UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
Commission File Number 033-19411-C
Paxton Energy, Inc. | |
(Exact name of registrant as specified in its charter) | |
Nevada | 20-1399613 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2533 North Carson Street, Suite 6232, Carson City, NV 89706 | |
(Address of principal executive offices) | |
(775) 841-5049 | |
(Registrant’s telephone number) | |
n/a | |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes | x | No | o |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes | ¨ | No | ¨ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer o | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes | o | No | x |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 12, 2009, issuer had 23,586,139 outstanding shares of common stock, par value $0.001.
1
TABLE OF CONTENTS
Page | ||
PART I – FINANCIAL INFORMATION | ||
Item 1. Financial Statements | 2 | |
Condensed Balance Sheets (Unaudited) | 3 | |
Condensed Statements of Operations (Unaudited) | 4 | |
Condensed Statements of Shareholders’ Deficit | 5 | |
Condensed Statements of Cash Flows (Unaudited) | 6 | |
Notes to Condensed Financial Statements (Unaudited) | 7 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | |
Item 3. Quantitative and Qualitative Disclosures about Market Risk | 16 | |
Item 4T. Controls and Procedures | 16 | |
PART II – OTHER INFORMATION | ||
Item 6. Exhibits | 17 | |
Signature | 17 |
1
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Paxton Energy, Inc., has included its unaudited condensed balance sheets as of March 31, 2009, and December 31, 2008 (the end of its most recently completed fiscal year), unaudited condensed statements of operations and cash flows for the three months ended March 31, 2009 and 2008, and for the period from June 30, 2004 (date of inception) through March 31, 2009, and unaudited condensed statement of stockholders’ deficit for the three months ended March 31, 2009, together with unaudited condensed notes thereto. In the opinion of management of Paxton Energy, Inc., the financial statements reflect all adjustments, all of which are normal recurring adjustments, necessary to fairly present the financial condition, results of operations, and cash flows of Paxton Energy, Inc., for the interim periods presented. The financial statements included in this report on Form 10-Q should be read in conjunction with the audited financial statements of Paxton Energy, Inc., and the notes thereto for the year ended December 31, 2008, included in our annual report on Form 10-K.
2
PAXTON ENERGY, INC. | ||||||||
(AN EXPLORATION-STAGE COMPANY) | ||||||||
CONDENSED BALANCE SHEETS | ||||||||
(Unaudited) | ||||||||
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 4,135 | $ | 27,523 | ||||
Receivable from attorney's trust account | 77,478 | $ | 77,478 | |||||
Accounts receivable | 6,028 | 4,076 | ||||||
Prepaid expenses and other current assets | 3,511 | 10,410 | ||||||
Total Current Assets | 91,152 | 119,487 | ||||||
Property and Equipment, net of accumulated depreciation | 2,045 | 2,428 | ||||||
Oil and gas properties, using full cost accounting | 587,886 | 587,886 | ||||||
Total Assets | $ | 681,083 | $ | 709,801 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 249,619 | $ | 231,221 | ||||
Accrued liabilities | 7,000 | 6,750 | ||||||
Payable to Bayshore Exploration L.L.C. | 85,132 | 79,903 | ||||||
Notes payable, less unamortized discount | 208,871 | 199,194 | ||||||
Notes payable to related parties | 75,000 | 75,000 | ||||||
Accrued registration right penalties and interest | 575,883 | 560,947 | ||||||
Total Current Liabilities | 1,201,505 | 1,153,015 | ||||||
Long-Term Liabilities | ||||||||
Long-term asset retirement obligation | 34,944 | 34,520 | ||||||
Fair value of warrants | 2,792 | - | ||||||
Total Long-Term Liabilities | 37,736 | 34,520 | ||||||
Stockholders' Deficit | ||||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding | - | - | ||||||
Common stock, $0.001 par value; 100,000,000 shares authorized, 23,586,139 shares issued and outstanding | 23,586 | 23,586 | ||||||
Additional paid-in capital | 7,243,887 | 7,243,887 | ||||||
Retained earnings (deficit) | - | (1,066,295 | ) | |||||
Deficit accumulated during the exploration stage | (7,825,631 | ) | (6,678,912 | ) | ||||
Total Stockholders' Deficit | (558,158 | ) | (477,734 | ) | ||||
Total Liabilities and Stockholders' Deficit | $ | 681,083 | $ | 709,801 |
3
PAXTON ENERGY, INC. | ||||||||||||
(AN EXPLORATION-STAGE COMPANY) | ||||||||||||
CONDENSED STATEMENTS OF OPERATIONS | ||||||||||||
(Unaudited) | ||||||||||||
For the Period from | ||||||||||||
June 30, 2004 | ||||||||||||
For the Three Months Ended | (Date of Inception) | |||||||||||
March 31, | through | |||||||||||
2009 | 2008 | March 31, 2009 | ||||||||||
Oil and gas revenues, net | $ | 1,535 | $ | 16,791 | $ | 331,554 | ||||||
Costs and Operating Expenses | ||||||||||||
Lease operating expenses | 4,223 | 15,125 | 119,906 | |||||||||
Impairment loss on oil and gas properties | 5,230 | - | 3,822,126 | |||||||||
Accretion of asset retirement obligations | 424 | 784 | 6,638 | |||||||||
General and administrative expense | 35,677 | 77,377 | 1,617,835 | |||||||||
Stock-based compensation | - | - | 1,468,575 | |||||||||
Total costs and operating expenses | 45,554 | 93,286 | 7,035,080 | |||||||||
Loss from operations | (44,019 | ) | (76,495 | ) | (6,703,526 | ) | ||||||
Other income (expense) | ||||||||||||
Interest income | - | 368 | 63,982 | |||||||||
Change in fair value of warrants | (2,284 | ) | - | (2,792 | ) | |||||||
Gain on transfer of common stock from Bayshore Exploration, L.L.C. | - | - | 24,000 | |||||||||
Interest expense | (23,936 | ) | (15,102 | ) | (227,343 | ) | ||||||
Interest expense from amortization of discount on secured convertible notes and other debt | (9,677 | ) | - | (979,952 | ) | |||||||
(35,897 | ) | (14,734 | ) | (1,122,105 | ) | |||||||
Net Loss | $ | (79,916 | ) | $ | (91,229 | ) | $ | (7,825,631 | ) | |||
Basic and Diluted Loss Per Common Share | $ | (0.00 | ) | $ | (0.00 | ) | ||||||
Basic and Diluted Weighted-Average Common Shares Outstanding | 23,586,139 | 23,586,139 |
The accompanying notes are an integral part of these condensed financial statements.
4
PAXTON ENERGY, INC. | ||||||||||||||||||||||||
(AN EXPLORATION-STAGE COMPANY) | ||||||||||||||||||||||||
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT | ||||||||||||||||||||||||
For the Three Months ended March 31, 2009 | ||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
Deficit | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Retained | During the | Total | |||||||||||||||||||||
Common Stock | Paid-In | Earnings | Exploration | Stockholders' | ||||||||||||||||||||
Shares | Amount | Capital | (Deficit) | Stage | Deficit | |||||||||||||||||||
Balance - December 31, 2008, as previously reported | 23,586,139 | $ | 23,586 | $ | 7,243,887 | $ | (1,066,295 | ) | $ | (6,678,912 | ) | $ | (477,734 | ) | ||||||||||
Cumulative effect of reclassification of warrants | - | - | - | 1,066,295 | (1,066,803 | ) | (508 | ) | ||||||||||||||||
Balance - January 1, 2009, as adjusted | 23,586,139 | 23,586 | 7,243,887 | - | (7,745,715 | ) | (478,242 | ) | ||||||||||||||||
Net loss | - | - | - | - | (79,916 | ) | (79,916 | ) | ||||||||||||||||
Balance - March 31, 2009 | 23,586,139 | $ | 23,586 | $ | 7,243,887 | $ | - | $ | (7,825,631 | ) | $ | (558,158 | ) |
The accompanying notes are an integral part of these condensed financial statements.
5
PAXTON ENERGY, INC. | ||||||||||||
(AN EXPLORATION-STAGE COMPANY) | ||||||||||||
CONDENSED STATEMENTS OF CASH FLOWS | ||||||||||||
(Unaudited) | ||||||||||||
For the Period from | ||||||||||||
June 30, 2004 | ||||||||||||
For the Three Months Ended | (Date of Inception) | |||||||||||
March 31, | through | |||||||||||
2009 | 2008 | March 31, 2009 | ||||||||||
Cash Flows From Operating Activities | ||||||||||||
Net loss | $ | (79,916 | ) | $ | (91,229 | ) | $ | (7,825,631 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Impairment loss on oil and gas properties | 5,230 | - | 3,822,126 | |||||||||
Stock-based compensation for services | - | - | 1,468,575 | |||||||||
Interest expense from amortization of discount on secured convertible notes and other debt | 9,677 | - | 979,952 | |||||||||
Gain on transfer of common stock from Bayshore Exploration, L.L.C. | - | - | (24,000 | ) | ||||||||
Accretion of asset retirement obligations | 424 | 783 | 6,638 | |||||||||
Depreciation expense | 383 | 351 | 3,118 | |||||||||
Change in fair value of warrants | 2,284 | - | 2,792 | |||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivable | (1,952 | ) | 12,363 | 10,790 | ||||||||
Prepaid expenses and other current assets | 6,899 | 13,835 | (3,511 | ) | ||||||||
Accounts payable and accrued liabilities | 18,647 | 12,582 | 399,217 | |||||||||
Accrued registration rights penalties and interest | 14,936 | 15,102 | 168,105 | |||||||||
Net Cash Used In Operating Activities | (23,388 | ) | (36,213 | ) | (991,829 | ) | ||||||
Cash Flows From Investing Activities | ||||||||||||
Acquisition of oil and gas properties | - | (22,313 | ) | (1,916,515 | ) | |||||||
Purchase of property and equipment | - | (1,137 | ) | (5,163 | ) | |||||||
Net Cash Used In Investing Activities | - | (23,450 | ) | (1,921,678 | ) | |||||||
Cash Flows From Financing Activities | ||||||||||||
Proceeds from the issuance of common stock, net of registration and offering costs | - | - | 2,879,970 | |||||||||
Proceeds from issuance of secured convertible notes and other debt, and related beneficial conversion features and common stock, less amounts held in attorney's trust account | - | - | 777,522 | |||||||||
Proceeds from related parties for issuance of secured convertible notes and other debt, and related beneficial conversion features and common stock | - | - | 150,000 | |||||||||
Payment of payable to Bayshore Exploration L.L.C. | - | - | (489,600 | ) | ||||||||
Payment of principal on notes payable to stockholder | - | - | (325,000 | ) | ||||||||
Payment of principal on note payable | - | - | (75,250 | ) | ||||||||
Net Cash Provided By Financing Activities | - | - | 2,917,642 | |||||||||
Net Increase (Decrease) In Cash And Cash Equivalents | (23,388 | ) | (59,663 | ) | 4,135 | |||||||
Cash and Cash Equivalents At Beginning Of Period | 27,523 | 117,210 | - | |||||||||
Cash and Cash Equivalents At End Of Period | $ | 4,135 | $ | 57,547 | $ | 4,135 |
Supplemental Cash Flow Information—Note E.
The accompanying notes are an integral part of these condensed financial statements.
6
PAXTON ENERGY, INC.
(An Exploration Stage Company)
Notes to Condensed Financial Statements
(A) Organization, Change in Control and Significant Accounting Policies
Organization and Nature of Operations – Paxton Energy, Inc. (the “Company”) was organized under the laws of the State of Nevada on June 30, 2004. During August 2004, shareholder control of the Company was transferred, a new board of directors was elected and new officers were appointed. During June 2005, the Company commenced acquiring working interests in oil and gas properties principally located in the Cooke Ranch prospect in LaSalle County, Texas. The Company is engaged primarily as a joint interest owner with Bayshore Exploration L.L.C. (Bayshore) in the acquisition, exploration, and development of oil and gas properties and the production and sale of oil and gas. Through March 31, 2009, the Company has participated in drilling ten wells. Additionally, the Company owns a working interest in the 8,843-acre balance of the Cooke Ranch prospect and has the right to participate in a program to acquire up to a 75% working interest in leases adjacent to the Cooke Ranch prospect, where, to date, the Company has acquired an interest in leases on approximately 2,268 gross acres. The Company is considered to be in the exploration stage due to the lack of significant revenues. Bayshore is sufficiently capitalized such that it is not a variable interest entity.
Condensed Interim Financial Statements – The accompanying unaudited condensed financial statements of Paxton Energy, Inc., 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. Accordingly, these financial statements do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the Company’s annual financial statements and the notes thereto for the year ended December 31, 2008, and for the period from June 30, 2004 (date of inception) through December 31, 2008, included in the Company’s annual report on Form 10-K. In the opinion of the Company’s management, the accompanying unaudited condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to fairly present the Company’s financial position as of March 31, 2009 and its results of operations and cash flows for the three months ended March 31, 2009 and 2008 and for the period from June 30, 2004 (date of inception), through March 31, 2009. The results of operations for the three months ended March 31, 2009, may not be indicative of the results that may be expected for the year ending December 31, 2009.
Business Condition – The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has not had significant revenue and is still considered to be in the exploration stage. The Company incurred losses of $79,916 for the three months ended March 31, 2009 and $2,376,293 for the year ended December 31, 2008, and used $23,388 and $196,296 of cash in its operating activities during the three-months ended March 31, 2009 and the year ended December 31, 2008, respectively. Through March 31, 2009, the Company has accumulated a deficit during the exploration stage of $7,825,631. At March 31, 2009, the Company has a working capital deficit of $1,110,353 including current liabilities of $1,201,505. The current liabilities are composed of accrued registration right penalties and interest of $575,883, notes payable of $283,871, payables to Bayshore of $85,132, and other accounts payable and accrued liabilities of $256,619. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
During the next 12 months, management will continue production from the Company’s La Salle County, Texas, wells. Additionally, the Company intends to rely on participation in farm-out agreements to provide additional cash to the Company. Under such farm-out agreements, various other parties undertake the operations of the wells with no cost to the Company. In these farm-outs, the Company will generally retain a rather small interest in the revenue of any particular well with the possibility of greater percentage participation after payout of the original costs of the wells to the other party. The Company has entered into a farm-out agreement related to its interest in a lease of 220 acres in LaSalle County, Texas. Depending upon the success of the farm-outs, the Company may also put some of its leasehold interest up for sale.
7
Without additional sources of cash, the Company will be unable to substantially reduce its working capital deficit or reduce its current liabilities, including those that are substantially past due. The Company’s creditors may not continue to forbear from collection efforts. Management’s external financing efforts may be impaired by the Company’s limited revenues, as well as the limited liquidity for the Company’s common stock. There is no assurance that additional capital funding would be available through private or public equity financing or bank financing, including any funds that the Company may seek from existing stockholders. Furthermore, outside events such as the price of oil, the condition of the stock market, and interest rate levels could affect the Company’s ability to obtain financing. The Company has no financing arrangements with any person to obtain additional funding on any terms and cannot assure that it will be able to do so. If the Company is unable to obtain additional capital funding, it may be required to sell assets, reduce its holdings of oil and gas properties or merge with another entity in order to generate sufficient cash to liquidate its liabilities.
Basic and Diluted Loss per Common Share – Basic loss per common share amounts are computed by dividing net loss by the weighted-average number of shares of common stock outstanding during each period. Diluted loss per share amounts are computed assuming the issuance of common stock for potentially dilutive common stock equivalents. All outstanding stock options and warrants are currently antidilutive and have been excluded from the diluted loss per share calculations. None of the 1,269,250 shares of common stock issuable upon exercise of warrants or the 375,000 shares of common stock issuable upon the exercise of options were included in the computation of diluted loss per share at March 31, 2009 or 2008.
(B) Oil and Gas Properties
At March 31, 2009, four wells (Cooke No. 2, Cooke No. 3, Cooke No. 6, and Cartwright No. 3) were either producing or were awaiting certain work over processes before being placed back into production, and two wells (Cooke No. 5 and Cartwright No. 1) are shut in awaiting further evaluation. During the quarter ended March 31, 2009, the Company incurred re-completion costs on the Cooke No. 3 well of $5,230, which have been included in the impairment loss for the current quarter.
(C) Fair Value of Warrants
Effective January 1, 2009 we adopted the provisions of EITF 07-5, "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result of adopting EITF 07-5, warrants to purchase 1,269,250 of the Company’s common stock previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. These warrants have an exercise price of $3.00 and expire in April 2011. As such, effective January 1, 2009 we reclassified the fair value of these common stock purchase warrants, which have exercise price reset features, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue in April 2006. On January 1, 2009, we recorded, as a cumulative effect adjustment, $508 to deficit accumulated during the exploration stage to recognize the fair value of such warrants on such date and reclassified the effects of prior accounting for the warrants in the amount of $1,066,295 from retained earnings (deficit) to deficit accumulated during the exploration stage. The fair value of these common stock purchase warrants increased to $2,792 as of March 31, 2009. As such, we recognized a $2,284 loss from the change in fair value of these warrants for the three months ended March 31, 2009.
8
These common stock purchase warrants were initially issued in connection with our April 2006 issuance of 2,452,100 shares of common stock. The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants will be recognized currently in results of operations until such time as the warrants are exercised or expire. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:
March 31, 2009 | January 1, 2009 | |||
Risk free interest rate | 0.84% | 0.84% | ||
Expected life | 2.1 Years | 2.3 Years | ||
Dividend yield | - | - | ||
Volatility | 160% | 140% |
Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods consistent with the expected life of the warrants. Management believes this method produces an estimate that is representative of expectations of future volatility over the expected term of these warrants. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities with a term consistent with the remaining terms of the warrants.
(D) Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157��), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
• | Level one — Quoted market prices in active markets for identical assets or liabilities; | ||
• | Level two — Inputs other than level one inputs that are either directly or indirectly observable; and | ||
• | Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use. |
Liabilities measured at fair value on a recurring basis at March 31, 2009 are summarized as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Fair value of warrants | $ | - | $ | 2,792 | $ | - | $ | 2,792 |
9
There were no liabilities measured at fair value at December 31, 2008. As further described in Note C, the fair value of warrants was determined using the Black-Scholes option pricing model.
Assets measured at fair value on a non-recurring basis at March 31, 2009, and at December 31, 2008, are summarized as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Oil and gas properties | $ | - | $ | - | $ | 587,886 | $ | 587,886 |
At December 31, 2008, the Company determined that capitalized costs for wells drilled were in excess of the present value of estimated future cash flows from those wells. As a result, the Company recognized impairment on wells drilled, reducing their carrying value to zero at December 31, 2008. Other oil and gas properties, including leasehold interest costs, exploration agreement costs, and geological and geophysical costs, are carried at the lower cost or fair market value. At December 31, 2008, management reduced their carrying value to $587,886, which reflects management’s judgment of the current fair value of leases for similar properties.
(E) Supplemental Cash Flow Information
During the three months ended March 31, 2009, the Company had the following noncash investing and financing activity:
· | Of the transactions with Bayshore during the three months ended March 31, 2009, $5,230 was financed by Bayshore on open account at March 31, 2009. |
During the three months ended March 31, 2008, the Company had the following noncash investing and financing activity:
· | Of the transactions with Bayshore during the three months ended March 31, 2008, $130,114 was financed by Bayshore on open account at March 31, 2008. |
The Company paid $8,750 and $0 for interest during the three months ended March 31, 2009 and 2008, respectively.
10
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes to our financial statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors discussed elsewhere in this report.
Certain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as statements relating to our anticipated revenues, costs and operating expenses and results, estimates used in the preparation of our financial statements, future performance and operations, plans for future oil and gas exploration, sources of liquidity, and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include those relating to the availability of funding from external sources on terms acceptable to us for planned exploration, development, or acquisitions; the ability of our management to develop and execute an effective exploration, development, and acquisition plan; the ability of third-party project operators and contractors to identify suitable prospects and conduct required operations effectively and economically and in accordance with contractual requirements; future results of drilling individual wells and other exploration and development activities; future variations in well performance as compared to initial test data; the prices at which we may be able to sell oil or gas; domestic or global economic conditions; the inherent uncertainty and costs of prolonged arbitration or litigation; and changes in federal or state tax laws or the administration of such laws.
Overview
We are a small oil and gas exploration company participating with minority working interests in oil and gas drilling in the Cooke Ranch field and another area in La Salle County, Texas, operated by Bayshore Exploration, L.L.C. (“Bayshore”) and L & J Exploration, LLC.
We were incorporated in Nevada on June 30, 2004. At that time, we issued to our founder 10,000,000 shares of common stock (after giving effect to the immediate cancellation of 41,000,000 shares) and 5,000,000 shares to another stockholder for cash. On August 25, 2004, a group of investors obtained the controlling interest in our company by purchasing 14,650,000 of the 15,000,000 shares then issued and outstanding, the initial officer and director resigned, and on that date, Robert Freiheit, our current president and a director, who purchased 7,500,000 of the outstanding shares transferred, was appointed as sole director and president.
In mid-2005, we initiated oil and gas exploration activities by acquiring for cash and common stock a working interest in the Cooke No. 3 test well to be drilled on the Cooke Ranch in La Salle County, Texas. We have subsequently expanded our La Salle County, Texas working interests.
Results of Operations
Comparison of Three Months Ended March 31, 2009 and 2008
Oil and Gas Revenues
Our oil and gas net revenue was $1,535 for the three months ended March 31, 2009, compared to $16,791 for the three months ended March 31, 2008, representing a decrease of $15,256, or 91%, for the three-month period. The decrease in revenues for the three months ended March 31, 2009, was principally due to the decrease in production for the quarter compared to the prior year for the Cooke #3 well, in spite of our recompletion efforts. Management has not received units of production and pricing information on which to base detailed comparisons.
11
Cost and Operating Expenses
Our costs and operating expenses were $45,554 for the three months ended March 31, 2009, compared to $93,286 for the three months ended March 31, 2008, representing a decrease of $47,732, or 51%.
Lease Operating Expenses — Lease operating expenses were $4,223 for the three months ended March 31, 2009, compared to $15,125 for the three months ended March 31, 2008, representing a decrease of $10,902, or 72%, for the three-month period. The decrease for the three month period primarily relates to a decrease of expense on the Cooke #6 well in comparison to the prior year.
Impairment Loss on Oil and Gas Properties — During the quarter ended March 31, 2009, we incurred capitalizable well costs of $5,230. During the year ended December 31, 2008, we had recognized impairment on all of our interests in wells and reduced their carrying value to zero. During the quarter ended March 31, 2009, we have recognized additional impairment equal to the amount of the capitalizable well costs incurred, which results in the carrying value of the wells continuing to be carried at zero. Other oil and gas properties with a carrying value of $587,886, including leasehold interest costs, exploration agreement costs, and geological and geophysical costs, are carried at the cost, which management believes to be lower than fair value.
Accretion of Asset Retirement Obligations — Accretion of asset retirement obligations was $424 for the three months ended March 31, 2009, compared to $784 for the three months ended March 31, 2008, representing a decrease of $360, or 46%, for the three-month period. The decrease in accretion of asset retirement obligations expenses principally reflects the fact that the original accretion period for certain wells has now past plus the decrease in the number of wells in which we are participating.
General and Administrative Expense — General and administrative expense was $35,677 for the three months ended March 31, 2009, as compared to $77,377 for the three months ended March 31, 2008, representing a decrease of $41,700, or 54%, for the three-month period. The decrease in general and administrative expense during the three months ended March 31, 2009 is related primarily to 1) decreases in consulting services from investor relations consultants, 2) reduced legal expenses, and 3) decreases in salary expense because the chief executive office ceased taking compensation effective March 1, 2008.
Although the net changes and percent changes with respect to our revenues and our costs and operating expenses for the three months ended March 31, 2009 and 2008, are summarized above, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.
Other Income (Expense)
Interest Income — We had no interest income for the three months ended March 31, 2009, as compared to $368 for the three months ended March 31, 2008, representing a decrease of $368 or 100% for the three-month period. This decrease is due to a decrease in cash balances and the closure of our money market savings account during the quarter ended December 31, 2008.
12
Change in fair value of warrants — As further explained in Note C to the accompanying financial statements, effective January 1, 2009 with the adoption of the provisions of EITF 07-5, warrants to acquire 1,269,250 shares of our common stock that were previously treated as equity must now be treated as a derivative liability and measured at fair value. During the three months ended March 31, 2009, the fair value of the warrants, measured using the Black-Scholes model, increased by $2,284 resulting in a corresponding charge to the statement of operations.
Interest Expense — We incurred interest expense of $23,936 for the three months ended March 31, 2009, as compared to $15,102 for the three months ended March 31, 2008. The increase in interest expense principally relates to interest we have been incurring of $3,000 per month on newly issued notes payable in the principal amount of $300,000 since September 2008.
Liquidity and Capital Resources
At March 31, 2009, our principal source of liquidity consisted of $4,135 of cash plus $77,478 being held in our attorney’s trust account, as compared to $27,523 of cash plus $77,478 being held in our attorney’s trust account at December 31, 2008. At March 31, 2009, we had a working capital deficit of $1,110,353 as compared to a deficit of $1,033,528 as of December 31, 2008. In addition, our stockholders’ deficit was $558,158 at March 31, 2009, compared to stockholders’ deficit of $477,734 at December 31, 2008, an increase in stockholders’ deficit of $80,424, principally representing our net loss for the three months ended March 31, 2009.
Our operations used net cash of $23,388 during the three months ended March 31, 2009, as compared to using $36,213 of net cash during the three months ended March 31, 2008. Net cash used in operating activities consists of our net loss, adjusted principally for the non-cash impairment loss and interest recognized during the three months ended March 31, 2009, plus changes in the non-cash elements of our working capital. The $12,825 decrease in the net cash used in our operating activities primarily resulted from reduced cash expenditures during the three months ended March 31, 2009, principally due to decreased cash available to pay for operations.
Investing activities for the three months ended March 31, 2009, used no net cash, as compared to $23,450 net cash used during the three months ended March 31, 2008. Historically, cash used in investing activities principally related to expenditures for exploration and development of oil and gas properties paid for with cash.
Financing activities provided no net cash during the three month period ended March 31, 2009, and no net cash during the three months ended March 31, 2008.
We are focusing our efforts on continuing limited production from our La Salle County, Texas, wells while we seek external funding to reduce liabilities and to undertake possible further oil and gas activities. Additionally, we intend to rely on participation in farm-out agreements to provide additional cash to us along with increasing the value of our leaseholds. Under such farm-out agreements, we would seek the commitment of other parties to undertake the operations of the wells at their cost, with no cost to us. In these farm-outs, we would likely generally retain a rather small interest in the revenue of any particular well with the possibility of greater percentage participation after payout of the original costs of the wells. We have entered into a farm-out agreement related to our interest in a recently-acquired lease of 220 acres in LaSalle County, Texas. We and Bayshore are currently negotiating with third parties a more extensive farm-out arrangement of other oil and gas interests, although no agreement has yet been reached.
13
We cannot assure that additional capital funding would be available through private or public equity financing or bank financing, including any funds that we may seek from existing stockholders. Without additional sources of cash, we will be unable to substantially reduce our working capital deficit or reduce our current liabilities, including those that are substantially past due. Our creditors may not continue to forbear from collection efforts. Management’s external financing efforts may be impaired by our limited revenues, our continuing inability to identify and exploit exploration opportunities and increase production, continuing general and administrative costs, and the limited liquidity for our common stock. There is no assurance that additional capital funding would be available through private or public equity financing or bank financing, including any funds that we may seek from existing stockholders. Furthermore, outside events such as the price of oil, the condition of the stock market, and interest rate levels could affect our ability to obtain financing. We have no financing arrangements with any person to obtain additional funding on any terms and cannot assure that we will be able to do so. If we are unable to obtain additional capital funding, we may be required to sell assets, reduce our holdings of oil and gas properties or merge with another entity in order to generate sufficient cash to liquidate our liabilities. In conjunction with Bayshore, we are outsourcing farm-out strategies on all our leased properties. If we are unable to farm-out some of our interests by June 1, 2009, we intend to put some of our leasehold interests up for sale.
We have no significant contractual obligations or commercial commitments not reflected on our balance sheet as of this date.
Critical Accounting Policies
We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations. The list is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management's judgment in their application. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis or Plan of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Notes to the December 31, 2008 Financial Statements. Note that our preparation of the financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Revenue Recognition
All revenues are derived from the sale of produced crude oil and natural gas. Revenue and related production taxes and lease operating expenses are recorded in the month the product is delivered to the purchaser. Payment for the revenue, net of related taxes and lease operating expenses, is received from the operator of the well approximately 45 days after the month of delivery. Accounts receivable are stated at the amount management expects to collect. Management provides for probable uncollectible amounts through a charge to earnings and a credit to an allowance based on its assessment of the collectibility of the receivable. At March 31, 2009, and December 31, 2008, no allowance for doubtful accounts was deemed necessary.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable and deferred taxes. Deferred taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements and tax operating loss carryforwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
14
Impairment of Long-Lived Assets
Long-lived assets, including oil and gas properties, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to estimated future undiscounted net cash flows of the related asset or group of assets over their remaining lives. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent of other groups of assets. The impairment of long-lived assets requires judgments and estimates. If circumstances change, such estimates could also change.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141(R)), which replaces SFAS 141, Business Combinations. In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which amends and clarifies the initial recognition and measurement, subsequent measurement and accounting, and related disclosures of assets and liabilities arising from contingencies in a business combination under SFAS 141(R). SFAS 141(R) and this FSP are effective for business combinations for which the acquisition date is on or after December 15, 2008. The adoption of these standards did not have any immediate effect on our financial statements, however, the revised standards will govern the accounting for any future business combinations that we may enter into.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 was effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, FSP No. 157-2 delayed the effective date of SFAS No. 157 one year for all nonfinancial assets and nonfinancial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. Those assets and liabilities measured at fair value under SFAS No. 157 at January 1, 2008 did not have a material impact on our financial statements. The adoption of FSP 157-2 for nonfinancial assets and liabilities at January 1, 2009 did not have a material impact on our financial statements.
In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which provides additional guidance for estimating fair value in accordance with SFAS No. 157. This FSP states that a significant decrease in the volume and level of activity for the asset or liability when compared with normal market activity is an indication that transactions or quoted prices may not be determinative of fair value because there may be increased instances of transactions that are not orderly in such market conditions. Accordingly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value. This FSP is effective for us beginning April 1, 2009. We do not expect the impact of the adoption of this FSP to be material on our financial statements.
15
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which requires disclosures about the fair value of our financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the balance sheets, in the interim reporting periods as well as in the annual reporting periods. In addition, the FSP requires disclosures of the methods and significant assumptions used to estimate the fair value of those financial instruments. This FSP is effective for us beginning April 1, 2009. We do not expect the impact of the adoption of this FSP to be material on our financial statements.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which establishes a new method of recognizing and reporting other-than-temporary impairments of debt securities and requires additional disclosures related to debt and equity securities. This FSP does not change existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This FSP is effective for us beginning April 1, 2009. We do not expect the impact of the adoption of this FSP to be material on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officer (who are the same person and whom we refer to as our Certifying Officer), as appropriate to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.
Our Certifying Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act) as of March 31, 2009, and concluded that our disclosure controls and procedures were not effective, because certain deficiencies involving internal controls constituted material weaknesses, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission. The material weaknesses identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, and management does not believe that the material weaknesses had any effect on the accuracy of our financial statements for the current reporting period.
The material weaknesses in our internal control over financial reporting that we identified in our Annual report on Form 10-K for the year ended December 31, 2008 related to 1) lack of administrative review over the reporting by Bayshore of revenues and expenditures in connection with oil and gas properties, 2) lack of sufficient number of company personnel to appropriately segregate accounting and reporting functions, and 3) lack of certain entity-level controls.
16
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2009, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 6. EXHIBITS
The following exhibits are filed as a part of this report:
Exhibit Number* | Title of Document | Location | ||
Item 31 | Rule 13a-14(a)/15d-14(a) Certifications | |||
31.01 | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rule 13a-14 | Attached | ||
Item 32 | Section 1350 Certifications | |||
32.01 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Chief Financial Officer) | Attached |
_______________
* | All exhibits are numbered with the number preceding the decimal indicating the applicable SEC reference number in Item 601 and the number following the decimal indicating the sequence of the particular document. |
SIGNATURE
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.
PAXTON ENERGY, INC. | ||
(Registrant) | ||
Date: May 18, 2009 | By: | /s/ Robert Freiheit |
Robert Freiheit, President, Chief Executive Officer, and Chief Financial Officer |
17