216,000,000 | 216,000,000 | — | |||||||||
STOCKHOLDERS’ DEFICIT | ||||||||||||
Common stock | 77,942 | 77,942 | — | |||||||||
Additional paid-in capital | 70,416,001 | 70,416,001 | — | |||||||||
Unrealized loss on hedge contracts | 1,816,564 | 1,816,564 | ||||||||||
Accumulated deficit | (83,847,856 | ) | (84,830,989 | ) | (983,133 | ) | ||||||
Total stockholders’ deficit | (11,537,349 | ) | (12,520,482 | ) | (983,133 | ) | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 560,928,639 | $ | 559,945,506 | $ | (983,133 | ) | |||||
13
Dune Energy, Inc.
Consolidated Statement of Operations
Three months ended June 30, 2006
(Unaudited)
| As Previously Reported Under Full Cost | As Reported Under Successful Efforts | Effect of Change | ||||||||||
Revenues | $ | 1,236,471 | $ | 1,236,471 | $ | — | ||||||
Operating expenses: | ||||||||||||
General and administrative expense | 1,478,925 | 1,478,925 | — | |||||||||
Direct operating expenses | 366,689 | 366,689 | — | |||||||||
Exploration costs | — | 25,121 | 25,121 | |||||||||
Accretion expense | 2,059 | 2,059 | — | |||||||||
Depletion, depreciation and amortization | 642,477 | 821,294 | 178,817 | |||||||||
Proved property impairment expense | — | |||||||||||
Total operating expense | 2,490,150 | 2,694,088 | 203,938 | |||||||||
Operating loss | (1,253,679 | ) | (1,457,617 | ) | (203,938 | ) | ||||||
Other income (expense): | ||||||||||||
Interest income | 62,442 | 62,442 | — | |||||||||
Interest expense | (923,860 | ) | (923,860 | ) | — | |||||||
Amortization of deferred financing costs | (221,406 | ) | (221,406 | ) | — | |||||||
Loss on derivative liabilities | (347,748 | ) | (347,748 | ) | — | |||||||
Other expense | 517,751 | 517,751 | — | |||||||||
Total other income (expense) | (912,821 | ) | (912,821 | ) | — | |||||||
Net loss | $ | (2,166,500 | ) | $ | (2,370,438 | ) | $ | (203,938 | ) | |||
Net loss per share: | ||||||||||||
Basic and diluted | $ | (0.04 | ) | $ | (0.04 | ) | $ | (0.00 | ) | |||
Weighted average shares outstanding: | ||||||||||||
Basic and diluted | 59,332,266 | 59,332,266 | — | |||||||||
14
Dune Energy, Inc.
Consolidated Statement of Operations
Six months ended June 30, 2006
(Unaudited)
| As Previously Reported Under Full Cost | As Reported Under Successful Efforts | Effect of Change | ||||||||||
Revenues | $ | 2,537,291 | $ | 2,537,291 | $ | — | ||||||
Operating expenses: | ||||||||||||
General and administrative expense | 2,777,109 | 2,777,109 | — | |||||||||
Direct operating expenses | 718,373 | 718,373 | — | |||||||||
Exploration costs | — | 643,619 | 643,619 | |||||||||
Accretion expense | 4,058 | 4,058 | — | |||||||||
Depletion, depreciation and amortization | 1,150,929 | 1,645,351 | 494,422 | |||||||||
Total operating expense | 4,650,469 | 5,788,510 | 1,138,041 | |||||||||
Operating loss | (2,113,178 | ) | (3,251,219 | ) | (1,138,041 | ) | ||||||
Other income (expense): | ||||||||||||
Interest income | 159,953 | 159,953 | — | |||||||||
Interest expense | (1,963,563 | ) | (1,963,563 | ) | — | |||||||
Amortization of deferred financing costs | (437,338 | ) | (437,338 | ) | — | |||||||
Loss on derivative liabilities | (347,748 | ) | (347,748 | ) | — | |||||||
Other expense | 545,268 | 545,268 | — | |||||||||
Total other income (expense) | (2,043,428 | ) | (2,043,428 | ) | — | |||||||
Net loss | $ | (4,156,606 | ) | $ | (5,294,647 | ) | $ | (1,138,041 | ) | |||
Net loss per share: | ||||||||||||
Basic and diluted | $ | (0.07 | ) | $ | (0.09 | ) | $ | (0.02 | ) | |||
Weighted average shares outstanding: | ||||||||||||
Basic and diluted | 57,746,885 | 57,746,885 | — | |||||||||
15
Dune Energy, Inc.
Consolidated Statement of Operations
Three months ended June 30, 2007
(Unaudited)
| Under Full Cost | As Reported Under Successful Efforts | Effect of Change | ||||||||||
Revenues | $ | 14,012,386 | $ | 14,012,386 | $ | — | ||||||
Operating expenses: | ||||||||||||
General and administrative expense | 7,817,984 | 7,817,984 | — | |||||||||
Direct operating expenses | 6,895,752 | 6,895,752 | — | |||||||||
Exploration costs | — | 40,782 | 40,782 | |||||||||
Accretion expense | 258,042 | 258,042 | — | |||||||||
Depletion, depreciation and amortization | 6,261,308 | 6,545,161 | 283,853 | |||||||||
Total operating expense | 21,233,086 | 21,557,721 | 324,635 | |||||||||
Operating loss | (7,220,700 | ) | (7,545,335 | ) | (324,635 | ) | ||||||
Other income (expense): | ||||||||||||
Interest income | 496,531 | 496,531 | — | |||||||||
Interest expense | (8,956,484 | ) | (8,956,484 | ) | — | |||||||
Amortization of deferred financing costs | (5,335,221 | ) | (5,335,221 | ) | — | |||||||
Loss on derivative liabilities | (890,572 | ) | (890,572 | ) | — | |||||||
Total other income (expense) | (14,685,746 | ) | (14,685,746 | ) | — | |||||||
Net loss | $ | (21,906,446 | ) | $ | (22,231,081 | ) | $ | (324,635 | ) | |||
Net loss per share: | ||||||||||||
Basic and diluted | $ | (0.30 | ) | $ | (0.31 | ) | $ | (0.01 | ) | |||
Weighted average shares outstanding: | ||||||||||||
Basic and diluted | 72,633,713 | 72,633,713 | — | |||||||||
16
Dune Energy, Inc.
Consolidated Statement of Operations
Six months ended June 30, 2007
(Unaudited)
| Under Full Cost | As Reported Under Successful Efforts | Effect of Change | ||||||||||
Revenues | $ | 17,006,800 | $ | 17,006,800 | $ | — | ||||||
Operating expenses: | ||||||||||||
General and administrative expense | 9,559,356 | 9,559,356 | — | |||||||||
Direct operating expenses | 7,744,025 | 7,744,025 | — | |||||||||
Exploration costs | — | 340,939 | 340,939 | |||||||||
Accretion expense | 266,530 | 266,530 | — | |||||||||
Depletion, depreciation and amortization | 7,504,819 | 8,147,013 | 642,194 | |||||||||
Bad debt expense | 396,629 | 396,629 | — | |||||||||
Loss on impairment of long-lived assets | 3,192,250 | 3,192,250 | — | |||||||||
Total operating expense | 28,663,609 | 29,646,742 | 983,133 | |||||||||
Operating loss | (11,656,809 | ) | (12,639,942 | ) | (983,133 | ) | ||||||
Other income (expense): | ||||||||||||
Interest income | 528,076 | 528,076 | — | |||||||||
Interest expense | (10,954,229 | ) | (10,954,229 | ) | — | |||||||
Amortization of deferred financing costs | (5,576,322 | ) | (5,576,322 | ) | — | |||||||
Loss on derivative liabilities | (2,099,938 | ) | (2,099,938 | ) | — | |||||||
Total other income (expense) | (18,102,413 | ) | (18,102,413 | ) | — | |||||||
Net loss | $ | (29,759,222 | ) | $ | (30,742,355 | ) | $ | (983,133 | ) | |||
Net loss per share: | ||||||||||||
Basic and diluted | $ | (0.45 | ) | $ | (0.47 | ) | $ | (0.02 | ) | |||
Weighted average shares outstanding: | ||||||||||||
Basic and diluted | 65,922,049 | 65,922,049 | — | |||||||||
17
Dune Energy, Inc.
Consolidated Statement of Cash Flows
Six months ended June 30, 2006
(Unaudited)
| As Previously Reported Under Full Cost | As Reported Under Successful Efforts | Effect of Change | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net loss | $ | (4,156,606 | ) | $ | (5,294,647 | ) | $ | (1,138,041 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depletion, depreciation and amortization | 1,150,929 | 1,645,351 | 494,422 | |||||||||
Exploration costs | — | 643,619 | 643,619 | |||||||||
Amortization of deferred financing costs | 437,338 | 437,338 | — | |||||||||
Share-based compensation | 1,007,826 | 1,007,826 | — | |||||||||
Accretion of asset retirement obligation | 4,058 | 4,058 | — | |||||||||
Loss on derivative mark-to-market adjustment | (545,268 | ) | (545,268 | ) | — | |||||||
Changes in: | — | |||||||||||
Accounts receivable | 63,995 | 63,995 | — | |||||||||
Other current assets | (589,188 | ) | (589,188 | ) | — | |||||||
Accounts payable and accrued liabilities | (714,908 | ) | (714,908 | ) | — | |||||||
NET CASH USED IN OPERATING ACTIVITIES | (3,341,824 | ) | (3,341,824 | ) | — | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Investment in proved and unproved properties | (11,790,274 | ) | (11,790,274 | ) | — | |||||||
Other cash flows from investing activities | (21,533 | ) | (21,533 | ) | — | |||||||
NET CASH USED IN INVESTING ACTIVITIES | (11,811,807 | ) | (11,811,807 | ) | — | |||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 13,599,899 | 13,599,899 | — | |||||||||
NET CHANGE IN CASH BALANCE | (1,553,732 | ) | (1,553,732 | ) | — | |||||||
Cash balance at beginning of period | 3,754,120 | 3,754,120 | — | |||||||||
Cash balance at end of period | $ | 2,200,388 | $ | 2,200,388 | $ | — | ||||||
SUPPLEMENTAL DISCLOSURES | ||||||||||||
Interest paid | $ | 1,294,792 | $ | 1,294,792 | $ | — | ||||||
Income taxes paid | — | — | — | |||||||||
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Dune Energy, Inc.
Consolidated Statement of Cash Flows
Six months ended June 30, 2007
(Unaudited)
Under Full Cost | As Reported Under Successful Efforts | Effect of Change | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net loss | $ | (29,759,222 | ) | $ | (30,742,355 | ) | $ | (983,133 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Exploration costs | — | 340,939 | 340,939 | |||||||||
Depletion, depreciation and amortization | 7,504,819 | 8,147,013 | 642,194 | |||||||||
Amortization of deferred financing costs | 5,576,322 | 5,576,322 | — | |||||||||
Share-based compensation | 6,156,745 | 6,156,745 | — | |||||||||
Accretion of asset retirement obligation | 266,530 | 266,530 | — | |||||||||
Bad debt expense | 396,629 | 396,629 | ||||||||||
Impairment of long-lived assets | 3,192,250 | 3,192,250 | ||||||||||
Loss on derivative mark-to-market adjustment | 2,099,938 | 2,099,938 | — | |||||||||
Changes in: | — | |||||||||||
Accounts receivable | 6,359,467 | 6,359,467 | — | |||||||||
Other current assets | 27,566 | 27,566 | — | |||||||||
Accounts payable and accrued liabilities | 6,182,808 | 6,182,808 | — | |||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 8,003,852 | 8,003,852 | — | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Investment in proved and unproved properties | (349,091,021 | ) | (349,091,021 | ) | — | |||||||
Other cash flows from investing activities | (189,845 | ) | (189,845 | ) | — | |||||||
NET CASH USED IN INVESTING ACTIVITIES | (349,280,866 | ) | (349,280,866 | ) | — | |||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 421,282,991 | 421,282,991 | — | |||||||||
NET CHANGE IN CASH BALANCE | 80,005,977 | 80,005,977 | — | |||||||||
Cash balance at beginning of period | 3,574,705 | 3,574,705 | — | |||||||||
Cash balance at end of period | $ | 83,580,682 | $ | 83,580,682 | $ | — | ||||||
SUPPLEMENTAL DISCLOSURES | ||||||||||||
Interest paid | $ | 3,319,257 | $ | 3,319,257 | $ | — | ||||||
Income taxes paid | — | — | — | |||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion will assist in the understanding of our financial position and results of operations. The information below should be read in conjunction with the financial statements, the related notes to financial statements, and our 2006 Form 10-KSB/A.
Our discussion contains both historical and forward-looking information. We assess the risks and uncertainties about our business, long-term strategy, and financial condition before we make any forward-looking statements, but we cannot guarantee that our assessment is accurate or that our goals and projections can or will be met. Statements concerning results of future exploration, exploitation, development, and acquisition expenditures as well as revenue, expense, and reserve levels are forward-looking statements. We make assumptions about commodity prices, drilling results, production costs, administrative expenses, and interest costs that we believe are reasonable based on currently available information.
We intend to focus our development and exploration efforts in our Gulf Coast properties, and utilize low risk extensional drilling in the Barnett Shale. We believe that our extensive acreage position will allow us to grow organically through low risk drilling in the near term. We have attractive opportunities to expand our reserve base through field extensions, delineating deeper formations within existing fields and high risk/high reward exploratory drilling for 2008 and beyond. We will review and rationalize our properties on a continuous basis in order to optimize our existing asset base.
We expect to maintain and utilize our technical and operations teams’ knowledge of salt-dome structures and multiple stacked producing zones common in the Gulf Coast to enhance our growth prospects and reserve potential. We will employ technical advancements, including 3-D seismic data, pre-stack depth migration and directional drilling to identify and exploit new opportunities in our asset base.We also plan to employ the latest drilling, completion and fracturing technology in all of our wells to enhance recoverability and accelerate cash flows associated with these wells.
We continually review opportunities to acquire producing properties, leasehold acreage and drilling prospects that are in core operating areas. We are seeking to acquire operational control of properties that we believe have a solid proved reserves base coupled with significant exploitation and exploration potential. We intend to continue to evaluate acquisition opportunities and make acquisitions that we believe will further enhance our operations and reserves in a cost effective manner.
Liquidity and Capital Resources
On June 30, 2007, our current assets exceeded our current liabilities by $58.1 million. Our current ratio was 2.3 to 1 owing largely to $83.6 million in cash remaining from the capital raise after the purchase of Goldking Energy Corporation. During the first six months of 2007 compared to the first six months of 2006, net cash flow provided by operations increased by $11.3 million, primarily because of the Goldking acquisition and higher oil and gas production. Oil and gas revenues increased by $14.5 million, as the 45 days of Goldking production accounted for 55% of the sales for the period and 65% of the overall increase in production. A slight increase in average prices of $0.54 per Mcfe, or 7%, also added to the gain.
The interest on the Senior Secured Note is due and payable on December 1, 2007 and semi-annually thereafter. The principle on the Senior Secured Notes is not due until 2012. The convertible preferred stock is not redeemable until December 1, 2012 or upon a change in control. Dividends are payable quarterly commencing on September 1, 2007 with the Company having the option of paying dividends on the convertible preferred stock in shares of common stock, shares of preferred stock or cash.
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Results of Operations
We recorded net loss for the three months ended June 30, 2007 of $22.2 million or $0.31 basic and diluted loss per share compared to $2.4 million or $0.04 basic and diluted loss per share for the three months ended June 30, 2006. For the first six months of 2007 we recorded net loss of $30.7 million or $0.47 basic and diluted loss per share compared to $5.3 million or $0.09 basic and diluted loss per share for the first six months of 2006. Net loss for the three and six months ended June 30, 2007 was greater than in the prior year primarily because of increased unit cost of operations and significantly higher interest and financing expense. The following table reflects the increase or decrease in oil and gas sales revenue due to the changes in prices and volumes.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2007 | 2006 | 2007 | 2006 | ||||||||||
| (In thousands, except prices) | |||||||||||||
Gas production volume (Mcf) | 1,083 | 148 | 1,506 | 272 | |||||||||
Gas sales revenue | $ | 7,654 | $ | 954 | $ | 10,022 | $ | 1,820 | |||||
Price per Mcf | $ | 7.07 | $ | 6.45 | $ | 6.66 | $ | 6.69 | |||||
Increase (decrease) in gas sales revenue due to: | |||||||||||||
Change in production volume | $ | 6,609 | $ | 8,212 | |||||||||
Change in prices | 91 | (10 | ) | ||||||||||
Total increase in gas sales revenue | $ | 6,700 | $ | 8,202 | |||||||||
Oil production volume (Bbls) | 97 | 4 | 107 | 11 | |||||||||
Oil sales revenue | $ | 6,335 | $ | 266 | $ | 6,938 | $ | 664 | |||||
Price per barrel | $ | 65.31 | $ | 63.32 | $ | 64.64 | $ | 60.45 | |||||
Increase in oil sales revenue due to: | |||||||||||||
Change in production volume | $ | 6,060 | $ | 6,228 | |||||||||
Change in prices | 9 | 46 | |||||||||||
Total increase in oil sales revenue | $ | 6,069 | $ | 6,274 | |||||||||
Total production Mcfe | 1,665 | 173 | 2,150 | 338 | |||||||||
Price per Mcfe | $ | 8.40 | $ | 7.05 | $ | 7.89 | $ | 7.35 | |||||
Revenues
Revenue for the current quarter ended 2007 increased $12.8 million from the comparable 2006 quarter. The Goldking acquisition made up $10.2 million of this increase with oil volumes of 86,566 bbls at an average price of $64.96/bbl and gas volumes of 572,380 mcfs at an average price of $7.98/mcf. The remaining increase for the second quarter of $2.6 million results from increased oil sales of 6,187 bbls and 362,518 mcfs. These increases are primarily attributable to the results of the Company’s drilling program in the Barnett Shale area which reflected an additional 15 wells producing during the quarter.
Revenue for the current six months ended 2007 increased $14.5 million from the comparable 2006 period. The Goldking acquisition made up $10.2 million of this increase with volumes of 86,566 bbls at an average price of $64.96/bbl and 572,380 mcfs at an average price of $7.98/mcf. The remaining increase for the six month period of $4.3 million results from increased oil sales of 9,792 bbls and 661,445 mcfs. As previously mentioned, this increase is primarily attributable to 15 additional wells drilled and brought on production in the Barnett Shale.
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Operating expenses
General and administrative expense (G&A expense)
G&A expense for the current quarter ended 2007 increased $6.3 million from the comparable 2006 quarter. The Goldking acquisition made up $1.0 million of this increase. The remaining $5.3 million is primarily attributable to stock-based compensation which resulted from the April 12, 2007 grant of stock options to purchase up to 500,000 shares of common stock to two individuals unaffiliated with Dune and the April 17, 2007 grant of restricted stock agreements to four officers to receive up to 7,075,000 shares of common stock. Stock-based compensation amounted to $4.7 million in the second quarter of 2007.
G&A expense for the current six months ended 2007 increased $6.8 million from the comparable 2006 period. The Goldking acquisition made up $1.0 million of this increase with the remaining $5.8 million primarily attributable to stock-based compensation. The increase in stock-based compensation for the first six months of 2007 totaled $5.1 million and was attributable to the stock options granted January 24, 2007 and April 12, 2007 as well as the shares issued relative to the restricted stock agreements dated April 17, 2007.
Direct operating expense
Direct operating expense for the current quarter ended 2007 increased $6.5 million from the comparable 2006 quarter. The Goldking acquisition made up $5.8 million of this increase. The remaining $0.7 million is related to increased operating costs associated with the Company’s drilling program in the Barnett Shale.
Direct operating expense for the current six months ended 2007 increased $7.0 million from the comparable 2006 period. The Goldking acquisition made up $5.8 million of this amount with the remaining increase of $1.2 million attributable to increased production costs in the Barnett Shale area. Also, many of the Goldking properties required significant workover expenses that are not anticipated to be continuing in future quarters.
Exploration costs
Associated with the Company’s conversion from the full cost method to the successful efforts method of accounting for our investments in oil and gas properties, exploration costs are expensed as incurred. Exploration costs for the current quarter ended 2007 totaled $40,782 compared to $25,121 in the second quarter of 2006. This volume of activity reflects the Company’s focus on evaluating exploration opportunities associated with the Goldking acquisition which occurred May 15, 2007.
Additionally, exploration costs for the current six months ended 2007 totaled $0.3 million compared to $0.6 million in 2006. This reduction of $0.3 million further demonstrates the focus on evaluating exploration opportunities associated with the Goldking acquisition.
Accretion expense
Accretion expense for abandonment obligations for the current quarter ended increased from $2,059 in 2006 compared to $258,042 in 2007 representing a $255,983 increase.
Additionally, accretion expense for the current six months ended increased from $4,058 in 2006 to $266,530 in 2007 representing a $262,472 increase. Both increases reflect the impact of the Goldking acquisition which recorded $249,527 of accretion expense for the 45 days ended June 30, 2007.
22
Depletion, depreciation and amortization (DD&A)
As mentioned above, the Company converted from the full cost method to the successful efforts method of accounting for our investments in oil and gas properties. Associated with this conversion, the Company has restated its prior period financial statements to reflect this change. For the current quarter of 2007, the Company recorded DD&A expense of $6.5 million compared to $0.8 million for 2006 representing an increase of $5.7 million. DD&A attributable to the Goldking acquisition amounts to $4.4 million. The remaining $1.3 million is primarily attributable to the added costs and production in the Barnett Shale.
For the current six months ended 2007, the Company recorded DD&A expense of $8.1 million compared to $1.6 million for 2006 representing an increase of $6.5 million. DD&A attributable to the Goldking acquisition amounted to $4.4 million. The remaining $2.1 million for the current six months ended of 2007 is primarily attributable to the added costs and production in the Barnett Shale.
Bad debt expense
Included in revenues receivable is a balance of $0.4 million due from American Energy Corp. (“ANEC”), Due to the financial situation of ANEC, Dune elected to establish a reserve for doubtful accounts in the first quarter of 2007 for the entire balance giving rise to bad debt expense of $0.4 million in the current six months ended of 2007.
Loss on impairment of assets
In 2006, Dune purchased 8% Convertible Secured Debentures issued by ANEC in the aggregate principal amount of $3.0 million for a cash price of $0.5 million from TransAtlantic Petroleum Corp. In 2007, the Company purchased additional Debentures in the aggregate principal amount of $4.9 million by issuing 1,380,641 shares of Dune’s common stock at a price of $1.95 or $2.7 million. Due to the financial situation of ANEC, Dune elected in the first quarter of 2007 to establish a reserve for uncollectible accounts for the entire value assigned to the ANEC Debentures giving rise to a loss on impairment of assets of $3.2 million.
Operating loss
For the current quarter ended 2007, the operating loss increased $6.1 million from the comparable 2006 quarter. Additionally, the operating loss for the current six months ended of 2007 increased $9.4 million compared to 2006. The operating loss attributable to the Goldking acquisition amounted to $1.2 million. The primary components of the remaining operating loss for the current quarter of $4.9 million pertain to stock-based compensation which totaled $4.7 million. The primary components of the remaining operating loss for the current six months ended of 2007 of $8.2 million consists of stock-based compensation of $5.1 million, loss on impairment of assets of $3.2 million and bad debt expense of $0.4 million.
Other income (expense)
Interest income
Interest income increased $0.4 million in the current quarter ended of 2007 compared to the comparable 2006 quarter. Additionally, interest income increased $0.4 million for the current six months ended 2007 compared to the 2006 comparable period. These increases are attributable to interest income on large cash balances resulting from our financing arrangements of $300 million in senior secured notes and $216 million in convertible preferred stock that occurred on May 15, 2007 and June 5, 2007. Although the majority of these funds were used to finance the Goldking acquisition, cash balances at June 30, 2007 amounted to $83.6 million.
23
Interest expense
On May 15, 2007, the Company issued $300 million of Senior Secured Notes at the rate of 10 1/2% per annum and $180 million of Convertible Preferred Stock at the rate of 10% per annum in order to finance the Goldking acquisition. Additionally, on June 5, 2007, the Company issued an additional $36 million of Convertible Preferred Stock at a rate of 10% per annum. Finally, on April 16, 2007, the Company borrowed $65 million from Jefferies Funding at a rate of 14% per annum for 30 days as interim financing. These factors give rise to an increase in interest expense of $8.0 million for the second quarter of 2007 compared to the comparable 2006 quarter and an increase of $9.0 million for the current six months ended of 2007 compared to the comparable 2006 period.
Amortization of deferred financing costs
For the current quarter ended for 2007, amortization of deferred financing costs increased $5.1 million from the comparable 2006 quarter. Also, for the current six months ended of 2007, amortization of deferred financing costs increased $5.1 million from the comparable 2006 period. Two factors are primarily responsible for these increases. First, as a result of retiring the Petrobridge and Jefferies borrowings, the Company expensed the associated deferred loan costs totaling $4.5 million. Second, associated with the May 15, 2007 financing, the Company incurred additional deferred financing costs of $30.5 million which generates a monthly amortization expense of approximately $0.5 million.
Gain (loss) on derivative liabilities
Dune entered into derivative contracts to provide a measure of stability in the cash flows associated with the Company’s oil and gas production and to manage exposure to commodity prices. Prior to the Goldking acquisition on May 15, 2007, Dune’s derivatives were designated as fair value hedges with the changes in the fair value of the derivatives and of the hedge items attributable to the hedged risk recognized in earnings. Subsequent to May 15, 2007, Dune’s derivatives were designated as cash flow hedges with the effective portions of changes in fair value recorded in other comprehensive income and recognized in the Statement of Operations when the hedged item affects earnings. For the current quarter ended of 2007, the Company incurred a loss on derivatives of $0.9 million compared to a gain of $0.5 million for the 2006 comparable quarter giving rise to a decrease of $1.4 million. Fair value hedges through May 15, 2007 generated a gain of $0.9 million while cash flow hedges since May 15, 2007 generated a loss of $2.3 million.
Additionally, for the current six months ended of 2007, the Company incurred a loss on derivative liabilities of $2.1 million compared to a gain of $0.5 million for the 2006 comparable period giving rise to a decrease of $2.6 million. Fair value hedges through May 15, 2007 generated a loss of $0.3 million while cash flow hedges since May 15, 2007 generated a loss of $2.3 million.
Net Loss
For the current quarter ended for 2007, the net loss increased $19.9 million from the comparable 2006 quarter. Additionally, for the six months ended for 2007, the net loss increased $25.4 million from the comparable 2006 period. The major components contributing to these changes include increases in stock-based compensation, DD&A, amortization of deferred loan costs, loss on derivative liabilities, loss on impairment of assets and interest expense as more fully detailed above.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our primary exposure to market risk is the commodity pricing available to our oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for oil and spot prices applicable to natural gas. To mitigate some of this risk, we engage periodically in certain hedging activities, including price swaps, costless collars and, occasionally, put options, in order to establish some price floor protection (see Note 6 to financial statements). We also have some exposure to market risk consisting of changes in interest rates on borrowings under our credit agreement with our senior lender. An increase in interest rates would adversely affect our operating results and the cash flow available after debt service to fund operations. We manage exposure to interest rate fluctuations by optimizing the use of fixed and variable debt.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
At the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2007, our disclosure controls and procedures are effective.
During the quarter ended June 30, 2007, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
25
PART II
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities.
During the quarter ended June 30, 2007, we sold to Jefferies & Company, Inc. (the “Initial Purchaser”) pursuant to the Purchase Agreement dated May 1, 2007 between us and the Initial Purchaser, among others (the “Purchase Agreement”), 216,000 shares of our 10% Senior Redeemable Convertible Preferred Stock (“Preferred Stock”) for gross proceeds of $216 million. The rights, preferences, powers, limitations and other terms of the Preferred Stock are set forth in that Certificate of Designations filed by us with the Secretary of State of the State of Delaware on May 15, 2007 (the “Certificate of Designations”), a copy of which was filed as Exhibit 4.5 to our Current Report on Form 8-K, filed with the SEC on May 21, 2007.
As provided in the Certificate of Designations, the Preferred Stock has a liquidation preference of $1,000 per share and pays a dividend at a rate of 10% per annum, payable quarterly, at the option of the Company, in additional shares of Preferred Stock, shares of the Company’s Common Stock (subject to the satisfaction of certain conditions) or cash. The Preferred Stock is initially convertible into 72 million shares of our Common Stock, based on an initial conversion price of $3.00 per share of the Common Stock and reflecting a 20% conversion premium to the $2.50 per share closing price of our Common Stock on the American Stock Exchange on May 1, 2007. There is a one-time test for adjustment of the conversion price and the dividend rate, effective as of May 1, 2008, based upon a specified average trading price of our Common Stock for the 30 trading days up to and including April 30, 2008. If we meet or exceed this target, there will be no adjustment. In addition, the conversion price of the Preferred Stock will be subject to adjustment pursuant to customary anti-dilution provisions and may also be adjusted upon the occurrence of a fundamental change. The Preferred Stock is redeemable at the option of the holder on December 1, 2012 or upon a change of control. In the event we fail to redeem shares of Preferred Stock “put” to the Company by a holder, then the conversion price shall be lowered and the dividend rate increased. After December 1, 2012, the Company may redeem shares of Preferred Stock. Holders converting Preferred Stock prior to June 1, 2010 will be entitled to receive a certain make whole premium.
Net proceeds from the sale of the Preferred Stock together with the net proceeds from the sale of our 10.5% Senior Secured Notes due 2012 were used primarily to acquire all of the issued and outstanding capital stock of Goldking Energy Corporation, to discharge outstanding indebtedness and for general working capital.
The Preferred Stock was offered and sold by us to the Initial Purchaser pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended provided by Section 4(2) of the Securities Act, and will be offered by the Initial Purchaser within the United States only to “qualified institutional buyers” pursuant to Rule 144A under the Securities Act.
26
Item 6. Exhibits
(a) Exhibits
Exhibit Number | Description | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer | |
| 32.2 | Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer | |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DUNE ENERGY, INC. | ||||
| Date: August 14, 2007 | By: | /s/ James A. Watt | ||
| Name: | James A. Watt | |||
| Title: | President and Chief Executive Officer | |||
| Date: August 14, 2007 | By: | /s/ Frank T. Smith, Jr. | ||
| Name: | Frank T. Smith, Jr. | |||
| Title: | Chief Financial Officer | |||
28
INDEX TO EXHIBITS
Exhibit Number | Description | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer | |
| 32.2 | Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer | |
