Exhibit 99.2
20.5% WORKING INTEREST IN DEEP LEASE
INDEX TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Condensed statements of financial condition as of November 30, 2013 (unaudited) and August 31, 2013 | 2 |
Unaudited condensed statements of operations for the three months ended November 30, 2013 and 2012 | 3 |
Unaudited condensed statements of cash flows for the three months ended November 30, 2013 and 2012 | 4 |
Unaudited condensed statement of changes in owners’ equity for the period ended November 30, 2013 | 5 |
Notes to unaudited condensed financial statements | 6 |
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Condensed Statements of Financial Condition | ||||||||
November 30, | August 31, | |||||||
2013 | 2013 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Accounts receivable | $ | 5,746 | $ | 5,546 | ||||
Inventory | 1,119 | 2,173 | ||||||
Prepaid expenses | 112 | 394 | ||||||
Total current assets | 6,977 | 8,113 | ||||||
Fixed assets: | ||||||||
Machinery and equipment, net of accumulated | ||||||||
depreciation of $4,981 and $4,670, respectively | 3,736 | 4,048 | ||||||
Other assets: | ||||||||
Capitalized oil and gas properties, net of accumulated | ||||||||
depletion of $19,924 and $18,422, respectively | 90,055 | 91,557 | ||||||
Total assets | $ | 100,768 | $ | 103,718 | ||||
LIABILITIES AND OWNERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 2,188 | $ | 3,908 | ||||
Net profits interest payable, current portion | 3,819 | 3,725 | ||||||
Total current liabilities | 6,007 | 7,633 | ||||||
Long-term liabilities: | ||||||||
Asset retirement obligations | 32,456 | 31,781 | ||||||
Net profits interest payable, net of current portion | 33,617 | 34,608 | ||||||
Total long-term liabilities | 66,073 | 66,389 | ||||||
Total liabilities | 72,080 | 74,022 | ||||||
Commitments: | - | - | ||||||
Owners' equity: | ||||||||
Owners' equity | 28,688 | 29,696 | ||||||
Total owners' equity | 28,688 | 29,696 | ||||||
Total liabilities and owners' equity | $ | 100,768 | $ | 103,718 |
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Condensed Statements of Operations | ||||||||
(Unaudited) | ||||||||
Three Months Ended | ||||||||
November 30, | ||||||||
2013 | 2012 | |||||||
Oil revenues | $ | 7,435 | $ | 7,207 | ||||
Expenses: | ||||||||
Direct operating costs | 3,557 | 3,782 | ||||||
Depreciation, depletion and amortization | 2,495 | 2,325 | ||||||
General and administrative expenses | 129 | 245 | ||||||
Total expenses | 6,181 | 6,352 | ||||||
Net operating income | 1,254 | 855 | ||||||
Other income (expense): | ||||||||
Interest expense | (936 | ) | (1,021 | ) | ||||
Total other income (expense) | (936 | ) | (1,021 | ) | ||||
Net income (loss) | $ | 318 | $ | (166 | ) |
The accompanying notes are an integral part of these financial statements
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20.5% Working Interest in the DEEP Lease | ||||||||
Condensed Statements of Cash Flows | ||||||||
(Unaudited) | ||||||||
Three Months Ended | ||||||||
November 30, | ||||||||
2013 | 2012 | |||||||
Cash flows from operating activities | ||||||||
Net income (loss) | $ | 318 | $ | (166 | ) | |||
Depreciation, depletion and amortization | 1,820 | 1,703 | ||||||
Accretion of asset retirement obligation | 675 | 622 | ||||||
Accretion of net profits interest payable | 936 | 1,021 | ||||||
Adjustments to reconcile net (loss) to cash | ||||||||
from operating activities: | ||||||||
Accounts receivable | (200 | ) | (490 | ) | ||||
Inventory | 1,048 | 1,317 | ||||||
Prepaid expenses | 282 | 283 | ||||||
Accounts payable and accrued expenses | (1,719 | ) | (83 | ) | ||||
Net cash provided by operating activities | 3,160 | 4,207 | ||||||
Cash flows from financing activities | ||||||||
Payment to owners | (1,326 | ) | (2,349 | ) | ||||
Payment on net profits interest agreement | (1,834 | ) | (1,858 | ) | ||||
Net cash (used in) financing activities | (3,160 | ) | (4,207 | ) | ||||
Net change in cash | - | - | ||||||
Cash, beginning | - | - | ||||||
Cash, ending | $ | - | $ | - | ||||
Supplemental disclosures: | ||||||||
Interest paid | $ | 936 | $ | 1,021 |
The accompanying notes are an integral part of these financial statements
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20.5% Working Interest in the DEEP Lease | ||||
Condensed Statement of Changes in Owners' Equity | ||||
(Unaudited) | ||||
Owners' Equity | ||||
Balance, August 31, 2012 | $ | 35,249 | ||
Owners' funding | 496 | |||
Net income (loss) | (6,049 | ) | ||
Balance, August 31, 2013 | 29,696 | |||
Payment to owners | (1,326 | ) | ||
Net income | 318 | |||
Balance, November 30, 2013 | $ | 28,688 |
The accompanying notes are an integral part of these financial statements
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20.5% WORKING INTEREST IN THE DEEP LEASE
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED NOVEMBER 30, 2013
UNAUDITED
1. DESCRIPTION OF BUSINESS
The DEEP Lease operations consist of a single oil-producing property known as the “DEEP Lease”, “DEEP” or the “DEEP property”, located near Bakersfield, California.
The DEEP Lease was acquired by SCNRG, LLC (“SCNRG”) on December 1, 2009. Concurrently, SAL Energy, LLC (“SAL”) acquired a 33.33% working interest from SCNRG, and concurrently sold 16.50 percentage points to Ten-One Oil and Gas, LLC (“Ten-One”). Subsequently, on December 1, 2011, SAL Energy, LLC transferred its interest to its affiliate Caleco, LLC (“Caleco”). As a result of these transactions, as of December 1, 2009, the DEEP Lease working interests were owned 66.67% SCNRG, 16.83% SAL (and subsequently its successor, Caleco) and 16.50% Ten-One. On September 12, 2013, SCNRG entered into an option to buy the Caleco and Ten-One working interests in the DEEP Lease, which totaled 33.33%, for an aggregate purchase price of $325,000 in cash, together with assumption of asset retirement obligations and NPI payable. On February 4, 2014, SCNRG closed on a portion of this purchase option, acquiring a 20.5108% working interest, bringing its working interest to 87.1808%.
SCNRG was a newly-formed, independent, entity at the time of the 2009 DEEP Lease acquisition, and on October 25, 2013, was acquired by Sara Creek Gold Corp., a publicly-traded company.
SAL (and its successor Caleco) has acted as operator of the DEEP Lease since December 1, 2009, including subsequent to the SCNRG purchase of the 20.5108% working interest, under a transition agreement with SCNRG. Upon the expected completion of the acquisition of the remaining 12.892% working interest, Caleco will continue to operate for a term under a transition agreement with SCNRG. See “Note 6 – Commitments and Contingencies”.
These financial statements include the assets acquired by SCNRG from Caleco and Ten-One, being the 20.5% working interest in the DEEP Lease, which is also referred to as the “20.5% Working Interest”, “we”, “us” and “our” in these financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information.
The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the years ended August 31, 2013 and 2012 included elsewhere in this Current Report on Form 8-K/A.
Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The interim results for the three months ended November 30, 2013 are not necessarily indicative of results for the full fiscal year.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates included in the financial statements are: (1) depreciation and depletion; (2) accrued assets and liabilities; (3) asset retirement obligations; and (4) net profits interest payable. Although management believes these estimates are reasonable, changes in facts and circumstances or discovery of new information may result in revised estimates. Actual results could differ from those estimates.
Financial Instruments
Financial instruments consist of cash, accounts receivable and accounts payable. Recorded values of cash, receivables, accounts payable and accrued liabilities approximate fair values due to the short maturities of such instruments.
Oil Properties
We follow the full-cost method of accounting under which all costs associated with property acquisition, exploration and development activities are capitalized. We also capitalize internal costs that can be directly identified with our acquisition, and exploration and development activities. We do not capitalize any costs related to production, general corporate overhead or similar activities. Surface equipment on a property is also part of the amounts capitalized.
Under the full-cost method, capitalized costs are depleted (amortized) on a composite unit-of-production method based on proved oil reserves. If we maintain the same level of production year over year, the depletion expense may be significantly different if our estimate of remaining reserves changes significantly. Proceeds from the sale of properties are accounted for as reductions of capitalized costs unless such sales involve a significant change in the relationship between costs and the value of proved reserves or the underlying value of unproved properties, in which case a gain or loss is recognized. The costs of unproved properties are excluded from amortization until the properties are evaluated. We review all of our unevaluated properties quarterly to determine whether or not and to what extent proved reserves have been assigned to the properties, and if impairment has occurred. Unevaluated properties are assessed individually when individual costs are significant.
We review the carrying value of our oil properties under the full-cost accounting rules of the SEC on a quarterly basis. This quarterly review is referred to as a ceiling test. Under the ceiling test, capitalized costs, less accumulated amortization and related deferred income taxes, may not exceed an amount equal to the sum of the present value of estimated future net revenues (adjusted for cash flow hedges) less estimated future expenditures to be incurred in developing and producing the proved reserves, less any related income tax effects. In calculating future net revenues, current SEC regulations require us to utilize prices at the end of the appropriate quarterly period. Such prices are utilized except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including the effects of derivatives qualifying as cash flow hedges. Two primary factors impacting this test are reserve levels and current prices, and their associated impact on the present value of estimated future net revenues. Revisions to estimates of oil reserves and/or an increase or decrease in prices can have a material impact on the present value of estimated future net revenues. Any excess of the net book value, less deferred income taxes, is generally written off as an expense. Under SEC regulations, the excess above the ceiling is not expensed (or is reduced) if, subsequent to the end of the period, but prior to the release of the financial statements, oil prices increase sufficiently such that an excess above the ceiling would have been eliminated (or reduced) if the increased prices were used in the calculations.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
The estimates of proved crude oil reserves utilized in the preparation of the financial statements are estimated in accordance with guidelines established by the SEC and the Financial Accounting Standards Board (“FASB”), which require that reserve estimates be prepared under existing economic and operating conditions using a 12-month average price with no provision for price and cost escalations in future years except by contractual arrangements. Actual results could differ materially from these estimates.
Long-Lived Assets
Impairment of long-lived assets is recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying value. The carrying value of the assets is then reduced to their estimated fair value that is usually measured based on an estimate of future discounted cash flows.
Asset Retirement Obligations
Asset retirement obligations relate to the plug and abandonment costs when our wells are no longer useful, and for the cost of removing related surface facilities. We determine the value of the liability by reviewing operator estimates and estimate the increase we will face in the future. We then discount the future value based on an intrinsic interest rate that is appropriate for us. If costs rise more than what we have expected there could be additional charges in the future, however, on a quarterly basis we monitor the costs of the abandoned wells and adjust this liability if necessary.
Revenue Recognition
Oil revenues are recognized net of royalties when production is sold to a purchaser at a fixed or determinable price, when title has transferred, and if collection of the revenue is probable.
Net Profits Interest
A Net Profits Interest (“NPI”) on the DEEP property calls for 40% of the net cash flow, as defined in the Assignment of Net Profit Interest (see “Note 4 – Net Profits Interest Payable”), to be paid each month to the owner of the NPI. If net cash flow is negative, such losses carry forward to be deducted against future positive net cash flow. There is a minimum monthly payment of $612 (our 20.5108% share). Payments are required until our NPI payments total between $71,173 and $73,307 (the actual maximum amount within this range dependent on when we satisfy our aggregate NPI payment obligations) has been paid on or before December 31, 2022. As of November 30, 2013, we have made NPI payments totaling $20,794.
Given its terminating nature, the discounted present value of the minimum monthly NPI payments, based on a discount rate of 10.0% per annum, was recorded as a liability at the December 1, 2009 acquisition date of the DEEP property.
Concentrations
Pursuant to a January 13, 2010 Crude Oil Purchase Contract between the DEEP operator and Plains Marketing L.P. (“PMLP”), all production from the DEEP property is sold to PMLP. The initial term of the agreement was for one year, expiring on December 31, 2010, and was automatically renewed for an additional one-year term that expired on December 31, 2011. Since January 1, 2012, the agreement has continued on a month-to-month basis and is cancellable upon thirty day’s written notice by either party.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
New Accounting Pronouncements
There are no recent accounting pronouncements that are expected to have a material effect on the Company’s financial statements.
3. ASSET RETIREMENT OBLIGATION
Our asset retirement obligations relate to the abandonment of oil wells and related surface facilities. The amounts recognized are based on numerous estimates and assumptions, including future retirement costs, inflation rates and credit adjusted risk-free interest rates.
The following shows the changes in asset retirement obligations:
2013 | 2012 | |||||||
Asset retirement obligations, August 31 | $ | 31,781 | $ | 29,291 | ||||
Liabilities incurred during the period | - | - | ||||||
Liabilities settled during the period | - | - | ||||||
Accretion | 675 | 622 | ||||||
Asset retirement obligations, November 30 | $ | 32,456 | $ | 29,913 |
4. NET PROFITS INTEREST (“NPI”) PAYABLE
In connection with our December 1, 2009 purchase of a 20.5% Working Interest in the DEEP Lease, and as part of the purchase price consideration, we assumed our 20.5% share of an Assignment of Net Profit Interest with Christian Hall Petroleum. Pursuant to the agreement, we are required to make monthly payments to the holder in an amount equal to 40% of our share of net profit (as defined in the agreement) from production, with a stated minimum payment of not less than $612 (our 20.5108% share). Payments are required until our NPI payments total between $71,173 and $73,307 (the actual maximum amount within this range dependent on when SCNRG satisfies the aggregate NPI payment obligations). The discounted present value of the NPI, utilizing a discount rate of 10% per annum, was recorded as a liability on December 1, 2009 in the amount of $41,676. As of November 30, 2013, we have made NPI payments totaling $20,794.
Changes in the NPI liability are as follows:
2013 | 2012 | |||||||
NPI liability, August 31 | $ | 38,333 | $ | 41,732 | ||||
Accretion recorded during the period | 937 | 1,020 | ||||||
Payments made during the period | (1,834 | ) | (1.858 | ) | ||||
NPI liability, November 30 | $ | 37,436 | $ | 40,894 |
The current portion is $3,819 and $3,725 respectively at November 30, 2013, and August 31, 2013.
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5. FAIR VALUE MEASUREMENTS
We hold certain financial assets, which are required to be measured at fair value on a recurring basis in accordance with the Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (“ASC Topic 820-10”). ASC Topic 820-10 establishes 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). ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability.
The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:
● | Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. We believe receivables and accounts payable approximate fair value at August 31, 2013. |
● | Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. |
● | Level 3 - Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. We consider depleting assets, asset retirement obligations and net profit interest liability to be Level 3. We determine the fair value of Level 3 assets and liabilities utilizing various inputs, including oil price quotations and contract terms. |
Fair Value Measurement | ||||||||||||
November 30, 2013 | Level 1 | Level 2 | Level 3 | |||||||||
Capitalized oil and gas properties | $ | - | $ | - | $ | 90,055 | ||||||
Net profit interest liability | - | - | (37,436 | ) | ||||||||
Asset retirement obligation | - | - | (32,456 | ) | ||||||||
Total | $ | - | $ | - | $ | 20,163 |
6. COMMITMENTS AND CONTINGENCIES
Commitments
Oil production from the DEEP property is subject to a 1% overriding royalty. Additionally, production is also subject to an aggregate additional 19.92% royalty for total royalties of 20.92%.
The DEEP Lease is operated by Caleco, LLC (“Caleco”) pursuant to an Operating Agreement for a term equal to the life of the wells. Caleco owns a working interest in DEEP, which working interest is part of these financial statements as described in “Note 1 – Nature of Business”. As the operator, Caleco incurs production and other costs, which are subsequently billed to the working interest owners through a joint interest billing process; and the operator distributes to each working interest owner their share of revenue received from production, less royalties and NPI obligations. All expenses and revenue presented in these financial statements represent our pro rata share of the revenue earned and expenses incurred for the DEEP Lease.
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6. COMMITMENTS AND CONTINGENCIES - continued
In accordance with the terms of the Operating Agreement, the operator is entitled to a fee for services but has instead elected to bill the working interest owners based on actual time and materials. Included in these financial statements is the cost of the pro rata operator fee borne by the 20.5% Working Interest, but not the operator fee income of Caleco as that revenue stream is not being purchased by SCNRG.
Contingencies
We are subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the owners for the cost of pollution cleanup resulting from operations and subject the owners to liability for pollution damages. In some instances, the operator may be directed to suspend or cease operations in the affected area. As of November 30, 2013, and August 31, 2013, we have no reserve for environmental remediation and are not aware of any environmental claims.
7. SUBSEQUENT EVENT
On February 4, 2014, SCNRG closed on the purchase of a 20.5108% working interest in the DEEP Lease for an aggregate purchase price of $200,000 in cash, together with assumption of asset retirement obligations and NPI payable.
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