UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended February 28, 2009.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to ___________
Commission File Number: 000-52319
EXTERRA ENERGY INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 20-5086877
------ ----------
(State of Incorporation) (I.R.S. Employer
Identification Number)
701 S. Taylor St. Suite 440, Amarillo, Texas 79101
--------------------------------------------------
(Address of Principal executive offices) (Zip Code)
806-373-7111
------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) 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. [X] 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 [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Act) [ ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
75,000,000 shares of common stock were issued and outstanding as of April 13,
2009.
INDEX
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
Item 4T. Controls and Procedures 16
Part II Other Information
Item 1. Legal Proceedings 16
Item 1A. Risk Factors 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXTERRA ENERGY, INC.
BALANCE SHEETS
(Unaudited)
February 28, 2009 May 31, 2008
----------------- ------------
CURRENT ASSETS:
Cash and equivalents $ 128 $ 9,190
Oil and gas receivable 62,184 148,114
Prepaid expenses and other current assets -- 11,327
------------ ------------
TOTAL CURRENT ASSETS 62,312 168,631
OIL AND GAS PROPERITES, net - successful efforts method 3,145,106 4,533,036
OIL AND GAS PROPERITES, unproved 669,600 669,600
VEHICLES, FURNITURE AND EQUIPMENT, net 27,634 32,754
OTHER ASSETS 9,913 9,913
------------ ------------
TOTAL ASSETS $ 3,914,565 $ 5,413,934
============ ============
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 818,513 $ 737,886
Oil and gas properties purchase note payable 200,000 207,609
Notes payable 829,625 829,625
------------ ------------
TOTAL CURRENT LIABILITIES
1,848,138 1,775,120
NON-CURRENT LIABILITIES:
Asset retirement obligation 66,991 62,872
TOTAL LIABILITIES 1,915,129 1,837,992
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock: $0.001 par value
75,000,000 shares authorized: 31,496,549 and
27,765,786, respectively
shares issued and outstanding, respectively 31,497 27,766
Additional paid-in capital 19,282,001 18,592,749
Retained earnings (17,314,062) (15,044,573)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,999,436 3,575,942
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 3,914,565 $ 5,413,934
============ ============
See accompanying notes to financial statements
3
EXTERRA ENERGY, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Nine months ended
---------------------------- -----------------------------
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
------------ ------------ ------------ ------------
REVENUE:
Oil and gas sales $ 74,337 $ 68,296 $ 348,554 $ 164,630
OPERATING EXPENSES:
Lease operating expenses 93,327 50,302 258,927 220,998
Depreciation, depletion and accretion 49,734 319,181 189,610 327,006
Impairment -- -- 1,207,558 --
Consulting fees 84,734 1,998,843 579,767 7,049,608
(Gain)/Loss on sale of assets -- (31,805) -- 150,195
General and administrative 35,472 341,328 288,815 863,475
------------ ------------ ------------ ------------
Total Expenses 263,267 2,677,889 2,524,677 8,611,282
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (188,890) (2,609,593) (2,176,123) (8,446,652)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest expense (23,400) (34,247) (93,366) (97,516)
------------ ------------ ------------ ------------
NET LOSS $ (212,290) $ (2,643,840) $ (2,269,489) $ (8,544,168)
============ ============ ============ ============
NET LOSS PER SHARE - BASIC
AND DILUTED $ (0.01) $ (0.10) $ (0.08) $ (0.47)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC
AND DILUTED 30,922,937 25,950,084 29,914,514 18,113,526
See accompanying notes to financial statements
4
EXTERRA ENERGY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine months ended
-------------------------
February 28, 2009 February 29, 2008
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(2,269,489) $(8,554,168)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion, depreciation & asset retirement
obligation accretion 189,610 327,006
Impairment of oil & gas property 1,207,558 --
Stock issued for services 394,983 5,680,525
Loss on sale of oil & gas property -- 150,195
Amortization of loan fees -- 21,451
Stock option expense -- 963,426
Changes in operating assets and liabilities
O&G receivables 85,930 (56,819)
Prepaid expenses and other current assets 11,327 (15,574)
Accounts payable and accrued expenses 220,627 352,812
----------- -----------
Net Cash Used in Operating Activities
(159,453) (1,121,146)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of oil and gas property -- 100,000
Purchase of oil and gas properties -- (191,054)
Purchase of fixed assets -- (4,500)
Advances to related parties -- (618,634)
----------- -----------
Net Cash Used in Investing Activities -- (714,188)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock 158,000 1,148,627
Borrowings on debt -- 602,128
Principal payments on long term debt (7,609) (137,875)
----------- -----------
Net cash Provided by Financing Activities 150,391 1,612,880
----------- -----------
NET INCREASE IN (DECREASE) CASH (9,062) (222,454)
CASH AT BEGINNING OF PERIOD 9,190 260,699
----------- -----------
CASH AT END OF PERIOD $ 128 $ 38,245
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ -- $ --
Income taxes $ -- $ --
EXTERRA ENERGY, INC.
STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
NON-CASH INVESTING AND FINANCING ACTIVITIES
Stock issued for acquisition of Star of Texas $ -- $8,640,000
Stock issued for working interest in O&G properties -- 686,592
Stock issued upon cashless conversion of warrants and options 498 --
Stock issued for prior year accounts payable 40,000 --
Stock issued for prior year accrued compensation 100,000 --
Stock issued for settlement of debt -- 414,069
Stock issued for conversion of notes payable and accrued
interest -- 104,128
Discount on notes payable from beneficial conversion feature -- 18,975
See accompanying notes to financial statements
5
EXTERRA ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Exterra Energy, Inc.
("Exterra") have been prepared in accordance with accounting principles
generally accepted in the United States of America and rules of the Securities
and Exchange Commission, and should be read in conjunction with the audited
financial statements and notes thereto contained in Exterra's annual report on
Form 10-K/A for the year ended May 31, 2008 filed with the SEC on February 17,
2009. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been
reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes to
the consolidated financial statements which would substantially duplicate the
disclosure contained in the audited financial statements as reported in the 2008
annual report on Form 10-K/A have been omitted.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the
current period presentation.
NOTE 2 - GOING CONCERN
Pursuant to the recent and ongoing decline in the price of oil and natural gas,
the Company has exhausted its financial resources. In addition, the collapse of
the world wide financial markets has largely prevented the Company from
acquiring new financing. Therefore, substantial doubt exists as to whether our
company can continue as a going concern.
The Company's financial statements are prepared using accounting principles
generally accepted in the United States of America applicable to a going concern
which contemplates the realization of assets and liquidation of liabilities in
the normal course of business. The Company has not yet established an ongoing
source of revenues sufficient to cover its operating costs and has defaulted on
certain outstanding notes payable. The ability of the Company to continue as a
going concern is dependent on the Company obtaining adequate capital to fund
operating losses until it becomes profitable and to settle or restructure its
outstanding past due notes payable. If the Company is unable to obtain adequate
capital, it could be forced to cease operations.
In order to continue as a going concern, the Company will need, among other
things, additional capital resources. Management's plans to obtain such
resources for the Company include obtaining capital from management and
significant shareholders sufficient to meet its minimal operating expenses.
However, management cannot provide any assurances that the Company will be
successful in accomplishing any of its plans.
The ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually secure other sources of financing and attain profitable
operations. The accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
NOTE 3 - ACQUISITIONS OF OIL AND GAS PROPERTIES
On October 17, 2007, the Company purchased oil & gas properties from Star of
Texas Energy Services, Inc., Star of Texas Minerals Resources LLC, Hydro-FX,
Inc., and Barnett Holding, LLC ("Seller"). These companies were owned or
controlled by a Director of the Company at the time of acquisition. The purchase
price of the properties was 8,000,000 shares of common stock valued at
$8,640,000 based upon the closing price of the common stock on the date the
sales agreement was signed. These shares were issued to Star of Texas Minerals
Resources LLC as to 620,000 common shares, Hydro-FX Inc. as to 135,000 common
shares, SMLL Trust as to 7,045,000 common shares and the Director as to 200,000
common shares. SMLL Trust is the owner of Star of Texas Energy Services, Inc.
The acquisition consists of oil and gas working interests and overriding royalty
interests in over 80 wells primarily in North Central Texas (Denton, Wise, Hood,
Parker, Jack, Hill and Tarrant Counties) and producing out of the Barnett Shale.
The acquisition also includes interests in gathering systems, undeveloped
leases, vehicles and office furniture.
Star of Texas Energy Services, Inc. is the operator on a majority of our
producing wells and is controlled by our former COO.
6
EXTERRA ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The results of this acquisition are included in the financial statements from
the date of acquisition. Unaudited proforma operating results for Exterra,
assuming the acquisition occurred on June 1, 2007 are as follows:
Nine Month Ended
---------------------
February 29, 2008
---------------------
Total revenues $ 164,630
Net loss $ (8,808,421)
Net loss per share $ (0.49)
NOTE 4 - ASSET RETIREMENT OBLIGATIONS
The following is a description of the changes to the Company's asset retirement
obligations:.
Asset retirement $62,872
obligations at May 31, 2008
Additions --
-------
Accretion expense 4,119
-------
Asset retirement
obligations at February 28, 2009 $66,991
=======
NOTE 5 - DEBT
Debts outstanding at February 28, 2009 are as follows:
Balance Balance Maturity
Note 5/31/2008 2/28/09 Date
- -------------------------------------------- ---------- ---------- ---------
Oil and gas properties purchase note payable $ 207,609 $ 200,000 7/15/2008
Convertible loans 367,500 367,500 6/30/2008
Note payable to Coventry Capital 462,125 462,125 5/7/2008
---------- ---------
Total $1,037,234 $1,029,625
========== =========
All notes are in default. As the Company is unable at present to pay the
balances due, we are seeking an extension from the lenders. There are no
guarantees these discussions will be successful.
NOTE 6 - STOCKHOLDERS' EQUITY
Common Stock
During the nine month period ended February 28, 2009, the Company consummated
the following transactions (shares issued for services and fees have been valued
at the market price of the Company's stock on the date the equity issuance was
authorized):
06/01/2008 Issued 35,000 common shares valued at $0.55 per share in payment for services and fees to third parties
06/25/2008 Issued 492,308 common shares upon the cashless exercise of warrants
07/01/2008 Issued 500,000 common shares valued at $0.40 per share in payment for services and fees to third parties
07/31/2008 Issued 300,000 common shares valued at $0.20 per share in payment for services and fees to third parties
08/04/2008 Issued 5,960 common shares upon the exercise of cashless warrants
08/28/2008 Issued 20,000 common shares valued at $0.20 per share in payment for services and fees to third parties
08/28/2008 Issued 655,000 common shares at $0.20 per share for cash in a private placement
09/09/2008 Issued 10,000 common shares at $0.20 per share for cash in a private placement
7
EXTERRA ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
09/30/2008 Issued 125,000 common shares at $0.20 per share for cash in a private placement
10/15/2008 Issued 300,000 common shares valued at $0.15 per share in payment for services and fees to third parties
11/30/2008 Issued 100,000 common shares to a third party valued at an average price of $0.57 per share in payment
for current period services of $16,733 and services included in accounts payable as of May 31, 2008
of $40,000.
01/15/09 Issued 687,495 common shares to an officer of the company valued at $0.20 per share for compensation.
$100,000 of the compensation was included in accrued liabilities as of May 31, 2008 and $37,500
was for services rendered during the nine months ended February 28, 2009
01/15/09 Issued 500,000 shares to an officer of the company valued at $0.025 for services rendered during the period
NOTE 7 - WARRANTS OUTSTANDING AND EXERCISED
As of May 31, 2008 there were 1,934,510 warrants outstanding.
On June 16, 2008, 500,000 cashless warrants were exercised, which resulted in
the issuance of 492,308 common shares.
On July 1, 2008, 400,000 cashless warrants were cancelled as a result of the
re-negotiation of a consulting agreement.
On July 15, 2008, 14,510 cashless warrants were exercised resulting in the
issuance of 5,960 common shares.
On August 28, 2008, 655,000 warrants were granted to Private Placement
investors, who subscribed to invest in our common stock. These warrants are
either exercisable in one year @ $.50 per share or in two years @ $.75 per
share.
In September 2008, Exterra issued 135,000 shares of common stock and 135,000
warrants exercisable in one year @ $.50 per share or in two years @ $.75 per
share for cash proceeds of $27,000 in a private placement.
As of February 28, 2009, there were 1,810,000 warrants outstanding.
NOTE 8 - IMPAIRMENT OF OIL AND GAS PROPERTIES
Due to the fall in oil and natural gas prices, Exterra evaluated its oil and gas
properties under FAS 144 as of November 30, 2008 to determine if they were
impaired. Based on the analysis, Exterra determined an impairment loss of
$1,207,558 should be recognized for the nine months ended February 28, 2009.
NOTE 9 - SUBSEQUENT EVENTS
On March 13, 2009, the Company completed the acquisition of a profits interest
in a saltwater disposal well and lease in the Newark East Field of North Texas,
in consideration of the payment of $2,660,607 payable in shares of restricted
common stock of the Company valued at $.06 a share for a total of 44,343,451
shares. As of the date of acquisition, the well was not operational.
Subsequent to February 28, 2009, Exterra reached a settlement with a former CEO
regarding severance pay. Under the terms of the settlement, the former CEO will
receive $135,000 in shares of Exterra common stock once Exterra has enough
authorized shares for the issuance. The $135,000 is included in accounts payable
and accrued expenses on the balance sheet as of February 28, 2009.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISION OF THE PRIVATE
LITIGATION REFORM ACT OF 1995. Statements contained in this filing that are not
based on historical fact, including without limitation statements containing the
words "believe," "may," "will," "estimate," "continue," "anticipate." "intend,"
"expect" and similar words, constitute "forward-looking statements". These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, events or developments to be
materially different from any future results, events or developments expressed
or implied by such forward-looking statements. These factors include, among
other, the following: general economic and business conditions, both nationally
and in the regions in which Exterra Energy, Inc. ("we", "Exterra" or "Company")
operates; technology changes, the competition we face; changes in our business
strategy or development plans; the high leverage of Exterra; our ability to
attract and retain qualified personnel; existing governmental regulations and
changes in, or our failure to comply with, governmental regulations; liability
and other claims asserted against us; our ability or the ability of our
third-party suppliers to take corrective action in a timely manner with respect
to changing government regulations; and other factors referenced in our filings
with the Securities and Exchange Commission.
Results of Operations
Three Months Ended February 28, 2009 and February 29, 2008
The following table sets forth the percentage relationship to total revenues of
principal items contained in the statements of operations of the consolidated
financial statements included herewith for the three months ended February 28,
2009 and February 29, 2008. It should be noted that percentages discussed
throughout this analysis are stated on an approximate basis.
Three Months Ended
February 28 ,2009 February 29, 2008
---------------------------------- ------------------------------------
Amount Percentage Amount Percentage
------------- ---------- ------------- ----------
Total revenues $ 74,337 100% $ 68,296 100%
Total Expenses 263,267 354% 2,677,889 3921%
Total Other Expenses (23,400) -31% (34,247) -50%
Net loss $(212,290) -285% $(2,643,840) -3871%
Oil and Gas Revenues
Revenues for the three months ended February 28, 2009 and February 29, 2008 were
$74,337 and $68,296, respectively. The increase is due to our purchase of
additional working interests primarily through the Star of Texas acquisition. We
expect our oil and gas revenues to decrease in the following months as oil and
natural gas prices have continued to decline.
Lease Operating Expenses
Lease operating expenses for the three months ended February 28, 2009 and
February 29, 2008 were $93,237 and $50,302, respectively. Prior period expenses
consisted of costs incurred in connection with putting our oil and natural gas
properties into production. We expect our operating expenses to continue to grow
as we repair and improve the wells we have purchased.
Depreciation, Depletion and Accretion
Depreciation and depletion expenses for the three months ended February 28, 2009
and February 29, 2008 were $49,734 and $319,181, respectively. The decrease in
the depreciation, depletion and accretion was due primarily to the impairment in
the previous quarter of Exterra's oil and gas properties.
General and Administrative and Consulting Expenses
General and administrative and consulting expenses for the three months ended
February 28, 2009 and February 29, 2008 were $120,206 and $2,340,171,
respectively. The decrease is principally due to the consulting fees for the
three months ended February 28, 2009 and February 29, 2008, which were $84,734
and $1,998,843 respectively. We expect our general and administrative expenses
to decline in the current year as the majority of non-cash consulting expenses
are non-recurring.
9
Interest Expense
Interest expense for the three months ended February 28, 2009 and February 29,
2009 were $23,400 and $34,247, respectively. The decrease was due to one debt
obligation that was satisfied by the issuance of common stock.
Net Loss
Our net loss for the three months ended February 28, 2009 and February 29, 2008
was $212,290 and $2,643,840, respectively. The decrease is primarily
attributable to the $1,941,109 decrease in consulting fees for the three months
ended February 28, 2009 as compared to February 29, 2008.
Nine months ended February 28, 2009 and February 29, 2008
The following table sets forth the percentage relationship to total revenues of
principal items contained in the statements of operations of the consolidated
financial statements included herewith for the nine months ended February 28,
2009 and February 29, 2008. It should be noted that percentages discussed
throughout this analysis are stated on an approximate basis.
Nine months ended
February 28, 2009 February 29, 2008
--------------------------------- ---------------------------------
Amount Percentage Amount Percentage
----------- ---------- ----------- ----------
Total revenues $ 348,554 100% $ 164,630 100%
Total Expenses 2,524,677 724% 8,611,282 5231%
Total Other Expenses (93,366) -27% (97,516) -59%
Net loss $(2,269,489) -651% $(8,544,168) -5190%
Oil and Gas Revenues
Revenues for the nine months ended February 28, 2009 and February 29, 2008 were
$348,554 and $164,630, respectively. The increase is due to our purchase of
additional working interests primarily through the Star of Texas acquisition. We
expect our oil and gas revenues to decrease in the following months as oil and
natural gas prices have continued to decline.
Lease Operating Expenses
Lease operating expenses for the nine months ended February 28, 2009 and
February 29, 2008 were $258,927 and $220,998, respectively. The increase in
expenses consisted of costs incurred in connection with putting our oil and
natural gas properties into production. We expect our operating expenses to
continue to grow as we repair and improve the wells we have purchased.
Depreciation, Depletion and Accretion
Depreciation and depletion expenses for the nine months ended February 28, 2009
and February 29, 2008 were $189,610 and $327,006, respectively. The decrease in
the depreciation, depletion and accretion was due primarily to the impairment of
$1,207,588 to Exterra's oil and gas properties. The downward revision of the
reserve estimates based on recent declines in oil and gas prices led to the
impairment of Exterra's properties in the second quarter of 2009.
General and Administrative and Consulting Expenses
General and administrative and consulting expenses for the nine months ended
February 28, 2009 and February 29, 2008 were $868,582 and $7,913,083,
respectively. The decrease is principally due to the consulting fees for the
nine months ended February 28, 2009 and February 29, 2008, which were $552,767
and $7,049,608, respectively. We expect our general and administrative expenses
to decline in the current year as the majority of non-cash consulting expenses
are non-recurring.
10
Interest Expense
Interest expense for the nine months ended February 28, 2009 and February 29,
2008 were $93,366 and $97,516, respectively. The decrease is due primarily to
the decrease in Exterra's outstanding debt for the nine months ended February
28, 2009.
Net Loss
Our net loss for the nine months ended February 28, 2009 and February 29, 2008
was $2,269,489 and $8,544,168, respectively. The decrease is primarily
attributable to the $6,496,841 decrease in consulting fees for the nine months
ended February 28, 2009 as compared to February 29, 2008.
Liquidity and Capital Resources
Pursuant to the recent and ongoing decline in the price of oil and natural gas,
the Company has exhausted its financial resources. In addition, the collapse of
the worldwide financial markets has largely prevented the Company from acquiring
new financing. Therefore, substantial doubt exists as to whether our company can
continue as a going concern.
As of February 28, 2009, Exterra had cash of $128 and negative working capital
of $1,785,826. This compares to cash of $9,190 and negative working capital of
$1,606,489 as of May 31, 2008.
Debts outstanding at February 28, 2009 are as follows:
(1) Note payable to purchase oil and gas properties $200,000
(2) Convertible loans $367,500
(3) Note payable to Coventry Capital $462,125
Total debt outstanding - $1,029,625
(1) Principal and interest (10% per annum) on the note are payable on the tenth
(10th) day of each calendar month, beginning on January 10, 2007, in monthly
installments equal to the difference between the prior month's (i) income and
(ii) the royalties, severance, ad valorem, lifting and transportation expenses
directly related to the operation of the Pecos County leases. Each monthly
installment will be applied first to any outstanding and accrued interest and,
thereafter, to principal on the note. The entire principal amount outstanding
under the note and all accrued interest thereon was due and payable on July 15,
2008. The note payable is secured by the oil and gas properties and 360,000
shares of the Company's restricted common stock. The Company has accrued $54,959
in interest on the note payable as of February 28, 2009. As the Company is
unable at present to pay the balances due, we are seeking an extension from the
Lender. There are no guarantees these discussions will be
(2) During the year ended May 31, 2007, the Company received $367,500 from the
sale of its Convertible Loans. The Convertible Loans were due June 30, 2008 and
bear interest at 10% per annum payable quarterly. In addition, 10% of the face
value of the Convertible Loans is due to the holders as a revenue sharing bonus.
This bonus is due from initial production revenue realized from the first six
months of net revenue from the University Lands, Pecos County, Texas.
Furthermore, 205,900 common shares in aggregate were issued as a bonus. These
bonus shares are restricted from sale for 2 years. The Convertible Loans are
convertible into common shares of the Company at $0.75 per share for a total of
476,667 common shares. The common shares from the conversion are subject to a
"pooling arrangement", whereby the shares will be released in equal installments
over a 6 month period, beginning May 31, 2008. The Company is currently
negotiating an extension with the Convertible Loan Holders. There are no
guarantees these negotiations will be successful.
Through February 28, 2009 a net revenue sharing bonus has not been paid as the
University Lands have yet to yield net revenue. The Company has accrued interest
of $39,382 at February 28, 2009 on the Convertible Loans.
The Company may force conversion into common shares. This will only occur if the
Company's common shares trade at $2.00 per share or more for a period of 90
consecutive days, or if the Company completes a stock offering for $3 million at
a price of $1.50 per share or higher.
11
(3) Principal and interest (18% per annum) due monthly in blended payments of
$20,000 commenced December 7, 2007. The loan is secured by certain oil and gas
properties and was due May 7, 2008. The Company has accrued $82,216 in interest
as of February 28, 2009. The Company is currently attempting to re-negotiate the
terms of the Loan. There can be no guarantees these attempts will be successful.
In addition, during the year ended May 31, 2008, The Company issued a $101,200
unsecured convertible note due in August of 2009, convertible at $0.75 per share
and bearing interest at 12%. The Company analyzed the conversion feature under
FAS 133 and EITF 00-19 and determined that equity classification was
appropriate. The note was analyzed under EITF 98-5 and determined to contain a
beneficial conversion feature with an intrinsic value of $18,975. The principal
of $101,200 plus accrued interest of $2,928 was converted during the 2008 period
into 130,160 shares of stock. At the date of conversion, the remaining balance
of the beneficial conversion feature was amortized to interest expense.
We believe these funds are inadequate to satisfy current operation needs and
comply with debt obligation for the next 12 months. Additional financing whether
debt or equity is necessary although we cannot provide any assurance we will be
able to successfully raise additional funds as needed to compete in the energy
market.
Cash Flow from Operating Activities
For the nine month period ended February 28, 2009, net cash used by operating
activities was $159,453, versus net cash used by operating activities of
$1,121,146 for the nine month period ended February 29, 2008. This decrease in
net cash used by operations activities is primarily due to cash flow generated
from field operations due to increased volumes and prices from production.
Cash Flow from Investing Activities
For the nine month period ended February 28, 2009, net cash used in investing
activities was $0, versus net cash used by investing activities of a $714,188
for the nine month period ended February 29, 2008. Our investing activities were
funded from the use of cash from borrowings on debt and operations.
Cash Flow from Financing Activities
For the nine month period ended February 28, 2009, net cash provided by
financing activities was $150,391, versus net cash provided by financing
activities of a $1,612,880 for the nine month period ended February 29, 2008.
The decrease in cash provided by financing activities was due to the decrease in
funds obtained through stock sales and borrowings for the nine months ended
February 28, 2009 versus February 29, 2008.
Subsequent Events
On March 13, 2009, the Company completed the acquisition of a profits interest
in a saltwater disposal well and lease in the Newark East Field of North Texas,
in consideration of the payment of $2,660,607 payable in shares of restricted
common stock of the Company valued at $.06 a share for a total of 44,343,451
shares. As of the date of acquisition, the well was not operational.
Subsequent to February 28, 2009, Exterra reached a settlement with a former CEO
regarding severance pay. Under the terms of the settlement, the former CEO will
receive $135,000 in shares of Exterra common stock once Exterra has enough
authorized shares for the issuance. The $135,000 is included in accounts payable
and accrued expenses on the balance sheet as of February 28, 2009.
Hedging
We did not hedge any of our oil or natural gas production during 2008 or 2009
and have not entered into any such hedges as of February 28, 2009 and through
the date of this filing.
Contractual Commitments
Information about contractual obligations at February 28, 2009 did not change
materially from the disclosures in our Annual Report on Form 10-K for the year
ended May 31, 2008.
Off-Balance Sheet Arrangements
As of February 28, 2009, we had no off-balance sheet arrangements.
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Related Party Transactions
Star of Texas Energy Services, Inc. is the operator on a majority of our
producing wells and is controlled by our former COO.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
is based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices. We are exposed to risks related to increases in the prices of fuel and
raw materials consumed in exploration, development and production. We do not
engage in commodity price hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Securities Exchange Act
of 1934, as amended (the "Act") is accumulated and communicated to the issuer's
management, including its principal executive officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote. As
of the end of the period covered by the Annual Report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and the Chief Financial Officer of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our CEO and CFO have concluded that our disclosure controls and
procedures are not effective because of the identification of a material
weakness in our internal control over financial reporting which is identified
below, which we view as an integral part of our disclosure controls and
procedures.
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act. Our internal control system was designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes, in accordance
with generally accepted accounting principles. Because of inherent limitations,
a system of internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate due to
change in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Our management conducted an evaluation of the effectiveness of our internal
control over financial reporting using the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control--Integrated Framework. Based on its evaluation, our management concluded
that there is a material weakness in our internal control over financial
reporting. A material weakness is a deficiency, or a combination of control
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the Company's annual or
interim financial statements will not be prevented or detected on a timely
basis.
The material weakness relates to the lack of segregation of duties in financial
reporting, as our financial reporting and all accounting functions are performed
by our Chief Financial Officer, who was hired on December 1, 2007, and prior to
that point, by an external consultant. Our CEO does not possess accounting
expertise and our Company does not have an audit committee. This weakness is due
to our lack of working capital to hire additional staff during the period
covered by this report. We intend to hire additional accounting personnel to
assist with financial reporting as soon as our finances will allow.
The Company's management based its evaluation on criteria set forth in the
framework in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on that assessment,
management has concluded that the Company's internal control over financial
reporting was not effective as of February 28, 2009.
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ITEM 4T. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
We have not yet made any changes in our internal controls over financial
reporting that occurred during the period covered by this report on Form 10-K
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material developments occurred in any previously reported legal proceedings
involving the Company during the quarter ended February 28, 2009.
ITEM 1A. RISK FACTORS
In addition to the risk factors listed in our Form 10k for the year ending May
31, 2008, management feels other factors to consider are the recent and ongoing
decline in the price of oil and natural gas, and the Company's financial
resources have been exhausted. In addition, the collapse of the world wide
financial markets has largely prevented the Company from acquiring new
financing. Therefore, substantial doubt exists as to whether our company can
continue as a going concern.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
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06/01/2008 Issued 35,000 common shares valued at $0.55 per share in
payment for services and fees to third parties in a
private placement under Section 4(2) of the `33 Act
06/25/2008 Issued 492,308 common shares upon the cashless exercise of
warrants
07/01/2008 Issued 500,000 common shares valued at $0.40 per share in
payment for services and fees to third parties in a
private placement under Section 4(2) of the `33 Act
07/31/2008 Issued 300,000 common shares valued at $0.20 per share in
payment for services and fees to third parties in a
private placement under Section 4(2) of the `33 Act
08/04/2008 Issued 5,960 common shares upon the cashless exercise of warrants
08/28/2008 Issued 20,000 common shares valued at $0.20 per share in
payment for services and fees to third parties in a
private placement under Section 4(2) of the `33 Act
08/28/2008 Issued 655,000 common shares valued at $0.20 per share
for cash in a private placement under Section 4(2) of the
`33 Act
09/09/2008 Issued 10,000 common shares at $0.20 per share for cash in a
private placement
09/30/2008 Issued 125,000 common shares at $0.20 per share for cash in a
private placement
10/15/2008 Issued 300,000 common shares valued at $0.15 per share in payment
for services and fees to third parties
11/30/2008 Issued 79,998 common shares valued at an average price of
$0.21 per share in payment for current period services
and 53,332 common shares valued at $1.33 for prior period
accounts payable.
01/31/2009 Issued 687,495 common shares valued at an average price
of $0.20 per share for Payment of current period services
and 500,000 common shares valued at $0.03 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The following listings of corporate debt are in default:
(1) Principal and interest (10% per annum) on the note are payable on the tenth
(10th) day of each calendar month, beginning on January 10, 2007, in monthly
installments equal to the difference between the prior month's (i) income and
(ii) the royalties, severance, ad valorem, lifting and transportation expenses
directly related to the operation of the Pecos County leases. Each monthly
installment will be applied first to any outstanding and accrued interest and,
thereafter, to principal on the note. The entire principal amount outstanding
under the note and all accrued interest thereon was due and payable on July 15,
2008. The note payable is secured by the oil and gas properties and 360,000
shares of the Company's restricted common stock. The Company has accrued $43,333
in interest on the note payable as of February 28, 2009. As the Company is
unable at present to pay the balances due, we are seeking an extension from the
Lender. There are no guarantees these discussions will be successful.
(2) During the year ended May 31, 2007, the Company received $367,500 from the
sale of its Convertible Loans. The Convertible Loans were due June 30, 2008 and
bear interest at 10% per annum payable quarterly. In addition, 10% of the face
value of the Convertible Loans is due to the holders as a revenue sharing bonus.
This bonus is due from initial production revenue realized from the first six
months of net revenue from the University Lands, Pecos County, Texas.
Furthermore, 205,900 common shares in aggregate were issued as a bonus. These
bonus shares are restricted from sale for 2 years. The Convertible Loans are
convertible into common shares of the Company at $0.75 per share for a total of
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476,667 common shares. The common shares from the conversion are subject to a
"pooling arrangement", whereby the shares will be released in equal installments
over a 6 month period, beginning May 31, 2008. The Company is currently
negotiating an extension with the Convertible Loan Holders. There are no
guarantees these negotiations will be successful.
Through February 28, 2009 a net revenue sharing bonus has not been paid as the
University Lands have yet to yield net revenue. The Company has accrued interest
of $46,313 at February 28, 2009 on the Convertible Loans.
The Company may force conversion into common shares. This will only occur if the
Company's common shares trade at $2.00 per share or more for a period of 90
consecutive days, or if the Company completes a stock offering for $3 million at
a price of $1.50 per share or higher.
(3) Principal and interest (18% per annum) due monthly in blended payments of
$20,000 commenced December 7, 2007. The loan is secured by certain oil and gas
properties and was due May 7, 2008. The Company has accrued $46,708 in interest
as of February 28, 2009. The Company is currently attempting to re-negotiate the
terms of the Loan. There can be no guarantees these attempts will be successful.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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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.
Exterra Energy Inc.
By: /s/ Robert Royal
----------------------------
Robert Royal
Chief Executive Officer
Date: April 15, 2009
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