SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q/A
(Amendment No. 2)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2007
|_| 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 001-32497
DUNE ENERGY, INC.
(Exact name of small business as specified in its charter)
Delaware 95-4737507
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
Two Shell Plaza, 777 Walker Street, Suite 2450, Houston, Texas 77002
(Address of principal executive offices)
(713) 229-6300
(Issuer'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 Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer |_| Accelerated Filer |_| Non-Accelerated Filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 77,941,679 shares of Common
Stock, $.001 per share, as of September 18, 2007.
Explanatory Note
On May 15, 2007, Dune Energy, Inc. (referred to herein as "Dune", "we", or
the "Company") filed this Quarterly Report on Form 10-Q for the quarter ended
March 31, 2007. Shortly after the end of such fiscal quarter, in connection with
a then pending acquisition, the Company hired a new President/Chief Executive
Officer and a new Chief Financial Officer. While preparing for the pending
acquisition, we discovered that the natural gas price used by our independent
engineers in their 2006 year end reserve report was incorrect. As a result, on
April 20, 2007, we amended our Annual Report on Form 10-KSB to restate our
consolidated financial statements for the year ended December 31, 2006, in order
to restate proved properties impairment expense and the supplemental oil and gas
information related to the revision of the reserve report of independent
engineer for the correction of natural gas prices used in the calculation of
year end reserves. In that amendment, we also stated that as of year end, our
internal controls were not effective and that we would be implementing
procedures whereby reports received from outside consultants would be more
thoroughly reviewed.
The purpose of this amendment to our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2007 is to amend Item 4 hereof to (i) state that as of
March 31, 2007 our disclosure controls and procedures were not effective and
(ii) elaborate on an additional procedure we have implemented since early in the
second quarter to remediate such weakness. In order to preserve the nature and
character of the disclosures set forth in this Quarterly Report as originally
filed, no attempt is made in this amendment to modify or update the disclosures
in the original filing on May 15, 2007, except with respect to Item 4 of Part I.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Dune Energy, Inc.
Consolidated Balance Sheets
As of March 31, 2007 and December 31, 2006
(Unaudited)
ASSETS March 31, 2007 December 31, 2006
-------------- -----------------
Current assets:
Cash $ 2,622,843 $ 3,574,705
Accounts receivable, net of reserve for doubtful
accounts of $396,629 and $0 1,240,392 3,849,929
Prepaid assets 146,543 132,272
------------ ------------
Total current assets 4,009,778 7,556,906
------------ ------------
Oil and gas properties, using full cost accounting:
Properties being amortized 93,694,289 83,503,586
Properties not subject to amortization 5,856,461 5,856,461
Less accumulated depreciation, depletion, amortization and
impairment (49,526,376) (48,286,003)
------------ ------------
Net oil and gas properties 50,024,374 41,074,044
------------ ------------
Property and equipment, net of accumulated depreciation of
$19,859 and 16,721 42,908 46,046
Deferred financing costs, net of accumulated amortization
of $551,812 and $310,711 943,197 1,181,554
Deposit - related party 500,000 500,000
Other assets -- 500,000
------------ ------------
TOTAL ASSETS $ 55,520,257 $ 50,858,550
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 6,525,672 $ 4,685,398
Other current liabilities 810,349 --
Current portion of long-term debt 5,471,000 4,786,000
------------ ------------
Total current liabilities 12,807,021 9,471,398
Long-term debt 32,979,303 27,815,223
Long-term debt - related party 28,235,380 27,423,932
Other long-term liabilities 1,000,427 1,397,649
------------ ------------
Total liabilities 75,022,131 66,108,202
------------ ------------
Commitments and contingencies -- --
STOCKHOLDERS' DEFICIT
Preferred stock, $.001 par value, 1,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $.001 par value, 100,000,000 shares authorized,
60,810,813 and 59,430,172 shares issued and outstanding 60,811 59,430
Additional paid-in capital 47,184,691 43,585,518
Accumulated deficit (66,747,376) (58,894,600)
------------ ------------
Total stockholders' deficit (19,501,874) (15,249,652)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 55,520,257 $ 50,858,550
============ ============
See notes to consolidated financial statements.
1
Dune Energy, Inc.
Consolidated Statements of Operations
For the three months ended March 31, 2007 and 2006
(Unaudited)
2007 2006
------------ ------------
Revenues $ 2,994,414 $ 1,300,820
------------ ------------
Operating expenses:
General and administrative expense 1,741,372 1,298,184
Direct operating expense 848,273 351,684
Accretion expense 8,488 1,999
Depletion, depreciation and amortization 1,243,511 508,452
Bad debt expense 396,629 --
Loss on impairment of long-lived assets 3,192,250 --
------------ ------------
Total operating expenses 7,430,523 2,160,319
------------ ------------
Operating loss (4,436,109) (859,499)
------------ ------------
Other income (expense):
Interest income 31,545 97,511
Interest expense (1,997,745) (1,039,703)
Amortization of deferred financing costs (241,101) (215,932)
Gain (loss) on embedded derivative liability (1,209,366) 27,517
------------ ------------
Total other expense (3,416,667) (1,130,607)
------------ ------------
Net loss $ (7,852,776) $ (1,990,106)
============ ============
Net loss per share:
Basic and diluted $ (0.13) $ (0.04)
Weighted average shares outstanding:
Basic and diluted 60,298,138 56,144,859
See notes to consolidated financial statements.
2
Dune Energy, Inc.
Consolidated Statements of Cash Flows
For the three months ended March 31, 2007 and 2006
(Unaudited)
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,852,776) $ (1,990,106)
Adjustments to reconcile net loss to net cash from
operating activities:
Depletion, depreciation and amortization 1,243,511 508,452
Amortization of deferred financing costs 241,101 215,932
Share-based compensation 908,304 473,388
Accretion of asset retirement obligation 8,488 1,999
Loss (gain) on derivative mark-to-market adjustment 1,209,366 (27,517)
Bad debt expense 396,629 --
Loss on impairment of long-lived assets 3,192,250 --
Changes in:
Accounts receivable 2,212,908 114,933
Prepaid assets (119,028) (631,616)
Accounts payable and accrued liabilities 1,951,752 (528,161)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 3,392,505 (1,862,696)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in proved and unproved properties (10,190,703) (4,385,912)
Purchase of office equipment -- (17,744)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (10,190,703) (4,403,656)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 6,449,080 --
Proceeds from issuance of common stock -- 22,103,232
Payment on long-term debt issuance cost (2,744) (13,353)
Payments on long-term debt (600,000) (8,500,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,846,336 13,589,879
------------ ------------
NET CHANGE IN CASH BALANCE (951,862) 7,323,527
Cash balance at beginning of period 3,574,705 3,754,120
------------ ------------
Cash balance at end of period $ 2,622,843 $ 11,077,647
============ ============
SUPPLEMENTAL DISCLOSURES
Interest paid $ 1,513,641 $ 327,827
Income taxes paid -- --
NON-CASH SUPPLEMENTAL DISCLOSURES
Common shares issued for ANEC Debentures $ 2,692,250 $ --
See notes to consolidated financial statements.
3
DUNE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Dune
Energy, Inc. ("Dune") have been prepared in accordance with accounting
principles generally accepted in the United States of America and the rules of
the Securities and Exchange Commission ("SEC"), and should be read in
conjunction with the audited consolidated financial statements and notes thereto
contained in the Dune's Annual Report filed with the SEC on Form 10-KSB/A for
the year ended December 31, 2006. 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 financial statements that would substantially duplicate
the disclosures contained in the audited financial statements for 2006 as
reported in the 10-KSB/A have been omitted.
NOTE 2 -- DEBT FINANCING
On September 26, 2006, Dune amended and restated their credit agreement with
Standard Bank Plc, as administrative agent, Standard Americas Inc., as
collateral agent, and the lenders described therein, dated as of November 17,
2005. The amended credit agreement provides for a credit commitment of up to $50
million. During the first quarter of 2007, the lenders advanced an additional
$6,449,080 of their commitment to Dune. Of the amount funded in the first
quarter, $1.2 million was treated as bridge loans. The bridge loans totaled $4.5
million at March 31, 2007. Unless earlier payment is required, loans made by the
lenders must be repaid on or before August 14, 2009, provided, however, that all
bridge loans must be repaid on or before March 26, 2007. Dune requested and
received an extension of the bridge loan repayment requirement through April 16,
2007. This loan was refinanced on April 16, 2007 (see Note 5). Interest on all
loans shall accrue at the prime rate plus 5% per annum, provided that the
interest rate shall not exceed 15.25% per annum nor be less than 11.25% per
annum. All loans are secured by a security interest in, and first lien on, all
of Dune's assets.
NOTE 3 -- DERIVATIVE FINANCIAL INSTRUMENTS
Dune entered into derivative contracts to provide a measure of stability in the
cash flows associated with Dune's oil and gas production and to manage exposure
to commodity prices. None of the derivative contracts Dune entered into have
been designated as cash flow hedges or fair value hedges. Dune recorded a loss
of $1,209,366 and a gain of $27,517 related to its derivative instruments for
the three months ended March 31, 2007 and 2006, respectively.
Natural Gas Derivatives
Dune entered into participating collars on natural gas hedges (NG-HOUSTON SHIP
CHANNEL) whereby Dune receives a floor price and pays a percent of any price in
excess of the floor up to a maximum payment. The following table shows the
monthly volumes hedged, the floor price, percent above the floor price paid
(cost) and the maximum payment for that volume.
Average Average Average Average
Start End Volume Floor Cost Dune Maximum
Month Month MMBTU $/MMBTU % over Floor % Participation Payment
----- ----- ----- ------- ------------ --------------- -------
Jan-07 Dec-07 63,000 $ 6.620 75% 25% $ 5.050
Jan-08 Dec-08 55,000 $ 6.620 75% 25% $ 5.050
Jan-09 Nov-09 41,000 $ 6.620 75% 25% $ 5.050
4
Crude Oil Derivatives
Dune entered into collars on crude oil hedges (WTI-NYMEX) whereby Dune receives
a floor price and pays 100% percent of any price in excess of the floor up to a
maximum payment. The following table shows the monthly volumes hedged, the floor
price, percent above the floor price paid (cost) and the maximum payment for
that volume.
Average Average Average Average
Start End Volume Floor Cost Dune Maximum
Month Month BBLS $/BBLS % over Floor % Participation Payment
----- ----- ---- ------ ------------ --------------- -------
Jan-07 Dec-07 2,150 $ 60.000 100% 0% $ 12.500
Jan-08 Dec-08 1,400 $ 60.000 100% 0% $ 12.500
Jan-09 Oct-09 840 $ 60.000 100% 0% $ 12.500
NOTE 4 -- COMMON STOCK
On February 1, 2006, Dune sold a total of 9,000,000 shares of common stock at a
price of $2.65 per share in a private equity offering. Gross proceeds raised in
the offering were $23,850,000. From the gross proceeds, Dune paid the investment
bankers a placement agent fee of $1,192,500 (5% of the gross proceeds), a
financial advisory fee of $477,000 (2% of the gross proceeds) and expenses of
$104,184, of which $26,916 had been prepaid as of December 31, 2005. Dune also
issued a warrant exercisable for up to 900,000 shares of its common stock at an
exercise price of $2.65 per share. Pursuant to rights granted by Dune to
investors in the February offering, Dune was required to file a registration
statement covering all shares purchased and to have such registration statement
declared effective June 1, 2006. Because such registration statement was not
declared effective by the SEC until July 5, 2006, Dune was required to pay to
the investors a registration failure penalty equal to one and one-half percent
(1.5%) of their aggregate investment for each 30-day period beyond June 1, 2006.
This resulted in Dune paying investors in the February offering an aggregate of
$395,168, which was recorded as other expense for the year ended December 31,
2006.
On January 24, 2007, Dune granted stock options, exercisable in the aggregate,
for up to 500,000 shares of common stock to the outside directors and its
president. Such options vested immediately, expire in five years and are
exercisable at $1.94 per share. The weighted average fair value of the options
was $1.57. Variables used in the Black-Scholes option-pricing model include (1)
risk-free interest rate of 4.4%, (2) expected option life is the actual
remaining life of the options, (3) expected volatility is 112% and (4) zero
expected dividends.
During the three months ended March 31, 2007, Dune acquired 8% Convertible
Secured Debentures issued by American Natural Energy Corp. ("ANEC"), in the
aggregate principal amount of $4,895,000. As consideration for the debentures,
Dune issued a total of 1,380,641 shares of common stock valued at $1.95 per
share, for aggregate consideration of $2,692,250 or 55% of the principal face
amount of the debentures acquired by Dune. Due to the poor financial condition
of ANEC, Dune elected to establish a reserve for uncollectible accounts for the
entire balance tendered of $2,692,250 along with the prior year's balance of
$500,000. Also, Dune elected to establish a reserve for doubtful accounts
related to the revenue receivable from ANEC of $396,629.
NOTE 5-- SUBSEQUENT EVENTS
On April 13, 2007, we amended and restated our Amended and Restated Credit
Agreement with D.B. Zwirn Special Opportunities Fund, L.P., as administrative
agent, and the lenders described therein and party thereto, dated as of
September 26, 2006 (the "Original Amended Credit Agreement"). We amended and
restated the Original Amended Credit Agreement by means of an Amended and
Restated Credit Agreement (the "Credit Agreement"), dated effective as of April
13, 2007, among us, Jefferies Funding LLC, ("Jefferies Funding") as
administrative agent, and the lenders named therein and party thereto (the
"Lenders"). Subject to numerous conditions precedent and covenants, the Credit
Agreement provides for a credit commitment of up to $65.0 million (the
"Commitment").
On April 16, 2007, the Lenders purchased the loans outstanding under the
Original Amended Credit Agreement and advanced the remainder of the Commitment
to us under the Credit Agreement. Funds borrowed by us under the Commitment were
used to (i) pay the $15 million Earnest Money deposit to the Shareholder
pursuant to the Stock Purchase and Sale Agreement ("SPSA") and (ii) fund certain
fees and expenses incurred by us in connection with our entering into the Credit
Agreement and the proposed acquisition of the issued and outstanding shares of
common stock of Goldking Energy Corporation. The remaining borrowed funds will
be utilized by us to carry out our intended plan of operations and for our
working capital needs, subject to the terms of the Credit Agreement.
5
Some of the principal changes between the Original Amended Credit Agreement and
the Credit Agreement included (a) increased borrowings at closing that allowed
us to pay a $15 million Earnest Money deposit to the Shareholders, that allowed
us to pay for costs of the Goldking Energy Corporation acquisition and the
Credit Agreement, and that provided additional working capital to us, (b) no
provisions for additional borrowings after closing of the acquisition, (c)
revision of the applicable interest rates and the financial covenants and (d)
terms that require the Credit Agreement to be repaid with the proceeds from the
issuance of the notes and the Preferred Stock.
Subject to various prepayment requirements under the Credit Agreement, loans
made by the Lenders pursuant to the Credit Agreement must be repaid on or before
May 13, 2008. Under the Credit Agreement, interest on all loans shall accrue at
a fluctuating interest rate per annum as shall be in effect from time to time,
which rate per annum shall be equal at all times to the higher of (a) the rate
of interest announced publicly by Citibank, N.A., in New York, New York, from
time to time, as its base rate and (b) 0.5% per annum plus the Federal Funds
Effective Rate (the "Base Rate") plus 5.75% until July 12, 2007, then at the
Base Rate plus 6.25% from July 13, 2007 until October 10, 2007, then at the Base
Rate plus 6.75% from October 11, 2007 until January 8, 2008, and then at the
Base Rate plus 7.25% from January 9, 2008 until May 13, 2008. All Loans under
the Credit Agreement are secured by a security interest in, and first lien on,
substantially all of our assets.
We also further amended our Amended and Restated Term Loan Agreement (as amended
and restated, the "Loan Agreement"), with our parent company, Itera Holdings BV
("Itera"), pursuant to the terms and conditions of the Lockup Letter and
Agreement Regarding Subordinated Indebtedness, dated as of April 13, 2007 (the
"Letter Agreement"). In accordance with the Letter Agreement, Itera agreed to a
lock up of our common stock, any other equity security of the Company and any
security convertible into common stock owned or held by Itera for a period
commencing on the date of the Letter Agreement and terminating upon the
repayment of our indebtedness, obligations and liabilities under the Credit
Agreement (the "Senior Debt"), provided that if the Senior Debt is paid in full
contemporaneously with the closing, the lockup will continue until the date that
is 90 days after closing. In addition to the foregoing, pursuant to the Letter
Agreement, we may not pay or make any cash payment of any kind, whether
principal or interest, under the Loan Agreement until all our Senior Debt is
paid in full, unless otherwise agreed to in writing by the Lenders.
On April 16, 2007 Dune entered into the SPSA with Goldking Energy Holdings, L.P.
(the "Shareholder"). The SPSA was dated effective as of April 13, 2007. Pursuant
to the SPSA, upon the closing, and subject to the satisfaction of various terms
and conditions, we will purchase from the Shareholder all of the GEC Common
Stock. The closing of the purchase of the GEC Common Stock is scheduled to occur
on or before May 28, 2007, unless extended by us, at our option, until June 12,
2007. The transfer of ownership of the GEC Common Stock will be effective as of
the closing date.
The purchase price we agreed to pay for the GEC Common Stock at the closing is
$320,500,000 (the "Purchase Price"), payable as follows: (a) $302,500,000 in
cash (the "Cash Portion"), subject to adjustment as discussed below, and (b)
10,055,866 shares of our common stock, par value $0.001 per share (the
"Consideration Shares"), representing shares having a value of $18,000,000 based
on the closing price for our common stock on the American Stock Exchange on
April 13, 2007.
Upon the execution of the SPSA, we paid a performance deposit of $15,000,000 to
the Shareholder (the "Earnest Money"), which will be credited against the Cash
Portion paid at the closing. If, however, the Shareholder terminates the SPSA
prior to the closing due to our failure to perform or satisfy certain
pre-closing conditions, including obtaining financing for the transaction, the
Shareholder will be entitled to retain the Earnest Money, and we will be
obligated to pay any interest accrued on the Purchase Price if we elect to
extend the closing date beyond May 28, 2007, as discussed below. If we terminate
the SPSA following the Shareholder's failure to perform or satisfy certain
pre-closing conditions, we will be entitled to the return of the Earnest Money
and to pursue arbitration proceedings against the Shareholder to recover damages
not to exceed $20,000,000.
If we elect to extend the closing date beyond May 28, 2007 (but in no event
later than June 12, 2007), interest will accrue on the Purchase Price at the
rate of 10% per annum during the period from May 29, 2007, until the closing
occurs, and the Cash Portion will be increased by the amount of the accrued
interest. The Cash Portion will also be increased by the amount of certain
payments to Goldking or Goldking's wholly-owned subsidiary, Goldking Operating
Company, a Texas corporation (the "Subsidiary") by EnerVest Energy, L.P., if
made before the closing. If the payment from EnerVest Energy, L.P., is not
received until after the closing, we will pass through this payment to the
Shareholder upon receipt.
The SPSA provides that we will assume no long-term debt of Goldking or the
Subsidiary and that all such long-term debt will be paid and discharged by the
Shareholder at the closing. Goldking or the Subsidiary may incur additional
long-term debt under its existing bank credit agreements between the date of the
6
SPSA and the closing date, and the Cash Portion will be increased by the amount
of all incremental long-term debt thus incurred. Any such increase in the Cash
Portion will be used by the Shareholder to pay and discharge all such
incremental long-term debt at the closing.
On April 17, 2007, we entered into four new employment agreements (collectively,
the "Employment Agreements"), pursuant to which we: (a) engaged James A. Watt to
serve as our President and Chief Executive Officer, (b) engaged Frank T. Smith,
Jr. to serve as Senior Vice President and Chief Financial Officer and (c)
extended and modified our employment arrangements with each of Alan Gaines and
Amiel David. Under the new Employment Agreements, Mr. Gaines will continue to
serve as our Chairman and consented to no longer serve as Chief Executive
Officer and Dr. David agreed to resign as President and Chief Operating Officer
and to serve as Senior Advisor to our Board of Directors. We also entered into
restricted stock agreements with each of the foregoing individuals, pursuant to
which we have agreed to issue up to an aggregate of 7,075,000 shares of our
common stock.
On April 12, 2007, our board of directors approved the grant of five-year stock
options to two individuals unaffiliated with Dune, to purchase up to an
aggregate of 500,000 shares of our common stock, at an exercise price of $1.87
(the closing share price on such date). The options are subject to vesting and
may not be exercised unless we successfully complete the proposed acquisition of
GEC Common Stock. Holders of the options were granted certain piggy-back
registration rights.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
We are engaged in the exploration, development, exploitation and production of
oil and natural gas. We sell our oil and gas primarily to domestic pipelines and
refineries. We entered into a number of property acquisitions and joint ventures
during 2005 and 2006. These acquisitions and joint ventures significantly
affected our results of operations during 2006 and 2007 and had the effect of
significantly increasing both our revenues and expenses. Our financial
statements consolidate our accounts with those of our wholly-owned subsidiaries,
Dune Operating Company and Vaquero Partners LLC ("Vaquero Partners"), and all
inter-company balances and transactions between Dune Energy, Inc., Dune
Operating Company and Vaquero Partners, LLC have been eliminated in such
consolidation.
Trends Affecting Our Results of Operations
Production trends. Average daily production of natural gas increased from 1,379
Mcf per day for the three months ended March 31, 2006 to 4,700 Mcf per day for
the three months ended March 31, 2007. Average daily production of oil increased
from 75 Bbl per day for the three months ended March 31, 2006 to 115 Bbl per day
for the three months ended March 31, 2007. Natural gas and oil production has
increased due to a combination of the acquisition of various interests in 12
properties and the successful drilling and completion of 12 new wells.
Natural gas and oil prices. Our revenues are dependent on the prevailing prices
of natural gas and oil and our ability to effectively hedge production to
minimize adverse fluctuations in prices. Higher natural gas and oil prices have
led to a higher demand for drilling rigs, operating personnel and field supplies
and services, and have caused increases in the cost of those goods and services.
To date, higher sales prices have offset higher field costs. Future earnings and
cash flows are dependent on our ability to manage our overall cost structure to
a level that allows for profitable production.
Our future earnings and cash flows are dependent on our ability to manage our
overall cost structure to a level that allows for profitable production. Our
expectations with respect to future production rates are subject to a number of
uncertainties, including those associated with the availability and cost of
drilling rigs and third party services, natural gas and oil prices, the
potential for mechanical problems, permitting issues, drilling success rates,
the availability of acceptable delivery and sales arrangements with respect to
our natural gas and crude oil production and the accuracy of our assumptions
regarding the sustainability of historical growth rates, weather and other
uncertainties.
Average prices received per Mcf of natural gas were $6.98 and $5.60 for the
three months ended March 31, 2006 and 2007, respectively. Average prices
received per Bbl of oil were $58.67 and $58.09 during the three months ended
March 31, 2006 and 2007, respectively.
We entered into derivative contracts to provide a measure of stability in the
cash flows associated with our oil and natural gas production and to manage
exposure to commodity prices.
Production expenses. Oil and natural gas operating expenses are driven in part
by the type of commodity produced, the level of maintenance activity and the
geographical location of our properties.
General and administration expenses. In order to manage and maximize growth, we
increased our professional staff, which has resulted in increased general and
administrative costs. Integration and systems conversion costs will be incurred
as part of the acquisition of Goldking.
8
Debt service obligations. The indebtedness we incurred in the various
acquisitions during 2005 and 2006 has significantly increased our debt service
obligations.
Results of Operations
Three months ended March 31, 2007 compared to three months ended March 31, 2006
Revenues:
Our revenues increased $1,693,594 or 130% from 2006 to 2007 based on increased
oil volumes of 3,600 Bbls and increased gas volumes 299,000 Mcfs. Although gas
prices decreased $1.38/Mcf during the comparable period, increased volumes more
than offset the drop in gas prices.
Operating expenses:
General and administrative expense ("G&A expense")
G&A expense increased $443,188 or 34% from 2006 to 2007. The majority of this
increase pertains to share-based compensation to employees and directors which
must be expensed in the financial statements based on their fair value. Dune
issued 500,000 stock options in the 1st quarter of 2007 compared to 100,000
stock options in the comparable period for 2006.
Direct operating expense
The Company's direct operating expense increased from $351,684 in 2006 to
$848,273 in 2007. Both components of direct operating expense reflected
significant increases in 2007 with lease operating expense increasing $173,046
and production costs increasing $323,543. These increases are indicative of the
impact on operating expenses of going from seventeen producing properties to
forty-one.
Accretion expense
Accretion expense increased from $1,999 in 2006 to $8,488 in 2007. This increase
results from more than doubling the number of producing properties during the
comparable periods.
Depletion, depreciation and amortization ("DD&A")
DD&A increased from $508,452 in 2006 to $1,243,511 in 2007. This increase is
primarily attributable to DD&A of the Company's oil and gas properties under the
full cost method. Although the cost per Mcfe dropped from $3.07 to $2.79,
production increased from 164,764 Mcfe to 431,993 Mcfe resulting in an increase
of almost $700,000.
Bad debt expense
Included in revenues receivable is a balance of $396,629 due from American
Natural Energy Corp. ("ANEC"). Due to the financial situation of ANEC, Dune
elected to establish a reserve for doubtful accounts for the entire balance
giving rise to bad debt expense of $396,629 in the first quarter of 2007.
Loss on impairment of long-lived assets
In 2006, Dune purchased 8% Convertible Secured Debentures issued by ANEC in the
aggregate principal amount of $3,000,000 for a cash price of $500,000 from
TransAtlantic Petroleum Corp. In 2007, the Company purchased additional
Debentures in the aggregate principal amount of $4,895,000 for 1,380,641 shares
9
of Dune's common stock at a price of $1.95 or $2,692,250. Due to the financial
situation of ANEC, Dune elected to establish a reserve for uncollectible
accounts for the entire value assigned to the ANEC Debentures giving rise to a
loss on impairment of long-lived assets of $3,192,250 for the first quarter of
2007.
Operating loss:
Operating loss increased $3,576,610 from $859,499 in 2006 to $4,436,109 in 2007.
For reasons documented above, Dune incurred significant increases in all areas
of operating expenses including a loss on impairment of long-lived assets of
$3,588,879 which were not offset by corresponding increases in revenue.
Other income (expense):
Interest income
Interest income decreased from $97,511 in 2006 to $31,545 in 2007. Interest
income in 2006 was significantly higher than normal due to higher cash balances
associated with Dune's February 1, 2006 stock sale. There were no sources of
increased cash balances in 2007.
Interest expense
Interest expense amounted to $1,039,703 in 2006 based on an average outstanding
debt balance of $34,994,000 and interest rates ranging from 11 1/2% - 12% for
the quarter. Interest expense amounted to $1,997,745 in 2007 based on an average
outstanding debt of $58,227,000 and interest rates ranging from 12% to 13 1/4%
for the quarter. As a result of these increased debt balances and interest
rates, interest expense increased $958,042.
Amortization of deferred loan costs
Loan costs and fees are amortized over the term of the debt instruments to which
they relate. Amortization expense amounted to $215,932 in 2006 and $241,101 in
2007. In September 2006, Dune refinanced their original credit agreement and
expenses all loan fees associated with this borrowing. Additionally, a new
credit agreement was signed and additional loan fees incurred. Some of the new
loan fees pertain to a bridge loan which has a significantly shorter life than
the main credit commitment. Consequently, the amortization of deferred loan
costs in 2007 reflects an increase of $25,169.
Gain (loss) on embedded derivative liability
Dune entered into derivative contracts to provide a measure of stability in the
cash flows associated with the Company's oil and gas production and to manage
exposure to commodity prices. Dune's mark-to-market balance at March 31, 2006
reflected a liability of $163,036, yielding a gain of $27,517 for the quarter.
Dune's mark-to-market balance at March 31, 2007 reflected a liability of
$1,433,652 yielding a loss of $1,209,366 for the quarter.
Net loss
Dune's net loss increased from $1,990,106 in 2006 to $7,852,776 in 2007. The
major components contributing to this increase includes loss on impairment of
long-lived assets, interest expense and loss on embedded derivative liability as
more fully detailed above.
10
Financial Liquidity and Capital Resources
Provided that borrowings under our existing credit facility remain available to
us, we believe that our cash requirements over the next twelve months will be
met by our revenues from operations, our cash reserves and draws available under
our current banking facilities.
Private Equity Placements
In February 2006, we closed a private equity offering pursuant to which we sold
a total of 9,000,000 shares of our common stock at a price of $2.65 per share.
Gross proceeds raised in this offering were $23,850,000. Sanders Morris Harris
Inc. ("SMH") served as our lead placement agent and C.K. Cooper & Company served
as co-placement agent. From the gross proceeds, we paid our investment bankers a
placement agent fee of $1,192,500 (5% of the gross proceeds) and we paid SMH a
financial advisory fee of $477,000 (2% of the gross proceeds). We also issued to
SMH, a warrant exercisable for up to 900,000 shares our common stock, at an
exercise price of $2.65 per share. The price per share in that offering was
determined by taking the 30 day volume weighted average market price of our
common stock as of January 17, 2006, and discounting it by approximately 10% to
account for investors' receiving unregistered stock.
Debt Financings
On April 13, 2007, we amended and restated our Amended and Restated Credit
Agreement with D.B. Zwirn Special Opportunities Fund, L.P., as administrative
agent, and the lenders described therein and party thereto, dated as of
September 26, 2006 (the "Original Amended Credit Agreement"). We amended and
restated the Original Amended Credit Agreement by means of an Amended and
Restated Credit Agreement (the "Credit Agreement"), dated as of April 13, 2007,
among us, Jefferies Funding LLC, ("Jefferies Funding") as administrative agent,
and the lenders named therein and party thereto (the "Lenders"). Subject to
numerous conditions precedent and covenants, the Credit Agreement provides for a
credit commitment of up to $65.0 million (the "Commitment").
On April 16, 2007, the Lenders purchased the loans outstanding under the
Original Amended Credit Agreement and advanced the remainder of the Commitment
to us under the Credit Agreement. Funds borrowed by us under the Commitment were
used to (i) pay the $15 million Earnest Money deposit to the Shareholder
pursuant to the Stock Purchase and Sale Agreement ("SPSA") and (ii) fund certain
fees and expenses incurred by us in connection with our entering into the Credit
Agreement and the proposed acquisition of the issued and outstanding shares of
common stock of Goldking Energy Corporation. The remaining borrowed funds will
be utilized by us to carry out our intended plan of operations and for our
working capital needs, subject to the terms of the Credit Agreement.
Some of the principal changes between the Original Amended Credit Agreement and
the Credit Agreement included (a) increased borrowings at closing that allowed
us to pay a $15 million Earnest Money deposit to the Shareholders, that allowed
us to pay for costs of the Goldking acquisition and the Credit Agreement, and
that provided additional working capital to us, (b) no provisions for additional
borrowings after closing of the acquisition, (c) revision of the applicable
interest rates and the financial covenants and (d) terms that require the Credit
Agreement to be repaid with the proceeds from the issuance of the Notes and the
Preferred Stock.
11
Subject to various prepayment requirements under the Credit Agreement, loans
made by the Lenders pursuant to the Credit Agreement must be repaid on or before
May 13, 2008. Under the Credit Agreement, interest on all loans shall accrue at
a fluctuating interest rate per annum as shall be in effect from time to time,
which rate per annum shall be equal at all times to the higher of (a) the rate
of interest announced publicly by Citibank, N.A., in New York, New York, from
time to time, as its base rate and (b) 0.5% per annum plus the Federal Funds
Effective Rate (the "Base Rate") plus 5.75% until July 12, 2007, then at the
Base Rate plus 6.25% from July 13, 2007 until October 10, 2007, then at the Base
Rate plus 6.75% from October 11, 2007 until January 8, 2008, and then at the
Base Rate plus 7.25% from January 9, 2008 until May 13, 2008. All Loans under
the Credit Agreement are secured by a security interest in, and first lien on,
substantially all of our assets.
Term Loan Agreement
We also further amended our Amended and Restated Term Loan Agreement (as amended
and restated, the "Loan Agreement"), with our parent company, Itera Holdings BV
("Itera"), pursuant to the terms and conditions of the Lockup Letter and
Agreement Regarding Subordinated Indebtedness, dated as of April 13, 2007 (the
"Letter Agreement"). In accordance with the Letter Agreement, Itera agreed to a
lock up of our common stock, any other equity security of the Company and any
security convertible into common stock owned or held by Itera for a period
commencing on the date of the Letter Agreement and terminating upon the
repayment of our indebtedness, obligations and liabilities under the Credit
Agreement (the "Senior Debt"), provided that if the Senior Debt is paid in full
contemporaneously with the Closing, the lockup will continue until the date that
is 90 days after Closing. In addition to the foregoing, pursuant to the Letter
Agreement, we may not pay or make any cash payment of any kind, whether
principal or interest, under the Loan Agreement until all our Senior Debt is
paid in full, unless otherwise agreed to in writing by the Lenders.
New Accounting Standards
In July 2006, the FASB issued FASB Interpretation ("FIN") No. 48, "Accounting
for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109."
FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise's financial statements in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
FIN No. 48 prescribes a recognition threshold as "more-likely-than-not" that a
tax position must meet before being recognized in the financial statements.. The
new standard also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, transition and disclosure. We
adopted FIN No. 48 effective January 1, 2007, and adoption did not have a
significant effect on our consolidated results of operations, financial position
or cash flows.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our primary exposure to market risk is the commodity pricing available to
our oil and natural gas production. Realized commodity prices received for such
production are primarily driven by the prevailing worldwide price for oil and
spot prices applicable to natural gas. To mitigate some of this risk, we engage
periodically in certain hedging activities, including price swaps, costless
collars and, occasionally, put options, in order to establish some price floor
protection (see Note 3 to financial statements). We also have some exposure to
market risk consisting of changes in interest rates on borrowings under our
credit agreement with our senior lender. An increase in interest rates would
adversely affect our operating results and the cash flow available after debt
service to fund operations. We manage exposure to interest rate fluctuations by
optimizing the use of fixed and variable debt.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13a-15(e). In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Shortly after the period covered by this Quarterly Report, during the
preparation of various pro forma financial models internally generated for a
then pending acquisition, our then President and Chief Operating Officer
discovered that the natural gas price used by our independent engineers in their
2006 year end reserve report was incorrect. As a result of such discovery, our
Chief Executive Officer and our Chief Financial Officer concluded that, as of
March 31, 2007, our disclosure controls and procedures were not effective.
Prior to April 2007, the Company believed it had adequate internal
controls and procedures in place regarding the review and processing of reports
by outside consultants. With respect to reviewing third party engineering
reports, our controls and procedures included (i) validation of all input data
to the final determination of oil and gas reserves ("reserve report") prior to
dissemination to the independent reserve engineer; (ii) vouching the input data
as provided to the independent engineer to the final reserve report; (iii)
testing the calculations used by the independent reserve engineer; (iv)
assessing the output of the final reserve report provided by the independent
reserve engineer to predetermined and documented expectations; (v) discussing
and documenting the assumptions used in the final reserve report and (vi)
verifying the accuracy of the FAS 69 supplemental disclosure of oil & gas
producing activities by agreeing amounts disclosed to reserve reports from prior
periods, production statements, supporting calculations and other relevant
documentation. Since discovering the error in our year end reserve report, in
early May 2007, we added an additional control and procedure whereby an
accounting supervisor in the Company will also review the validation and
vouching functions performed by our personnel. We believe that by virtue of
implementing this additional safeguard, together with the addition of several
new employees to our accounting department when we acquired Goldking Energy
Corporation during the second quarter, our controls surrounding the verification
of information supplied to and received from our independent reserve engineers
were effective by mid May 2007. We do not expect to incur any material costs
associated with our corrective action.
During the quarter ended March 31, 2007, there were no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
13
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits
(a) Exhibits
Exhibit Number Description
- --------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, by Chief Executive Officer
32.2 Certification pursuant to 18 U.S.C. 1350, adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, by Chief Financial Officer
14
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.
DUNE ENERGY, INC.
Date: October 16, 2007 By: /s/ James A. Watt
----------------------------------------
Name: James A. Watt
Title: President and Chief Executive Officer
Date: October 16, 2007 By: /s/ Frank T. Smith, Jr.
----------------------------------------
Name: Frank T. Smith, Jr.
Title: Chief Financial Officer
15
INDEX TO EXHIBITS
Exhibit Number Description
- --------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, by Chief Executive Officer
32.2 Certification pursuant to 18 U.S.C. 1350, adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, by Chief Financial Officer