The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
UNITED AMERICAN PETROLEUM CORP.
United American Petroleum Corp. is incorporated under the laws of the state of Nevada (“United”). United’s principal business is the acquisition and management of leasehold interests in petroleum and natural gas rights, either directly or indirectly, and the exploitation and development of properties subject to these leases.
These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim consolidated financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of SEC Regulation S-X. The principles for interim consolidated financial information do not require the inclusion of all the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements on Form 10-K for the year ended December 31, 2012. The condensed consolidated financial statements included herein are unaudited; however, in the opinion of management, they contain all normal recurring adjustments necessary for a fair statement of the condensed results for the interim periods. Operating results for the nine month period ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. We made certain reclassifications to prior-period amounts to conform to the current presentation.
The Company has incurred a net loss and negative operating cash flows since inception through September 30, 2013. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s management is implementing plans to sustain the Company’s cash flow from operating activities and/or acquire additional capital funding. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Certain amounts disclosed in prior periods have been reclassified to conform to current presentation. Such reclassifications are for presentation purposes only and have no effect on the Company’s net loss or financial position in any of the periods presented.
UNITED AMERICAN PETROLEUM CORP.
UNITED AMERICAN PETROLEUM CORP.
UNITED AMERICAN PETROLEUM CORP.
As of September 30, 2013 and December 31, 2012, the Company had a related party receivables of $23,771 and $13,196, respectively, related to working interest amounts payable. Our directors are also officers in the Company.
The Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
The following is a reconciliation of the conversion option liability and embedded warrant liability for which Level 3 inputs were used in determining fair value:
The Company’s conversion option liabilities are valued using pricing models and the Company generally uses similar models to value similar instruments. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs. These consolidated financial liabilities do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy. The Company uses the Black Scholes Option Pricing Model to value its derivatives based upon the following assumptions: dividend yield of -0-%, volatility of 129.70-143.41%, risk free rate of 0.14-0.42% and an expected term of 0.50 to 1 year.
On January 31, 2013, we entered into a Note Purchase Agreement with an investor pursuant to which the investor agreed to lend the Company up to $400,000 in multiple installments in exchange for a senior secured convertible promissory note with a conversion price equal to 60% of the lowest trading price per share during the previous 25 trading days. The first installment of $55,000 was delivered less a fee of $5,000 on the date of the Purchase Agreement. The second installment of $25,000 was delivered in April 2013. The notes mature on January 31, 2014, or upon default, whichever is earlier and bear interest at an annual rate of 12%. As described in Note 5, the embedded conversion feature qualified for liability classification at fair value. As a result, the Company recorded a full discount of $55,000 to the note payable on issuance.
On August 13, 2013, September 9, 2013 and September 26, 2013 the holder of the convertible note exercised a portion of the conversion rights of the note for 250,000, 300,000 and 600,000 shares of common respectively at stock prices of $0.03, $0.0265, and $0.01160 respectively for a total of $22,410 principal converted.
As a result of the exercise of the conversion option of the note, the Company fully amortized the remaining balance of the associated debt discount of $55,000 recognizing interest expense for the same amount.
Credit Facility – February 19, 2013
On February 19, 2013, we entered into a credit facility with an investor unrelated to the investor described above pursuant to which the investor lent $103,500 to us in a single installment in exchange for a convertible promissory note with a conversion price equal to the average lowest trading price per share during the previous 10 trading days. The embedded conversion option cannot be exercised until 180 days from the date of the note and as such, will not be priced until exercisable. The total number of conversion shares is calculated by dividing the amount of the notes by the conversion price.
In May of 2013, we did not comply with the timely filing requirement on this loan. Pursuant to the promissory note, a penalty of 50% of the outstanding principal amount equaling $51,750 was added to the balance of the note. This additional sum will be eligible for conversion at the same terms as the original principal balance.
On August 26, 2013, September 6, 2013 and September 26, 2013 the holder of the convertible note exercised a portion of the conversion rights of the note for 478,469, 840,336 and 1,034,483 shares of common respectively at stock prices of $0.0418, $0.0357, and $0.145 respectively for a total of $90,250 principal converted.
As a result of the exercise of the conversion option of the note, the Company fully amortized the remaining balance of the associated debt discount of $155,250 recognizing interest expense for the same amount.
Credit Facility – April 22, 2013
On April 22, 2013, we entered into a credit facility with an investor unrelated to the investor described above pursuant to which the investor lent $63,000 to us in a single installment in exchange for a convertible promissory note with a conversion price equal to the average lowest trading price per share during 5 of the previous 10 trading days. The embedded conversion option cannot be exercised until 180 days from the date of the note and as such, will not be priced until exercisable. The total number of conversion shares is calculated by dividing the amount of the notes by the conversion price.
On September 23, 2013 the investor lent an additional $47,000 in a single installment under the same terms agreement and terms as the previous installment made April 22, 2013.
8.Subsequent Events
On October 7, 2013, the holder of the February 19, 2013 note exercised a portion of the conversion rights of the note for 1,492,537 shares of common stock at a stock price of $0.0134 for a total of $70,250 principle converted.
This Quarterly Report of United American Petroleum Corp. on Form 10-Q contains forward-looking statements, particularly those identified with the words “anticipates,” “believes,” “expects,” “plans,” “intends,” “objectives” and similar expressions. These statements reflect management’s best judgment based on factors known at the time of such statements. The reader may find discussions containing such forward-looking statements in the material set forth under “Management’s Discussion and Analysis and Plan of Operations,” generally, and specifically therein under the captions “Liquidity and Capital Resources” as well as elsewhere in this Quarterly Report on Form 10-Q. Actual events or results may differ materially from those discussed herein. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guarantee, or warranty is to be inferred from those forward-looking statements.
The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.
The Company follows the full cost method of accounting for its investments in oil and gas properties. Under the full cost method, all costs associated with the exploration of properties are capitalized into appropriate cost centers within the full cost pool. Internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken and do not include any costs related to production, general corporate overhead, or similar activities. Cost centers are established on a country-by-country basis.
Capitalized costs within the cost centers are amortized on the unit-of-production basis using proved oil and gas reserves. The cost of investments in unproved properties and major development projects are excluded from capitalized costs to be amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such a determination is made, the properties are assessed annually to ascertain whether impairment has occurred. The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.
For each cost center, capitalized costs are subject to an annual ceiling test, in which the costs shall not exceed the cost center ceiling. The cost center ceiling is equal to i) the present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus ii) the cost of properties not being amortized; plus iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less iv) income tax effects related to differences between the book and tax basis of the properties. If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs.
The Company accounts for share-based compensation in accordance with Accounting Standards Codification subtopic 718-10, Stock Compensation (“ASC 718-10”). This requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.
As of September 30, 2013, there were no outstanding employee stock options.
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations or cash flows.
surviving, making United our new wholly-owned subsidiary. Immediately thereafter and pursuant to the Merger Agreement, United merged with and into the Company, with the Company surviving and we changed our name to “United American Petroleum Corp.” In connection with the Merger Transaction, we assumed all of United’s contractual obligations and acquired certain oil and gas properties of United located in Texas. The Merger Transaction was deemed to be a reverse acquisition, where the Company (the legal acquirer) is considered the accounting acquiree and United (the legal acquiree) is considered the accounting acquirer. The Company is deemed a continuation of the business of United, and the historical financial statements of United became the historical financial statements of the Company.
Recent Events.
On October 11, 2012, the Company filed with the Nevada Secretary of State a Certificate of Designation, for its Series B Preferred Stock (the “Designation”). The Designation, which was approved by the Board of Directors on October 9, 2012 and authorized under the Company’s Articles of Incorporation, which provides the Board of Directors the right to designate series of preferred stock, provided for the designation of a series of 1,000 shares of Series B Preferred Stock, par value $0.001 (the “Series B Preferred Stock”). The Series B Preferred Stock have no dividend rights, no liquidation preference, no redemption rights and no conversion rights. The Series B Preferred Stock have the right, voting in aggregate, to vote on all shareholder matters (including, but not limited to at every meeting of the stockholders of the Company and upon any action taken by stockholders of the Company with or without a meeting) equal to fifty-one percent (51%) of the total vote (the “Super Majority Voting Rights”). Additionally, we are not allowed to adopt any amendments to our Bylaws, Articles of Incorporation, as amended, make any changes to the Certificate of Designations establishing the Series A Preferred Stock, or effect any reclassification of the Series A Preferred Stock, without the affirmative vote of at least 66-2/3% of the outstanding shares of the Series B Preferred Stock.
No shares of the Company’s newly designated Series B Preferred Stock have been issued.
The Company also filed a Certificate of Withdrawal with the Secretary of State of Nevada on October 11, 2012, which terminated its previous designation of Series A Convertible Preferred Stock, of which no shares were outstanding as of such termination.
Our Business. We are an exploration company engaged in the acquisition, exploration, development and production of oil and gas properties. Our principal business is the acquisition of leasehold interests in petroleum and natural gas rights, either directly or indirectly, and the exploitation and development of properties subject to these leases. Our primary focus is to develop our properties that have potential for near-term production. We also provide operational expertise for several third-party well owners out of our operation base in Austin, Texas. We currently have proved reserves in the State of Texas.
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements for the period ended September 30, 2013, together with notes thereto, which are included in this Quarterly Report.
Results of Operations for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012.
Revenues. We had total revenues of $111,884 for the three months ended September 30, 2013, which were generated from oil and gas sales of $106,634 and operating income of $5,250. This was a $102,137 decrease from total revenues of $214,021 for the three months ended September 30, 2012, which were generated from oil and gas sales of $194,723 and operating income of $19,298. The Company had to rework certain wells as a result of decreasing yields, as a result oil and gas revenue decreased during the period of the rework. During the three months ended September 30, 2013, we decreased our barrels of oil per day (BOPD) produced to an average of 12.01 BOPD from 22.05 BOPD for the three months ended September 30, 2012, also as a result of the well rework.
Additionally, our properties are commonly owned by many working interest owners. Some of those working interest owners have elected not to contribute amounts due for workover procedures resulting in an election of “non-consent”. We have been able to benefit by paying for those non-consenting portions of the workover procedure. We are able to benefit from paying the non-consenting portion because we are allowed to collect from production an amount equal 400% of the non-consenting portion that we paid. Approximately 50% of our increase in oil and gas sales was directly attributable to non-consenting revenues.
Our administrative revenue increase was a result of income derived from well administrative fees charged through United Operating, LLC, our wholly-owned subsidiary, to third party well owners for managing and accounting for the development and production of their oil and gas property interests.
The following table sets forth the revenue and production data for the three months ended September 30, 2013 and September 30, 2012
| | | THREE MONTHS ENDED
SEPTEMBER 30, 2013 | | THREE MONTHS ENDED
SEPTEMBER 30, 2012 | | INCREASE
(DECREASE) | | % INCREASE
(DECREASE) |
| REVENUES | | | | | | | | | | | | | | | | |
| Oil and Gas Revenues | | $ | 106,634 | | | | 194,723 | | | $ | (88,089 | ) | | | (83 | %) |
| Administrative revenues | | | 5,250 | | | | 19,298 | | | | (14,048 | ) | | | (871 | %) |
| Total Revenues | | | 111,884 | | | | 214,021 | | | | (102,137 | ) | | | (120 | %) |
| | | | | | | | | | | | | | | | | |
| PRODUCTION: | | | | | | | | | | | | | | | | |
| Total production (BOE) | | | 1,081 | | | | 2,012 | | | | | | | | (46 | %) |
| Barrels of Oil Equivalent per day (BOPD) | | | 12.01 | | | | 22.05 | | | | | | | | (46 | %) |
| | | | | | | | | | | | | | | | | |
| AVERAGE SALES PRICES: | | | | | | | | | | | | | | | | |
| Price per Barrel of Oil Equivalent | | | 98.65 | | | | 98.78 | | | $ | 18.76 | | | | 2 | % |
Operating Expenses. For the three months ended September 30, 2013, our total operating expenses were $254,329, which consisted of lease operating expenses of $82,517, accretion expense of $1,000, depletion expense of $14,769 and general and administrative expenses of $156,045. By comparison, for the three months ended September 30, 2012, our total operating expenses were $372,822, which consisted of lease operating expenses of $98,023, accretion expense of $0, amortization expense of $1,757, depletion expense of $21,922, and general and administrative expenses of $251,120.
The following table sets forth information relating to our operating expenses for the three months ended September 30, 2013 and September 30, 2012.
| | | THREE MONTHS ENDED
SEPTEMBER 30, 2013 | | THREE MONTHS ENDED
SEPTEMBER 30, 2012 | | INCREASE
(DECREASE) | | % INCREASE
(DECREASE) |
| | | | | | | | | | | | | | | | | |
| LEASE OPERATING EXPENSES | | | | | | | | | | | | | | | | |
| Lease operating expenses | | | 62,840 | | | | 42,474 | | | | 20,006 | | | | 47 | % |
| Workover expenses | | | 13,071 | | | | 61,063 | | | | (47,992 | ) | | | (79 | %) |
Legal, title and administrative well
expenses
| | | 6,966 | | | | 2,290 | | | | 4,676 | | | | 204 | % |
| Total Lease Operating expenses | | | 82,517 | | | | 105,827 | | | | (23,310 | ) | | | (22 | %) |
| | | | | | | | | | | | | | | | | |
| Depreciation, depletion, amortization and accretion expense | | | 14,769 | | | | 23,679 | | | | (7,696 | ) | | | (33 | %) |
| | | | | | | | | | | | | | | | | |
| GENERAL AND ADMINISTRATIVE EXPENSES | | | | | | | | | | | | | | | | |
SEC related general and administrative
expenses
| | | 65,647 | | | | 89,565 | | | | (23,918 | ) | | | (27 | %) |
| Employee and officer expenses | | | 27,126 | | | | 130,753 | | | | (103,627 | ) | | | (79 | %) |
| Other general and administrative | | | 63,272 | | | | 54,684 | | | | 8,588 | | | | 16 | % |
Total General and Administrative
expenses
| | | 156,045 | | | | 275,002 | | | | (118,956 | ) | | | (43 | %) |
| | | | | | | | | | | | | | | | | |
| TOTAL OPERATING EXPENSES | | | 254,329 | | | | 404,508 | | | | (137,012 | ) | | | (34 | %) |
For the three months ended September 30, 2013 compared to the three months ended September 30, 2012, the Company incurred decreasing lease and well operating expenses of $23,310 or 22% as a result of Company conducting significant workover of the Lozano, McKenzie, Merrick Davis and Welder properties in 2012 that continued into 2013 but decreased by the third quarter as a result of decreasing well yields.
During the three months ended September 30, 2013 compared to the three months ended September 30, 2012, our depreciation, depletion, amortization, and accretion expenses decreased by $7,696 or 33% due to an decrease in our production and producing properties.
The decrease in general and administrative expenses of $118,956 or 48% during the three months ended September 30, 2013, compared to the prior period, was largely due to decreases in officer compensation and public reporting and compliance related expenses. We believe we have reduced our costs of operating as a public company to their absolute minimum amount.
Net Operating Loss. For the three months ended September 30, 2013, our total net operating loss was $142,445 as compared to a net operating loss of $158,801 for the three months ended September 30, 2012, a decrease of $16,356 or 2% from the prior period. Our net operating loss decreased over the prior period due to increases in oil and gas sales partially offset by increases to workover expenses and decreases in General and Administrative expenses.
Other Income (Expense). For the three months ended September 30, 2013, we had interest expense $193,956 associated with the conversion of certain of our previously outstanding convertible promissory notes during the period, compared to interest income of $21,548 for the three months ended September 30, 2012, relating to our outstanding convertible promissory notes.
Net Income (Loss). For the three months ended September 30, 2013, our net loss was $307,215 as compared to a net loss of $137,253 for the three months ended September 30, 2012, an increase of $169,962 or 520% from the prior period.
Results of Operations for the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012.
Revenues. We had total revenues of $496,595 for the nine months ended September 30, 2013, which were generated from oil and gas sales of $475,145 and Operating income of $21,450. This was a $64,891 increase from total revenues of $431,704 for the nine months ended September 30, 2012, which were generated from oil and gas sales of $376,140 and administrative revenue of $55,564. Our Oil and Gas Revenue increased nearly 50% over the same period in the prior year because of results from recently completed workover procedures. Those workover procedures were planned on properties with the best possible results.
Additionally, our properties are commonly owned by many working interest owners. Some of those working interest owners have elected not to contribute amounts due for workover procedures resulting in an election of “non-consent”. We have been able to benefit by paying for those non-consenting portions of the workover procedure. We are able to benefit from paying the non-consenting portion because we are allowed to collect from production an amount equal 400% of the non-consenting portion that we paid. Approximately 50% of our increase in oil and gas sales was directly attributable to non-consenting revenues.
Our administrative revenue decrease was a result of income derived from well administrative fees charged through United Operating, LLC, our wholly-owned subsidiary, to third party well owners for managing and accounting for the development and production of their oil and gas property interests.
The following table sets forth the revenue and production data for the nine months ended September 30, 2013 and September 30, 2012
| | | NINE MONTHS ENDED
SEPTEMBER 30, 2013 | | NINE MONTHS ENDED
SEPTEMBER 30, 2012 | | INCREASE
(DECREASE) | | % INCREASE
(DECREASE) |
| REVENUES | | | | | | | | | | | | | | | | |
| Oil and Gas Revenues | | $ | 475,145 | | | | 376,140 | | | $ | 99,005 | | | | 26 | % |
| Administrative revenues | | | 21,450 | | | | 55,564 | | | | (34,114 | ) | | | (86 | %) |
| Total Revenues | | | 496,595 | | | | 431,704 | | | | 64,891 | | | | (6 | %) |
| | | | | | | | | | | | | | | | | |
| PRODUCTION: | | | | | | | | | | | | | | | | |
| Total production (BOE) | | | 5,053 | | | | 4,346 | | | | 1,638 | | | | 70 | % |
| Barrels of Oil Equivalent per day (BOPD) | | | 28.07 | | | | 24.07 | | | | 9.10 | | | | 70 | % |
| | | | | | | | | | | | | | | | | |
| AVERAGE SALES PRICES: | | | | | | | | | | | | | | | | |
| Price per Barrel of Oil Equivalent | | | 94.03 | | | | 86.55 | | | $ | 15.05 | | | | 19 | % |
For the nine months ended September 30, 2013, we increased total barrels of oil equivalent (BOE) produced by 70% over the same period in the prior year. For the nine months ended September 30, 2013 and September 30, 2012, total BOE produced was 5,053 and 4,346, respectively. The increase in oil and gas production and revenues is primarily related to production increases on the Lozano, McKenzie, Merrick Davis and Welder properties. The Company conducted workover procedures on each of these properties during 2012 which has yielded significant increases in production for the current year’s period over the prior year’s period.
Operating Expenses. For the nine months ended September 30, 2013, our total operating expenses were $870,542, which consisted of lease operating expenses of $345,930, accretion expense of $3,000, depletion expense of $89,022, and general and administrative expenses of $423,590. By comparison, for the nine months ended September 30, 2012, our total operating expenses were $1,020,009, which consisted of lease operating expenses of $320,467, accretion expense of $5,271, depletion expense of $57,224, and general and administrative expenses of $637,047.
The following table sets forth information relating to our operating expenses for the nine months ended September 30, 2013 and September 30, 2012.
| | | NINE MONTHS ENDED
SEPTEMBER 30, 2013 | | | NINE MONTHS ENDED
SEPTEMBER 30, 2012 | | | INCREASE
(DECREASE) | | % INCREASE
(DECREASE) |
| | | | | | | | | | | |
| LEASE OPERATING EXPENSES | | | | | | | | | | |
| Lease operating expenses | | | 214,290 | | | | | 200,584 | | | | 13,706 | | 7% |
| Workover expenses | | | 129,081 | | | | | 139,731 | | | | (10,650) | | (8%) |
Legal, title and administrative well
expenses
| | | 11,199 | | | | | 3,216 | | | | 8,343 | | 259% |
| Total Lease Operating expenses | | | 354,930 | | | | | 343,531 | | | | 11,399 | | 3% |
| | | | | | | | | | | |
| Depreciation, depletion, amortization and accretion expense | | | 92,022 | | | | | 62,495 | | | | 29,527 | | 47% |
| | | | | | | | | | | |
| GENERAL AND ADMINISTRATIVE EXPENSES | | | | | | | | | | |
SEC related general and administrative
expenses
| | | 209,558 | | | | | 353,425 | | | | (143,867) | | (41%) |
| Employee and officer expenses | | | 100,632 | | | | | 242,200 | | | | (141,568) | | (58%) |
| Other general and administrative | | | 113,401 | | | | | 112,651 | | | | 753 | | 1% |
Total General and Administrative
expenses
| | | 423,591 | | | | | 708,276 | | | | (284,682) | | (40%) |
| | | | | | | | | | | | | | | |
TOTAL OPERATING EXPENSES
| | | 870,543 | | | | | 1,114,302 | | | | (243,759) | | (22%) |
During the three months ended September 30, 2013 compared to the three months ended September 30, 2012, our depreciation, depletion, amortization, and accretion expenses increased by $29,040 or 155% due to an increase in our production and producing properties.
The decrease in general and administrative expenses of $708,276 or 40% during the nine months ended September 30, 2013, compared to the prior period, was largely due to decreases in public reporting and compliance related expenses offset by increases to employee and officer related compensation.
Net Operating Loss. For the nine months ended September 30, 2013, our total net operating loss was $373,947 as compared to a net operating loss of $588,305 for the nine months ended September 30, 2012, a decrease of $214,358 or 30% from the prior period. Our net operating decreased over the prior period due to increases in oil and gas sales.
Other Income (Expense). For the nine months ended September 30, 2013, we had interest expense $274,894 associated with the conversion of certain of our previously outstanding convertible promissory notes during the period, compared to interest expense of $2,252,939 for the nine months ended September 30, 2012, relating to our outstanding convertible promissory notes.
Net Income (Loss). For the nine months ended September 30, 2013, our net loss was $552,753, as compared to a net loss of $5,871,462 for the nine months ended September 30, 2012, an increase in net income of $5,318,709 or 81% from the prior period.
Liquidity and Capital Resources. During the nine months ended September 30, 2013, we used $302,218 in operations, $68,201 in investing activities, related solely to property acquisitions and received $285,500 of cash from financing activities, related directly to proceeds on convertible notes. Our convertible notes are described below.
We consider the breakeven point for the company to be roughly 36 Barrels of Oil per Day (BOPD). During the previous three months, we have increased our production toward that objective. Further, we believe we will be closer to achieving that objective through workovers already conducted as of the date of this report.
Third Note. On January 31, 2013, we entered into a Note Purchase Agreement with an investor pursuant to which the investor agreed to lend the Company up to $400,000 in multiple installments in exchange for a senior secured convertible promissory note with a conversion price equal to 60% of the lowest trading price per share during the previous 25 trading days. The first installment of $55,000 was delivered less a fee of $5,000 on the date of the Purchase Agreement. The second installment of $25,000 was delivered in April 2013. The notes mature on January 31, 2014, or upon default, whichever is earlier and bear interest at an annual rate of 12%. As described in Note 5, the embedded conversion feature qualified for liability classification at fair value. As a result, the Company recorded a full discount of $55,000 to the note payable on issuance.
On August 13, 2013, September 9, 2013 and September 26, 2013 the holder of the convertible note exercised a portion of the conversion rights of the note for 250,000, 300,000 and 600,000 shares of common respectively at stock prices of $0.03, $0.0265, and $0.01160 respectively for a total of $22,410 principal converted.
As a result of the exercise of the conversion option of the note, the Company fully amortized the remaining balance of the associated debt discount of $55,000 recognizing interest expense for the same amount.
The agreement provided that the investor would lend additional amounts to us in installments at their discretion.
Fourth Note . On February 19, 2013, we entered into a credit facility with an investor unrelated to the investor described above pursuant to which the investor lent $103,500 to us in a single installment in exchange for a convertible promissory note with a conversion price equal to the average lowest trading price per share during the previous 10 trading days. The embedded conversion option cannot be exercised until 180 days from the date of the note and as such, will not be priced until exercisable. The total number of conversion shares is calculated by dividing the amount of the notes by the conversion price.
In May of 2013, we did not comply with the timely filing requirement on this loan. Pursuant to the promissory note, a penalty of 50% of the outstanding principal amount equaling $51,750 was added to the balance of the note. This additional sum will be eligible for conversion at the same terms as the original principal balance.
On August 26, 2013, September 6, 2013 and September 26, 2013 the holder of the convertible note exercised a portion of the conversion rights of the note for 478,469, 840,336 and 1,034,483 shares of common respectively at stock prices of $0.0418, $0.0357, and $0.145 respectively for a total of $90,250 principal converted.
As a result of the exercise of the conversion option of the note, the Company fully amortized the remaining balance of the associated debt discount of $155,250 recognizing interest expense for the same amount.
On September 23, 2013 the investor lent an additional $47,000 in a single installment under the same terms agreement and terms as the previous installment made April 22, 2013.
As of September 30, 2013, we had total current assets of $981,751, consisting of cash of $624,267, accounts receivable of $333,713, related party receivable of $23,771.
As of September 30, 2013, we had a working capital deficit of $553,675 and an accumulated deficit of $7,809,396.
In the opinion of management, available funds will not satisfy our working capital requirements to operate at our current level of activity for the next twelve months. If we do not raise additional capital, then we may not be able to conduct oil and gas exploration and development activities and expand our operations. Our forecast for the period for which our financial resources will be adequate to support our operations involves risks and uncertainties and actual results could differ as a result of a number of factors. In addition to generating revenues from our current operations, we will need to raise additional capital to expand our operations to the point at which we are able to operate profitably.
We have been, and intend to continue, working toward identifying and obtaining new sources of financing. No assurances can be given that we will be successful in obtaining additional financing in the future. Any future financing that we may obtain may cause significant dilution to existing stockholders. Moreover, in the event that we can raise additional funds, we cannot guarantee that additional funding will be available on favorable terms. Any debt financing or other financing of securities senior to common stock that we are able to obtain will likely include financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would have a negative impact on our business, prospects, financial condition, results of operations and cash flows.
If adequate funds are not available, we may be required to delay, scale back or eliminate portions of our operations or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain of our assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of our assets and could also adversely affect our ability to fund our continued operations and our expansion efforts with respect to our properties.
During the remainder of 2012 and through 2013, we expect that the following will continue to impact our liquidity: (i) legal and accounting costs of being a public company; (ii) expected expenses related to the exploration and development of our properties; (iii) expected expenses related to repair and maintenance costs on wells that are currently producing and (iv) anticipated increases in overhead and the use of independent contractors for services to be provided to us. We will need to obtain funds to pay those expenses. Other than those items specified above, we are not aware of any other known trends, events or uncertainties, which may affect our future liquidity.
We are in the exploration stage, have limited revenue and have incurred net losses to date. These factors raise substantial doubt about our ability to continue as a going concern. No assurances can be given that we will obtain sufficient working capital to sustain ongoing operations. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
We are not currently conducting any research and development activities. We do not anticipate conducting such activities in the near future. In the event that we expand our operations, then we may need to hire additional employees or independent contractors as well as purchase or lease additional equipment. Our management believes that we do not require the services of independent contractors to operate at our current level of activity. However, if our level of operations increases beyond the level that our current staff can provide, then we may need to supplement our staff in this manner.
Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements as of September 30, 2013.
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).
Evaluation of disclosure controls and procedures. We maintain controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, 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 principal executive and principal financial officer, to allow timely decisions regarding required disclosures. Based upon the evaluation by our principal executive and principal financial officer, of those controls and procedures, performed as of the end of the period covered by this report, our principal executive and principal financial officer concluded that our disclosure controls and procedures were not effective due to our over reliance on consultants in our accounting and financial statement closing processes. To address the need for more effective internal controls, management has plans to improve the existing controls and implement new controls as our financial position and capital availability improves.
Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
From time to time, we may be party to various legal proceedings. We do not currently expect that any currently pending legal proceedings will have a material adverse effect on our business, results of operations or financial condition.
There have been no material changes from the risk factors previously disclosed in the Company’s Form 10-K/A filed with the Commission on October 19, 2012, which risk factors are incorporated by reference herein. Investors are encouraged to read and review the risk factors included in the Form 10-K/A prior to making an investment in the Company.
None.
None.
Not applicable.
On October 11, 2012, the Company filed with the Nevada Secretary of State, a Certificate of Designations, Establishing the Designations, Preferences, Limitations and Relative Rights of Its Series B Preferred Stock (the “Designation”). The Designation, which was approved by the Board of Directors on October 9, 2012 and authorized under the Company’s Articles of Incorporation, which provides the Board of Directors the right to designate series of preferred stock, provided for the designation of a series of 1,000 shares of Series B Preferred Stock, par value $0.001 (the “Series B Preferred Stock”). The Series B Preferred Stock have no dividend rights, no liquidation preference, no redemption rights and no conversion rights. The Series B Preferred Stock have the right, voting in aggregate, to vote on all shareholder matters (including, but not limited to at every meeting of the stockholders of the Company and upon any action taken by stockholders of the Company with or without a meeting) equal to fifty-one percent (51%) of the total vote (the “Super Majority Voting Rights”). Additionally, we are not allowed to adopt any amendments to our Bylaws, Articles of Incorporation, as amended, make any changes to the Certificate of Designations establishing the Series A Preferred Stock, or effect any reclassification of the Series A Preferred Stock, without the affirmative vote of at least 66-2/3% of the outstanding shares of the Series B Preferred Stock. No shares of the Company’s newly designated Series B Preferred Stock have been issued.
The Company also filed a Certificate of Withdrawal with the Secretary of State of Nevada on October 11, 2012, which terminated its previous designation of Series A Convertible Preferred Stock, of which no shares were outstanding as of such termination.
| 2.1 | Agreement and Plan of Exchange by and between Northern Future Energy Corp. and NFE Acquisition Corp., dated December 16, 2009 (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K, filed February 7, 2008). |
| 2.2 | Asset Purchase Agreement by and between Enforce Global Solutions, LLC and the Company, dated as of December 29, 2009 (incorporated by reference to Exhibit 2.5 of the Company’s Annual Report on Form 10-K, filed May 14, 2010). |
| 2.3 | Membership Interest Purchase Agreement by and between the Company and John Britchford-Steel, dated as of December 31, 2009 (incorporated by reference to Exhibit 2.6 of the Company’s Annual Report on Form 10-K, filed May 14, 2010. |
| 2.4 | Agreement and Plan of Merger, by and among the Company, United American Petroleum Corp. and United PC Acquisition Corp., dated December 31, 2010 (incorporated by reference to the Company’s Current Report on Form 8-K filed January 5, 2011). |
| 2.5 | Agreement and Plan of Merger and Reorganization dated December 31, 2010, by and between the Company and United American Petroleum Corp. (incorporated by reference to the Company’s Current Report on Form 8-K filed January 5, 2011). |
| 3.1 | Amended and Restated Articles of Incorporation, as filed with the Secretary of State of the State of Nevada, effective January 31, 2008 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed February 7, 2008). |
| 3.2 | Bylaws (incorporated by reference to Exhibit 3(ii) of the Company’s Registration Statement on Form SB-2, filed April 15, 2005). |
| 3.3 | Certificate of Designation of Series A Convertible Preferred Stock, as filed with the Secretary of State of the State of Nevada, effective January 31, 2008 (incorporated by reference to Exhibit 3.3 of the Company’s Current Report on Form 8-K, filed February |
| | 7, 2008). |
| 3.4 | Articles of Exchange, as filed with the Secretary of State of the State of Nevada, effective January 31, 2008 (incorporated by reference to Exhibit 3.4 of the Company’s Current Report on Form 8-K, filed February 7, 2008). |
| 3.5 | Articles of Merger, as filed with the Secretary of State of the State of Nevada, effective December 16, 2009. |
| 3.6 | Certificate of Correction to Articles of Merger, as filed with the Secretary of State of the State of Nevada, effective January 29, 2010 (incorporated by reference to Exhibit 3.6 of the Company’s Annual Report on Form 10-K, as amended, filed January 21, 2011). |
| 3.7 | Articles of Merger between United PC Acquisition Corp. and United American Petroleum Corp. (incorporated by reference to the Company’s Current Report on Form 8-K filed January 5, 2011). |
| 3.8 | Articles of Merger between United American Petroleum Corp. and Forgehouse, Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed January 5, 2011). |
| 3.9 | Certificate of Designation of Series B Preferred Stock (1) |
| 3.10 | Certificate of Withdrawal of Certificate of Designation of Series A Convertible Preferred Stock (1) |
| 4.1 | Form of Registration Rights Agreement (incorporated by reference to the Company’s Current Report on Form 8-K filed January 5, 2011). |
| 4.2 | Form of Registration Rights Agreement (incorporated by reference to the Company’s Current Report on Form 8-K filed October 18, 2011). |
| 10.1 | 2008 Incentive Plan (incorporated by reference to Exhibit B of the Company’s Definitive Information Statement on Schedule 14C, filed January 2, 2008). |
| 10.2 | Form of Note and Warrant Purchase Agreement (incorporated by reference to the Company’s Current Report on Form 8-K filed January 5, 2011). |
| 10.3 | Form of Senior Secured Convertible Promissory Note (incorporated by reference to the Company’s Current Report on Form 8-K filed January 5, 2011). |
| 10.4 | Form of Warrant (incorporated by reference to the Company’s Current Report on Form 8-K filed January 5, 2011). |
| 10.5 | Form of Security Agreement (incorporated by reference to the Company’s Current Report on Form 8-K filed January 5, 2011). |
| 10.6 | Stock Vesting Agreement by and among the Company and Michael Carey, dated as of December 31, 2010 (incorporated by reference to the Company’s Current Report on Form 8-K filed January 5, 2011). |
| 10.7 | Stock Vesting Agreement by and among the Company and Ryan Hudson, dated as of December 31, 2010 (incorporated by reference to the Company’s Current Report on Form 8-K filed January 5, 2011). |
| 10.8 | Employment Agreement of Michael Carey (incorporated by reference to the Company’s Current Report on Form 8-K filed January 5, 2011). |
| 10.9 | Employment Agreement of Ryan Hudson (incorporated by reference to the Company’s Current Report on Form 8-K filed January 5, 2011). |
| 10.10 | Form of Note and Warrant Purchase Agreement (incorporated by reference to the Company’s Current Report on Form 8-K filed October 18, 2011). |
| 10.11 | Form of Convertible Promissory Note (incorporated by reference to the Company’s Current Report on Form 8-K filed October 18, 2011). |
| 10.12 | Form of Warrant (incorporated by reference to the Company’s Current Report on Form 8-K filed October 18, 2011). |
| 10.13 | Purchase and Sale Agreement by and between the Company and Alamo Energy Corp. dated October 28, 2011 (incorporated by reference to the Company’s Current Report on Form 8-K filed November 8, 2011). |
| 10.14 | Purchase and Sale Agreement by and between the Company and McKenzie Corp. dated November 30, 2011(incorporated by reference to the Company’s Current Report on Form 8-K filed December 5, 2011). |
| 10.15 | Promissory Note by and between the Company and JMJ Financial date January 31, 2013 (incorporated by reference to the Company’s Current Report on Form 8-K filed March 7, 2013). |
| 10.16 | Security Purchase Agreement between the Company and Asher Enterprises, Inc. dated February 19, 2013 (incorporated by reference to the Company’s Current Report on Form 8-K filed March 7, 2013). |
| 10.17 | Promissory Note by and between the Company and Asher Enterprises, Inc. dated February 19, 2013 (incorporated by reference to the Company’s Current Report on Form 8-K filed March 7, 2013). |
| 31.1 | Certification of Principal Executive and Financial Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934 (1) |
| 32.1 | Certification of Principal Executive and Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) |
| 101.ins* | XBRL Instance Document (1) |
| 101.sch* | XBRL Taxonomy Schema Document (1) |
| 101.cal* | XBRL Taxonomy Calculation Linkbase Document (1) |
| 101.lab* | XBRL Taxonomy Label Linkbase Document (1) |
| 101.pre* | XBRL Taxonomy Presentation Linkbase Document (1) |
(1) Filed herewith.
* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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.
| | United American Petroleum Corp.,
a Nevada corporation | |
| | | | |
| Date: November 19, 2013 | | | |
| | | Michael Carey | |
| | | Chief Executive Officer, Chief Financial Officer, President, Treasurer and a director (Principal Executive and Financial Officer) | |
