SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2016
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________to _______________.
Commission File Number 000-10690
ARABELLA EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
| Cayman Islands | 98-1162608 | |
(State or Other Jurisdiction of | (I.R.S. Employer |
509 Pecan Street, Suite 200
Fort Worth, Texas 76102
(Address of Principal Executive Offices including zip code)
432 897-4755
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. Yesþ No ☐
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). Yesþ No ☐
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company
| Large Accelerated Filer ☐ | Accelerated Filer ☐ | Non-Accelerated Filer ☐ | Smaller reporting company ☒ |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes ☐ Noþ
As of May 19, 2016, 5,020,303 shares of the issuer’s common stock, par value $0.01, were outstanding.
TABLE OF CONTENTS
| ITEM 1 | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
ARABELLA EXPLORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2016 | December 31, 2015 | |||||||
| ASSETS | (unaudited) | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 3,086 | $ | 73,472 | ||||
| Accounts receivable - oil and gas sales | 1,385,632 | 1,631,735 | ||||||
| Total current assets | 1,388,718 | 1,705,207 | ||||||
| Deposits and other assets | 67,368 | 67,368 | ||||||
| Property and equipment, net | 25,088 | 132,508 | ||||||
| Oil and gas properties, successful efforts method - net | 6,857,172 | 6,931,126 | ||||||
| Total assets | $ | 8,338,346 | $ | 8,836,209 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 1,592,422 | $ | 1,820,209 | ||||
| Accrued interest payable | 3,050,573 | 2,191,620 | ||||||
| Payable to affiliates | 2,193,336 | 1,983,155 | ||||||
| Notes payable, net of discount | 16,115,000 | 16,115,000 | ||||||
| Accrued joint interest billings payable, related party | 4,296,710 | 4,109,729 | ||||||
| Total current liabilities | 27,248,041 | 26,220,025 | ||||||
| Note payable to officer | 3,007,170 | 3,007,170 | ||||||
| Asset retirement obligation | 24,910 | 24,490 | ||||||
| Total liabilities | 30,280,121 | 29,251,685 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders’ deficit | ||||||||
| Preferred shares, $0.001 par value, authorized 5,000,000 shares and none issued and outstanding | - | - | ||||||
| Ordinary shares, $0.001 par value, authorized 50,000,000 shares; issued and outstanding 5,020,303 at March 31, 2016 and December 31, 2015 | 5,020 | 5,020 | ||||||
| Additional paid-in-capital | 15,550,679 | 15,540,755 | ||||||
| Accumulated deficit | (37,497,474 | ) | (35,961,251 | ) | ||||
| Total shareholders’ deficit | (21,941,775 | ) | (20,415,476 | ) | ||||
| Total liabilities and shareholders’ equity | $ | 8,338,346 | $ | 8,836,209 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 1 |
ARABELLA EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the three months ended | ||||||||
| March 31, 2016 | March 31, 2015 | |||||||
| (unaudited) | (unaudited) | |||||||
| Revenues: | ||||||||
| Oil and gas revenue | $ | 236,878 | $ | 346,669 | ||||
| Other revenue – administrative overhead | 10,800 | 12,000 | ||||||
| Total revenues | 247,678 | 358,669 | ||||||
| Costs and expenses: | ||||||||
| Lease operating expenses | 111,306 | 182,529 | ||||||
| Ad valorem and production taxes | 18,225 | 17,945 | ||||||
| Depreciation, depletion and amortization | 78,478 | 190,322 | ||||||
| Accretion of asset retirement obligation | 420 | 480 | ||||||
| General and administrative expenses | 646,519 | 995,860 | ||||||
| Total costs and expenses | 854,948 | 1,387,136 | ||||||
| Loss from operations | (607,270 | ) | (1,028,467 | ) | ||||
| Other expense | ||||||||
| Interest expense | 928,953 | 2,160,657 | ||||||
| Other expenses | 928,953 | 2,160,657 | ||||||
| Net loss | $ | (1,536,223 | ) | $ | (3,189,124 | ) | ||
| Net loss per ordinary share: | ||||||||
| Basic | $ | (0.31 | ) | $ | (0.64 | ) | ||
| Diluted | $ | (0.31 | ) | $ | (0.64 | ) | ||
| Weighted average ordinary shares outstanding: | ||||||||
| Basic | 5,020,303 | 5,020,303 | ||||||
| Diluted | 5,020,303 | 5,020,303 | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 2 |
ARABELLA EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the three months ended March 31, 2016
(unaudited)
| Ordinary | Shares | Paid – In | Accumulated | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at December 31, 2015 | 5,020,303 | $ | 5,020 | $ | 15,540,755 | $ | (35,961,251 | ) | $ | (20,415,476 | ) | |||||||||
| Stock based compensation | - | - | 9,924 | - | 9,924 | |||||||||||||||
| Net loss | - | - | - | (1,536,223 | ) | (1,536,223 | ) | |||||||||||||
| Balance at March 31, 2016 | 5,020,303 | $ | 5,020 | $ | 15,550,679 | $ | (37,497,474 | ) | $ | (21,941,775 | ) | |||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 3 |
ARABELLA EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the three months ended | ||||||||
| March 31, 2016 | March 31, 2015 | |||||||
| Cash flows from operating activities: | (unaudited) | (unaudited) | ||||||
| Net loss | $ | (1,536,223 | ) | $ | (3,189,124 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Depreciation, depletion and amortization | 78,478 | 190,322 | ||||||
| Accretion of asset retirement obligation | 420 | 480 | ||||||
| Amortization of interest expense | - | 400,000 | ||||||
| Amortization of deferred financing costs | - | 751,198 | ||||||
| Amortization of debt discount | - | 809,460 | ||||||
| Stock based compensation | 9,924 | 51,268 | ||||||
| Loss on disposal of fixed assets | 52,280 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable - oil and gas sales | 246,103 | 143,305 | ||||||
| Receivable from affiliated companies | - | 303,668 | ||||||
| Accrued joint interest billing payable | 186,981 | (12,904 | ) | |||||
| Accrued interest expense | 858,953 | - | ||||||
| Accounts payable and accrued liabilities | (176,100 | ) | 1,153,996 | |||||
| Net cash (used in) provided by operating activities | (279,183 | ) | 601,669 | |||||
| Cash flows from investing activities: | ||||||||
| Additions to property and equipment | - | |||||||
| Additions to oil and gas properties | (1,384 | ) | (599,774 | ) | ||||
| Proceeds from sale of oil and gas properties | - | |||||||
| Net cash used in investing activities | (1,384 | ) | (599,774 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Cash advance from affiliate | 210,181 | - | ||||||
| Net cash provided by financing activities | 210,181 | - | ||||||
| Net (decrease) increase in cash and cash equivalents | (70,386 | ) | 1,895 | |||||
| Cash and cash equivalents at beginning of period | 73,472 | 3,002 | ||||||
| Cash and cash equivalents at end of period | $ | 3,086 | $ | 4,897 | ||||
| Cash for: | ||||||||
| Interest | $ | 70,000 | $ | - | ||||
| Taxes | $ | - | $ | - | ||||
| Non-cash investing and financing activities: | ||||||||
| Addition to deferred financing costs | $ | - | - | |||||
| Addition to oil and gas properties through increase in accrued joint interest billings payable | $ | - | $ | - | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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ARABELLA EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMNTS
1. Organization and Operations of the Company
Organization
Arabella Exploration, Inc. (formerly known as Lone Oak Acquisition Corporation) (the “Parent”) was incorporated in the Cayman Islands on June 17, 2010 as a blank check company whose objective was to acquire an operating business. Parent’s wholly owned subsidiary Arabella Exploration, Limited Liability Company (“Arabella LLC”) was formed in 2011, to acquire interests in low risk prospective and producing oil and gas properties primarily in the Permian Basin in West Texas. The Parent and Arabella LLC (collectively the “Company”) completed a reverse merger on December 24, 2013 as more fully described below in Note 2.
Arabella Operating, LLC (“AOC”), a wholly owned subsidiary of the Parent, was formed in 2014 to assume the operations role for the Parent. AOC posted a surety bond with the Texas Railroad Commission and is the operator of record for the Company’s oil and gas properties as of December 31, 2014. Prior to December 31, 2014 Arabella Petroleum Company, LLC, an affiliate of Jason Hoisager, the Parent’s Chief Executive Officer was the operating of record for the Company’s acreage.
Nature of Business
The Company is an independent exploration and production company focused on the acquisition and development of unconventional oil and natural gas resources in the Permian Basin in West Texas. The Company owns acreage leases and participates in the drilling of oil and natural gas wells with other working interest partners. Due to the capital intensive nature of oil and natural gas drilling activities, the operating company responsible for conducting the drilling operations may request advance payments from the working interest partners for their share of the costs.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries after all significant intercompany balances and transactions have been eliminated upon consolidation.
These financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). They reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted pursuant to such rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. This Quarterly Report on Form 10–Q should be read in conjunction with the Company’s most recent Annual Report on Form 10–K for the fiscal year ended December 31, 2015, which contains a summary of the Company’s significant accounting policies and other disclosures.
2. Reverse Merger
Parent and Arabella LLC (the wholly owned subsidiary) entered into a reverse merger on December 24, 2013 where the Parent issued 3,125,000 ordinary shares to the holders of all of the issued and outstanding interests of Arabella LLC immediately prior to the time of the Acquisition in exchange for 100% of the units of Arabella LLC. In connection with the reverse merger, 1,704,826 of the Parent’s ordinary shares remained outstanding and the remaining funds in the trust account, in the amount of $5,183,417, were distributed to the Parent. With that exchange, the Company’s Chief Executive Officer Jason Hoisager owns the majority of the Company’s ordinary shares. In connection with the reverse merger, 1,705,002 of additional ordinary shares (“earnout shares”) will be awarded to certain individuals associated with Arabella LLC over the following three years if the Company achieves its earnout goals. The shares will be issued in equal thirds if on each of December 31, 2014, 2015 and 2016 the Company shall have increased its proved reserves over the immediately preceding year by 100%, 66% and 33%, respectively and conformed to certain cost metrics. The Company has not determined the ultimate disposition of these shares for 2015 or 2014.
| 5 |
The merger was accounted for as a “reverse merger” and a recapitalization since the shareholders of Arabella LLC (i) owned a majority of the outstanding ordinary shares of the Company immediately following the completion of the transaction, and (ii) have the significant influence and the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity, and Arabella LLC’s senior management dominates the management of the combined entity in following the completion of the transaction in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification (“FASB-ASC”) Topic 805 Business Combinations. Accordingly, Arabella LLC is deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of Arabella LLC. Accordingly, the assets and liabilities and the historical operations that are reflected in the financial statements are those of Arabella LLC and are recorded at the historical cost basis of Arabella LLC. Parent’s assets, liabilities and results of operations were consolidated with the assets, liabilities and results of operations of Arabella LLC after the merger.
3. Recent Developments, Liquidity and Ability to Continue as a Going Concern
The accompanying financial statements have been prepared in US dollars and in accordance with accounting principles generally accepted in the United States on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company commenced oil and gas exploration activities in 2011 and at March 31, 2016 had an accumulated deficit of $37,497,474 and a working capital deficit of $25,859,323 largely consisting of the Notes discussed below as well as accounts payable and advances from affiliates. The Company is not currently engaged in any new drilling for oil and gas due to the depressed price for oil. The current oil pricing environment and related conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on its ability to generate revenue from oil and gas operations or asset sales and achieve profitable operations and to generate sufficient cash flow from financing and operations to meet its obligations, as they become payable.
Management is exploring alternatives to its existing oil and gas activities in the current oil pricing environment. Although there are no assurances that management’s plans will be realized management believes that the Company will be able to continue operations in the future. Accordingly, no adjustment relating to the recoverability and classification of recorded asset amounts and the classification of liabilities has been made to the accompanying financial statements in anticipation of the Company not being able to continue as a going concern.
The Company is not currently drilling any new wells; if it were to resume drilling it might need $40 million over a twelve month period, which would include minimum annual property lease payments, well expenditures and operating costs and expenses. However, unless oil prices rebound significantly in a short time it is highly unlikely that the Company will resume drilling or drill at such a high pace. In the event that it begins new drilling operations it may require additional funding in 2016.
On September 2, 2014 the Company sold $16,000,000 of Notes under its $45,000,000 Senior Secured Note Facility (See Note 8 – Senior Secured Notes), with further sales during the term of the facility to be based upon reserve based performance hurdles. No additional Notes were issued. The Notes were due on September 2, 2015; the Company was unable to repay them and the Company is continuing to negotiate with its Senior Lender. On January 21, 2016 the Company received notice from its Senior Lender that they were declaring the Notes in default as of June 4, 2015.
In the event that the Company is able to redeem its initial public offering warrants as discussed in Note 11 – Shareholders Equity, the initial public offering warrants would likely be exercised resulting in the receipt of proceeds up to $20,532,500. Given the Company’s current stock price, it is unlikely that the Company will redeem the initial public offering warrants in the near future.
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4. Summary of Significant Accounting Policies
Principals of Consolidation
The accompanying consolidated financial statements of the Company include the accounts of Arabella Exploration Inc. and its wholly owned subsidiaries Arabella Exploration, LLC, Arabella Operating, LLC and Arabella Midstream, LLC. All significant intercompany transactions have been eliminated in consolidation.
Use of Estimates
Preparation of the Company’s consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil and natural gas reserves and related cash flow estimates used in impairment tests of long-lived assets, estimates of future development, dismantlement and abandonment costs, estimates relating to certain oil and natural gas revenues and expenses, estimates of the valuation allowance for deferred tax assets and estimates of expenses related to legal, environmental and other contingencies. Certain of these estimates require assumptions regarding future commodity prices, future costs and expenses and future production rates. Actual results could differ from those estimates.
As an oil and natural gas producer, the Company’s revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which are dependent upon numerous factors beyond its control such as economic, political and regulatory developments and competition from other energy sources. The energy markets have historically been very volatile and there can be no assurance that oil and natural gas prices will not be subject to wide fluctuations in the future. A substantial or extended decline in oil and natural gas prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows and quantities of oil and natural gas reserves that may be economically produced.
Estimates of oil and natural gas reserves and their values, future production rates and future costs and expenses are inherently uncertain for numerous reasons, including many factors beyond the Company’s control. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, prevailing commodity prices, operating costs and other factors. These revisions may be material and could materially affect future depreciation, depletion and amortization expense, dismantlement and abandonment costs, and impairment expense.
5. Property and Equipment
Property and equipment include furniture and fixtures, computer equipment and software and transportation equipment:
| March 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Property and equipment, gross | $ | 52,306 | $ | 346,199 | ||||
| Less: Accumulated depreciation, depletion, amortization and impairment | (27,218 | ) | (213,691 | ) | ||||
| Property and Equipment, net | $ | 25,088 | $ | 132,508 | ||||
Depreciation expense was $3,141 and $44,816 for the three months ended March 31, 2016 and 2015, respectively.
Effective January 1, 2016 the Company transferred certain of its fixed assets to a third party management company controlled by one of its directors in return for the partial, non-cash settlement of certain indebtedness in the amount of $52,000. The net book value of the assets was $104,280 and they were appraised at under $50,000 in current conditions. The Company incurred a loss on disposal of fixed assets of $52,280 which is accounted for in general and administrative expenses for the period. The Company currently leases this equipment for its use from that third party management company, inclusive of utilities and other office expenses for $12,500 per month.
| 7 |
6. Oil and Gas Properties
The following table sets forth the Company’s oil and gas properties:
| March 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Proved oil and gas properties(1) | $ | 22,318,144 | $ | 22,316,760 | ||||
| Less: Accumulated depreciation, depletion, amortization and impairment | (20,246,902 | ) | (20,171,564 | ) | ||||
| Proved oil and gas properties, net | 2,071,242 | 2,145,196 | ||||||
| Unproved oil and gas properties | 4,785,930 | 4,785,930 | ||||||
| Total oil and gas properties, net | $ | 6,857,172 | $ | 6,931,126 | ||||
| (1) | Included in the Company’s proved oil and gas properties are estimates of future asset retirement costs of $21,105 at March 31, 2016 and December 31, 2015. |
Depletion expense was $75,337 and $145,506 for the three months ended March 31, 2016 and 2015, respectively.
7. Asset Retirement Obligations
The following table reflects the changes in the Company’s ARO during the three months ended March 31, 2015 and the year ended December 31, 2014:
| March 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Asset retirement obligation — beginning of period | $ | 24,490 | $ | 25,843 | ||||
| Additions to ARO from new properties | - | - | ||||||
| Sales or abandonments of properties | - | (3,273 | ) | |||||
| Accretion expense during period | 420 | 1,920 | ||||||
| Asset retirement obligation — end of period | $ | 24,910 | $ | 24,490 | ||||
8. Senior Secured Notes
On September 2, 2014 the Company entered into a $45,000,000 Senior Secured Note Facility with a one year borrowing period and a one year term per draw (the “Notes”) with a New York based investor (the “Investor”). The sale of $16,000,000 in Notes occurred on September 2, 2014 with further sales to be based upon reserve based performance hurdles. No additional Notes were issued. The Notes bear interest at an annual rate of 15%, of which six months was prepaid at close. The Notes became due on September 2, 2015; the Company was unable to repay them and is continuing to negotiate with its Senior Lender. The Company paid a 3% origination fee to the Investor and a 5% cash commission to its advisors on the transaction. In conjunction with the sale of the Notes, the Company issued warrants to purchase 1,300,000 of the Company’s ordinary shares at a price of $5.00 per share (the “Financing Warrants”). The Financing Warrants expire on September 2, 2019.
The Notes are carried at their face value less the amortized amount of the debt discount associated with the relative fair value at issuance of the Financing Warrants. The fair value of the Financing Warrants at issue was determined to be approximately $4,059,300 using the Black-Scholes pricing model. Significant assumptions used in the valuation include an expected term of 5 years, an expected volatility of 51.0% based on historical value and corresponding volatility of the Company’s peer group stock price for a period consistent with the warrants expected term, a risk free interest rate of 1.69% based on the a U.S. Treasury Note with a similar term to the expected term on the date of the grant, and an expected dividend yield of 0.0% as the Company does not expect to pay dividends in the near future. The relative fair value of the Financing Warrants was then determined by applying the ratio of value of the Notes to the value of the Notes plus the fair value of the Financing Warrants to the amount of the Notes. Using this metric, the relative fair value of the Financing Warrants was determined to be $3,237,840. The debt discount is amortized using the straight line method over the one year term of the Notes.
| 8 |
Interest expenses for the period ended March 31, 2016 was $928,953 (including $328,953 in possible penalty rate interest) of which $70,000 was paid in cash and $858,953 was accrued. Interest expense for the period ended March 31, 2015 was a total of $1,409,460 consisting of $600,000 of interest expense and $809,460 of accretion of the debt discount. Amortization of deferred financing costs was $751,198 for the same period.
On January 21, 2016 the Company received notice from its Senior Lender that they were declaring the Notes in default as of June 4, 2015. While the Company does not necessarily believe that additional interest is due, it has recorded an additional accrued interest charge in the amount of $258,953 at March 31, 2016 and $591,620 at December 31, 2015 to reflect the maximum possible difference between the original Note interest and the default Note interest provisions.
9. Term Note
On May 4, 2015 the Company reached a settlement agreement to pay Heartland Bank (“Heartland”) $125,000 to settle Heartland’s demands that the Company pay a break-up fee and certain costs relating to a financing that the Company explored with Heartland but ultimately rejected in favor of other financing. Under the settlement, the Company issued Heartland a $250,000 Term Note (the “Term Note”) and agreed to pay $10,000 on the 15th of every month towards that note. However, the full face amount of the Term Note is intended only to be punitive in the event of non-compliance and, upon the maturity of the Senior Secured Notes, the Company will pay an amount of $125,000 less payments made to date, in full satisfaction of the Term Note. The Term Note is not interest bearing. The Company made only a single $10,000 payment on the Term Note in 2015, leaving a $115,000 balance; the final disposition of the Term Note has not been determined.
10. Note Payable to Officer
As of March 31, 2016 and December 31, 2015, the Company’s note payable to officer is payable to Jason Hoisager, the founder of Arabella LLC, with an outstanding balance of $3,007,170. The founder is currently the President of the Company and is a director and majority shareholder of the Company. The note payable is non-interest bearing and matures in December of 2023.
11. Shareholders’ Equity
Ordinary Shares
The Company is authorized to issue 50,000,000 ordinary shares with a par value of $0.001 per share.
Preferred Shares
The Company is authorized to issue up to 5,000,000 preferred shares with a par value of $0.001 and the characteristics of the preferred shares will be determined by the Board of Directors of the Company from time to time.
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Warrants
In connection with Parent’s initial public offering (“Offering”) in March 2011, the Company issued 4,106,500 offering warrants, which entitles the holders to purchase ordinary shares at the price of $5.00 per share, commencing on the date of the business combination, if the Company has an effective and current registration statement covering the ordinary shares issuable upon exercise of the offering warrants and a current prospectus relating to such ordinary shares, and expiring three years from that date. The Company may redeem the offering warrants at a price of $0.01 per offering warrant upon 30 days’ notice while the offering warrants are exercisable, only when the last sale price of the ordinary shares is at least $10.50 per share for any 20 trading days within a 30 trading day period, provided that a current registration statement is in effect for the ordinary shares underlying the offering warrants. If not exercised, the offering warrants expire on December 24, 2016. If the Company redeems the offering warrants, management of the Company will have the option to require any holder that wishes to exercise his offering warrants to do so on a cashless basis.
Simultaneously with the Offering, certain of the shareholders purchased 6,600,000 insider warrants at the price of $0.35 per insider warrant (for an aggregate purchase price of $2,310,000) from the Company. These insider warrants have the same terms as the 4,106,500 offering warrants referred to in the preceding paragraph, except these insider warrants are not redeemable and the insider warrants are exercisable for cash or on a cashless basis.
In conjunction with the sale of the Notes, the Company issued the Financing Warrants to purchase 1,300,000 of the Company’s ordinary shares at a price of $5.00. The Financing Warrants expire on September 2, 2019.
Unit Purchase Option
In connection with the Offering, the Company issued unit purchase options to purchase an aggregate of 400,000 units at an exercise price of $8.80 per unit to its underwriters and designees of the underwriter. Each unit consists of one ordinary share and one redeemable ordinary share purchase warrant, which contains a provision for cashless exercise and has the same terms as the 4,106,500 initial public offering warrants. The unit purchase option expires on December 24, 2018.
Stock-based Compensation
On May 5, 2014 the Company granted each non-employee director 30,000 stock options to purchase its ordinary shares for joining the board and 20,000 stock options to purchase its ordinary shares for the year of service commencing from January 30, 2014. All, 50,000 stock options in aggregate, vest ratably over two years and expire five years from the grant date. The stock options have an exercise price of $6.15 per share, which represents the closing price of the Company’s ordinary shares the day prior to the grant date. The grant date fair value of the options granted was determined to be $558,950 using the Black-Scholes pricing model. Significant assumptions used in the valuation include an expected term of 3.5 years utilizing the “Simplified Method” as the Company does not have sufficient historical experience to estimate an expected term, an expected volatility of 49.0% based on historical value and corresponding volatility of the Company’s peer group stock price for a period consistent with the stock option expected term, a risk free interest rate of 0.9% based on the a U.S. Treasury Note with a similar term to the expected term on the date of the grant, and an expected dividend yield of 0.0% as the Company does not expect to pay dividends in the near future. According to the terms of the option plan, vesting was retroactive to the beginning of service in January 2014; as such two quarters of vesting was recorded during the three months ended June 30, 2014. Messrs. Bush and Boyuls, two of the directors, resigned from the board on September 9, 2014. The remaining members of the board voted to allow them to continue in the vesting of their granted stock options as if they had served out their term. However, as no further service is required for the vesting, the Company expensed the entire amount of the grant in 2014. All stock-based compensation expense under the 2014 grant had been recognized as of the fourth quarter of 2015. At March 31, 2016, no options had been exercised and no options had been forfeited. As of March 31, 2016 the aggregate intrinsic value of these options was $0.
On February 2, 2015 the Company granted each non-employee director 20,000 stock options to purchase its ordinary shares for the year of service commencing from January 30, 2015. All, 20,000 stock options vest ratably over two years on a quarterly basis and expire five years from the grant date. The stock options have an exercise price of $3.35 per share, which represents the closing price of the Company’s ordinary shares the day prior to the grant date. The grant date fair value of the options granted was determined to be $74,772 using the Black-Scholes pricing model. Significant assumptions used in the valuation include an expected term of 3.5 years utilizing the “Simplified Method” as the Company does not have sufficient historical experience to estimate an expected term, an expected volatility of 51.0% based on historical value and corresponding volatility of the Company’s peer group stock price for a period consistent with the stock option expected term, a risk free interest rate of 0.8% based on the a U.S. Treasury Note with a similar term to the expected term on the date of the grant, and an expected dividend yield of 0.0% as the Company does not expect to pay dividends in the near future. Aggregated stock-based compensation expense under the 2015 grant for the three months ended March 31, 2016 was $9,347. Unrecognized compensation expense as of March 31, 2016, relating to non-vested common stock options is $28,040 and is expected to be recognized through the fourth quarter of 2016. At March 31, 2016, no options had been exercised and no options had been forfeited. As of March 31, 2016 the aggregate intrinsic value of these options was $0.
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On February 11, 2016 the Company granted each non-employee director 20,000 stock options to purchase its ordinary shares for the year of service commencing from January 30, 2016. All, 20,000 stock options vest ratably over two years on a quarterly basis and expire five years from the grant date. The stock options have an exercise price of $0.18 per share, which represents the closing price of the Company’s ordinary shares the day prior to the grant date. The grant date fair value of the options granted was determined to be $4,620 using the Black-Scholes pricing model. Significant assumptions used in the valuation include an expected term of 3.5 years utilizing the “Simplified Method” as the Company does not have sufficient historical experience to estimate an expected term, an expected volatility of 59.0% based on historical value and corresponding volatility of the Company’s peer group stock price for a period consistent with the stock option expected term, a risk free interest rate of 0.8% based on the a U.S. Treasury Note with a similar term to the expected term on the date of the grant, and an expected dividend yield of 0.0% as the Company does not expect to pay dividends in the near future. Aggregated stock-based compensation expense under the 2016 grant for the three months ended March 31, 2016 was $578. Unrecognized compensation expense as of March 31, 2015, relating to non-vested common stock options is $4,042 and is expected to be recognized through the fourth quarter of 2017. At March 31, 2016, no options had been exercised and no options had been forfeited. As of March 31, 2016 the aggregate intrinsic value of these options was $0.
A summary of stock option activity for the three months ended March 31, 2016 is presented below:
| Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding at December 31, 2015 | 310,000 | $ | 5.61 | |||||
| Granted | 60,000 | $ | 0.18 | |||||
| Forfeited | - | - | ||||||
| Exercised | - | - | ||||||
| Outstanding at March 31, 2016 | 370,000 | $ | 4.73 | |||||
| Exercisable at March 31, 2016 | 295,000 | $ | 5.64 | |||||
12. Related Party Transactions
Mr. Jason Hoisager, the Company’s Chief Executive Officer, owns 100% of Arabella Petroleum Company LLC (“Petroleum”), which was the operating company for substantially all the wells that the Company has its working interest in prior to December 31, 2014. As Petroleum drilled and completed the wells, Petroleum billed the Company for its working ownership percentage of the capital costs. After the completion of each well, Petroleum sold the oil and gas and provided the Company its working interest revenue, net of production taxes and charges for the lease operating expenses.
As of March 31, 2016 and December 31, 2015, the Company owed Petroleum $2,952,190 in joint interest billings to vendors for the well costs. As of December 31, 2014, Petroleum has ceased to provide these services to the Company and Arabella Operating, LLC, a wholly owned subsidiary of the Company, is the operator of record for the Company’s wells.
The Company has a month to month consulting agreement with an affiliate of one of its directors to provide certain financial and operation services for $24,584 per month.
Effective January 1, 2016 the Company transferred certain of its fixed assets to a third party management company controlled by one of its directors in return for the partial, non-cash settlement of certain indebtedness in the amount of $52,000. The net book value of the assets was $104,280 and they were appraised at under $50,000 in current conditions. The Company incurred a loss on disposal of fixed assets of $52,280 which is accounted for in general and administrative expenses for the period. The Company currently leases this equipment for its use from that third party management company, inclusive of utilities and other office expenses for $12,500 per month.
During the three months ended March 31, 2016 and the year ended December 31, 2015, advances of $210,181 and $1,950,605, respectively, were received from affiliates of the Company’s Chief Executive Officer and other shareholders. These advances are non-interest bearing and payable on demand.
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13. Income Taxes
As of December 23, 2013, Arabella LLC elected to be treated as a corporation for tax purposes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized. The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured.
The Company had no income tax expense due to operating losses incurred for either the three months ended March 31, 2016 or 2015.
14. Earnings per Share
Basic earnings per share is computed by dividing net income available to shareholders by the weighted average number of shares outstanding for the periods presented. Fully diluted earnings per share is computed by dividing net income available to shareholders by the weighted average number of fully diluted shares outstanding for the periods presented.
The calculation of diluted earnings per share does not include the potential dilutive impact of the 4,106,500 offering warrants outstanding during the periods presented since in the three months ended March 31, 2016 and 2015 they were anti-dilutive. The calculation of diluted earnings per share does not include the potential dilutive impact of the Unit Purchase Option as it would be anti-dilutive.
The calculation of diluted earnings per share does not include the impact of the 6,600,000 Insider Warrants in the three months ended March 31, 2016 and 2015 as they were anti-dilutive.
The calculation of diluted earnings per share does not include the impact of the 1,300,000 financing warrants in the three months ended March 31, 2016 and 2015 as they were anti-dilutive.
The calculation of diluted earnings per share does not include the impact of the 370,000 board of directors’ options as they were anti-dilutive in the three months ended March 31, 2016 and 2015.
The following table sets forth the computation of the basic and diluted earnings per share for the periods ended March 31, 2016 and 2015:
| Three Months Ended | ||||||||
| March 31, | March 31, | |||||||
| 2016 | 2015 | |||||||
| Numerator for basic and diluted earnings per share: | ||||||||
| Net (loss) income | $ | (1,536,223 | ) | $ | (3,189,124 | ) | ||
| Denominator: | ||||||||
| Denominator for basic earnings per ordinary shares – weighted average shares outstanding | 5,020,303 | 5,020,303 | ||||||
| Effect of dilutive warrants | - | |||||||
| Denominator for diluted earnings per ordinary share – weighted average shares outstanding | 5,020,303 | 5,020,303 | ||||||
| Basic earnings per ordinary share | $ | (0.31 | ) | $ | (0.64 | ) | ||
| Diluted earnings per ordinary share | $ | (0.31 | ) | $ | (0.64 | ) | ||
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| ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of this Report, including any projections of earnings, revenue or other financial items, any statements regarding the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, any statements regarding expected benefits from any transactions and any statements of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this Report are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Thus, investors should refer to and carefully review information in future documents the Company files with the Securities and Exchange Commission (“SEC”). Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risk and uncertainties, including, but not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2015 under “Part I, Item 1A – Risk Factors” and for the reasons described elsewhere in this Report. All forward looking statements and reasons why results may differ included in this Report are made as of the date hereof, and we do not intend to update any forward-looking statements except as required by law or applicable regulations. Except where the context otherwise requires, in this Report, the “Company,” “Arabella,” “we,” “us” and “our” refer to Arabella Exploration, Inc., a Cayman Islands company, and, where appropriate, its subsidiaries.
Business Overview
We are an independent oil and natural gas company focused on the acquisition, development, exploration and exploitation of unconventional, long-life, onshore oil and natural gas reserves in the Delaware Basin in West Texas, which is a part of the Permian Basin. Our activities have historically been directed at the Avalon, Bone Springs, and Wolfcamp formations, which we refer to collectively as the Wolfbone play.
Substantially all of our revenues are generated through the sale of oil, natural gas liquids and natural gas production, though we do on occasion sell parcels of our land when the opportunity to generate profit presents itself. Our production was approximately 75% oil, no natural gas liquids and 25% natural gas for the quarter ended March 31, 2016 and 83% oil, no natural gas liquids and 17% natural gas for the year ended December 31, 2015. On March 31, 2016, our net acreage position in the Delaware Basin was approximately 1,562 net acres. On December 31, 2015, our net acreage position in the Delaware Basin was approximately 1,562 net acres. We are not currently engaged in any drilling activity due to the reduced price of oil.
We were organized on June 17, 2010 as an exempted company under the laws of the Cayman Islands. We were a blank check company formed to acquire through a merger, capital stock exchange, asset acquisition, stock purchase or similar business combination, or control through contractual arrangements, one or more operating businesses. On October 23, 2013, we entered into an Agreement and Plan of Merger and Reorganization to acquire Arabella Exploration, Limited Liability Company, a Texas limited liability company (the “Acquisition”). On December 24, 2013, we consummated the Acquisition with Arabella Exploration, Limited Liability Company, as more fully described in our Annual Report on Form 20-F for the year ended December 31, 2013 filed on May 15, 2014. On February 4, 2014, we changed our name from Lone Oak Acquisition Corporation to Arabella Exploration, Inc.
During 2015 the dramatic and continuing decline in oil and gas prices caused significant damage to our assets and business. Among other things, we were forced to write down the value of our oil and gas assets by $21,202,608 reflecting acreage and wells lost to lease expiration and the reduced production economics on our producing wells. Reduced oil prices have also dramatically reduced our proven reserves through the reduction in the dollar value of our reserve barrels of oil and the number of barrels that we can produce economically over the expected life of ours wells. The adverse pricing conditions have led to operating losses which were exacerbated by the non-cash earnings charge for the oil and gas asset impairment. Further, the reduced revenue resulting from the prices for oil and gas has left us unable to service and repay the senior secured notes which came due on September 2, 2015. On January 21, 2016 we received notice from our lender that they were declaring the senior secured notes in default as of June 4, 2015.
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Future Activity
Any future drilling and completion activity will be highly dependent on the recovery of prices for crude oil. Unless oil prices rebound significantly in a short time, it is highly unlikely that we will drill new wells. We are not currently engaged in any drilling activity due to the reduced price of oil.
Operating Results Overview
During the three months ended March 31, 2016, our average daily production was approximately 101 BOE, consisting of 75.9 Bbls/d of oil, 152.9 Mcf/d of natural gas and no natural gas liquids, as compared to the three months ended March 31, 2015, when our average daily production was approximately 94.3 BOE, consisting of 86.3 Bbls/d of oil, 47.8 Mcf/d of natural gas and no natural gas liquids.
Through March 31, 2016, we had participated in 8 gross (2.96 net) operated wells in the Delaware Basin.
Sources of Our Revenue
Our revenues are derived from the sale of oil and natural gas production, as well as the sale of natural gas liquids that are extracted from our natural gas during processing. For the periods ended March 31, 2016 and 2015 our revenues were derived 90% and 96%, respectively, from oil sales, 0 and 0%, respectively, from natural gas liquids sales and 10% and 4%, respectively, from natural gas sales. Our revenues may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices. Oil, natural gas liquids and natural gas prices have historically been volatile.
Results of Operations
The following table sets forth selected historical operating data for the three month periods indicated.
| March 31, 2016 | March 31, 2015 | |||||||
| Revenues: | ||||||||
| Oil and gas revenue | $ | 236,878 | $ | 346,669 | ||||
| Other revenue – administrative overhead | 10,800 | 12,000 | ||||||
| Total revenues | 247,678 | 358,669 | ||||||
| Costs and expenses: | ||||||||
| Lease operating expenses | 111,306 | 182,529 | ||||||
| Ad valorem and production taxes | 18,225 | 17,945 | ||||||
| Depreciation, depletion and amortization | 78,478 | 190,322 | ||||||
| Accretion of asset retirement obligation | 420 | 480 | ||||||
| General and administrative expenses | 646,519 | 995,860 | ||||||
| Total costs and expenses | 854,948 | 1,387,136 | ||||||
| Loss from operations | (607,270 | ) | (1,028,467 | ) | ||||
| Other expense | ||||||||
| Interest expense | 928,953 | 2,160,657 | ||||||
| Total other expense | 928,953 | 2,160,657 | ||||||
| Net loss before taxes | (1,536,223 | ) | (3,189,124 | ) | ||||
| Provision for income taxes | - | - | ||||||
| Net loss | $ | (1,536,223 | ) | $ | (3,189,124 | ) | ||
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| March 31, 2016 | March 31, 2015 | |||||||
| Production Data: | ||||||||
| Oil (Bbls) | 6,905.9 | 7,771.1 | ||||||
| Natural gas (Mcf) | 13,916.9 | 4,302.9 | ||||||
| Combined volumes (BOE) | 9,225.4 | 8,488.3 | ||||||
| Daily combined volumes (BOE/d) | 94.3 | |||||||
| Average Prices: | ||||||||
| Oil (per Bbl) | $ | 26.51 | $ | 42.29 | ||||
| Natural gas (per Mcf) | 1.47 | 2.89 | ||||||
| Combined (per BOE) | 22.06 | 40.18 | ||||||
| Average Costs (per BOE): | ||||||||
| Lease operating expense | $ | 12.07 | $ | 21.50 | ||||
| Production Taxes | 1.98 | 2.11 | ||||||
| Production Taxes as a % of sales | 7.7 | % | 5.2 | % | ||||
| Depreciation, depletion and amortization | 8.51 | 22.42 | ||||||
| General and Administrative | 70.08 | 117.32 | ||||||
Three Months Ended March 31, 2016 Compared to the Three Months EndedMarch 31, 2015
Oil and Natural Gas Revenues. Our oil and natural gas revenues decreased by $109,791, or 32%, to $229,048 for the three months ended March 31, 2016, as compared to $346,669 for the three months ended March 31, 2015. Our revenues are a function of oil and natural gas production volumes sold and average sales prices received for those volumes. The decrease in revenues is due to the lower price of oil realized in the period ended March 31, 2016 as well as decreased oil production.
Other Revenue.Other revenue relates to administrative overhead fees paid to Arabella Operating to operate our wells. Arabella Operating was paid $10,800 and $12,000 for the three months ended March 31, 2016 and 2015, respectively.
Lease Operating Expense. Lease operating expenses decreased from $182,529 in the three months ended March 31, 2015 to $111,306 in the three months ended March 31, 2015. This decrease is the result of reduced spending in light of reduced revenue as described under revenues, above. Lease operating expenses can vary based upon conditions at the well site and well productivity.
Ad Valorem and Production Tax Expense. Ad valorem and production taxes as a percentage of oil and natural gas revenues increased for the three months ended March 31, 2016, as compared to the three months ended March 31, 2015. The increase was due to normal variances in the taxes due at production. Ad valorem and production taxes are primarily based on the market value of our production at the wellhead and may vary across the different counties in which we operate.
Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense decreased from $190,322 in the three months ended March 31, 2015 to $78,478 in the three months ended March 31, 2016. The decrease is related to decreased production from our wells discussed under revenue, above and the disposal of fixed assets.
General and Administrative. General and administrative expenses decreased from $995,860 in the three months ended March 31, 2015 to $646,519 in the three months ended March 31, 2016. These expenses relate primarily to salaries and wages, investor relations costs and professional and consulting fees. The decrease is related to cost cutting efforts in response to the significantly lower price of oil in the period ended March 31, 2015.
Net Interest Expense. Net interest expense was $928,953 during the three months ended March 31, 2016 as compared to $2,160,657 during the three months ended March 31, 2015. The interest for the three months ended March 31, 2016 includes provisions for possible default interest. The interest expense the three months ended March 31, 2015 was non-cash and represented the costs of our Senior Secured Notes (see “Senior Secured Notes” below).
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Liquidity and Capital Resources
Our primary sources of liquidity have previously been oil and gas sales revenue and the sales of certain properties, equity contributions from the Acquisition, equity and loans from our founder Jason Hoisager, loans from Hauser Holdings, LLC and BBS Capital Fund, LP, affiliates of two of our directors and the Senior Secured Note Facility entered into on September 2, 2014 (the “Notes”) and advances from affiliates . Currently, our only source of liquidity is our ongoing sales of oil and gas. Our primary uses of capital have been the acquisition, development and exploration of oil and natural gas properties. We regularly consider which capital resources, including equity and debt financings, are available to meet our future financial obligations, planned capital expenditure activities and liquidity requirements. Our future ability to grow proved reserves and production will be highly dependent on the capital resources available to us.
The Notes discussed below became due on September 2, 2015 and the Company was unable to repay them and is continuing to negotiate with its Senior Lender. On January 21, 2016 we received notice from our Senior Lender that they were declaring the Notes in default as of June 4, 2015.
The rapid and substantial decline in oil prices in the later part of 2014 and in 2015 significantly reduced the amount of revenue we receive per barrel of oil. Approximately 90% of our oil and gas revenue comes from oil sales. This decline has reduced our revenue and, as a result, our cash flow, which limits our operations and could limit our future growth. Our current cash position, availability of financing from our Notes and current level of operating cash flows may not, in aggregate, be adequate to support our current working capital requirements, interest costs and, at the same time, support additional drilling activity. The current oil pricing environment and related conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management is exploring various opportunities to remedy the Company’s liquidity concerns.
Liquidity and cash flow
We commenced oil and gas exploration activities in 2011 and had a working capital deficit of $25,859,323 as of March 31, 2016 largely consisting of our Notes described below, accrued liabilities and advances from affiliates. Our net cash flow for the three months ended March 31, 2016 was a decrease of $70,386, the components of which are described below. Our net cash flow for the three months ended March 31, 2015 was an increase of $1,895. We are not currently drilling any new wells; if we were to resume drilling we might need $40 million over a 12 month period, which would include minimum annual property lease payments, well expenditures and operating costs and expenses. However, unless oil prices rebound significantly in a short time, it is highly unlikely that we will resume drilling or drill at such a high pace. In the event that we begin new drilling operations we may require additional funding in 2016.
On September 2, 2014 we sold $16,000,000 of Notes under our $45,000,000 Senior Secured Note Facility, with further sales during the term of the facility to be based upon reserve based performance hurdles. No additional Notes were issued. The Notes became due on September 2, 2015; we were unable to repay them and are continuing to negotiate with our Senior Lender. On January 21, 2016 we received notice from our Senior Lender that they were declaring the Notes in default as of June 4, 2015.
In the event we are able to redeem our offering warrants, they would likely be exercised resulting in the receipt of proceeds up to $20,532,500. There can be no assurance we will redeem the offering warrants. Given the Company’s current stock price, it is unlikely that the Company will redeem the initial public offering warrants in the near future.
Operating Activities
Net cash used in operating activities was $279,183 for the three months ended March 31, 2016, as compared to net cash provided by operating activities of $1,895 for the three months ended March 31, 2015. The decrease in cash from operating activities is largely due to the reduced cash from oil and gas sales due to lower prices for oil and gas.
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Investing Activities
The purchase and development of oil and natural gas properties generally accounts for the majority of our cash outlays for investing activities.
We used net cash for investing activities of $1,384 and $599,774 for the three months ended March 31, 2016 and March 31, 2015, respectively. We used cash for investing in oil and natural gas properties in the amounts of $1,384 and $599,774 for the three months ended March 31, 2016 and 2015, respectively. We used no cash for investing in property and equipment for the three months ended March 31, 2016 and March 31, 2015.
Financing Activities
During the year three months ended March 31, 2016 we received an aggregate of $210,181 in advances from affiliates and shareholders, which are repayable on demand without interest. We had no cash used or provided by financing activities during the three months ended March 31, 2015.
Senior Secured Note Facility
On September 2, 2014 we entered into a $45,000,000 Senior Secured Note Facility (the “Notes”) with a New York based investor (the “Investor”). The sale of $16,000,000 in Notes occurred on September 2, 2014 with further sales during the term of the facility to be based upon reserve based performance hurdles. No additional Notes were issued. The Notes bear interest at an annual rate of 15%, of which six months was prepaid at close. We paid a 3% origination fee to the Investor and a 5% cash commission to our advisors on the transaction. In conjunction with the sale of the Notes, we issued warrants to purchase 1,300,000 of our ordinary shares at a price of $5.00 per share. The warrants expire on September 2, 2019. The Notes became due on September 2, 2015; we were unable to repay them and are continuing to negotiate with our Senior Lender.
On January 21, 2016 we received notice from our Senior Lender that they were declaring the Notes in default as of June 4, 2015. While we do not necessarily believe that additional interest is due, we have recorded an accrued interest charges in the total amount of $258,953 for the three months ended March 31, 2016 and $591,620 at December 31, 2015 to reflect the maximum possible difference between the original Note interest and the default Note interest provisions. We paid $70,000 in cash interest payments for the three months ended March 31, 2016.
The Notes are the senior secured obligations of the Company and, with certain exceptions, are secured by first lien positions on all of the Company’s assets and property.
Capital Requirements, Sources of Liquidity and Ability to Continue as a Going Concern
We are not currently drilling any new wells; if it were to resume drilling it might need $40 million over a 12 month period, which would include minimum annual property lease payments, well expenditures and operating costs and expenses. However, unless oil prices rebound significantly in a short time, it is highly unlikely that the Company will resume drilling or drill at such a high pace. In the event that we begin new drilling operations we may require additional funding in 2016.
The amount and timing of any capital expenditures is largely discretionary and within our control. We could choose to defer a portion of any planned capital expenditures depending on a variety of factors, including but not limited to raising of outside capital, the success of our drilling activities, prevailing and anticipated prices for oil and natural gas, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners.
Additionally, while some of our capital expenditures will be financed through operations, the majority of these costs will require outside financing.
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The current oil pricing environment, the amounts due on the Senior Secured Note Facility and related conditions raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to generate revenue from oil and gas operations or asset sales and achieve profitable operations and to generate sufficient cash flow from financing and operations to meet our obligations, as they become payable. We have plans to explore additional alternatives to our existing oil and gas activities to generate revenue in the current oil pricing environment. Although there are no assurances that our plans will be realized we believe that we will be able to continue operations in the future.
Critical Accounting Policies
There have been no changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.
OFF-BALANCE SHEET ARRANGEMENTS:
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, operating results, liquidity or capital expenditures.
| ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a smaller reporting company we are not required to provide information required by this Item.
| ITEM 4 | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2016 was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in internal controls
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(d) of the Exchange Act) that occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
On April 20, 2016 we learned that our Chief Financial Officer, Terry E. Sanford, had passed away. Our Chief Executive Officer was appointed as interim Chief Financial Officer pending a search for Mr. Sanford’s replacement.
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OTHER INFORMATION
| ITEM 1 | LEGAL PROCEEDINGS |
We have been named as a defendant in an action brought by Morris Weiss, Chapter 11 Trustee for Arabella Petroleum, LLC (“APC”), a predecessor in interest to much of the acreage that our wholly owned subsidiary, Arabella Exploration, LLC, owns and which another wholly owned subsidiary, Arabella Operating, LLC, operates. Both subsidiaries are also named defendants, as is Platinum Long Term Growth VIII, LLC (“Platinum”), our senior secured lender. Platinum’s parent fund, one of our directors, Jason Hoisager, and a company owned by one Mr. Hoisager are also named defendants. The action alleges, among other things against parties other than us or our wholly owned subsidiaries, that the transfer of the majority of acreage owned by Arabella LLC was constructively or actually fraudulent on the creditors of APC, are preferential transfers and that APC has, and should be allowed to foreclose on, a lien against those property interests. The APC Trustee seeks return of the properties to APC or the payment of the fair market value of those assets at the time of the transfer. The Trustee has not stated an amount of damages dollars. The answer date to the action was set at April 29, 2016 at which time we filed a general denial. We intend to vigorously defend ourselves and dispute both the factual and legal basis underpinning the suit. This action was only recently filed on February 29, 2016; little to no discovery has been undertaken and no substantive rulings have been made.
Due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including workers’ compensation claims and employment related disputes. In the opinion of our management, none of the pending litigation, disputes or claims against us, unless previously mentioned in this section, if decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations.
| ITEM 1A. | RISK FACTORS |
There have been no material changes from the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
| ITEM 2 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
There were no unregistered sales of equity securities that were not reported on a Current Report on Form 8-K.
| ITEM 3 | DEFAULTS UPON SENIOR SECURITIES |
The Notes became due on September 2, 2015 and the Company was unable to repay them and is continuing to negotiate with its Senior Lender. On January 21, 2016, the Company received notice from its Senior Lender that they were declaring the Notes in default as of June 4, 2015.
| ITEM 4 | mine safety disclosures |
Not Applicable.
| ITEM 5 | OTHER INFORMATION |
None.
| ITEM 6 | EXHIBITS |
The exhibits listed on the Exhibit Index are filed as part of this report.
| No. | Description | |
| 31.1 | Certification of Chief Executive Officer and interim Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. | |
| 32.1 | Certification of Chief Executive Officer and interim Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. | |
| 101.1 | Interactive Data Files |
| 19 |
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.
| Dated: May 20, 2016 | ARABELLA EXPLORATION, INC. | |
| By: | /s/ Jason Hoisager | |
| Jason Hoisager | ||
| Chief Executive Officer and interim Chief Financial Officer (Principal Executive, Financial and Accounting Officer) | ||
20