ARABELLA EXPLORATION, INC. - FORM 10-Q

Attached files

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EX-31.1 - CERTIFICATION - ARABELLA EXPLORATION, INC.	f10q0615ex31i_arabellaexp.htm
EX-32.2 - CERTIFICATION - ARABELLA EXPLORATION, INC.	f10q0615ex32ii_arabellaexp.htm
EX-32.1 - CERTIFICATION - ARABELLA EXPLORATION, INC.	f10q0615ex32i_arabellaexp.htm
EX-31.2 - CERTIFICATION - ARABELLA EXPLORATION, INC.	f10q0615ex31ii_arabellaexp.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2015

q Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________to _______________.

Commission File Number 000-10690

ARABELLA EXPLORATION, INC.

(Exact name of registrant as specified in its charter)

Cayman Islands

98-1162608

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

	509 Pecan Street, Suite 200 Fort Worth, Texas 76102
	(Address of Principal Executive Offices including zip code)

	432 897-4755
	(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No q

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every, Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No q

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company

Large Accelerated Filer ☐	Accelerated Filer ☐	Non-Accelerated Filer ☐	Smaller reporting company R
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes o No þ

As of August 18, 2015, 5,020,303 shares of the issuer’s common stock, par value $0.01, were outstanding.

TABLE OF CONTENTS

Part I	FINANCIAL INFORMATION		1

	ITEM 1	CONSOLIDATED FINANCIAL STATEMENTS	1

	ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12

	ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	13

	ITEM 4	CONTROLS AND PROCEDURES.	13

Part II	OTHER INFORMATION		15

	ITEM 1	LEGAL PROCEEDINGS	15

	ITEM 1A	RISK FACTORS	15

	ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	15

	ITEM 3	DEFAULTS UPON SENIOR SECURITIES	15

	ITEM 4	MINE SAFETY DISCLOSURES	15

	ITEM 5	OTHER INFORMATION	15

	ITEM 6	EXHIBITS	15

Part I
FINANCIAL INFORMATION

ITEM 1

CONSOLIDATED FINANCIAL STATEMENTS

ARABELLA EXPLORATION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2015			December 31, 2014
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	84,520		$	3,002
Accounts receivable - oil and gas sales		697,729			814,689
Prepaid expenses		-			417,617

Total current assets		782,249			1,235,308

Deposits and other assets		26,281			85,000
Receivable from affiliate		-			381,801
Property and equipment, net		243,143			315,826
Oil and gas properties, successful efforts method - net		28,457,243			28,305,172

Total assets	$	29,508,916		$	30,323,107

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued liabilities	$	1,840,950		$	1,001,058
Advances from affiliates		1,626,273			32,550
Notes payable, net of discount		15,084,562			11,838,247
Accrued joint interest billings payable, related party		2,894,396			3,382,514

Total current liabilities		21,446,181			16,254,369

Note payable to officer		3,007,170			3,007,170
Asset retirement obligation		26,803			25,843
Total liabilities		24,480,154			19,287,382

Commitments and contingencies

Shareholders’ equity
Preferred shares, $0.001 par value, authorized 5,000,000 shares and none issued and outstanding		-			-
Ordinary shares, $0.001 par value, authorized 50,000,000 shares; issued and outstanding 5,020,303 at June 30, 2015 and December 31, 2014		5,020			5,020
Additional paid-in-capital		15,438,220			15,335,684
Accumulated deficit		(10,414,478	)		(4,304,979	)

Total shareholders’ equity		5,028,762			11,035,725

Total liabilities and shareholders’ equity	$	29,508,916		$	30,323,107

The accompanying notes are an integral part of the condensed consolidated financial statements.

ARABELLA EXPLORATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the three months ended						For the six months ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenues:
Oil and gas revenue	$	270,515		$	976,373			617,184		$	1,762,197
Other revenue – administrative overhead		7,800			-			19,800			-
Other operating revenue – gain on sale of oil and gas properties		-			1,768,521			-			3,004,721

Total revenues		278,315			2,744,894			636,984			4,766,918

Costs and expenses:
Lease operating expenses		81,531			438,652			264,060			552,352
Ad valorem and production taxes		14,471			46,878			32,415			79,017
Depreciation, depletion and amortization		121,400			331,731			311,722			571,374
Accretion of asset retirement obligation		480			180			960			810
General and administrative expenses		819,987			1,295,961			1,815,848			2,601,085
Total costs and expenses		1,037,869			2,113,402			2,425,005			3,804,638
(Loss) income from operations		(759,554	)		631,492			(1,788,021	)		962,280

Other expense (expense)
Interest Expense, related party		-			(16,073	)		-			(16,073	)
Interest expense		(2,160,821	)		-			(4,321,478	)
Other expenses		(2,160,821	)		(16,073	)		(4,321,478	)		(16,073	)

Net (loss) income before taxes		(2,920,375	)		615,419			(6,109,499	)		946,207

Provision for income taxes		-			(215,417	)		-			(327,885	)

Net (loss) income	$	(2,920,375	)	$	400,002			(6,109,499	)	$	618,322

Net (loss) income per ordinary share:
Basic	$	(0.58	)	$	0.08		$	(1.22	)	$	0.13

Diluted	$	(0.58	)	$	0.07		$	(1.22	)	$	0.10

Weighted average ordinary shares outstanding:
Basic		5,020,303			4,838,199			5,020,303			4,834,035

Diluted		5,020,303			5,910,560			5,020,303			6,325,676

The accompanying notes are an integral part of the condensed consolidated financial statements.

ARABELLA EXPLORATION, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the six months ended June 30, 2015

(unaudited)

	Ordinary		Shares		Paid – In		Accumulated
	Shares		Amount		Capital		Deficit			Total

Balance at December 31, 2014		5,020,303	$	5,020	$	15,335,684	$	(4,304,979	)	$	11,035,725

Stock based compensation		-		-		102,536		-			102,536

Net loss		-		-		-		(6,109,499	)		(6,109,499	)

Balance at June 30, 2015		5,020,303	$	5,020	$	15,438,220	$	(10,414,478	)	$	5,028,762

The accompanying notes are an integral part of the condensed consolidated financial statements.

ARABELLA EXPLORATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the six months ended
	June 30, 2015			June 30, 2014
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net income (loss)	$	(6,109,499	)	$	618,322
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization		311,722			571,374
Accretion of asset retirement obligation		960			810
Deferred Taxes		-			327,885
Amortization of interest expense		400,000			-
Amortization of deferred financing costs		1,502,395			-
Amortization of debt discount		1,618,920			-
Stock based compensation		102,536			139,738
Gain from sale of oil and gas properties		-			(3,004,721	)
Changes in operating assets and liabilities:
Accounts receivable - oil and gas sales		116,960			(693,228	)
Prepaid expenses		17,617			(198,032	)
Deposits		58,719			(10,000	)
Receivable from affiliated companies		381,801			-
Payable to affiliated companies		-			817,504
Accrued joint interest billing payable		(488,117	)		-
Accounts payable and accrued liabilities		964,892			212,360
Net cash used in operating activities		(1,121,094	)		(1,217,988	)

Cash flows from investing activities:
Additions to property and equipment		-			(495,049	)
Additions to oil and gas properties		(391,111	)		(8,529,034	)
Proceeds from sale of oil and gas properties		-			5,371,788
Net cash used in investing activities		(391,111	)		(3,652,295	)

Cash flows from financing activities:
Proceeds from sale of ordinary shares		-			2,000,009
Proceeds from directors’ loans		-			1,300,000
Proceeds from advances from affiliates		1,593,723			-
Net cash provided by financing activities		1,593,723			3,300,009

Net increase (decrease) in cash and cash equivalents		81,518			(1,570,274	)

Cash and cash equivalents at beginning of period		3,002			2,118,533

Cash and cash equivalents at end of period	$	84,520		$	548,259

Cash for:
Interest	$	-		$	-
Taxes	$	-		$	-

Non-cash investing and financing activities:
Accrued liability converted to term note	$	125,000		$	-
Addition to oil and gas properties through increase in accrued joint interest billings payable		-			8,225,664

The accompanying notes are an integral part of the condensed consolidated financial statements.

ARABELLA EXPLORATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMNTS

1. Organization and Operations of the Company

Organization

Arabella Exploration, Inc. (formerly known as Lone Oak Acquisition Corporation) (the “Parent”) was incorporated in the Cayman Islands on June 17, 2010 as a blank check company whose objective was to acquire an operating business. Parent’s wholly owned subsidiary Arabella Exploration, Limited Liability Company (“Arabella LLC”) was formed in 2011, to acquire interests in low risk prospective and producing oil and gas properties primarily in the Permian Basin in West Texas. The Parent and Arabella LLC (collectively the “Company”) completed a reverse merger on December 24, 2013 as more fully described below in Note 2.

Arabella Operating, LLC (“AOC”), a wholly owned subsidiary of the Parent, was formed in 2014 to assume the operations role for the Parent. AOC posted a surety bond with the Texas Railroad Commission and is the operator of record for the Company’s oil and gas properties as of December 31, 2014. Prior to December 31, 2014 Arabella Petroleum Company, LLC, an affiliate of Jason Hoisager, the Parent’s Chief Executive Officer was the operating of record for the Company’s acreage.

Nature of Business

The Company is an independent exploration and production company focused on the acquisition and development of unconventional oil and natural gas resources in the Permian Basin in West Texas. The Company owns acreage leases and participates in the drilling of oil and natural gas wells with other working interest partners. Due to the capital intensive nature of oil and natural gas drilling activities, the operating company responsible for conducting the drilling operations may request advance payments from the working interest partners for their share of the costs.

Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries after all significant intercompany balances and transactions have been eliminated upon consolidation.

These financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). They reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted pursuant to such rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. This Quarterly Report on Form 10–Q should be read in conjunction with the Company’s most recent Annual Report on Form 10–K for the fiscal year ended December 31, 2014, which contains a summary of the Company’s significant accounting policies and other disclosures.

Revised Prior Period Amounts

The Company revised the presentation of oil and gas properties, successful efforts method - net, notes payable, net of discount and accrued joint interest billings payable – related party in its consolidated balance sheet for the year ending December 31, 2014 to reverse the effect of an over-accrual of joint interest billings payable – related party in the amount of $737,974, more fully discussed in Note 6 and to reflect a $125,000 liability as described more fully in Note 9. Tabular summaries of the revisions are presented below:

	Consolidated Balance Sheet December 31, 2014
	Previously Reported			Revisions			Revised Reported
Oil and gas properties, successful efforts method - net	$	29,043,146		$	(737,974	)	$	28,305,172

Accounts payable and accrued liabilities		876,058			125,000			1,001,058

Accrued joint interest billings payable, related party		4,120,488			(737,974	)		3,382,514

Accumulated deficit		(4,179,979	)		(125,000	)		(4,304,979	)

	Consolidated Income Statement Year ended December 31, 2014
	Previously Reported			Revisions			Revised Reported
Net (loss) income	$	(4,691,549	)	$	(125,000	)	$	(4,816,549	)

Net (loss) income per ordinary share:
Basic	$	(0.95	)	$	(0.03	)	$	(0.98	)
Diluted	$	(0.95	)	$	(0.03	)	$	(0.98	)

The Company analyzed the revisions under SEC staff guidance (Staff Accounting Bulletin 108) and determined that the revisions are immaterial on a quantitative and qualitative basis and that it is probable that the judgment of a reasonable person relying upon the financial statements would not have been changed or influenced by the inclusion or correction of the items in the year ended December 31, 2014. Therefore, amendment of the previously filed annual report on Form 10-K is not considered necessary. However, if the adjustments to correct the errors had been recorded in the first quarter of 2015, the Company believes the impact would have been significant to the first quarter and would impact comparisons to prior periods. The Company has also revised in this current Form 10-Q filing, and plans to revise in future filings of its reports on Form 10-K, the previously reported annual financial statements for 2014 on Form 10-K for these amounts.

2. Reverse Merger

Parent and Arabella LLC (the wholly owned subsidiary) entered into a reverse merger on December 24, 2013 where the Parent issued 3,125,000 ordinary shares to the holders of all of the issued and outstanding interests of Arabella LLC immediately prior to the time of the Acquisition in exchange for 100% of the units of Arabella LLC. In connection with the reverse merger, 1,704,826 of the Parent’s ordinary shares remained outstanding and the remaining funds in the trust account, in the amount of $5,183,417, were distributed to the Parent. With that exchange, the Company’s Chief Executive Officer Jason Hoisager owns the majority of the Company’s ordinary shares. In connection with the reverse merger, 1,705,002 of additional ordinary shares (“earnout shares”) will be awarded to certain individuals associated with Arabella LLC over the following three years if the Company achieves its earnout goals. The shares will be issue in equal thirds if on each of December 31, 2014, 2015 and 2016 the Company shall have increased its proved reserves over the immediately preceding year by 100%, 66% and 33%, respectively and conforms with certain cost metrics. The Company has not determined whether the goals have been met for 2014.

The merger was accounted for as a “reverse merger” and a recapitalization since the shareholders of Arabella LLC (i) owned a majority of the outstanding ordinary shares of the Company immediately following the completion of the transaction, and (ii) have the significant influence and the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity, and Arabella LLC’s senior management dominates the management of the combined entity in following the completion of the transaction in accordance with the provision of Financial Accounting Standards Board Accounting Standards Codification (“FASB-ASC”) Topic 805 Business Combinations. Accordingly, Arabella LLC is deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of Arabella LLC. Accordingly, the assets and liabilities and the historical operations that are reflected in the financial statements are those of Arabella LLC and are recorded at the historical cost basis of Arabella LLC. Parent’s assets, liabilities and results of operations were consolidated with the assets, liabilities and results of operations of Arabella LLC after the merger.

3. Recent Developments, Liquidity and Ability to Continue as a Going Concern

The accompanying financial statements have been prepared in US dollars and in accordance with accounting principles generally accepted in the United States on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company commenced oil and gas exploration activities in 2011 and at June 30, 2015 had an accumulated deficit of approximately $10,414,000 and a working capital deficit of approximately $20,664,000 largely consisting of notes payable due in less than twelve months as well as accounts payable and advances from affiliates. The Company is not currently engaged in any new drilling for oil and gas due to the depressed price for oil. The current oil pricing environment and related conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on its ability to generate revenue from oil and gas operations or asset sales and achieve profitable operations and to generate sufficient cash flow from financing and operations to meet its obligations, as they become payable.

Management is exploring alternatives to its existing oil and gas activities in the current oil pricing environment. Although there are no assurances that management’s plans will be realized management believes that the Company will be able to continue operations in the future. Accordingly, no adjustment relating to the recoverability and classification of recorded asset amounts and the classification of liabilities has been made to the accompanying financial statements in anticipation of the Company not being able to continue as a going concern. As further described below (See Note 17 – Subsequent Events), the Company has entered into two separate transactions anticipated to close concurrently that would provide the Company will drilling opportunities more suitable to the current oil and gas pricing environment.

In the event of a return to drilling, the Company expects that, depending on the pace of drilling and the pricing environment for oil and gas, it could need approximately $40 million to fund its operations during the first twelve months of activity, which will include minimum annual property lease payments, well expenditures and operating costs and expenses. However, as further described below (See Note 17 – Subsequent Events), the Company has entered into two separate transactions anticipated to close concurrently that would provide the Company the opportunity to drill far less costly wells which could dramatically change capital needs going forward.

On September 2, 2014 the Company sold the first $16,000,000 of Notes under its $45,000,000 Senior Secured Note Facility (See Note 8 – Senior Secured Notes). Future sales of Notes are subject to certain funding conditions. The Company expects that the proceeds from future sales of these Notes, if any, would sustain its base drilling operations for approximately twelve months. There can be no assurance that the Company will meet the conditions for funding or that the price of oil will improve to the point that drilling resumes and future sales of Notes occur. In the event that the Company begins new drilling operations, it may require additional funding in 2015. In the event that the transactions disused below (See Note 17 – Subsequent Events) close, the Company anticipates repaying a significant portion of the outstanding Notes and restructuring the remainder.

Additionally, in the event that the Company is able to redeem its initial public offering warrants as discussed in Note 11 – Shareholders Equity, the initial public offering warrants would likely be exercised resulting in the receipt of proceeds up to $20,532,500 to further sustain the Company’s operations. There can be no assurance that the Company will redeem the initial public offering warrants.

4. Summary of Significant Accounting Policies

Principals of Consolidation

The accompanying consolidated financial statements of the Company include the accounts of Arabella Exploration Inc. and its wholly owned subsidiaries Arabella Exploration, Limited Liability Company, Arabella Operating, LLC and Arabella Midstream, LLC. All significant intercompany transactions have been eliminated in consolidation.

Use of Estimates

Preparation of the Company’s consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil and natural gas reserves and related cash flow estimates used in impairment tests of long-lived assets, estimates of future development, dismantlement and abandonment costs, estimates relating to certain oil and natural gas revenues and expenses, estimates of the valuation allowance for deferred tax assets and estimates of expenses related to legal, environmental and other contingencies. Certain of these estimates require assumptions regarding future commodity prices, future costs and expenses and future production rates. Actual results could differ from those estimates.

As an oil and natural gas producer, the Company’s revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which are dependent upon numerous factors beyond its control such as economic, political and regulatory developments and competition from other energy sources. The energy markets have historically been very volatile and there can be no assurance that oil and natural gas prices will not be subject to wide fluctuations in the future. A substantial or extended decline in oil and natural gas prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows and quantities of oil and natural gas reserves that may be economically produced.

Estimates of oil and natural gas reserves and their values, future production rates and future costs and expenses are inherently uncertain for numerous reasons, including many factors beyond the Company’s control. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, prevailing commodity prices, operating costs and other factors. These revisions may be material and could materially affect future depreciation, depletion and amortization expense, dismantlement and abandonment costs, and impairment expense.

5. Property and Equipment

Property and equipment include furniture and fixtures, computer equipment and software and transportation equipment:

	June 30,			December 31,
	2015			2014

Property and equipment, gross	$	435,679		$	435,679
Less: Accumulated depreciation and amortization		(192,536	)		(119,853	)
Property and Equipment, net	$	243,143		$	315,826

Depreciation expense was $27,866 and $38,819 for the three months and $72,683 and $42,716 for the six months ended June 30, 2015 and 2014, respectively.

6. Oil and Gas Properties

The following table sets forth the Company’s oil and gas properties:

	June 30,			December 31,
	2015			2014

Proved oil and gas properties ⁽¹⁾	$	25,432,442		$	25,168,514
Less: Accumulated depreciation, depletion, amortization and impairment		(2,002,771	)		(1,763,731	)
Proved oil and gas properties, net		23,429,671			23,404,783
Unproved oil and gas properties		5,027,572			4,900,389
Total oil and gas properties, net	$	28,457,243		$	28,305,172

⁽¹⁾	Included in the Company’s proved oil and gas properties are estimates of future asset retirement costs of $23,575 at June 30, 2015 and $23,575 at December 31, 2014, respectively.

Depletion expense was $93,533 and $255,768 for the three months ended June 30, 2015 and 2014, respectively. Depletion expense was $239,039 and $495,411 for the six months ended June 30, 2015 and 2014, respectively.

The Company accrued certain amounts during 2014 to reflect estimated spending on oil and gas leases based upon the overall spending during 2014. As a result of declining oil prices, those amounts were overestimated and the Company revised certain accruals for the year ended December 31, 2014. The preceding table reflects the revisions described in Note 1.

7. Asset Retirement Obligations

The following table reflects the changes in the Company’s ARO during the six months ended June 30, 2015 and the year ended December 31, 2014:

	June 30,		December 31,
	2015		2014

Asset retirement obligation — beginning of period	$	25,843	$	21,171
Additions to ARO from new properties		-		6,030
Sales or abandonments of properties		-		(3,128	)
Accretion expense during period		960		1,770
Asset retirement obligation — end of period	$	26,803	$	25,843

8. Senior Secured Notes

On September 2, 2014 the Company entered into a $45,000,000 Senior Secured Note Facility (the “Notes”) with a New York based investor (the “Investor”). The initial sale of $16,000,000 in Notes occurred on September 2, 2014 with further sales to be based upon reserve based performance hurdles. The Notes bear interest at an annual rate of 15%, of which six months was prepaid at close. The Notes are due one year from the issuance date and can be redeemed by the Company at any time without penalty. The Company paid a 3% origination fee to the Investor and a 5% cash commission to its advisors on the transaction. In conjunction with the sale of the Notes, the Company issued warrants to purchase 1,300,000 of the Company’s ordinary shares at a price of $5.00 per share (the “Financing Warrants”). The Financing Warrants expire on September 2, 2019.

The Senior Secured Notes are carried at their face value less the amortized amount of the debt discount associated with the relative fair value at issuance of the Financing Warrants. The fair value of the Financing Warrants at issue was determined to be approximately $4,059,300 using the Black-Scholes option pricing model. Significant assumptions used in the valuation include an expected term of 5 years, an expected volatility of 51.0% based on historical value and corresponding volatility of the Company’s peer group stock price for a period consistent with the warrants expected term, a risk free interest rate of 1.69% based on the a U.S. Treasury Note with a similar term to the expected term on the date of the grant, and an expected dividend yield of 0.0% as the Company does not expect to pay dividends in the near future. The relative fair value of the Financing Warrants was then determined by applying the ratio of value of the Notes to the value of the Notes plus the fair value of the Financing Warrants to the amount of the Notes. Using this metric, the relative fair value of the Financing Warrants was determined to be $3,237,840. The debt discount is amortized using the straight line method over the one year term of the Notes.

The Company has elected early adoption of accounting Standards Update (ASU) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, as such deferred financing costs, net of amortization do not appear in current assets and are instead netted against the face value of the Notes.

	June 30,			December 31,
	2015			2014

Senior Secured Notes Payable	$	16,000,000		$	16,000,000
Less:
Debt discount – Financing Warrants		(3,237,840	)		(3,237,840	)
Deferred financing costs		(3,004,790	)		(3,004,790	)
Add:
Accretion of debt discount		2,698,200			1,079,280
Amortization of deferred financing cost		2,503,992			1,001,597

Senior Secured Notes Payable, net of discount	$	14,959,562		$	11,838,247

Interest expense for the three months ended June 30, 2015 was a total of $1,409,460 consisting of $600,000 of interest expense and $809,460 of accretion of the debt discount. Amortization of deferred financing costs was $751,198 for the same period. There was no interest expense or amortization of deferred financing costs for the three months ended June 30, 2014. Interest expense for the six months ended June 30, 2015 was a total of $2,818,920 consisting of $1,200,000 of interest expense and $1,618,920 of accretion of the debt discount. Amortization of deferred financing costs was $1,502,395 for the same period. There was no interest expense or amortization of deferred financing costs for the six months ended June 30, 2014.

9. Term Note

On May 4, 2015 the Company reached a settlement agreement to pay Heartland Bank (“Heartland”) $125,000 to settle Heartland’s demands that the Company pay a break-up fee and certain costs relating to a financing that the Company explored with Heartland but ultimately rejected in favor of other financing. Under the settlement, the Company issued Heartland a $250,000 Term Note (the “Term Note”) and agreed to pay $10,000 on the 15^th of every month towards that note. However, the full face amount of the Term Note is intended only to be punitive in the event of non-compliance and, upon the maturity of the Senior Secured Notes, the Company will pay an amount of $125,000, less payments made to date, in full satisfaction of the Term Note. The Term Note is not interest bearing.

Because the events leading to the Heartland lawsuit occurred during 2014, the Company has accounted for the liability as if it had been incurred during the year ended December 31, 2014 and adjusted its financials accordingly as described in Note 1.

10. Notes Payable to Directors

On May 1, 2014 the Company received a loan from Hauser Holdings, LLC an affiliate of Richard Hauser, one of our directors. The $800,000 loan was due August 31, 2014 and bore an interest rate of 10% per annum.

On June 10, 2014 the Company received a loan from BBS Capital Fund, LP an affiliate of Berke Bakay, one of our directors. The $500,000 loan was due August 31, 2014 and bore an interest rate of 10% per annum.

On September 4, 2014 the Company repaid its loans from BBS Capital Fund, LP and Hauser Holdings, LLC with accrued interest for total repayment of $512,500 and $828,222, respectively.

The Company accrued $16,073 in interest expenses for these loans in both the three and six months ended June 30, 2014.

11. Note Payable to Officer

As of June 30, 2015 and December 31, 2014, the Company’s note payable to officer is payable to Jason Hoisager, the founder of Arabella Exploration LLC, with an outstanding balance of $3,007,170. The founder is currently the President of the Company and is a director and majority shareholder of the Company. The note payable is non-interest bearing and matures in December of 2023.

12. Shareholders’ Equity

The Company is authorized to issue 50,000,000 ordinary shares and 5,000,000 preferred shares with a par value of $0.001 per share.

Ordinary Shares

On June 26, 2014 the Company’s Chief Executive Officer Jason Hoisager purchased 190,477 of the Company’s ordinary shares for $10.50 per share for an aggregate of $2,000,009 in a private placement.

Preferred Shares

The Company is authorized to issue up to 5,000,000 preferred shares with a par value of $0.001 and the characteristics of the preferred shares will be determined by the Board of Directors of the Company from time to time.

Warrants

In connection with Parent’s initial public offering (“Offering”) in March 2011, the Company issued 4,106,500 offering warrants, which entitles the holders to purchase ordinary shares at the price of $5.00 per share, commencing on the date of the business combination, if the Company has an effective and current registration statement covering the ordinary shares issuable upon exercise of the offering warrants and a current prospectus relating to such ordinary shares, and expiring three years from that date. The Company may redeem the offering warrants at a price of $0.01 per offering warrant upon 30 days’ notice while the offering warrants are exercisable, only when the last sale price of the ordinary shares is at least $10.50 per share for any 20 trading days within a 30 trading day period, provided that a current registration statement is in effect for the ordinary shares underlying the offering warrants. If not exercised, the offering warrants expire on December 24, 2016. If the Company redeems the offering warrants, management of the Company will have the option to require any holder that wishes to exercise his offering warrants to do so on a cashless basis.

Simultaneously with the Offering, certain of the shareholders purchased 6,600,000 insider warrants at the price of $0.35 per insider warrant (for an aggregate purchase price of $2,310,000) from the Company. These insider warrants have the same terms as the 4,106,500 offering warrants referred to in the preceding paragraph, except these insider warrants are not redeemable and the insider warrants are exercisable for cash or on a cashless basis.

In conjunction with the sale of the Notes, the Company issued the Financing Warrants to purchase 1,300,000 of the Company’s ordinary shares at a price of $5.00. The Financing Warrants expire on September 2, 2019.

Unit Purchase Option

In connection with the Offering, the Company issued unit purchase options to purchase an aggregate of 400,000 units at an exercise price of $8.80 per unit to its underwriters and designees of the underwriter. Each unit consists of one ordinary share and one redeemable ordinary share purchase warrant, which contains a provision for cashless exercise and has the same terms as the 4,106,500 initial public offering warrants.

Stock-based Compensation

On May 5, 2014 the Company granted each non-employee director 30,000 stock options to purchase its ordinary shares for joining the board and 20,000 stock options to purchase its ordinary shares for the year of service commencing from January 30, 2014. All, 50,000 stock options in aggregate, vest ratably over two years and expire five years from the grant date. The stock options have an exercise price of $6.15 per share, which represents the closing price of the Company’s ordinary shares the day prior to the grant option date. The grant date fair value of the options granted was determined to be $558,950 using the Black-Scholes option pricing model. Significant assumptions used in the valuation include an expected term of 3.5 years utilizing the “Simplified Method” as the Company does not have sufficient historical experience to estimate an expected term, an expected volatility of 49.0% based on historical value and corresponding volatility of the Company’s peer group stock price for a period consistent with the stock option expected term, a risk free interest rate of 0.9% based on the a U.S. Treasury Note with a similar term to the expected term on the date of the grant, and an expected dividend yield of 0.0% as the Company does not expect to pay dividends in the near future. According to the terms of the option plan, vesting was retroactive to the beginning of service in January 2014; as such two quarters of vesting was recorded during the three months ended June 30, 2014. Messrs. Bush and Boyuls, two of the directors, resigned from the board on September 9, 2014. The remaining members of the board voted to allow them to continue in the vesting of their granted stock options as if they had served out their term. However, as no further service is required for the vesting, the Company expensed the entire amount of the grant in 2014. Accordingly, aggregated stock-based compensation expense under the 2014 grant for the six months ended June 30, 2015 was $83,843. Unrecognized compensation expense as of June 30, 2015, relating to non-vested common stock options is $83,843 and is expected to be recognized through the fourth quarter of 2015. At June 30, 2015, no options had been exercised and no options had been forfeited. As of June 30, 2015 the aggregate intrinsic value of these options was $0.

On February 2, 2015 the Company granted each non-employee director 20,000 stock options to purchase its ordinary shares for the year of service commencing from January 30, 2015. All, 20,000 stock options vest ratably over two years on a quarterly basis and expire five years from the grant date. The stock options have an exercise price of $3.35 per share, which represents the closing price of the Company’s ordinary shares the day prior to the grant date. The grant date fair value of the options granted was determined to be $74,772 using the Black-Scholes pricing model. Significant assumptions used in the valuation include an expected term of 3.5 years utilizing the “Simplified Method” as the Company does not have sufficient historical experience to estimate an expected term, an expected volatility of 51.0% based on historical value and corresponding volatility of the Company’s peer group stock price for a period consistent with the stock option expected term, a risk free interest rate of 0.8% based on the a U.S. Treasury Note with a similar term to the expected term on the date of the grant, and an expected dividend yield of 0.0% as the Company does not expect to pay dividends in the near future. Aggregated stock-based compensation expense under the 2015 grant for the six months ended June 30, 2015 was $18,694. Unrecognized compensation expense as of June 30, 2015, relating to non-vested common stock options is $56,079 and is expected to be recognized through the fourth quarter of 2016. At June 30, 2015, no options had been exercised and no options had been forfeited. As of June 30, 2015 the aggregate intrinsic value of these options was $0.

A summary of stock option activity for the three months ended June 30, 2015 is presented below:

	Number of Options		Weighted Average Exercise Price
Outstanding at December 31, 2014		250,000	$	6.15
Granted		60,000	$	3.35
Forfeited		-		-
Exercised		-		-
Outstanding at June 30, 2015		310,000	$	5.61
Exercisable at June 30, 2015		202,500	$	6.02

13. Related Party Transactions

Mr. Jason Hoisager, the Company’s Chief Executive Officer, owns 100% of Arabella Petroleum Company LLC (“Petroleum”), which was the operating company for substantially all the wells that the Company has its working interest in prior to December 31, 2014. As Petroleum drilled and completed the wells, Petroleum billed the Company for its working ownership percentage of the capital costs. After the completion of each well, Petroleum sold the oil and gas and provided the Company its working interest revenue, net of production taxes and charges for the lease operating expenses.

As of June 30, 2015 and December 31, 2014, the Company owed Petroleum $2,894,396 and $3,382,514, respectively, in joint interest billings to vendors for the well costs. During the year ended December 31, 2014, the Company paid Petroleum $17,072,542 in capital costs for the wells. Petroleum was responsible for collecting the revenue from the purchasers and providing the Company its accounts receivable, which totaled $814,689 at December 31, 2014. As of December 31, 2014 Petroleum owed the Company $381,801, a portion of the costs from the expense sharing agreement between the companies. As of December 31, 2014, Petroleum has ceased to provide these services to the Company and Arabella Operating, LLC, a wholly owned subsidiary of the Company, is the operator of record for the Company’s wells.

During the six months ended June 30, 2015, aggregate proceeds of $1,593,723 were received from affiliates and shareholders.

14. Other Operating Revenue – Gain on Sale of Oil and Gas Properties

During the second quarter of 2014, Arabella sold undeveloped leased acreage for $2,924,854 in cash and recognized a gain on the sale of the property of $1,722,123. Contingent conditions on the sale of the Weatherby acreage may result in an additional $78,300 of revenue.

During the first half of 2014, Arabella sold undeveloped leased acreage (which includes the acreage identified in the immediately preceding paragraph) for $5,044,054 in cash and recognized a gain on the sale of the properties of $2,958,323. Contingent conditions on the sale of the Weatherby acreage may result in an additional $78,300 of revenue.

During the second quarter of 2014, Arabella sold developed, non-operated leased acreage for $327,734 in cash and recognized a gain on the sale of the properties of $46,398.

Total acreage sales resulted in $3,252,588 and $5,371,788 in cash and gains of $1,768,521 and $3,004,721 for the three and six months ended June 30, 2014, respectively.

15. Income Taxes

As of December 23, 2013, Arabella LLC elected to be treated as a corporation for tax purposes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized. The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured.

The Company had no income tax expense due to operating losses incurred for the six months ended June 30, 2015 and none for the six months ended June 30, 2014 due to deductions available from intangible drilling costs.

16. Earnings per Share

Basic earnings per share is computed by dividing net income available to shareholders by the weighted average number of shares outstanding for the periods presented.

The calculation of diluted earnings per share does not include the potential dilutive impact of the 4,106,500 offering warrants outstanding during the periods presented since in the three or six months ended June 30, 2015 they were anti-dilutive and in the three or six months ended June 30, 2014 the exercise of the offering warrants was contingent upon the effectiveness of a registration statement that had not yet been filed with the SEC. The calculation of diluted earnings per share does not include the potential dilutive impact of the Unit Purchase Option as it was not exercisable based on the Company’s average share and warrant prices.

The calculation of diluted earnings per share included the dilutive impact of the 6,600,000 Insider Warrants as they were sold pursuant to an exemption from the registration requirements of the Securities Act in the three and six months ended June 30, 2014 but not in the three and six months ended June 30, 2015 as they were anti-dilutive.

The calculation of diluted earnings per share does not include the impact of the 1,300,000 financing warrants as they were not issued in the three or six months ended June 30, 2014 and anti-dilutive in the three and six months ended June 30, 2015.

The calculation of diluted earnings per share does not include the impact of the 310,000 board of directors’ options as they were not issued in the three and six months ended June 30, 2014 and anti-dilutive in the three and six months ended June 30, 2015.

The following table sets forth the computation of the basic and diluted earnings per share for the three and six months ended June 30, 2015 and 2014:

	Three Months Ended					Six Months Ended
	June 30,			June 30,		June 30,			June 30,
	2015			2014		2015			2014

Numerator for basic and diluted earnings per share:
Net (loss) income	$	(2,920,375	)	$	400,002	$	(6,109,499	)	$	618,322

Denominator:
Denominator for basic earnings per ordinary shares – weighted average shares outstanding		5,020,303			4,838,199		5,020,303			4,834,035
Effect of dilutive warrants		-			1,072,361		-			1,491,641
Denominator for diluted earnings per ordinary share – weighted average shares outstanding		5,020,303			5,910,560		5,020,303			6,325,676

Basic earnings per ordinary share	$	(0.58	)	$	0.08	$	(1.22	)	$	0.13
Diluted earnings per ordinary share	$	(0.58	)	$	0.07	$	(1.22	)	$	0.10

17. Subsequent Events

The Company entered into a Purchase and Sale Agreement with a third party buyer (“Buyer”), dated as of July 1, 2015, and a letter agreement with McCabe Petroleum Corporation (“McCabe”), dated as of April 15, 2015, pursuant to which the Company will sell its ownership interest in certain of its properties for cash and properties. Pursuant to the agreements, the transactions will close simultaneously and the Company will transfer its Locker State, Graham, Woods, Jackson and Emily Bell prospects to the Buyer and will receive cash from the Buyer and certain properties from McCabe. The Company will receive the following in connection with the two transactions:

●

$15 million in cash, subject to certain closing adjustments

●

Producing property in the Southern Delaware Basin with net production of approximately 88 BOE/Day.

●

A participation agreement covering 20,000 undeveloped acres (gross and net) in the Midland Basin

●

An option to purchase approximately 1,000 net acres of royalty interests underlying the 20,000 acres in the Midland Basin

●

The return of 1,003,597 of the Company’s ordinary shares and the rights to certain earn-out shares; the 1,003,597 shares will be canceled upon receipt (provided that such shares may be reissued in the event that Arabella does not drill at least one well on its new property within one year from the closing date)

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of this Report, including any projections of earnings, revenue or other financial items, any statements regarding the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, any statements regarding expected benefits from any transactions and any statements of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this Report are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Thus, investors should refer to and carefully review information in future documents the Company files with the Securities and Exchange Commission (“SEC”). Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risk and uncertainties, including, but not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2014 under “Part I, Item 1A – Risk Factors” and for the reasons described elsewhere in this Report. All forward looking statements and reasons why results may differ included in this Report are made as of the date hereof, and we do not intend to update any forward-looking statements except as required by law or applicable regulations. Except where the context otherwise requires, in this Report, the “Company,” “Arabella,” “we,” “us” and “our” refer to Arabella Exploration, Inc., a Cayman Islands company, and, where appropriate, its subsidiaries.

Business Overview

We are an independent oil and natural gas company focused on the acquisition, development, exploration and exploitation of unconventional, long-life, onshore oil and natural gas reserves in the Delaware Basin in West Texas, which is a part of the Permian Basin. Our activities have historically been directed at the Avalon, Bone Springs, and Wolfcamp formations, which we refer to collectively as the Wolfbone play. In the event that the transactions described below in Recent Events close, the Company would shift a significant portion of its focus to the Midland Basin on the other side of the Permian and focus on the Spraberry and Wolfcamp formations, which we refer to collectively as the Wolfberry play.

When it is feasible to do so, we intend to grow our reserves and production through development drilling, exploitation and exploration activities on our multi-year inventory of identified potential drilling locations and through acquisitions that meet our strategic and financial objectives, targeting oil-weighted reserves. Substantially all of our revenues are generated through the sale of oil, natural gas liquids and natural gas production, though we do on occasion sell parcels of our land when the opportunity to generate profit presents itself. Our production was approximately 82% oil, no natural gas liquids and 18% natural gas for the three months ended June 30, 2015 and 84% oil, no natural gas liquids and 16% natural gas for the three months ended June 30, 2014. Our production was approximately 88% oil, no natural gas liquids and 12% natural gas for the six months ended June 30, 2015 and 85% oil, no natural gas liquids and 15% natural gas for the six months ended June 30, 2014. On June 30, 2015, our net acreage position in the Delaware Basin was approximately 4,972 net acres. On December 31, 2014, our net acreage position in the Delaware Basin was approximately 4,972 net acres. We are not currently engaged in any drilling activity due to the reduced price of oil, although we anticipate beginning drilling again if the transaction described under Recent Events, below, closes.

We were organized on June 17, 2010 as an exempted company under the laws of the Cayman Islands. We were a blank check company formed to acquire through a merger, capital stock exchange, asset acquisition, stock purchase or similar business combination, or control through contractual arrangements, one or more operating businesses. On October 23, 2013, we entered into an Agreement and Plan of Merger and Reorganization to acquire Arabella Exploration, Limited Liability Company, a Texas limited liability company (the “Acquisition”). On December 24, 2013, we consummated the Acquisition with Arabella Exploration Limited Liability Company, as more fully described in our Annual Report on Form 20-F for the year ended December 31, 2013 filed on May 15, 2014. On February 4, 2013, we changed our name from Lone Oak Acquisition Corporation to Arabella Exploration, Inc.

Recent Events

We entered into a Purchase and Sale Agreement with a third party buyer (“Buyer”), dated as of July 1, 2015 (the “Purchase Agreement”), and a letter agreement with McCabe Petroleum Corporation (“McCabe”), dated as of April 15, 2015, pursuant to which we will sell our ownership interest in certain of our properties for cash and properties with a potential value totaling approximately $47 million. Pursuant to the agreements, the transactions will close simultaneously and we will transfer our Locker State, Graham, Woods, Jackson and Emily Bell prospects to the Buyer and will receive cash from the Buyer and certain properties from McCabe. We will receive the following in connection with the two transactions:

	●	$15 million in cash, subject to certain closing adjustments
	●	Producing property in the Southern Delaware Basin with net production of approximately 88 BOE/Day. We estimate the value of this property to be approximately $6 million

●

A participation agreement covering 20,000 undeveloped acres (gross and net) in the Midland Basin, valued by us at approximately $1,000/acre or $20 million total

●

An option to purchase approximately 1,000 net acres of royalty interests underlying the 20,000 acres in the Midland Basin valued by us at approximately $3 million, net of the option cost

●

The return of 1,003,597 of our ordinary shares and the rights to certain earn-out shares valued at approximately $3 million; the 1,003,597 shares will be canceled upon receipt (provided that such shares may be reissued in the event that we do not drill at least one well on our new property within one year from the closing date)

Use of Proceeds

Pending agreement with the holders of its Senior Secured Notes, we will repay $10 million of the $16 million outstanding. The remainder of the cash proceeds will be used for the development of properties, the repayment of other amounts owing and general corporate purposes.

Overview of Transition

The following chart summarizes the changes to our properties, production and capital structure as a result of the two deals:

	Arabella Pre-Transactions		Removed		Added		Arabella Post-Transactions

Gross Wells⁽¹⁾		18		6		4		16
Net BOE/Day⁽²⁾		78		76		88		90

Gross Acres		34,921		2,560		20,844		53,205
Net Acres		4,972		1,314		20,140		23,798

Senior Secured Notes	$	16,000,000	$	10,000,000		-	$	6,000,000
Shares Outstanding		5,020,303		1,003,597		-		4,016,706

	⁽¹⁾	Includes ten wells currently producing on our back in acreage
	⁽²⁾	BOE/Day estimated pre-transaction production is for the six months ended June 30, 2015, post-transaction estimate includes new producing property; neither amount includes production from our back in acreage

The original closing date under the Purchase Agreement had been tentatively scheduled for July 31, 2015 but has been delayed; we now anticipate closing before the beginning of September 2015.

Future Activity

If oil prices improve during 2015, depending on the pace of drilling, we could drill and complete an estimated ten additional gross horizontal wells on our acreage. Based on this plan, we would estimate that our capital expenditures for the next twelve months would be approximately $40 million, which includes costs for infrastructure and non-operated wells, but does not include the cost of any land acquisitions. However, any future drilling and completion activity will be highly dependent on the recovery of prices for crude oil. If oil prices do not rebound significantly in a short time, it is highly unlikely that we will drill at such a high pace. We are not currently engaged in any drilling activity due to the reduced price of oil, although we anticipate beginning drilling again if the transaction described under Recent Events, above, closes.

Operating Results Overview

During the three months ended June 30, 2015, our average daily production was approximately 67.5 BOE, consisting of 55.4 Bbls/d of oil, 72.9 Mcf/d of natural gas and no natural gas liquids, as compared to the three months ended June 30, 2014, when our average daily production was approximately 128.6 BOE, consisting of 108.7 Bbls/d of oil, 127.6 Mcf/d of natural gas and no natural gas liquids.

During the six months ended June 30, 2015, our average daily production was approximately 80.9 BOE, consisting of 70.8 Bbls/d of oil, 60.4 Mcf/d of natural gas and no natural gas liquids, as compared to the six months ended June 30, 2014, when our average daily production was approximately 114.2 BOE, consisting of 97.2 Bbls/d of oil, 102.1 Mcf/d of natural gas and no natural gas liquids.

The reduction in production during the 2015 periods is a direct result of the lack of availability of funds to maintain our wells. Without access to additional Senior Secured Notes funding and reduced revenue due to depressed prices for oil and natural gas we have had to delay regular maintenance items on our wells resulting in additional periods with wells offline and not producing.

Through June 30, 2015, we had participated in 8 gross (2.96 net) operated wells in the Delaware Basin.

Sources of Our Revenue

Our revenues are derived from the sale of oil and natural gas production, as well as the sale of natural gas liquids that are extracted from our natural gas during processing. For the three months ended June 30, 2015 and 2014 our revenues were derived 93% and 93%, respectively, from oil sales, 0 and 0%, respectively, from natural gas liquids sales and 7% and 7%, respectively, from natural gas sales. For the six months ended June 30, 2015 and 2014 our revenues were derived 95% and 93%, respectively, from oil sales, 0 and 0%, respectively, from natural gas liquids sales and 5% and 7%, respectively, from natural gas sales. Our revenues may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices. Oil, natural gas liquids and natural gas prices have historically been volatile.

Results of Operations

The following table sets forth selected historical operating data for the three and six month periods indicated.

	Three months ended June 30,						Six months ended June 30,
	2015			2014			2015			2014

Revenues:
Oil and gas revenue	$	270,515		$	976,373			617,184		$	1,762,197
Other revenue – administrative overhead		7,800			-			19,800			-
Other operating revenue – gain on sale of oil and gas properties		-			1,768,521			-			3,004,721
Total revenues		278,315			2,744,894			636,984			4,766,918
Costs and expenses:
Lease operating expenses		81,531			438,652			264,060			552,352
Ad valorem and production taxes		14,471			46,878			32,415			79,017
Depreciation, depletion and amortization		121,400			331,731			311,722			571,374
Accretion of asset retirement obligation		480			180			960			810
General and administrative expenses		819,987			1,295,961			1,815,848			2,601,085
Total costs and expenses		1,037,869			2,113,402			2,425,005			3,804,638
Income (loss) from operations		(759,554	)		631,492			(1,788,021	)		962,280
Other income (expense)
Interest expense, related party		-			(16,073	)		-			(16,073	)
Interest expense		(2,160,821	)		-			(4,321,478	)		-
Total other income (expense)		(2,160,821	)		(16,073	)		(4,321,478	)		(16,073	)
Net income before taxes		(2,920,375	)		615,419			(6,109,499	)		946,207

Provision for income taxes		-			(215,417	)		-			(327,885	)

Net income (loss)	$	(2,920,375	)	$	400,002			(6,109,499	)	$	618,322

	Three months ended June 30,						Six months ended June 30,
	2015			2014			2015		2014
Production Data:
Oil (Bbls)		5,039.2			9,785.0			12,813.0		17,598.1
Natural gas (Mcf)		6,629.7			11,487.3			10,932.7		18,485.1
Combined volumes (BOE)		6,144.2			11,699.6			14,635.1		20,679.0
Daily combined volumes (BOE/d)		67.5			128.6			80.9		114.2
Average Prices:
Oil (per Bbl)	$	51.30		$	93.10			45.83		93.52
Natural gas (per Mcf)		2.77			5.69			2.82		6.30
Combined (per BOE)		45.06			83.45			42.23		85.22
Average Costs (per BOE):
Lease operating expense	$	13.27		$	37.49			18.04		26.71
Production Taxes		2.36			4.01			2.21		3.82
Production Taxes as a % of sales		5.3	%		4.8	%		5.3		4.5	%
Depreciation, depletion and amortization		19.76			28.35			21.30		27.63
General and Administrative		133.46			104.8			124.08		125.78

Three Months Ended June 30, 2015 Compared to the Three Months Ended June 30, 2014

Oil and Natural Gas Revenues. Our oil and natural gas revenues decreased by $705,858, or 72%, to $270,515 for the three months ended June 30, 2015, as compared to $976,373 for the three months ended June 30, 2014. Our revenues are a function of oil and natural gas production volumes sold and average sales prices received for those volumes. The decrease in revenues is due to the substantially lower price of oil realized in the period ended June 30, 2015 ($51.30 per barrel in the quarter ended June 2015 as compared to $93.10 in the prior year period) and to the decreased volumes of production.

Other Revenue. Other revenue relates to administrative overhead fees paid to Arabella Operating by other working interest owners to operate our wells. Arabella Operating was paid $7,800 for the three months ended June 30, 2015 and did not operate our wells for the three months ended June 30, 2014.

Other Operating Revenue. Other operating revenue in the three months ended June 30, 2014 relates to oil and gas property sales. In the three months ended June 30, 2014, we sold three non-producing properties for $2,924,854, with a net profit of $1,722,123, and one non-operated, producing property for $327,734 with a net profit of $46,398. Contingent conditions on the sale of the Weatherby acreage may result in an additional $78,300 of revenue. We did not have any property sales in the three months ending June 30, 2015. Other operating revenue from the sale of oil and gas properties fluctuates due to market demand and preparation of the land. We buy and sell parcels of land when the opportunity to generate significant profit presents itself.

Lease Operating Expense. Lease operating expenses decreased from $438,652 in the three months ended June 30, 2014 to $81,531 in the three months ended June 30, 2015. This decrease is the result of reduced operations due to low oil prices. Lease operating expenses can vary based upon conditions at the well site and well productivity.

Ad Valorem and Production Tax Expense. Ad valorem and production taxes as a percentage of oil and natural gas revenues increased for the three months ended June 30, 2015, as compared to the three months ended June 30, 2014. There was an overall decrease in taxes due to the revenue decrease discussed above. Ad valorem and production taxes are primarily based on the market value of our production at the wellhead and may vary across the different counties in which we operate.

Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense decreased from $331,731 in the three months ended June 30, 2014 to $121,400 in the three months ended June 30, 2015. The decrease is related to decreased production from our wells discussed under revenue, above.

General and Administrative. General and administrative expenses decreased from $1,295,967 in the three months ended June 30, 2014 to $819,988 in the three months ended June 30, 2015. These expenses relate primarily to salaries and wages, investor relations costs and professional and consulting fees. The decrease is related to cost cutting efforts in response to the significantly lower price of oil in the period ended June 30, 2015.

Net Interest Expense. Net interest expense was $2,160,821 during the three months ended June 30, 2015 as compared to $16,073 during the three months ended June 30, 2014. In the 2015 period, the interest expense was non-cash and represented the costs of our Senior Secured Notes (see “Senior Secured Notes” below). In the 2014 period, the interest expense was non-cash and represented the costs of our Directors’ Loans.

Six Months Ended June 30, 2015 Compared to the Six Months Ended June 30, 2014

Oil and Natural Gas Revenues. Our oil and natural gas revenues decreased by $1,145,013, or 65%, to $617,184 for the six months ended June 30, 2015, as compared to $1,762,197 for the six months ended June 30, 2014. Our revenues are a function of oil and natural gas production volumes sold and average sales prices received for those volumes. The decrease in revenues is due to the substantially lower price of oil realized in the period ended June 30, 2015 ($45.83 per barrel in the quarter ended June 2015 as compared to $93.52 in the prior year period) and to the decreased volumes of production.

Other Revenue. Other revenue relates to administrative overhead fees paid to Arabella Operating by other working interest owners to operate our wells. Arabella Operating was paid $19,800 for the six months ended June 30, 2015 and did not operate our wells for the six months ended June 30, 2014.

Other Operating Revenue. Other operating revenue in the six months ended June 30, 2014 relates to oil and gas property sales. In the six months ended June 30, 2014, we sold four non-producing properties for $5,044,054 with a net profit of $2,958,323 and one non-operated, producing property for $327,734 with a net profit of $46,398. Contingent conditions on the sale of the Weatherby acreage may result in an additional $78,300 of revenue. We did not have any property sales in the six months ending June 30, 2015. Other operating revenue from the sale of oil and gas properties fluctuates due to market demand and preparation of the land. We buy and sell parcels of land when the opportunity to generate significant profit presents itself.

Lease Operating Expense. Lease operating expenses decreased from $552,352 in the six months ended June 30, 2014 to $264,060 in the six months ended June 30, 2015. This decrease is the result of reduced operations due to low oil prices. Lease operating expenses can vary based upon conditions at the well site and well productivity.

Ad Valorem and Production Tax Expense. Ad valorem and production taxes as a percentage of oil and natural gas revenues decreased for the six months ended June 30, 2015, as compared to the six months ended June 30, 2014. There was an overall decrease in taxes due to the revenue decrease discussed above. Ad valorem and production taxes are primarily based on the market value of our production at the wellhead and may vary across the different counties in which we operate.

Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense decreased from $571,374 in the six months ended June 30, 2014 to $311,722 in the six months ended June 30, 2015. The decrease is related to decreased production from our wells discussed under revenue, above.

General and Administrative. General and administrative expenses decreased from $2,601,085 in the six months ended June 30, 2014 to $1,815,848 in the six months ended June 30, 2015. These expenses relate primarily to salaries and wages, investor relations costs and professional and consulting fees. The decrease is related to cost cutting efforts in response to the significantly lower price of oil in the period ended June 30, 2015.

Net Interest Expense. Net interest expense was $4,321,478 during the six months ended June 30, 2015 as compared to $16,073 during the three months ended June 30, 2014. In the 2015 period, the interest expense was non-cash and represented the costs of our Senior Secured Notes (see “Senior Secured Notes” below). In the 2014 period, the interest expense was non-cash and represented the costs of our Directors’ Loans.

Liquidity and Capital Resources

Our primary source of liquidity has been oil and gas sales revenue and the sales of certain properties. A major source of our liquidity is the Senior Secured Note Facility entered into on September 2, 2014 (the “Notes”). Our primary uses of capital have been the acquisition, development and exploration of oil and natural gas properties. As we pursue reserves and production growth, we regularly consider which capital resources, including equity and debt financings, are available to meet our future financial obligations, planned capital expenditure activities and liquidity requirements. Our future ability to grow proved reserves and production will be highly dependent on the price of oil and the capital resources available to us.

The rapid and substantial decline in oil prices in the later part of 2014 significantly reduced the amount of revenue we receive per barrel of oil. Approximately 95% of our oil and gas revenue comes from oil sales. This decline has reduced our revenue and, as a result, our cash flow, which limits our operations and could limit our future growth. Our current cash position, availability of financing from our Notes and current level of operating cash flows may not, in aggregate, be adequate to support our current working capital requirements, interest costs and, at the same time, support additional drilling activity. The current oil pricing environment and related conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management is exploring various opportunities to remedy the Company’s liquidity concerns.

Liquidity and cash flow

We commenced oil and gas exploration activities in 2011 and had a working capital deficit of $20,663,932 as of June 30, 2015 largely consisting of notes payable in less than twelve months. Our net cash flow for the six months ended June 30, 2015 was an increase of $81,518, the components of which are described below. Our net cash flow for the six months ended June 30, 2014 was a decrease of $1,570,274. Depending on the pace of drilling and the oil and gas pricing environment, we may need approximately $40 million to fund our operations during the next twelve months (which we would expect to be funded in large part by the Notes), which will include minimum annual property lease payments, well expenditures and operating costs and expenses, however, if oil prices do not rebound significantly in a short time it is highly unlikely that we will drill at such a high pace.

On September 2, 2014 we sold the first $16,000,000 of Notes under our $45,000,000 Senior Secured Note Facility. Future sales of Notes are subject to certain funding conditions. Assuming that the price of oil improves or that we choose to restart our drilling program in the light of depressed oil process, we expect that the proceeds from future sales of these Notes, if any, would sustain our base drilling operations for approximately twelve months, assuming we meet the conditions for future Notes sales. There can be no assurance that we will meet these conditions or that we will drill wells in the future. In the event that we begin new drilling operations or do not meet the conditions for future note sales, we may require additional funding in 2015.

Additionally, in the event we are able to redeem our offering warrants, they would likely be exercised resulting in the receipt of proceeds up to $20,532,500. There can be no assurance we will redeem the offering warrants.

Operating Activities

Net cash used in operating activities was $1,121,094 for the six months ended June 30, 2015, as compared to net cash used in operating activities of $1,217,988 for the six months ended June 30, 2014. The change in operating cash flows is largely a result of the impact of the operating losses during the 2015 period and operating income and the sale of oil & gas properties in the 2014 period.

Investing Activities

The purchase and development of oil and natural gas properties generally accounts for the majority of our cash outlays for investing activities, however, we did not have any drilling activity in the first half of 2015. We used net cash for investing activities of $391,111 and $3,652,295 for the six months ended June 30, 2015 and 2014, respectively. During the six months ended June 30, 2014 we received proceeds of $5,371,788 from sales of oil and gas properties. We used cash for investing in oil and natural gas properties in the amounts of $391,111 and $8,529,034 for the six months ended June 30, 2015 and 2014, respectively. We used cash for investing in property and equipment in the amounts of $0 and $495,049 for the six months ended June 30, 2015 and 2014, respectively.

Financing Activities

During the six months ended June 30, 2015 we received an aggregate of $1,593,723 in advances from affiliates and shareholders. During the six months ended June 30, 2014 we received a loan from Hauser Holdings, LLC an affiliate of Richard Hauser, one of our directors. The $800,000 loan was due August 31, 2014 and bore an interest rate of 10% per annum as well as a loan from BBS Capital Fund, LP an affiliate of Berke Bakay, one of our directors. The $500,000 loan was due August 31, 2014 and bore an interest rate of 10% per annum. On September 4, 2014 we repaid the loans from BBS Capital Fund, LP and Hauser Holdings, LLC with accrued interest for total repayment of $512,500 and $828,222, respectively.

On June 26, 2014 our Chief Executive Officer Jason Hoisager purchased 190,477 of our ordinary shares for $10.50 a share in a private transaction from us.

Senior Secured Note Facility

On September 2, 2014 we entered into a $45,000,000 Senior Secured Note Facility (the “Notes”) with a New York based investor (the “Investor”). The initial sale of $16,000,000 in Notes occurred on September 2, 2014 with further sales to be based upon reserve based performance hurdles. The Notes bear interest at an annual rate of 15%, of which six months was prepaid at close. The Notes are due one year from the issuance date and can be redeemed by us at any time without penalty. We paid a 3% origination fee to the Investor and a 5% cash commission to our financial advisors on the transaction. In conjunction with the sale of the Notes, we issued warrants to purchase 1,300,000 of our ordinary shares at a price of $5.00 per share. The warrants expire on September 2, 2019.

During the term of the Notes we can submit further reserve reports to the Investor, and if, in its discretion, the PV10 of our PDP has increased from the most recently submitted previous reserve report, the Investor will acquire additional Notes in principal amounts on a dollar-for-dollar basis equal to said increase. The maximum amount of the Notes shall be $45,000,000 of total commitment and successive sales under this process must be at least $500,000 unless a lesser amount would constitute the entire remaining availability.

The Notes are the senior secured obligations of the Company and, with certain exceptions, are secured by first lien positions on all of the Company’s assets and property.

Capital Requirements, Sources of Liquidity and Ability to Continue as a Going Concern

Currently, we are not engaged in any drilling activity due to the reduced price of oil. A return to our drill schedule will be dependent on future oil prices and planning. Depending on the pace of drilling and the oil and gas pricing environment, we could need approximately $40 million to fund our operations during the first twelve months of drilling (which we expect to be funded in large part by the Senior Secured Note Facility if it is still in place at that time and if we meet the conditions for its use), which will include minimum annual property lease payments, well expenditures and operating costs and expenses. We do not have a specific acquisition budget since the timing and size of acquisitions cannot be accurately forecasted. We anticipate that while some of these expenditures will be funded by operations, the majority will come from outside funding sources, including the Notes.

The amount and timing of these capital expenditures is largely discretionary and within our control. The timing of these capital expenditures depends on a variety of factors, including but not limited to raising of outside capital, the success of our drilling activities, prevailing and anticipated prices for oil and natural gas, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners.

Additionally, while some of our capital expenditures will be financed through operations, the majority of these costs will require outside financing.

The current oil pricing environment and related conditions raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to generate revenue from oil and gas operations or asset sales and achieve profitable operations and to generate sufficient cash flow from financing and operations to meet our obligations, as they become payable. We have plans to explore additional alternatives to our existing oil and gas activities to generate revenue in the current oil pricing environment. Although there are no assurances that our plans will be realized we believe that we will be able to continue operations in the future. As discussed above in recent Events, the Company has entered into two separate transactions anticipated to close concurrently that would provide the Company will drilling opportunities more suitable to the current oil and gas pricing environment.

Critical Accounting Policies

There have been no changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

OFF-BALANCE SHEET ARRANGEMENTS:

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, operating results, liquidity or capital expenditures.

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company we are not required to provide information required by this Item.

Item 4

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2015 was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal controls

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(d) of the Exchange Act) that occurred during the six months ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Part II
OTHER INFORMATION

ITEM 1

LEGAL PROCEEDINGS

We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. We expect to resolve these and any similar suits within the ordinary course of business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

ITEM 1A

RISK FACTORS

There have been no material changes from the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

ITEM 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities that were not reported on a Current Report on Form 8-K.

ITEM 3

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4

mine safety disclosures

Not Applicable.

ITEM 5

OTHER INFORMATION

None.

ITEM 6

EXHIBITS

The exhibits listed on the Exhibit Index are filed as part of this report.

No.		Description

10.1*		Purchase and Sale Agreement between Legacy Reserves Operating LP and Arabella Exploration, Inc., dated as of July 1, 2015.

10.2*		Agreement between McCabe Petroleum Corporation and Arabella Exploration, Inc., dated as of April 15, 2015.

31.1		Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

31.2		Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

32.1		Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

32.2		Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

101.1		Interactive Data Files

* To be filed by amendment.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: August 19, 2015	ARABELLA EXPLORATION, INC.

	By:	/s/ Jason Hoisager
		Jason Hoisager
		Chief Executive Officer (Principal Executive Officer)

Dated: August 19, 2015	ARABELLA EXPLORATION, INC.

	By:	/s/ Terry E. Sanford
		Terry E. Sanford
		Chief Financial Officer (Principal Financial and Accounting Officer)

ARABELLA EXPLORATION, INC. - FORM 10-Q - August 19, 2015

Attached files

ARABELLA EXPLORATION, INC. Reports