MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
The following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal years ended
December 31, 2013and 2012, included elsewhere in this prospectus. The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains "forward-looking statements". Forward-looking statements are generally written in the future tense and/or are preceded by words such as "may," "should," "forecast," "could," "expect," "suggest," "believe," "anticipate," "intend," "plan," or other similar words. The forward-looking statements contained in this prospectus involve a number of risks and uncertainties, many of which are outside of our control. Factors that could cause actual results to differ materially from projected results include, but are not limited to, those discussed in "Risk Factors" elsewhere in this prospectus. Although we believe that the assumptions underlying the forward-looking statements contained in this prospectus are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements will be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Furthermore, past performance in operations and share price is not necessarily indicative of future performance. Except as required by applicable laws including the securities laws of the United States, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our Business We are an oil and gas exploration and production company. We acquire oil and gas leases from landowners in geographical locations which we believe have the potential for the successful drilling of new wells to locate commercial quantities of oil and gas or which have existing wells which we believe can be rehabilitated or stimulated to produce additional quantities of hydrocarbons. Once the wells are drilled or acquired we operate the wells to manage their production and market the oil and gas produced. We also receive fees to operate wells not owned by us. 30
RESULTS OF OPERATIONS
For the year ended
During the year ended
December 31, 2013, production decreased 307 barrels of oil as compared to 26,413 sold in 2012. During the year ended December 31, 2013, we produced an additional 17,734 MCFs of gas as compared to 134,736 sold in 2012. Our average price per barrel sold during 2013 increased by $2.95from the $90.86in 2012. Our average price per MCF (adjusted for liquids content) sold during 2013 decreased by $1.12from the $9.51in 2012. These items increased our revenues from oil in 2013 by $49,000and decreased our revenues from gas in 2013 by $3,000. Net Production Price Revenue Net Cash Oil Gas Oil Gas Total Taxes LOE Oil Gas ($) ($) ($) ($) ($) ($) ($) ($) For the year ended December 31, 2012 26,413 134,736 90.86 9.51 2,400,000 1,282,000 3,682,000 177,000 1,114,000 2,391,000 For the year ended December 31, 2013 26,106 152,470 93.81 8.39 2,449,000 1,279,000 3,728,000 199,000 1,147,000 2,382,000 Variance (307) 17,734 2.95 (1.12) 49,000 (3,000) 46,000 22,000 (33,000) 9,000 Revenue. During the year ended December 31, 2013the Company generated revenues of $3,622,000, a decrease of $2,886,000or 44% as compared to the same period last year. The Company had decreased revenues through drilling services to third parties. The Company has determined to pursue development of their own assets rather than to drill and complete other parties properties resulting in the drastic decline in total revenues. During the year ended December 31, 2013the Company generated revenues from oil and gas sales of $3,728,000an increase of $46,000or 1% as compared to the same period last year. The Company had no revenues through drilling services to third parties generating a decrease of $2,746,000. The Company has determined to pursue development of their own assets rather than to drill and complete other parties properties. Total Expenses. During the year ended December 31, 2013, total expenses, which are comprised of depreciation, operating costs and general and administrative expenses, were $7,025,000compared to $4,717,000during the same period in 2012. This change represents an increase of $2,308,000or 49%. The increase is primarily due to increased professional and legal fees as a result of ongoing litigation and the costs of becoming a public entity. The company also incurred losses on turn key contracts in 2013 as a result of drilling done for a third party in 2012.
LIQUIDITY AND CAPITAL RESOURCES
Summary of Cash Flows. Net cash used in operating activities of (
$1,654,000) for the twelve months ended December 31, 2013decreased from cash provided by operations of $1,571,000during the same period in 2012. This change represents a decrease of $3,225,000. The decrease is primarily due to the decrease in net income of 4,944,000 due to the lack of income from third party drilling and increased expenses as a result of ongoing litigation and the costs of becoming a public entity. Net cash used in investing activities of $871,000was utilized to develop our oil and gas assets during the year 2013 and acquire additional proved producing properties in our core areas. This is a decrease of $1,254,000from the same period in 2012. Net cash provided by (used in) financing activities increased by $2,937,000as the Company generated a considerable amount of cash through equity sales of the Company's preferred stock as well as additional borrowings through the line of credit with GreenBank. Since inception we have funded our operations primarily through equity and debt financings and we expect that we will continue to fund our operations through the equity and debt financing. We currently intend to raise our needed additional working capital primarily through private placement offerings of our common and preferred stock. However we may also consider doing a public offering as an alternative. There can be no assurance that any private or public offering we may undertake will be successful or raise sufficient capital to fund our business plan. If we raise additional financing by issuing common stock, our existing stockholders' ownership will be diluted. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. There is no assurance that we will be able to maintain operations at a level sufficient for investors to obtain a return on their investment in our common stock. 31
Off-Balance Sheet Arrangements
From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of
December 31, 2013, the off-balance sheet arrangements and transactions that we had entered into included operating lease agreements, personal guarantees of our line of credit with Greenbankby three of the officers and majority stockholders and gas transportation commitments. The Company does not believe that these arrangements are reasonably likely to materially affect its liquidity or availability of, or requirements for, capital resources currently or in the future.
Application of Critical Accounting Policies
Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in
the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financials. We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, politics, global economics, general business conditions and other factors. Our significant estimates are related to the valuation of warrants and options.
There are accounting policies that we believe are significant to the presentation of our financial statements. The most significant of these accounting policies relates to the accounting for our research and development expenses and stock-based compensation expense.
We account for all stock-based payments and awards under the fair value based method.
Stock-based payments to non-employees are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees is periodically re-measured until the counterparty performance is complete, and any change therein is recognized over the vesting period of the award and in the same manner as if we had paid cash instead of paying with or using equity based instruments. The cost of the stock-based payments to non-employees that are fully vested and non-forfeitable as at the grant date is measured and recognized at that date, unless there is a contractual term for services in which case such compensation would be amortized over the contractual term. We account for the granting of share purchase options to employees using the fair value method whereby all awards to employees will be recorded at fair value on the date of the grant. The fair value of all share purchase options are expensed over their vesting period with a corresponding increase to additional capital surplus. Upon exercise of share purchase options, the consideration paid by the option holder, together with the amount previously recognized in additional capital surplus, is recorded as an increase to share capital. We use the Black-Scholes option valuation model to calculate the fair value of share purchase options at the date of the grant. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in assumptions can materially affect the fair value estimate and therefore the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of our share purchase options.