U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 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 September 30, 2013
OR
| o | TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934 |
From the transition period from ____________ to ___________.
Commission File Number 000-50541
| Bering Exploration, Inc. |
| (Exact name of small business issuer as specified in its charter) |
| N/A |
| (Former Name if Applicable) |
| Nevada | | 88-0507007 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification Number) |
710 North Post Oak, Suite 410, Houston, Texas 77024
(Address of principal executive offices)
(713) 780-0806
(Issuer's telephone number)
Check whether the issuer has (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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, and accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ | Smaller reporting company 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
As of November 19, 2013 there were outstanding 38,680,775 shares of common stock, $0.001 par value per share.
BERING EXPLORATION, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
| Part I | Financial Information |
| | | | | |
| | Item 1. | Financial Statements | | |
| | | Consolidated Balance Sheets – September 30, 2013 (unaudited) and March 31, 2013 | | 3 |
| | | Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended September 30, 2013 and 2012 | | 4 |
| | | Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended September 30, 2013 and 2012 | | 5 |
| | | Notes to Unaudited Consolidated Financial Statements | | 6 |
| | | | | |
| | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 11 |
| | | | | |
| | Item 3. | Quantitative and Qualitative Disclosures About Market Risk | | 13 |
| | | | | |
| | Item 4. | Controls and Procedures | | 13 |
| Part II | Other Information | | |
| | | | | |
| | Item 1. | Legal Proceedings | | 13 |
| | | | | |
| | Item 1A. | Risk Factors | | 13 |
| | | | | |
| | Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | | 13 |
| | | | | |
| | Item 3. | Defaults Upon Senior Securities | | 13 |
| | | | | |
| | Item 4. | Mine Safety Disclosure | | 13 |
| | | | | |
| | Item 5. | Other Information | | 14 |
| | | | | |
| | Item 6. | Exhibits | | 14 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BERING EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | September 30, 2013 | | | March 31, 2013 | |
| | | (unaudited) | | | | |
| ASSETS | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 14,747 | | | $ | 1,113 | |
| Restricted cash | | | 25,000 | | | | 25,000 | |
| Accounts receivable, net | | | 22,803 | | | | 16,416 | |
| Prepaid expenses | | | 30,000 | | | | 3,850 | |
| Total current assets | | | 92,550 | | | | 46,379 | |
Oil and gas properties, net of accumulated depletion of $262,706 and $229,706, at September 30, 2013 and March 31, 2013, respectively, full cost method | | | | | | | | |
| Proved | | | 367,444 | | | | 400,444 | |
| Unproved | | | 145,316 | | | | 348,813 | |
| Total assets | | $ | 605,310 | | | $ | 795,636 | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 145,538 | | | $ | 134,007 | |
| Accounts payable – related parties | | | 26,000 | | | | 52,808 | |
| Accrued liabilities | | | 25,585 | | | | 340,229 | |
| Note payable | | | 5,820 | | | | 5,820 | |
Convertible note payable – related parties, net of discount of $32,714 and $108,370 at September 30, 2013 and March 31, 2013, respectively | | | 314,786 | | | | 121,130 | |
| Derivative liability | | | 329,959 | | | | 1,017,865 | |
| Total current liabilities | | | 847,688 | | | | 1,671,859 | |
| Asset retirement obligation | | | 8,507 | | | | 8,507 | |
| Total liabilities | | | 856,195 | | | | 1,680,366 | |
| | | | | | | | | |
| Commitments | | | | | | | | |
| Shareholders’ deficit | | | | | | | | |
Preferred stock, $0.001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2013 and March 31, 2013 | | | - | | | | - | |
Common stock, $0.001 par value; 500,000,000 shares authorized; 38,680,775 and 19,455,923 shares issued and outstanding as of September 30, 2013 and March 31, 2013, respectively | | | 38,680 | | | | 19,455 | |
| Additional paid-in capital | | | 13,531,650 | | | | 11,859,619 | |
| Accumulated deficit | | | (13,821,215 | ) | | | (12,763,804 | ) |
| Total shareholders’ deficit | | | (250,885 | ) | | | (884,730 | ) |
| Total liabilities and shareholders’ deficit | | $ | 605,310 | | | $ | 795,636 | |
See accompanying notes to unaudited consolidated financial statements.
3
BERING EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | For the Three months Ended September 30, | | | For the Six months Ended September 30, | |
| | | 2013 | | | 2012 | | | | 2013 | | | | 2012 | |
| Oil and gas revenue | | $ | 19,084 | | | $ | 25,263 | | | $ | 44,886 | | | $ | 49,340 | |
| Total revenues | | | 19,084 | | | | 25,263 | | | | 44,886 | | | | 49,340 | |
| Operating costs and expenses: | | | | | | | | | | | | | | | | |
| Lease operating expenses | | | 9,875 | | | | 114,829 | | | | 55,478 | | | | 150,363 | |
| Compensation and related expenses | | | 829,685 | | | | 1,274,494 | | | | 1,208,251 | | | | 1,443,712 | |
| Office administration | | | 16,073 | | | | 6,341 | | | | 35,811 | | | | 38,942 | |
| Professional fees | | | 40,633 | | | | 91,608 | | | | 63,952 | | | | 218,672 | |
| Investor relations | | | 195 | | | | - | | | | 1,272 | | | | - | |
| Depletion, depreciation and amortization | | | 16,500 | | | | 16,715 | | | | 33,000 | | | | 33,210 | |
| Impairment expense | | | 203,497 | | | | – | | | | 203,497 | | | | – | |
| Other expenses | | | 3,499 | | | | 44,971 | | | | 10,927 | | | | 44,971 | |
| Total operating costs and expenses | | | 1,119,957 | | | | 1,548,958 | | | | 1,612,188 | | | | 1,929,870 | |
| Loss from operations | | | (1,100,873 | ) | | | (1,523,695 | ) | | | (1,567,302 | ) | | | (1,880,530 | ) |
| | | | | | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | | | | | |
| Interest expense | | | (124,097 | ) | | | (70,339 | ) | | | (203,013 | ) | | | (502,811 | ) |
| Change in derivative liability | | | 461,454 | | | | (215,726 | ) | | | 712,904 | | | | (215,726 | ) |
| Total other income (expense) | | | 337,357 | | | | (286,065 | ) | | | 509,891 | | | | (718,537 | ) |
| Net loss | | $ | (763,516) | | | $ | (1,809,760) | | | $ | (1,057,411 | ) | | $ | (2,599,067 | ) |
| | | | | | | | | | | | | | | | | |
| Net Loss Per Share – Basic and Diluted | | $ | (0.03) | | | $ | (0.16) | | | $ | (0.05 | ) | | $ | (0.28 | ) |
| Weighted Average Common Shares Outstanding – Basic and Diluted | | | 25,226,531 | | | | 11,063,099 | | | | 21,810,371 | | | | 9,255,926 | |
See accompanying notes to unaudited consolidated financial statements.
4
BERING EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | For the Six Months Ended September 30, | |
| | | 2013 | | | 2012 | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (1,057,411 | ) | | $ | (2,599,067 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depletion, depreciation and amortization | | | 33,000 | | | | 33,210 | |
| Amortization of debt discount and noncash interest expense | | | 193,656 | | | | 484,580 | |
| Share-based compensation | | | 1,208,251 | | | | 1,323,992 | |
| Impairment of oil and gas properties | | | 203,497 | | | | - | |
| Change in derivative liability | | | (712,904 | ) | | | 215,726 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (6,387 | ) | | | (30,598 | ) |
| Prepaid expenses | | | 3,850 | | | | (11,550 | ) |
| Accounts payable | | | 132,531 | | | | 51,531 | |
| Accounts payable – related parties | | | (26,808 | ) | | | - | |
| Accrued liabilities | | | (75,641 | ) | | | 112,068 | |
| Net cash used in operating activities | | | (104,366 | ) | | | (420,108 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Purchases of oil and gas properties | | | - | | | | (389,668 | ) |
| Net cash used in investing activities | | | - | | | | (389,668 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from sale of common stock | | | - | | | | 500,603 | |
| Proceeds from notes payable – third parties | | | - | | | | 9,182 | |
| Proceeds from convertible note payable – related party | | | 118,000 | | | | 308,220 | |
| Repayment of convertible note payable – related party | | | - | | | | (32,500 | ) |
| Net cash provided by financing activities | | | 118,000 | | | | 785,505 | |
| | | | | | | | | |
| Net change in cash | | | 13,634 | | | | (24,271 | ) |
| Cash - beginning of period | | | 1,113 | | | | 52,088 | |
| Cash - end of period | | $ | 14,747 | | | $ | 27,817 | |
| | | | | | | | | |
| Supplemental Disclosures | | | | | | | | |
| Interest paid | | $ | – | | | $ | – | |
| Interest taxes paid | | $ | – | | | $ | – | |
| Non-cash investing and financing activities: | | | | | | | | |
| Conversion of notes payable and accrued interest to common stock | | $ | – | | | $ | 384,883 | |
| Conversion of notes payable and accrued interest to common stock - related party | | $ | – | | | $ | 49,869 | |
| Stock issued to settle accounts payable, bonuses and services | | $ | 471,000 | | | $ | – | |
| Common stock issued for prepaid asset | | $ | 30,000 | | | $ | - | |
| Debt discount on convertible notes | | $ | – | | | $ | 597,500 | |
| Debt discount on convertible notes – related party | | $ | 93,000 | | | $ | 70,570 | |
| Conversion of accounts payable and accrued expenses to convertible note payable | | $ | – | | | $ | 33,500 | |
See accompanying notes to unaudited consolidated financial statements.
5
BERING EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Bering Exploration, Inc. (the "Company" or "Bering") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X related to smaller reporting companies. These consolidated financial statements should be read in conjunction with the audited financial statements and notes, which are included as part of the Company's Form 10-K filed with the Securities and Exchange Commission (“SEC”) on July 16, 2012. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation, have been included in the accompanying unaudited consolidated financial statements. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. Notes to the consolidated financial statements which substantially duplicate the disclosures contained in the audited consolidated financial statements for fiscal year ended March 31, 2013 as reported in the 10-K have been omitted.
Significant accounting policies
Principles of Consolidation
The consolidated financial statements include the accounts of Bering Exploration, Inc. and its wholly owned subsidiaries, Secure Voice Communications, Inc. (Texas) and Bering Operations, Inc. All significant inter-company accounts and transactions have been eliminated.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Oil and Natural Gas Properties
We account for our oil and natural gas producing activities using the full cost method of accounting as prescribed by the United States Securities and Exchange Commission (SEC). Under this method, subject to a limitation based on estimated value, all costs incurred in the acquisition, exploration, and development of proved oil and natural gas properties, including internal costs directly associated with acquisition, exploration, and development activities, the costs of abandoned properties, dry holes, geophysical costs, and annual lease rentals are capitalized within a cost center on a country by country basis. Costs of production and general and administrative corporate costs unrelated to acquisition, exploration, and development activities are expensed as incurred.
Costs associated with unevaluated properties are capitalized as oil and natural gas properties but are excluded from the amortization base during the evaluation period. When we determine whether the property has proved recoverable reserves or not, or if there is an impairment, the costs are transferred into the amortization base and thereby become subject to amortization. We evaluate unevaluated properties for impairment at least annually.
Capitalized costs included in the amortization base are depleted using either the units of production method based on proved reserves where the Company operates the well or the percentage depletion method when the Company does not operate the well. Depletion is calculated using the capitalized costs included in the amortization base, including estimated asset retirement costs, plus the estimated future expenditures to be incurred in developing proved reserves, net of estimated salvage values.
The net book value of all capitalized oil and natural gas properties within a cost center, less related deferred income taxes, is subject to a full cost ceiling limitation which is calculated quarterly. Under the ceiling limitation, costs may not exceed an aggregate of the present value of future net revenues attributable to proved oil and natural gas reserves discounted at 10 percent using current prices, plus the lower of cost or market value of unproved properties included in the amortization base, plus the cost of unevaluated properties, less any associated tax effects. Any excess of the net book value, less related deferred tax benefits, over the ceiling is written off as expense. Impairment expense recorded in one period may not be reversed in a subsequent period even though higher oil and gas prices may have increased the ceiling applicable to the subsequent period.
6
BERING EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
Sales or other dispositions of oil and natural gas properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded unless the ratio of cost to proved reserves would significantly change. During the period ended September 30, 2013, the Company recognized an impairment of $203,497.
Note 2. Going Concern
These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has not generated significant revenue since its inception and is unlikely to generate earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders and the ability of the Company to obtain necessary equity financing to continue operations and the attainment of profitable operations. As of September 30, 2013, the Company has accumulated losses of approximately $13,821,000 since inception and has negative working capital of approximately $755,000. These factors raise substantial doubt regarding the Company's ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3. Related Party Transactions
In April 2013, the Company issued 305,000 shares of its common stock to the chief executive officer in lieu of paying him cash compensation and for unpaid expense reimbursements. The fair market value of the shares on the date of issuance was $61,000.
In April 2013, the Company cancelled a previously issued stock option to its chief financial officer and issued a new option to purchase 700,000 shares of the Company's common stock at a price of $0.10 per share, vesting immediately, with a five year term.
In April 2013, a shareholder advanced the Company $75,000 in exchange for a convertible note payable due September 30, 2013, bearing interest at 10% per annum and convertible into shares of the Company’s common stock at $0.05 per share.
In June 2013, the Company issued 900,000 shares of its common stock to the chief executive officer in lieu of paying him a cash bonus. The fair market value of the shares on the date of issuance was $45,000.
In June 2013, the Company issued 1,200,000 shares of its common stock to the chief financial officer for duties performed for the Company related the Company’s recent workover, farm-out and related oil and gas projects which were not contemplated in his employment contract. The fair market value of the shares on the date of issuance was $60,000.
In June 2013, a shareholder advanced the Company $18,000 in exchange for a convertible note payable due December 31, 2013, bearing interest at 10% per annum and convertible into shares of the Company's common stock at $0.05 per share.
In September 2013, the Company issued 10,016,200 shares to the chief executive officer in lieu of paying him cash compensation and for unpaid expense reimbursements. The fair market value of the shares on the date of issuance was $701,134.
In September 2013, the Company issued 5,500,000 shares to the chief financial officer in lieu of paying him cash compensation and for unpaid expense reimbursements. The fair market value of the shares on the date of issuance was $380,000.
7
BERING EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
Note 4. Debt
Debt as of September 30, 2013 and March 31, 2013 consists of the following:
Description | | September 30, 2013 | | | March 31, 2013 | |
| Notes payable | | | | | | |
| In June 2012, the Company financed the unpaid balance of a general liability insurance policy in the amount of $11,404 with a premium finance company. The financing agreement bears annual interest at 8% and is due in April 2013 and calls for monthly principal and interest payments of $1,193. The note is currently in default. | | $ | 5,820 | | | $ | 5,820 | |
| | | | | | | | | |
| Convertible note payable – related party | | | | | | | | |
| In August 2012, the Company entered into a convertible note agreement with Jinsun, LLC, in the principal amount of $247,500 at an annual interest rate of 10%. The note is due August 31, 2013. The note is convertible into the Company’s common stock at the lesser of (i) 50% of the average of the lowest three (3) closing bid prices for the Company’s common stock during the ten (10) trading days prior to the Conversion Date or (ii) $0.05 per share. The Company recorded a discount of $247,500 related to the derivative liability at inception. The Company recorded amortization of $247,500 and payments of $40,000 related to the discount from inception of the loan through September 30, 2013. The note is currently in default. | | $ | 207,500 | | | $ | 207,500 | |
| In December 2012, the Company entered into a convertible note agreement with Jinsun, LLC, in the principal amount of $20,000 at an annual interest rate of 10%. The note is convertible at $0.05 per share and is due August 31, 2013. The Company recorded a discount related to the beneficial conversion feature of the note of $20,000. The note is currently in default. | | | 20,000 | | | | 20,000 | |
| In January 2013, the Company entered into a convertible note agreement with Jinsun, LLC, in the principal amount of $2,000 at an annual interest rate of 10%. The note is convertible at $0.05 per share and is due August 31, 2013. The Company recorded a discount related to the beneficial conversion feature of the note of $2,000. The note is currently in default. | | | 2,000 | | | | 2,000 | |
| In April 2013, the Company entered into a convertible note agreement with Pass the Biscuits, LLC, in the principal amount of $75,000 at an annual interest rate of 10%. The note is convertible at $0.05 per share and is due September 30, 2013. The Company recorded a discount related to the beneficial conversion feature of the note of $75,000. The note is currently in default. | | | 75,000 | | | | - | |
| In June 2013, the Company entered into a convertible note agreement with Jinsun, LLC, in the principal amount of $18,000 at an annual interest rate of 10%. The note is convertible at $0.05 per share and is due December 31, 2013. The Company recorded a discount related to the beneficial conversion feature of the note of $18,000. | | | 18,000 | | | | - | |
| In September 2013, the Company entered into a convertible note agreement with Cinco NRG, LLC, in the principal amount of $25,000 at an annual interest rate of 10%. The note is convertible at the lesser of $0.04 per share or 50% of the closing price per share on the date of conversion. The note is due October 31, 2013. The Company recorded a discount related to the derivative liability at inception of $25,000. | | | 25,000 | | | | - | |
| Less: discounts | | | (226,370 | ) | | | (269,500 | ) |
| Add: Amortization of discounts | | | 193,656 | | | | 161,130 | |
| Total convertible notes payable – related party, net of discounts | | | 314,786 | | | | 121,130 | |
| Total convertible notes payable – related party, net of discount | | $ | 314,786 | | | $ | 121,130 | |
8
BERING EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
Note 5. Common Stock
In April 2013, the Company issued 305,000 shares of its common stock to the chief executive officer in lieu of paying him cash compensation and for unpaid expense reimbursements. The fair market value of the shares on the date of issuance was $61,000.
In April 2013, the Company issued 395,652 shares of its common stock to the chief financial officer upon the cashless exercise of a stock option.
In April 2013, the Company issued 300,000 shares of its common stock to an outside consultant. The total fair market value of the shares on the date of issuance was $69,000.
In May 2013, the Company issued a stock option to an outside consultant to purchase 400,000 shares of the Company’s common stock at a price of $0.04 per share, vesting immediately and exercisable over a three year term, as compensation for management consulting services. The fair market value of the option on the date of grant was $79,966 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include (1) discount rate of 0.19%, (2) expected life of three years, (3) expected volatility of 381% and (4) zero expected dividends. The options were exercised in May 2013.
In May 2013, the Company issued 33,000 shares of its common stock to an outside consultant in lieu of paying him cash compensation for accounting services. The fair market value of the shares on the date of issuance was $6,600.
In June 2013, the Company issued 900,000 shares of its common stock to the chief executive officer in lieu of paying him a cash bonus. The fair market value of the shares on the date of issuance was $45,000.
In June 2013, the Company issued 1,200,000 shares of its common stock to the chief financial officer for duties performed for the Company related the Company’s recent workover, farm-out and related oil and gas projects which were not contemplated in his employment contract. The fair market value of the shares on the date of issuance was $60,000.
In July 2013, under a settlement agreement, the Company entered into an agreement with its former production manager and his company whereby it will issue 150,000 shares of the Company’s common stock and a warrant to purchase 900,000 shares of the Company’s common stock and deliver a previously issued stock certificate for 500,000 shares on the Company’s restricted common stock.
In July 2013, the Company issued 25,000 shares of its common stock to an outside consultant in lieu of paying him cash compensation for accounting services. The fair market value of the shares on the date of issuance was $3,000.
In September 2013, the Company issued 10,016,200 shares to the chief executive officer in lieu of paying him cash compensation and for unpaid expense reimbursements. The fair market value of the shares on the date of issuance was $701,134.
In September 2013, the Company issued 5,500,000 shares to the chief financial officer in lieu of paying him cash compensation and for unpaid expense reimbursements. The fair market value of the shares on the date of issuance was $380,000.
Note 6. Stock Options and Warrants
In April 2012, the Company issued a stock option to its chief financial officer to purchase 700,000 shares of the Company’s common stock at a price of $0.10 per share, vesting immediately, with a five year term. The fair market value of the option on the date of grant was $154,000, and the Company expensed that amount related to these options in the year ended March 31, 2013. In April 2013, the stock option was cancelled and a new option was issued to purchase 700,000 shares of the Company’s stock at a price of $0.10 per share, vesting immediately, with a five year term. The fair market value of the option was $161,000 on the date of grant, and the Company expensed the incremental increase in the period ended September 30, 2013. The option was valued using the Black-Scholes option pricing model. Variables used in the valuation include (1) discount rate of 0.36%, (2) expected life of five years, (3) expected volatility of 400% and (4) zero expected dividends. The options were exercised in April 2013.
In July 2013, under a settlement agreement, the Company entered into an agreement with its former production manager and his company whereby it will issue 150,000 shares of the Company’s common stock and a warrant to purchase 900,000 shares of the Company’s common stock at a price of $0.10 per share with a three year term and deliver a previously issued stock certificate for 500,000 shares on the Company’s restricted common stock. The fair market value of the warrant was $71,921 on the date of grant. The warrant was valued using the Black-Scholes option pricing model. Variables used in the valuation include (1) discount rate of 0.17%, (2) expected life of three years, (3) expected volatility of 380% and (4) zero expected dividends.
9
BERING EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
The following table summarizes stock options issued and outstanding:
| | | Options | | | Weighted average exercise price | | | Aggregate intrinsic value | | | Weighted average remaining contractual life (years) | |
| Outstanding at March 31, 2013 | | | 700,000 | | | | 0.10 | | | | 294,000 | | | | 4.79 | |
| Granted | | | 1,100,000 | | | | 0.08 | | | | 191,000 | | | | 4.79 | |
| Exercised | | | (1,100,000 | ) | | | 0.08 | | | | (191,000 | ) | | | 4.79 | |
| Forfeited or cancelled | | | (700,000 | ) | | | 0.10 | | | | (294,000 | ) | | | 4.66 | |
| Expired | | | - | | | | - | | | | - | | | | - | |
| Outstanding at September 30, 2013 | | | - | | | $ | - | | | $ | - | | | | - | |
As of September 30, 2013, no options are exercisable.
The following table summarizes warrants issued and outstanding:
| | | Warrants | | | Weighted average exercise price | | | Aggregate intrinsic value | | | Weighted average remaining contractual life (years) | |
| Outstanding at March 31, 2013 | | | 46,000 | | | $ | 7.50 | | | $ | 333,966 | | | | 3.10 | |
| Granted | | | 900,000 | | | | 0.10 | | | | 71,921 | | | | 2.80 | |
| Exercised | | | - | | | | - | | | | - | | | | - | |
| Forfeited or cancelled | | | - | | | | - | | | | - | | | | - | |
| Expired | | | - | | | | - | | | | - | | | | - | |
| Outstanding at September 30, 2013 | | | 946,000 | | | $ | 0.46 | | | $ | 405,887 | | | | 2.79 | |
As of September 30, 2013, warrants to purchase 946,000 shares of common stock are exercisable.
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| ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of the Company’s financial condition as of September 30, 2013 and 2012, and its results of operations for the three and six months ended September 30, 2013 and 2012, should be read in conjunction with the audited consolidated financial statements and notes included in Bering Exploration Inc.’s Form 10-K for the year ended March 31, 2013, filed with the Securities and Exchange Commission.
Overview
In July 2010, the Company determined to primarily focus its business on the exploration, acquisition, development, production and sale of natural gas, crude oil and natural gas liquids from conventional reservoirs within the United States.
In addition, the Company owns 25% of Intertech Bio, which is developing products to treat cancer, infectious diseases and other medical conditions associated with compromised immune systems. The Company is not actively involved in the management of Intertech Bio.
A description of the Company’s oil and gas properties follows.
Chicas Locas Field,
Victoria County, Texas
In June 2011, the Company entered into a joint development agreement to co-develop an approximately 640 acre tract in Victory County, Texas. The Company will retain a 50% working interest in this prospect. Our net revenue interest in this field is 75%. In August 2011, the first well developed in this area began producing oil. The well is currently producing 4 bbl of oil per day. The operator of the well has determined that the well is producing more natural gas than oil and installed a gas pipeline to connect the well to a commercial pipeline. In April 2012, the pipeline was completed and we began producing natural gas accordingly. Our share of net production on this well was $21,065 and $44,392, respectively, during the three and six month periods ended September 30, 2013.
Singer Prospect,
Beauregard Parish, Louisiana
In August and October 2011, the Company leased the mineral rights on 320 gross acres in Singer, Louisiana. Initial geological assessment reveals four sands in zones from 9,600’ to 10,600’ with four potential drilling locations. Bering retains a 90% working interest in the prospect and a 75% net revenue interest. In August and October 2013, the lease on the Singer Prospect expired without being renewed and the Company transferred the cost to capitalized cost subject to amortization and evaluated for impairment under the ceiling test.
Ashland Prospect,
Concordia Parish, Louisiana
In July 2011, the Company purchased a 10% working interest in the Ashland prospect in Concordia Parish, Louisiana. Our net revenue interest in this well is 7.5%. The prospect contains 1,200 acres. Preliminary geological analysis reveals two sands between 6,900’ and 7,100’. In September 2011, the Sharp Heirs A No. 1 (A-1) well was successfully drilled on the prospect. The well was completed in November 2011 and is producing approximately 26 gross barrels of oil per day. In November 2011, a second well was drilled on this prospect. It was not commercially viable and was converted into a salt water disposal well. This well will be used to off load water produced in the first well and allow for production to increase on the first well. This work was completed and permitted in July 2012. A third well was drilled in May 2012 and is in the process of being completed. In October 2012, the Company assigned its interest in the Ashland Project to an unrelated third party in exchange for $150,000.
Gohlke Project
Texas Gulf Coast
In October 2011, the Company leased the mineral rights to 10,000 feet on 272 gross acres in South Texas. The tract has 12 potential drilling locations. Preliminary geological assessment reveals 3 sands at depths of 3,800’, 5,500’ and 8,100’. Bering currently holds a 95% working interest and a 76.5% net revenue interest. In June 2013, Bering entered into a Letter of Intent ("LOI") to farm-out the Gohlke Project in exchange for a 10% working interest calling to the Casiz Point. The LOI is subject to a definitive agreement which is currently being negotiated. In September 2013, the Company entered into a definitive agreement for the farm-out. The well was drilled in October 2013. After analysis of the information available to the Company, the Company elected not to participate in the completion of the well. Accordingly, the Company has no further economic interest in the Gohlke Project.
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North Edna Project
In May 2012, the Company acquired a 74% net revenue interest and a 100% of working interests in the North Edna Field located in Jefferson Davis Parish, Louisiana (“N. Edna”). N. Edna consists of 384.84 gross acres and the Lejeune No. 1 oil and gas well (Lejeune 1). In January 2013, the Company initiated a workover of the Lejeune 1 well. The workover was completed in February and is currently undergoing testing. The well is currently shut-in.
South Texas Project
Texas Gulf Coast
In September 2010, the Company obtained a 5% back in after payout working interest in a single well being drilled in South Texas, along the Texas Gulf Coast. The well was successfully completed and is producing natural gas. The operator of the well estimates that payout will be achieved in twelve months, at which time the Company’s net working interest will be established. Until such time as payout is achieved, the Company has no rights to the production from this well and accordingly, has not recognized any oil and gas revenues or reserves from this well.
We are currently evaluating additional mineral rights and drilling opportunities to acquire.
During the period ended September 30, 2013, the Company recognized an impairment of $203,497.
Comparison of Three Months Ended September 30, 2013 and 2012
The Company had revenue of $19,084 for the three months ended September 30, 2013 and $25,263 in revenue for the three months ended September 30, 2012. The decrease in revenues was due to a reduction in production of two wells completed in the calendar quarter ending December 31, 2011.
The Company’s expenses decreased from $1,548,958 for three months ended September 30, 2012 to $1,119,957 for three months ended September 30, 2013. The decrease of $429,001 was primarily due to the following: decreases in compensation expense of $444,809, oil and gas operating expenses of $104,954, professional fees of $50,975 and other expenses of $41,472, offset by the impairment of oil and gas assets of $203,497 and an increase in office administration costs of $9,732.
Compensation expense decreased due to a decrease in expenses paid via stock grants, oil and gas operating expenses decreased due to a workover that was completed in the prior year and not in the current year, professional fees decreased due to less utilization of geology and drilling professionals. The increase in impairment of oil and gas assets in the current period was due to the value of our oil and gas properties falling below the cost pool. The value of properties in the prior year was above the value of the accumulated costs and so no impairment was recorded in the prior year.
Interest expense increased $53,758, from $70,339 during the three months ended September 30, 2012 to $124,097 during the three months ended September 30, 2013, primarily due to increased debt levels during the current quarter. During the three months ended September 30, 2013, the Company recorded a reduction in its derivative liability of $461,454. In the three months ended September 30, 2012, the company recorded an increase in its derivative liability of $215,726.
As a result of the foregoing, the Company’s net loss for the three months ended September 30, 2013 and 2012 was $763,516 and $1,809,760, respectively.
Comparison of Six Months Ended September 30, 2013 and 2012
The Company had revenue of $44,886 for the six months ended September 30, 2013 and $49,340 in revenue for the six months ended September 30, 2012. The decrease in revenues was due to a reduction in production of two wells completed in the calendar quarter ending December 31, 2011.
The Company’s expenses decreased from $1,929,870 for six months ended September 30, 2012 to $1,612,188 for six months ended September 30, 2013. The decrease of $317,682 was primarily due to the following: decreases in compensation expense of $235,461, professional fees of $154,720, oil and gas operating expenses of $94,885, and other expenses of $34,044, offset by the impairment of oil and gas assets of $203,497.
Compensation expense decreased due to a decrease in expenses paid via stock grants, oil and gas operating expenses decreased due to a workover that was completed in the prior year and not in the current year, professional fees decreased due to less utilization of geology and drilling professionals. The increase in impairment of oil and gas assets in the current period was due to the value of our oil and gas properties falling below the cost pool. The value of properties in the prior year was above the value of the accumulated costs and so no impairment was recorded in the prior year.
In addition, interest expense decreased $299,798, from $502,811 during the six months ended September 30, 2012 to $203,013 during the six months ended September 30, 2013, primarily due to overall lower debt levels during the current year. During the six months ended September 30, 2013, the Company recorded a reduction in its derivative liability of $712,904. In the six months ended September 30, 2012, the company recorded an increase in its derivative liability of $215,726.
As a result of the foregoing, the Company’s net loss for the six months ended September 30, 2013 and 2012 was $1,057,411 and $2,599,067, respectively.
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Liquidity and Capital Resources
As of September 30, 2013, the Company had $14,747 in cash and negative working capital of $755,138. Additional capital will be necessary to fund ongoing operating costs and planned drilling programs over the next twelve months.
Net cash used in operating activities for the six months ended September 30, 2013 and 2012 was $104,366 and $420,108, respectively.
We anticipate that future liquidity requirements will arise from the need to finance our operations and continue our lease acquisition and drilling programs. The primary sources of funding for such requirements are expected to be raising additional capital from the sale of equity and/or debt securities. However, we can provide no assurances that we will be able to obtain additional financing on terms satisfactory to us, if at all, to remain a going concern. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis and ultimately to attain profitability. The Company is attempting to obtain cash to finance its operations through the sale of equity, debt borrowing and/or through the sale of working interests in our drilling programs. We can provide no assurances that financing will be available to us on terms satisfactory to us, if at all, or that we will be able to continue as a going concern. In this respect, see Note 2 - Going Concern in our financial statements for additional information as to the possibility that we may not be able to continue as a going concern.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the CEO and CFO concluded that our disclosure controls and procedures were not effective as of September 30, 2013 due to a lack of segregation of duties and an overreliance on consultants in the accounting and financial reporting process.
(b) Changes in Internal Controls Over Financial Reporting
There were no changes that occurred during the quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 1A. RISK FACTORS
Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable
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ITEM 5. OTHER INFORMATION
In September 2013, the Company issued 10,016,200 shares of the Company’s $0.001 par value Common Stock to the chief executive officer of the Company in lieu of paying him cash compensation and for unpaid expense reimbursements.
In September 2013, the Company issued 5,500,000 shares of the Company’s $0.001 par value Common Stock to the chief financial officer of the Company in lieu of paying him cash compensation and for unpaid expense reimbursements.
ITEM 6. EXHIBITS
| Exhibit No. | | Description |
| | | |
| 31.1 | | Certification of J. Leonard Ivins. |
| 31.2 | | Certification of Steven M. Plumb |
| 32.1 | | Certification for Sarbanes-Oxley Act of J. Leonard Ivins |
| 32.2 | | Certification for Sarbanes-Oxley Act of Steven M. Plumb |
| | | |
| 101.INS XBRL | | Instance Document |
| 101.SCH XBRL | | Taxonomy Extension Schema |
| 101.CAL XBRL | | Taxonomy Extension Calculation Linkbase |
| 101.DEF XBRL | | Taxonomy Extension Definition Linkbase |
| 101.LAB XBRL | | Taxonomy Extension Label Linkbase |
| 101.PRE XBRL | | Taxonomy Extension Definition Linkbase |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
| | BERING EXPLORATION, INC. |
| | |
| By: | /s/ J. Leonard Ivins |
| | J. Leonard Ivins, Chief Executive Officer |
| | Date: November 19, 2013 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| | | | | |
| /s/J. Leonard Ivins | | Chief Executive Officer and | | November 19, 2013 |
| J. Leonard Ivins | | Chairman of the Board | | |
| | | | | |
| /s/Steven M. Plumb | | Principal Financial and | | November 19, 2013 |
| Steven M. Plumb | | Accounting Officer | | |
