Attached files
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
☑
Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the
Quarterly Period Ended September 30, 2016
☐
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: 001-32624
FieldPoint Petroleum Corporation
(Exact
name of small business issuer as specified in its
charter)
Colorado
(State
or Other Jurisdiction ofIncorporation or Organization)
|
84-0811034
(I.R.S.
EmployerIdentification No.)
|
609
Castle Ridge Road, Suite 335
Austin,
Texas
78746
(Address
of Principal Executive Offices) (Zip Code)
(512)
579-3560
(Issuer's
Telephone Number, Including Area Code)
___________________________________________________
(former
name, address and fiscal year, if changed since last
report)
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 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
☑ No ☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files). Yes ☑ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of “large accelerated
filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (check
one):
Large accelerated
filer
|
☐
|
Accelerated
filer
|
☐
|
Non-accelerated
filer
|
☐
|
Smaller reporting
company
|
☑
|
(Do
not check if a smaller reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of
November 11, 2016, the number of shares outstanding of the
Registrant's $.01 par value common stock was
9,784,665.
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
FieldPoint Petroleum Corporation
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
|
September
30,
|
December
31,
|
|
2016
|
2015
|
ASSETS
|
||
|
|
|
CURRENT
ASSETS:
|
|
|
Cash and cash
equivalents
|
$508,319
|
$1,467,279
|
Accounts
receivable:
|
|
|
Oil and natural gas
sales
|
371,790
|
536,413
|
Joint interest
billings, less allowance for doubtful accounts of
approximately $237,000 each period
|
200,944
|
221,159
|
Prepaid income
taxes
|
18,202
|
23,442
|
Prepaid expenses
and other current assets
|
61,618
|
67,236
|
Total current
assets
|
1,160,873
|
2,315,529
|
|
|
|
PROPERTY
AND EQUIPMENT:
|
|
|
Oil and natural gas
properties (successful efforts method)
|
41,088,531
|
41,085,514
|
Other
equipment
|
108,460
|
108,460
|
Less accumulated
depletion, depreciation and impairment
|
(33,885,214)
|
(32,989,814)
|
Net property and
equipment
|
7,311,777
|
8,204,160
|
|
|
|
OTHER
ASSETS
|
25,000
|
-
|
|
|
|
Total
assets
|
$8,497,650
|
$10,519,689
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
||
|
|
|
CURRENT
LIABILITIES:
|
|
|
Short-term
debt
|
$6,478,333
|
$6,478,333
|
Accounts payable
and accrued expenses
|
937,489
|
891,611
|
Oil and gas
revenues payable
|
457,144
|
459,627
|
Asset retirement
obligation - current
|
61,168
|
127,795
|
Total current
liabilities
|
7,934,134
|
7,957,366
|
|
|
|
ASSET
RETIREMENT OBLIGATION
|
1,750,887
|
1,685,185
|
Total
liabilities
|
9,685,021
|
9,642,551
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
Common
stock, $.01 par value, 75,000,000 shares authorized;
|
|
|
9,827,101 and
9,807,101 shares issued, respectively, and 8,900,101 and 8,880,101
outstanding, respectively
|
98,270
|
98,070
|
Additional paid-in
capital
|
13,014,997
|
13,001,447
|
Accumulated
deficit
|
(12,333,746)
|
(10,255,487)
|
Treasury stock,
927,000 shares, each period, at cost
|
(1,966,892)
|
(1,966,892)
|
Total
stockholders’ equity (deficit)
|
(1,187,371)
|
877,138
|
Total liabilities
and stockholders’ equity
|
$8,497,650
|
$10,519,689
|
See accompanying notes to these
unaudited condensed consolidated financial
statements.
2
FieldPoint Petroleum Corporation
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
|
Three Months
Ended
|
Nine Months
Ended
|
||
|
September
30,
|
September
30,
|
||
|
2016
|
2015
|
2016
|
2015
|
REVENUE:
|
|
|
|
|
Oil and natural gas
sales
|
$635,489
|
$932,614
|
$1,955,263
|
$3,170,100
|
Well operational
and pumping fees
|
1,262
|
1,262
|
3,786
|
3,786
|
Disposal
fees
|
24,881
|
23,606
|
67,876
|
79,239
|
Total
revenue
|
661,632
|
957,482
|
2,026,925
|
3,253,125
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
Production
expense
|
608,252
|
808,460
|
1,949,616
|
2,349,223
|
Depletion and
depreciation
|
267,800
|
475,800
|
895,400
|
1,426,400
|
Exploration
expense
|
-
|
2,610
|
-
|
18,107
|
Accretion of
discount on asset retirement obligations
|
28,000
|
26,000
|
82,000
|
79,000
|
General and
administrative
|
323,223
|
309,868
|
988,025
|
966,502
|
Total costs and
expenses
|
1,227,275
|
1,622,738
|
3,915,041
|
4,839,232
|
|
|
|
|
|
OPERATING
LOSS
|
(565,643)
|
(665,256)
|
(1,888,116)
|
(1,586,107)
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
Interest
income
|
16
|
191
|
787
|
417
|
Interest
expense
|
(64,819)
|
(65,392)
|
(191,201)
|
(193,271)
|
Realized gain on
commodity derivative
|
-
|
132,298
|
-
|
157,532
|
Unrealized gain on
commodity derivatives
|
-
|
167,000
|
-
|
191,000
|
Warrant
modification expense
|
-
|
-
|
-
|
(66,124)
|
Miscellaneous
|
147
|
-
|
271
|
15,878
|
Total other income
(expense)
|
(64,656)
|
234,097
|
(190,143)
|
105,432
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES
|
(630,299)
|
(431,159)
|
(2,078,259)
|
(1,480,675)
|
|
|
|
|
|
INCOME
TAX EXPENSE – CURRENT
|
-
|
(4,130)
|
-
|
(4,540)
|
INCOME
TAX BENEFIT – DEFERRED
|
-
|
159,000
|
-
|
498,000
|
TOTAL
INCOME TAX PROVISION
|
-
|
154,870
|
-
|
493,460
|
|
|
|
|
|
NET
LOSS
|
$(630,299)
|
$(276,289)
|
$(2,078,259)
|
$(987,215)
|
|
|
|
|
|
LOSS
PER SHARE:
|
|
|
|
|
BASIC
|
$(0.07)
|
$(0.03)
|
$(0.23)
|
$(0.12)
|
DILUTED
|
$(0.07)
|
$(0.03)
|
$(0.23)
|
$(0.12)
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
BASIC
|
8,899,992
|
8,621,410
|
8,893,386
|
8,299,139
|
DILUTED
|
8,899,992
|
8,621,410
|
8,893,386
|
8,299,139
|
|
|
|
|
|
See accompanying notes to these
unaudited condensed consolidated financial
statements.
3
FieldPoint Petroleum Corporation
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
For the Nine
Months Ended
|
|
|
September
30,
|
|
|
2016
|
2015
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$(2,078,259)
|
$(987,215)
|
Adjustments to
reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
Unrealized gain on
commodity derivatives
|
-
|
(191,000)
|
Depletion and
depreciation
|
895,400
|
1,426,400
|
Exploration
expense
|
-
|
18,107
|
Accretion of
discount on asset retirement obligations
|
82,000
|
79,000
|
Deferred income tax
benefit
|
-
|
(498,000)
|
Stock compensation
expense
|
13,750
|
75,626
|
Warrant
modification expense
|
-
|
66,124
|
Changes in current
assets and liabilities:
|
|
|
Accounts
receivable
|
184,838
|
114,373
|
Prepaid income
taxes
|
5,240
|
(7,037)
|
Prepaid expenses
and other current assets
|
5,618
|
2,278
|
Accounts payable
and accrued expenses
|
31,554
|
329,787
|
Oil and gas
revenues payable
|
(2,483)
|
132,792
|
Other
|
-
|
30,815
|
Net cash provided
by (used in) operating activities
|
(862,342)
|
592,050
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Additions to oil
and natural gas properties and other equipment
|
(96,618)
|
(226,233)
|
Net cash used in
investing activities
|
(96,618)
|
(226,233)
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
Proceeds from the
exercise of warrants
|
-
|
734,716
|
Net cash provided
by financing activities
|
-
|
734,716
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
(958,960)
|
1,100,533
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of
the period
|
1,467,279
|
978,145
|
|
|
|
CASH AND CASH EQUIVALENTS, end of the
period
|
$508,319
|
$2,078,678
|
|
|
|
SUPPLEMENTAL
INFORMATION:
|
|
|
Cash paid during
the period for interest
|
$191,806
|
$192,296
|
Cash paid during
the period for income taxes
|
$2,174
|
$6,931
|
Change in accrued
capital expenditures
|
$54,932
|
$(42,400)
|
See accompanying notes to these
unaudited condensed consolidated financial
statements.
4
FieldPoint
Petroleum Corporation
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1.
Nature of Business, Organization and Basis of Preparation and
Presentation
FieldPoint
Petroleum Corporation (the “Company”,
“FieldPoint”, “our”, or “we”)
is incorporated under the laws of the state of Colorado. The
Company is engaged in the acquisition, operation and development of
oil and natural gas properties, which are located in Louisiana, New
Mexico, Oklahoma, Texas, and Wyoming.
The
condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted
accounting principles have been condensed or omitted. However, in
the opinion of management, all adjustments (which consist only of
normal recurring adjustments) necessary to present fairly the
financial position and results of operations for the periods
presented have been made. These condensed consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the
Company's Form 10-K filing for the year ended December 31,
2015.
2.
Liquidity and Going Concern
Our
condensed consolidated financial statements for the nine months
ended September 30, 2016, were prepared assuming that we will
continue as a going concern, which contemplates realization of
assets and the satisfaction of liabilities in the normal course of
business for the twelve-month period following the date of these
consolidated financial statements. Continued low oil and natural
gas prices during 2015 and 2016 have had a significant adverse
impact on our business, and as a result of our financial condition,
substantial doubt exists that we will be able to continue as a
going concern.
As of
September 30, 2016, the Company has a working capital deficit of
approximately $6,773,000 primarily due to the classification of our
line of credit as a current liability. The line of credit provides
for certain financial covenants and ratios measured quarterly which
include a current ratio, leverage ratio, and interest coverage
ratio requirements. The Company is out of compliance with all
three ratios as of September 30, 2016, and we do not expect to
regain compliance in 2016 without an amendment to our credit
agreement.
Citibank
is in a first lien position on all of our properties. We are
current on all interest payments but Citibank lowered our borrowing
base from $11,000,000 to $5,500,000 on December 1, 2015. As a
result of the redetermination of the credit base, the Company had a
borrowing base deficiency in the amount of $1,495,000 on December
1, 2015. As an election under the Loan Agreement, the Company
agreed to pay and cure the deficiency in three equal monthly
installments of $498,333 each, due on December 31, 2015, January
31, 2016 and February 29, 2016. We made our first required
deficiency payment in the amount of $516,667 on December 29, 2015.
However, we did not make the required deficiency payments in
January or February 2016. As of September 30, 2016, our loan
balance is $6,478,333 and our borrowing base deficiency is
$978,333.
5
To
mitigate our current financial situation, we are taking the
following steps. We are actively meeting with investors for
possible equity investments, including business combinations. We
have filed a new shelf registration statement on Form S-3 that was
effective August 15, 2016, to permit the future sale of equity
securities, including a limited at the market (ATM) capital raise.
We are investigating other sources of capital. As reported in
Note 10 – Subsequent
Events, on August 12, 2016, the Company entered into a
binding Stock and Mineral Purchase agreement with HFT Enterprises,
LLC (the “Buyer”) in order to provide liquidity to the
Company, pursuant to which on November 3, 2016, we sold in a
private placement an aggregate of 884,564 shares of common stock
for gross proceeds of $393,054.
Our
ability to continue as a “going concern” is dependent
on many factors, including, among other things, our ability to
comply with the covenants in our existing debt agreements, our
ability to cure any defaults that occur under our debt agreements
or to obtain waivers or forbearances with respect to any such
defaults, and our ability to pay, retire, amend, replace or
refinance our indebtedness as defaults occur or as interest and
principal payments come due. Our ability to continue as a going
concern is also dependent on raising additional capital to fund our
operations and ultimately on generating future profitable
operations. While we are actively involved in seeking new sources
of working capital, there can be no assurance that we will be able
to raise sufficient additional capital or to have positive cash
flow from operations to address all of our cash flow needs.
Additional capital could be on terms that are highly dilutive to
our shareholders. If we are not able to find alternative sources of
cash or generate positive cash flow from operations, our business
and shareholders may be materially and adversely
affected.
On May
11, 2016, the Company received notification from the NYSE MKT that
it was noncompliant with the NYSE MKT continued listing standards;
specifically, Section 1003(a) of the Company Guide related to
financial impairment. The Company’s stockholders’
equity is below the $2.0 million threshold required for listed
companies that have reported losses from continuing operations in
two of its three most recently completed fiscal years. The Company
submitted a plan to regain compliance; whereupon NYSE Regulation
reviewed the plan and determined to accept it, as supplemented, and
granted a plan period through November 13, 2017, to regain
compliance, the targeted completion date. NYSE Regulation staff
will review the Company periodically for compliance with the
initiatives outlined in the plan. If the Company is not in
compliance with the continued listing standards by the targeted
completion date of November 13, 2017, or if the Company does not
make progress consistent with the plan during the plan period, NYSE
Regulation staff will initiate delisting proceeding as appropriate.
If our initiatives to regain compliance are not successful and the
Company is delisted from the NYSE MKT, it could have a significant
adverse impact on our ability to raise additional
capital.
3.
Recently Issued Accounting
Pronouncements
The
FASB issued ASU 2016-09 “Compensation – Stock
Compensation” simplifying the accounting for share-based
payment transactions including the income tax consequences,
classification of awards as either equity or liabilities and
classification on the statements of cash flows. Under the new
standard, all excess tax benefits and tax deficiencies (including
tax benefits of dividends on share-based payment awards) should be
recognized as income tax expense or benefit on the statements of
income. Under current GAAP, excess tax benefits are recognized in
additional paid-in capital while tax deficiencies are recognized
either as an offset to accumulated excess tax benefits, if any, or
on the statements of income. The new accounting guidance is
effective for annual periods beginning after December 15,
2016. Early adoption is permitted in any interim or annual
period. Certain provisions require retrospective/modified
retrospective transition while others are to be applied
prospectively. Management plans to adopt ASU 2016-09 effective
January 1, 2017. The Company does not expect the adoption of this
standard to have a material impact on the consolidated financial
statements.
6
In
February 2016, the FASB issued Update No.
2016-02 – Leases to increase transparency and
comparability among organizations by recognizing lease assets and
lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. This authoritative guidance
is effective for fiscal years beginning after December 15, 2018 and
interim periods within those fiscal years. The Company is currently
evaluating the provisions of this guidance and assessing its impact
in relation to the Company's leases.
In
April 2015, the FASB issued ASU 2015-03, "Simplifying the
Presentation of Debt Issuance Costs", which requires debt issuance
costs to be presented in the balance sheet as a direct deduction
from the associated debt liability, consistent with the
presentation of a debt discount. The guidance is effective on a
retrospective basis for annual periods beginning after December 15,
2015, including interim periods within that reporting period, with
early adoption permitted. The Company adopted this accounting
standard update as of January 1, 2016. The Company did not have any
debt issuance costs at January 1, 2016, and the adoption of the
updated standard had no effect on our consolidated financial
statements and related disclosures.
In
August 2014, the FASB issued Accounting Standards Update No.
2014-15 – Presentation of Financial Statements – Going
Concern that requires management to evaluate whether there are
conditions or events that raise substantial doubt about an
entity’s ability to continue as a going concern within one
year after the date that the entity’s financial statements
are issued, or within one year after the date that the
entity’s financial statements are available to be issued, and
to provide disclosures when certain criteria are met. This guidance
is effective for the annual period ending after December 15, 2016,
and for annual periods and interim periods thereafter. Early
application is permitted. The Company is currently evaluating the
provisions of this guidance and assessing its impact.
4.
Oil and Natural Gas
Properties
No
wells were drilled or completed during the three or nine months
ended September 30, 2016 or 2015.
On a
quarterly basis, the Company compares our most recent engineering
reports to current pricing and production to determine impairment
charges, if needed, in order to write down the carrying value of
certain properties to fair value. In order to determine the amounts
of the impairment charges, the Company compares net capitalized
costs of proved oil and natural gas properties to estimated
undiscounted future net cash flows using management's expectations
of economically recoverable proved reserves. If the net capitalized
cost exceeds the undiscounted future net cash flows, the Company
impairs the net cost basis down to the discounted future net cash
flows, which is management's estimate of fair value. In order to
determine the fair value, the Company estimates reserves, future
operating and development costs, future commodity prices and a
discounted cash flow model utilizing a 10 percent discount rate.
The estimates used by management for the fair value measurements
utilized in this review include significant unobservable inputs,
and therefore, the fair value measurements are classified as Level
3 of the fair value hierarchy. Based on its current circumstances,
the Company has not recorded any impairment charges during the nine
months ended September 30, 2016.
5.
Earnings Per Share
Basic
earnings per share are computed based on the weighted average
number of shares of common stock outstanding during the period.
Diluted earnings per share take common stock equivalents (such as
options and warrants) into consideration using the treasury stock
method. The Company had 7,177,010 warrants outstanding with an
exercise price of $4.00 at September 30, 2016 and 2015. The
dilutive effect of the warrants for the three and nine months ended
September 30, 2016 and 2015 is presented below.
7
|
For the Three
Months Ended
September
30,
|
For the Nine
Months Ended
September
30,
|
||
|
2016
|
2015
|
2016
|
2015
|
|
|
|
|
|
Net
loss
|
$(630,299)
|
$(276,289)
|
$(2,078,259)
|
$(987,215)
|
|
|
|
|
|
Weighted average
common stock outstanding
|
8,899,992
|
8,621,410
|
8,893,386
|
8,299,139
|
Weighted average
dilutive effect of stock warrants
|
-
|
-
|
-
|
-
|
Dilutive weighted
average shares
|
8,899,992
|
8,621,410
|
8,893,386
|
8,299,139
|
|
|
|
|
|
Loss per
share:
|
|
|
|
|
Basic
|
$(0.07)
|
$(0.03)
|
$(0.23)
|
$(0.12)
|
Diluted
|
$(0.07)
|
$(0.03)
|
$(0.23)
|
$(0.12)
|
6.
Income Taxes
In
November 2015, the FASB issued Accounting Standards Update No.
2015-17 – Balance Sheet Classification of Deferred Taxes that
simplifies the presentation of deferred income taxes on the balance
sheet. Under the new standard, deferred tax assets and liabilities
are classified as noncurrent on the balance sheet. This new update
is effective for financial statements issued for fiscal years
beginning after December 15, 2016 (and interim periods within
those fiscal years), with early adoption permitted and allows
prospective or retrospective application. The Company adopted this
accounting standard update prospectively as of January 1, 2016. The
adoption of this standard had no impact on the consolidated balance
sheet as of September 30, 2016, or December 31, 2015.
For the
three and nine months ended September 30, 2016, the Company’s
deferred tax assets were reduced in full by a valuation allowance
due to our determination that it is more likely than not that some
or all of the deferred tax assets will not be realized in the
future. As a result, the Company has not recognized an income tax
benefit associated with its net loss for the three or nine months
ended September 30, 2016. The rate for the three months ended
September 30, 2015, was approximately 36% of book income before tax
and approximates the statutory federal and state rates. The rate
for the nine months ended September 30, 2015, was 33% and differed
slightly from the statutory federal and state rates due primarily
to permanent differences in book and taxable income related to the
warrant modification expense and stock compensation
expense.
7.
Line of Credit
The
Company has a line of credit with a bank with a borrowing base of
$5,500,000 at September 30, 2016, and December 31, 2015. The amount
outstanding under this line of credit was $6,478,333 which is
$978,333 over the borrowing base at September 30, 2016, and
December 31, 2015.
The
agreement requires quarterly interest-only payments until maturity
on October 18, 2016. The interest rate is based on a LIBOR or Prime
option. The Prime option provides for the interest rate to be prime
plus a margin ranging between 1.75% and 2.25% and the LIBOR option
to be the 3-month LIBOR rate plus a margin ranging between 2.75%
and 3.25%, both depending on the borrowing base usage. Currently,
we have elected the LIBOR interest rate option in which our
interest rate was approximately 4% as of September 30, 2016, and
December 31, 2015, respectively. The commitment fee is .50% of the
unused borrowing base.
8
The
line of credit provides for certain financial covenants and ratios
which include a current ratio that cannot be less than 1.10:1.00, a
leverage ratio that cannot be more than 3.50:1.00, and an interest
coverage ratio that cannot be less than 3.50:1.00. The Company is
out of compliance with all three ratios as of September 30, 2016,
and is in technical default of the agreement. As a result of
the redetermination of the credit base, the Company had a borrowing
base deficiency in the amount of $1,495,000 on December 1, 2015.
As an election under the Loan Agreement, the Company agreed
to pay and cure the deficiency in three equal monthly installments
of $498,333 each, due on December 31, 2015, January 31, 2016 and
February 29, 2016. We made our first required deficiency payment in
the amount of $516,667 on December 29, 2015. However, we did not
make the required deficiency payments in January or February 2016.
As of September 30, 2016, our loan balance is $6,478,333 and our
borrowing base deficiency $978,333. Citibank is in a first lien
position on all of our properties and assets.
In
October 2016, we executed a sixth amendment to the original loan
agreement, which provides for Citibank’s forbearance from
exercising remedies relating to the current defaults including the
principal payment deficiencies. The Forbearance Agreement runs
through January 1, 2018, and requires that we make a $500,000 loan
principal pay down by September 30, 2017, and adhere to other
requirements including weekly cash balance reports, quarterly
operating reports, monthly accounts payable reports and that we pay
all associated legal expenses. Furthermore, under the agreement
Citibank may sweep any excess cash balances exceeding a net amount
of $800,000 less equity offering proceeds, which will be applied
towards the outstanding principal balance. We are currently in
compliance with the agreement, however the Agreement was extended
by a closing letter agreement to allow the Company time to pay the
associated legal costs and solidify the Deposit/Withdraw at
Custodian Agreements (“DEWAC”) as provided for in the
Forbearance Agreement.
8.
Stockholders’ Equity
There
were 7,177,010 warrants with an exercise price of $4.00 outstanding
at September 30, 2016. There have been no warrants issued or
exercised during the nine months ended September 30, 2016. The
weighted average expected life of the warrants was 2.25 years at
December 31, 2015, and was 1.50 years at September 30,
2016.
As a
signing bonus to his “at will” employment agreement,
Phillip Roberson, as President and CFO, is entitled to receive a
total of 50,000 shares of common stock, of which 10,000 shares were
immediately vested in 2014 and 20,000 shares vested in 2015. An
additional 10,000 shares were vested and issued on January 1, 2016.
The remaining 10,000 shares vested at the last six-month
anniversary date on July 1, 2016. The fair value of this stock
grant was $275,000 on July 1, 2014, of which $13,750 was recognized
as non-cash stock compensation expense during the nine months ended
September 30, 2016. There was no remaining future expense related
to this stock grant after June 30, 2016.
9.
Commodity Derivatives
No
commodity positions were outstanding at September 30, 2016, or at
December 31, 2015. On May 13, 2015, we entered into the following
commodity positions to hedge our oil production price risk,
effective from June 1, 2015, to December 31, 2015.
Period
|
Volume
(Barrels)
|
$/Barrel
|
||
|
Daily
|
Total
|
Floor
|
Ceiling
|
NYMEX –WTI
Collars October 1 – December 2015
|
200
|
18,400
|
$55.00
|
$70.00
|
9
The
following table summarizes the change in fair value of our
commodity derivatives:
|
|
Fair
Value
|
|||
|
Income
Statement
|
Three Months
Ended
September
30,
|
Nine Months
Ended
September
30,
|
||
|
Location
|
2016
|
2015
|
2016
|
2015
|
Derivatives
not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain
(loss) on commodity derivatives
|
Other Income
(Expense)
|
$-
|
$167,000
|
$-
|
$191,000
|
|
|
|
|
|
|
Realized gain
(loss) on commodity derivatives
|
Other Income
(Expense)
|
$-
|
$132,298
|
$-
|
$157,532
|
Unrealized
gains and losses, at fair value, are included on our consolidated
balance sheets as current or non-current assets or liabilities
based on the anticipated timing of cash settlements under the
related contracts. Changes in the fair value of our commodity
derivative contracts are recorded in earnings as they occur and
included in other income (expense) on our consolidated statements
of operations. We estimate the fair values of collar contracts
based on the present value of the difference in exchange-quoted
forward price curves and contractual settlement prices multiplied
by notional quantities. We internally valued the option contracts
using industry-standard option pricing models and observable market
inputs. We use our internal valuations to determine the fair values
of the contracts that are reflected on our consolidated balance
sheets. Realized gains and losses are also included in other income
(expense) on our consolidated statements of
operations.
We are
exposed to credit losses in the event of non-performance by the
counterparties on our commodity derivatives positions and have
considered the exposure in our internal valuations. However, we do
not anticipate non-performance by the counterparties over the term
of the commodity derivatives positions.
To
estimate the fair value of our commodity derivatives positions, we
use market data or assumptions that market participants would use
in pricing the asset or liability, including assumptions about risk
and the risks inherent in the inputs to the valuation technique.
These inputs can be readily observable, market corroborated or
generally unobservable. We primarily apply the market approach for
recurring fair value measurements and attempt to use the best
available information. We determine the fair value based upon the
hierarchy that prioritizes the inputs used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level
1 measurement) and lowest priority to unobservable inputs (Level 3
measurement). The three levels of fair value hierarchy are as
follows:
●
Level 1 – Quoted prices are available in
active markets for identical assets or liabilities as of the
reporting date. At September 30, 2016, we had no Level 1
measurements.
●
Level 2 – Pricing inputs are other than
quoted prices in active markets included in Level 1, which are
either directly or indirectly observable as of the reporting date.
Level 2 includes those financial instruments that are valued using
models or other valuation methodologies. These models are primarily
industry-standard models that consider various assumptions,
including quoted forward prices for commodities, time value,
volatility factors and current market and contractual prices for
the underlying instruments, as well as other relevant economic
measures. Our derivatives, which consist of commodity collars, are
valued using commodity market data which is derived by combining
raw inputs and quantitative models and processes to generate
forward curves. Where observable inputs are available, directly or
indirectly, for substantially the full term of the asset or
liability, the instrument is categorized in Level 2. At
September 30, 2016, we had no Level 2
measurements.
10
●
Level 3 – Pricing inputs include significant
inputs that are generally less observable from objective sources.
These inputs may be used with internally developed methodologies
that result in management’s best estimate of fair value.
At September 30, 2016, we had
no Level 3 measurements.
10.
Subsequent Events
On
August 12, 2016, the Company entered into a binding Stock and
Mineral Purchase Agreement (the “SMPA”) with HFT
Enterprises, LLC (the “Buyer”) in order to provide
liquidity to the Company. The original closing date of September
30, 2016, was extended to November 3, 2016, by mutual consent. The
Buyer will purchase in two equal tranches, a number of newly-issued
shares of common stock of the Company equal to 19.9% of the total
number of issued and outstanding shares of the Company, as measured
on the date of the Agreement, for a price of $0.45 per share (the
shares to be purchased, the “Shares”). The first
tranche was purchased on November 3, 2016, for gross proceeds of
$398,053 paid in consideration of 884,564 shares of unregistered
common stock. The second tranche is expected to be purchased by
December 31, 2016. The shares are restricted shares that are also
not registered under the Securities Act of 1933, as amended (the
“Securities Act”), and therefore the Buyer must hold
the Shares indefinitely unless they are registered with the
Securities and Exchange Commission and qualified by state
authorities, or an exemption from such registration and
qualification requirements is available. Euro Pacific Capital, Inc.
acted as the placement agent and garnered a fee of 5%. The SMPA
also granted to the Buyer the right to purchase an undivided 100%
working interest on or before December 31, 2016, in the
Company’s Elkhorn and JC Kinney leases in the Big Muddy Oil
Field in Converse County, Wyoming for a purchase price of $430,000.
As a contingency of the purchase, all proceeds from the sale of the
working interest must be used to pay down the Company’s
indebtedness owed to Citibank. Other contingencies include the
requirement that Citibank will have agreed to extend the maturity
date on the Company’s current indebtedness owed until
December 31, 2017, which was accomplished in the Forbearance
Agreement discussed above. Also, the Buyer will have the right to
nominate one member of the Board of Directors.
11
PART I
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the
Company’s Condensed Consolidated Financial Statements, and
respective notes thereto, included elsewhere herein. The
information below should not be construed to imply that the results
discussed herein will necessarily continue into the future or that
any conclusion reached herein will necessarily be indicative of
actual operating results in the future. Such discussion represents
only the best present assessment of the management of FieldPoint
Petroleum Corporation.
General
FieldPoint
Petroleum Corporation derives its revenues from its operating
activities including sales of oil and natural gas and operating oil
and natural gas properties. The Company's capital for investment in
producing oil and natural gas properties has been provided by cash
flow from operating activities and from bank financing. The Company
categorizes its operating expenses into the categories of
production expenses and other expenses.
The
Company has temporarily suspended drilling and exploration
activities due to low commodity prices and has no near-term plans
at this time to drill a fourth well in the East Lusk field in New
Mexico or continue development of the Taylor Serbin field.
Furthermore, we plan to limit any remedial work that does not
increase production and reduce general and administrative costs as
much as possible until commodity pricing improves. As we are out of
compliance with our revolving line of credit and may have our
borrowing base decreased, we do not expect to reinstate our
drilling programs until commodity prices and our cash flow
improve.
Going concern
We have
incurred net losses of $630,299 and $2,078,259 for the three and
nine months ended September 30, 2016, respectively. We expect that
the Company will continue to experience operating losses and
negative cash flow for so long as commodity prices remain
depressed. Our financial statements for the fiscal years ended
December 31, 2015 and 2014, include an explanatory paragraph
expressing substantial doubt as to our ability to continue as a
going concern. The financial statements have been prepared
"assuming that the Company will continue as a going concern." Our
ability to continue as a going concern is dependent on raising
additional capital to fund our operations and ultimately on
generating future profitable operations. We have filed a new shelf
registration statement on Form S-3 which was declared effective by
the SEC on August 15, 2016, which will permit the future sale of
equity securities, including a limited at the market (ATM) capital
raise. We are investigating other sources of capital. There can be
no assurance that we will be able to raise sufficient additional
capital or have positive cash flow from operations to address all
of our cash flow needs. If we are not able to find alternative
sources of cash or generate positive cash flow from operations, our
business and shareholders may be materially and adversely
affected.
On May 11, 2016, the Company received notification from the NYSE
MKT that it was noncompliant with the NYSE MKT continued listing
standards; specifically, Section 1003(a) of the Company Guide
related to financial impairment. The Company’s
stockholders’ equity is below the $2.0 million threshold
required for listed companies that have reported losses from
continuing operations in two of its three most recently completed
fiscal years. The Company submitted
a plan to regain compliance; whereupon NYSE Regulation reviewed the
plan and determined to accept it, as supplemented, and granted a
plan period through November 13, 2017, to regain compliance, the
targeted completion date. NYSE Regulation staff will review the
Company periodically for compliance with the initiatives outlined
in the plan. If the Company is not in compliance with the continued
listing standards by the targeted completion date of November 13,
2017, or if the Company does not make progress consistent with the
plan during the plan period, NYSE Regulation staff will initiate
delisting proceeding as appropriate. If our initiatives to regain
compliance are not successful and the Company is delisted from the
NYSE MKT, it could have a significant adverse impact on our ability
to raise additional capital.
12
Results of Operations
Comparison of three months ended September 30, 2016, to the three
months ended September 30, 2015
|
Quarter Ended
September 30,
|
|
|
2016
|
2015
|
Revenue:
|
|
|
Oil
sales
|
$564,496
|
$842,066
|
Natural gas
sales
|
70,993
|
90,548
|
Total oil and
natural gas sales
|
$635,489
|
$932,614
|
|
|
|
Sales
volumes:
|
|
|
Oil
(Bbls)
|
15,288
|
19,000
|
Natural gas
(Mcf)
|
30,562
|
40,021
|
Total
(BOE)
|
20,382
|
25,670
|
|
|
|
Average sales
prices:
|
|
|
Oil
($/Bbl)
|
$36.92
|
$44.32
|
Natural gas
($/Mcf)
|
2.32
|
2.26
|
Total
($/BOE)
|
$31.18
|
$36.33
|
|
|
|
Costs and expenses
($/BOE)
|
|
|
Production expense
(lifting costs)
|
$29.84
|
$31.49
|
Depletion and
depreciation
|
13.14
|
18.54
|
Exploration
expense
|
-
|
0.10
|
Accretion of
discount on asset retirement obligations
|
1.37
|
1.01
|
General and
administrative
|
15.86
|
12.07
|
Total
|
$60.21
|
$63.21
|
Oil and
natural gas sales revenues decreased 32% or $297,125 to $635,489
for the three months ended September 30, 2016, from the comparable
2015 period. Average oil sales prices decreased 17% to $36.92 for
the three months ended September 30, 2016, compared to $44.32 for
the period ended September 30, 2015. Average natural gas sales
prices increased 3% to $2.32 for the three months ended September
30, 2016, compared to $2.26 for the period ended September 30,
2015. Decreased oil and natural gas production accounted for a
decrease in revenue of approximately $186,000. Lower commodity
prices for oil accounted for a decrease in revenue of approximately
$113,000 offset approximately $2,000 by higher commodity prices for
natural gas. We have temporarily suspended drilling and exploration
activity due to low commodity prices and expect our volumes to
decline in the coming quarters until drilling and exploration
activities are re-established.
Production
expense decreased 25% or $200,208 to $608,252 for the three months
ended September 30, 2016, from the comparable 2015 period. This was
primarily due to a decrease in non-critical workover activity and
production taxes. Lifting costs per BOE decreased $1.65 to $29.84
for the 2016 period compared to $31.49 for the three months ended
September 30, 2015, due mainly to less workover activity and
general decreases in costs and lease operating expenses. We
anticipate lease operating expenses to remain stable over the
following quarters due to a cessation of new well activity as a
result of low commodity pricing.
13
Depletion
and depreciation decreased 44% or $208,000 to $267,800 for the
three months ended September 30, 2016, versus $475,800 in the 2015
comparable period. This was primarily due to lower production
volumes during the three months ended September 30,
2016.
General
and administrative overhead costs increased 4% or $13,355 to
$323,223 for the three months ended September 30, 2016, from the
three months ended September 30, 2015. This was primarily
attributable to an increase in consulting and professional
services. At this time, the Company anticipates general and
administrative expenses to remain stable or decrease slightly in
the coming quarters.
Other
expense, net for the quarter ended September 30, 2016, was $64,656
compared to other income, net of $234,097 for the quarter ended
September 30, 2015. Interest expense was $64,819 and $65,392 for
the three months ended September 30, 2016 and 2015, respectively. A
realized gain on commodity derivatives of $132,298 and an
unrealized gain on commodity derivatives of $167,000 were reported
in the three months ended September 30, 2015.
Results of Operations
Comparison of Nine Months Ended September 30, 2016 to the Nine
Months Ended September 30, 2015
|
Nine Months
Ended September 30,
|
|
|
2016
|
2015
|
Revenues:
|
|
|
Oil
sales
|
$1,782,213
|
$2,900,750
|
Natural gas
sales
|
173,050
|
269,350
|
Total
|
$1,955,263
|
$3,170,100
|
|
|
|
Sales
volumes:
|
|
|
Oil
(Bbls)
|
50,230
|
60,768
|
Natural gas
(Mcf)
|
84,633
|
102,903
|
Total
(BOE)
|
64,336
|
77,919
|
|
|
|
Average sales
prices
|
|
|
Oil
($/Bbl)
|
$35.48
|
$47.73
|
Natural gas
($/Mcf)
|
2.04
|
2.62
|
Total
($/BOE)
|
$30.39
|
$40.68
|
Costs and expenses
($/BOE)
|
|
|
Production expense
(lifting costs)
|
$30.30
|
$30.15
|
Depletion and
depreciation
|
13.92
|
18.31
|
Exploration
expense
|
-
|
0.23
|
Accretion of
discount on asset retirement obligations
|
1.27
|
1.01
|
General and
administrative
|
15.36
|
12.41
|
Total
|
$60.85
|
$62.11
|
Oil and
natural gas sales revenues decreased 38% or $1,214,837 to
$1,955,263 for the nine months ended September 30, 2016, from
$3,170,100 for the comparable 2015 period. An overall decrease in
oil and natural gas production accounted for a decrease in revenue
of approximately $551,000 while a decrease in oil and natural gas
commodity prices decreased revenue by approximately $664,000. Sales
volumes decreased 17% on a BOE basis primarily due to production
depletion which was not replaced due to a cessation of drilling
activity. Average oil sales prices decreased $12.25 to $35.48 for
the nine months ended September 30, 2016, compared to $47.73 for
the nine months ended September 30, 2015. Average natural gas sales
prices decreased 22% to $2.04 for the nine months ended September
30, 2016, compared to $2.62 for the nine months ended September 30,
2015. We anticipate volumes to decrease in the coming quarters
primarily due to suspension of drilling and exploration activity
due to low commodity prices and expect our volumes to decline in
the coming quarters unless or until drilling and exploration
activities are re-established.
14
Production
expense decreased 17% or $399,607 to $1,949,616 for the nine months
ended September 30, 2016, from the comparable 2015 period. This was
primarily due to a general decrease in workover and remedial
activity and generally lower costs and lease operating expenses.
Lifting costs per BOE increased 1%, from $30.15 to $30.30 for the
2016 period mainly due to additional costs incurred to settle asset
retirement liabilities in the nine months ended September 30, 2016.
We anticipate lease operating expenses to remain stable over the
following quarters due to a continued decrease of workover and
remedial activity.
Depletion
and depreciation expense decreased 37% to $895,400, compared to
$1,426,400 for the comparable 2015 period. This was primarily due
to a decrease in production.
General
and administrative overhead cost increased 2% or $21,523 to
$988,025 for the nine months ended September 30, 2016, from the
nine months ended September 30, 2015. This was attributable
primarily to an increase in salary expenses and professional
services. In the coming quarters we anticipate general and
administrative expenses to remain stable or decrease
slightly.
Other
expense, net for the nine months ended September 30, 2016, amounted
to $190,143 compared to other income, net of $105,432 for the
comparable 2015 period. Interest expense was $191,201 and $193,271
for the nine months ended September 30, 2016 and 2015,
respectively. A realized gain of $157,532 and an unrealized gain of
$191,000 on commodity derivatives was reported during the nine
months ended September 30, 2015. Warrant modification expense of
$66,124 was reported during the nine months ended September 30,
2015.
Liquidity and Capital Resources
Cash
flow used in operating activities was $862,342 for the nine months
ended September 30, 2016, as compared to $592,050 of cash flow
provided by operating activities in the comparable 2015 period. The
decrease in cash flows from operating activities was primarily due
to a greater net loss.
Cash
flow used in investing activities was $96,618 for the nine months
ended September 30, 2016, and $226,233 in the comparable 2015
period due to fewer additions to oil and natural gas properties and
equipment in the current period.
No cash
flow was provided by or used in financing activities for the nine
months ended September 30, 2016. Cash flow provided by financing
activities for the nine months ended September 30, 2015, was
$734,716 from the exercise of 734,716 of our outstanding publicly
traded common stock purchase warrants at an exercise price of $1.00
per share during the temporary modification period commencing at
the opening of trading on July 6, 2015, and ending at the close of
trading on August 7, 2015.
We are
out of compliance with the current ratio, leverage ratio, and
interest coverage ratio required by our line of credit as of
September 30, 2016, and are in technical default of the
agreement. In October 2016, we executed a sixth amendment to the
original loan agreement, which provides for Citibank’s
forbearance from exercising remedies relating to the current
defaults including the principal payment deficiencies. The
Forbearance Agreement runs through January 1, 2018, and requires
that we make a $500,000 loan principal pay down by September 30,
2017, and adhere to other requirements including weekly cash
balance reports, quarterly operating reports, monthly accounts
payable reports and pay all associated legal expenses. Furthermore,
under the agreement Citibank may sweep any excess cash balances
exceeding a net amount of $800,000 less equity offering proceeds,
which will be applied towards the outstanding principal balance. We
are currently in compliance with the agreement, however the
Agreement was extended by a closing letter agreement to allow the
Company time to pay the associated legal costs and solidify the
Deposit/Withdraw at Custodian Agreements (“DEWAC”) as
provided for in the Forbearance Agreement.
On May
11, 2016, the Company received notification from the NYSE MKT that
it was noncompliant with the NYSE MKT continued listing standards;
specifically, Section 1003(a) of the Company Guide related to
financial impairment. The Company’s stockholders’
equity is below the $2.0 million threshold required for listed
companies that have reported losses from continuing operations in
two of its three most recently completed fiscal years. The Company
submitted a plan to regain compliance; whereupon NYSE Regulation
reviewed the plan and determined to accept it, as supplemented, and
granted a plan period through November 13, 2017, to regain
compliance, the targeted completion date. NYSE Regulation staff
will review the Company periodically for compliance with the
initiatives outlined in the plan. If the Company is not in
compliance with the continued listing standards by the targeted
completion date of November 13, 2017, or if the Company does not
make progress consistent with the plan during the plan period, NYSE
Regulation staff will initiate delisting proceeding as appropriate.
If our initiatives to regain compliance are not successful and the
Company is delisted from the NYSE MKT, it could have a significant
impact on our ability to raise additional capital.
Subsequent Events.
On
August 12, 2016, the Company entered into a binding Stock and
Mineral Purchase Agreement (the “SMPA”) with HFT
Enterprises, LLC (the “Buyer”) in order to provide
liquidity to the Company. The original closing date of September
30, 2016, was extended to November 3, 2016, by mutual consent. The
Buyer will purchase in two equal tranches, a number of newly-issued
shares of common stock of the Company equal to 19.9% of the total
number of issued and outstanding shares of the Company, as measured
on the date of the Agreement, for a price of $0.45 per share (the
shares to be purchased, the “Shares”). The first
tranche was purchased on November 3, 2016, for gross proceeds of
$398,053 paid in consideration of 884,564 shares of unregistered
common stock. The second tranche is expected to be purchased by
December 31, 2016. The shares are restricted shares that are also
not registered under the Securities Act of 1933, as amended (the
“Securities Act”), and therefore the Buyer must hold
the Shares indefinitely unless they are registered with the
Securities and Exchange Commission and qualified by state
authorities, or an exemption from such registration and
qualification requirements is available. Euro Pacific Capital, Inc.
acted as the placement agent and garnered a fee of 5%. The SMPA
also granted to the Buyer the right to purchase an undivided 100%
working interest on or before December 31, 2016, in the
Company’s Elkhorn and JC Kinney leases in the Big Muddy Oil
Field in Converse County, Wyoming for a purchase price of $430,000.
As a contingency of the purchase, all proceeds from the sale of the
working interest must be used to pay down the Company’s
indebtedness owed to Citibank. Other contingencies include the
requirement that Citibank will have agreed to extend the maturity
date on the Company’s current indebtedness owed until
December 31, 2017, which was accomplished in the Forbearance
Agreement discussed above. Also, the Buyer will have the right to
nominate one member of the Board of Directors.
15
PART
I
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We
periodically enter into certain commodity price risk management
transactions to manage our exposure to oil and natural gas price
volatility. These transactions may take the form of futures
contracts, swaps or options. All data relating to our derivative
positions is presented in accordance with authoritative guidance.
Accordingly, unrealized gains and losses related to the change in
fair value of derivative contracts that qualify and are designated
as cash flow hedges are recorded as other comprehensive income or
loss and such amounts are reclassified to oil and natural gas sales
revenues as the associated production occurs. Derivative contracts
that do not qualify for hedge accounting treatment are recorded as
derivative assets and liabilities at fair value in the consolidated
balance sheet, and the associated unrealized gains and losses are
recorded as current expense or income in the consolidated statement
of operations. While such
derivative contracts do not qualify for hedge accounting,
management believes these contracts can be utilized as an effective
component of commodity price risk management activities. There were
no commodity positions open at September 30, 2016. On May 13, 2015,
we entered into a commodity derivative position effective June 1,
2015. The collars have a floor of $55.00 per barrel and a ceiling
of $70.00 for 200 barrels of oil per day from June 1, 2015, to
December 31, 2015. We had a realized gain of $157,532 and a net
unrealized gain of $191,000 on commodity derivative transactions
during the nine month period ending September 30,
2015.
PART I
Item 4. CONTROLS AND PROCEDURES
a)
Disclosure Controls and Procedures
Our
Principal Executive Officer, Roger D. Bryant, and our Principal
Financial Officer, Phillip H. Roberson, have established and are
currently maintaining disclosure controls and procedures for the
Company. The disclosure controls and procedures have been designed
to provide reasonable assurance that the information required to be
disclosed by the Company in reports that it files under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC and to
ensure that information required to be disclosed by the Company is
accumulated and communicated to the Company's management as
appropriate to allow timely decisions regarding required
disclosure.
The
Principal Executive Officer and the Principal Financial Officer
conducted a review and evaluation of the effectiveness of the
Company’s disclosure controls and procedures and have
concluded, based on their evaluation as of the end of the period
covered by this Report, that our disclosure controls and procedures
are effective to provide reasonable assurance that information
required to be disclosed in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms
of the SEC and to ensure that information required to be disclosed
by the Company is accumulated and communicated to
management, including our principal executive officer and our
principal financial officer, to allow timely decisions regarding
required disclosure and we refer you to Exchange Act Rule
13a-15(e).
b)
Changes in Internal Control over Financial Reporting
There
have been no changes to the Company’s system of internal
controls over financial reporting during the quarter ended
September 30, 2016, that have materially affected, or are
reasonably likely to materially affect, the Company’s system
of controls over financial reporting. As part of a continuing
effort to improve the
Company’s business processes, management is evaluating its
internal controls and may update certain controls to accommodate
any modifications to its business processes or accounting
procedures.
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c)
Limitations of Any Internal Control Design
Our
principal executive and financial officers do not expect that our
disclosure controls or internal controls will prevent all error and
all fraud. Although our disclosure controls and procedures were
designed to provide reasonable assurance of achieving their
objectives and our principal executive and financial officers have
determined that our disclosure controls and procedures are
effective at doing so, a control system, no matter how well
conceived and operated, can provide only reasonable, not absolute
assurance that the objectives of the system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be
circumvented if there exists in an individual a desire to do so.
There can be no assurance that any design will succeed in achieving
its stated goals under all potential future
conditions.
17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
None.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item 3. Default Upon Senior Securities
Our
line of credit provides for certain financial covenants and ratios
which include a current ratio that cannot be less than 1.10:1.00, a
leverage ratio that cannot be more than 3.50:1.00, and an interest
coverage ratio that cannot be less than 3.50:1.00. The Company is
out of compliance with all three ratios as of September 30, 2016,
and is in technical default of the agreement. As a result of
the redetermination of the credit base, the Company had a borrowing
base deficiency in the amount of $1,495,000 on December 1, 2015.
As an election under the Loan Agreement, the Company agreed
to pay and cure the deficiency in three equal monthly installments
of $498,333 each, due on December 31, 2015, January 31, 2016 and
February 29, 2016. We made our first required deficiency payment in
the amount of $516,667 on December 29, 2015. However, we did not
make the required deficiency payments in January or February 2016.
As of September 30, 2016, our loan balance is $6,478,333 and our
borrowing base deficiency $978,333. The Company’s plans to
cure the borrowing base deficiency are discussed in Note 2 – Liquidity and Going
Concern.
In
October 2016, we executed a sixth amendment to the original loan
agreement, which provides for Citibank’s forbearance from
exercising remedies relating the current defaults including the
principal payment deficiencies. The Forbearance Agreement runs
through January 1, 2018, and requires that we make a $500,000 loan
principal pay down by September 30, 2017, and adhere to other
requirements including weekly cash balance reports, quarterly
operating reports, monthly accounts payable reports and that we pay
all associated legal expenses. Furthermore, under the agreement
Citibank may sweep any excess cash balances exceeding a net amount
of $800,000 less equity offering proceeds, which will be applied
towards the outstanding principal balance. We are currently in
compliance with the agreement, however the Agreement was extended
by a closing letter agreement to allow the Company time to pay the
associated legal costs and solidify the Deposit/Withdraw at
Custodian Agreements (“DEWAC”) as provided for in the
Forbearance Agreement. Citibank is in a first lien position on all
of our properties and assets.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
18
Item 6.
Exhibits
Exhibits
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Description
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Certifications
of Chief Executive Officer
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Certifications
of Chief Financial Officer
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Certification
of Chief Executive Officer Pursuant to U.S.C. Section
1350
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Certification
of Chief Financial Officer Pursuant to U.S.C. Section
1350
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101.INS
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XBRL
Instance Document
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101.SCH
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XBRL
Schema Document
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101.CAL
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XBRL
Calculation Linkbase Document
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101.LAB
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|
XBRL
Label Linkbase Document
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101.PRE
|
|
XBRL
Presentation Linkbase Document
|
101.DEF
|
|
XBRL
Definition Linkbase Document
|
19
SIGNATURES
In
accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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Date: November 14, 2016 |
By:
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/s/
Roger
D. Bryant
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Roger D. Bryant |
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Principal Executive Officer |
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Date: November 14, 2016 |
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/s/ Phillip H.
Roberson |
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Phillip H.
Roberson |
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Principal Financial Officer |
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