News Column

AMERICAN NATURAL ENERGY CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 13, 2014

General

We currently are experiencing a severe shortage of working capital and funds to pay our liabilities. We have no current borrowing capacity with any lender. We incurred a net gain of $478,000 for the six months ended June 30, 2014 due to a gain on the settlement of disputed revenue payables and a net loss of $3,147,000 and $3,318,000 for the years ended December 31, 2013 and 2012. We have a working capital deficiency and an accumulated deficit at June 30, 2014 which leads to substantial doubt concerning our ability to meet our obligations as they come due. We also have a need for substantial funds to develop our oil and gas properties and repay borrowings as well as to meet our other current liabilities.

The accompanying consolidated financial statements in this Report have been prepared on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. The independent registered public accounting firm's report on our consolidated financial statements as of and for the year ended December 31, 2013 includes an explanatory paragraph which states that we have sustained a substantial loss in 2013 and have a working capital deficiency and an accumulated deficit at December 31, 2013 that raise substantial doubt about our ability to continue as a going concern. These matters raise substantial doubt about our ability to continue as a going concern. As a result of our losses incurred and current negative working capital, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. Our ability to continue as a going concern is dependent upon adequate sources of capital and our ability to sustain positive results of operations and cash flows sufficient to continue to explore for and develop our oil and gas reserves and pay our obligations.

A Comparison of Operating Results For The Three Months Ended June 30, 2014 and June 30, 2013

We recorded net income of $1,450,000 during the three months ended June 30, 2014 compared to a net loss of $109,000 for the three months ended June 30, 2013. During the three months ended June 30, 2014, our revenues were comprised of oil and gas sales totaling $470,000 compared with oil and gas sales of $874,000 during the same period of 2013. Oil and gas prices decreased as well as production for the second quarter of 2014 as compared to the second quarter of 2013. Our net average daily production for the three month period ended June 30, 2014 decreased by 45% over the same period of the prior year, from 91 net barrels of oil equivalent per day to 50 net barrels of oil equivalent per day. The weighted average price was $104.23 per barrel of oil equivalent for the three months ended June 30, 2014 compared to $105.78 per barrel of oil equivalent for the same period in 2013. Production from our existing wells is subject to fluctuation based upon which zones of wells are in production.

13



--------------------------------------------------------------------------------

We had operating expenses of $670,000 for the three months ended June 30, 2014 compared to operating expenses of $493,000 for the three months ended June 30, 2013. Our general and administrative expenses were $303,000 for the three months ended June 30, 2014 compared to $369,000 for the three months ended June 30, 2013, a decrease of $66,000.

Interest and financing costs decreased for the three months ended June 30, 2014 compared to the same period in 2013 at $402,000 and $506,000 respectively. Interest and financing costs were lower in the second quarter of 2014 due to lower amortization of note discounts.

Lease operating expenses of $142,000, production taxes of $24,000 and depletion, depreciation and amortization of $188,000 during the three months ended June 30, 2014 changed from $226,000, $103,000, and $227,000, respectively, during the three months ended June 30, 2014. Lease operating expenses were lower for the second quarter of 2014 compared to the same period in 2013 due to decreased production. Production taxes decreased for the second quarter of 2014 as a result of decreased production. The decrease in depletion, depreciation and amortization for the second quarter of 2014 is a result of decreased production.

During the three months ended June 30, 2014, we had a foreign exchange loss of $13,000 compared to a $432,000 foreign exchange gain for the three months ended June 30, 2013. Our foreign exchange gains and losses arise out of an inter-company indebtedness we owe to our wholly-owned subsidiary, Gothic, which is payable in Canadian dollars, in addition to a note owed to a third party denominated in Canadian dollars. The foreign exchange loss for the three months ended June 30, 2014 was caused by the weakening of the US dollar against the Canadian dollar. The loss related to the note denominated in Canadian dollars was $13,000 for the three months ended June 30, 2014

We recorded a gain of $2,052,000 for the three months ended June 30, 2014 as the result of the settlement of disputed revenue payables to a royalty owner.

A Comparison of Operating Results For The Six Months Ended June 30, 2014 and June 30, 2013

We recorded net income of $478,000 during the six months ended June 30, 2014 compared to a net loss of $605,000 for the six months ended June 30, 2013. During the six months ended June 30, 2014, our revenues were comprised of oil and gas sales totaling $1,045,000 compared with oil and gas sales of $1,872,000 during the same period of 2013. Oil and gas prices and production decreased for the first six months of 2014 as compared to the same period of 2013. Our net average daily production for the six month period ended June 30, 2014 decreased by 42% over the same period of the prior year, from 96 net barrels of oil equivalent per day to 56 net barrels of oil equivalent per day. Oil and gas prices decreased for the six month period ended June 30, 2014 over the same period of the prior year. The weighted average price was $103.47 and $107.41 per barrel of oil equivalent for the six months ended 2014 and 2013 respectively. Production from our existing wells is subject to fluctuation based upon which zones of wells are in production.

14



--------------------------------------------------------------------------------

We had operating expenses of $1,417,000 for the six months ended June 30, 2014 compared to operating expenses of $1,454,000 for the six months ended June 30, 2013. Our general and administrative expenses were $648,000 for the six months ended June 30, 2014 compared to $857,000 for the six months ended June 30, 2013. General and administrative expenses were higher for the period ended June 30, 2013 primarily due to higher professional fees and higher payroll expense.

Interest and financing costs decreased for the six months ended June 30, 2014 compared to the same period in 2013 at $795,000 and $1,012,000 respectively. Interest and financing costs were lower in the first two quarters of 2014 primarily as a result of lower amortization of note discounts.

Lease operating expenses of $281,000, production taxes of $81,000 and depletion, depreciation and amortization of $406,000 during the six months ended June 30, 2014 changed from $516,000, $177,000, and $596,000, respectively, during the six months ended June 30, 2014. Lease operating expenses were lower for the first two quarters of 2014 compared to the same period in 2013 due to decreased production. Production taxes decreased for the first two quarters of 2014 as a result of decreased production. The decrease in depletion, depreciation and amortization for the first two quarters of 2014 is a result of decreased production.

During the six months ended June 30, 2014, we had a foreign exchange loss of $916 compared to a $692,000 foreign exchange gain for the six months ended June 30, 2013. Our foreign exchange gains and losses arise out of an inter-company indebtedness we owe to our wholly-owned subsidiary, Gothic, which is payable in Canadian dollars, in addition to a note owed to a third party denominated in Canadian dollars. The foreign exchange loss for the six months ended June 30, 2014 was caused by the weakening of the US dollar against the Canadian dollar. The loss related to the note denominated in Canadian dollars was $916 for the six months ended June 30, 2014

During the six months ended June 30, 2014 we also amended the loan with TCA. The amendment qualified as debt extinguishment and $408,000 was recorded as a loss on debt extinguishment. We recorded a gain of $2,052,000 for the six months ended June 30, 2014 as the result of the settlement of disputed revenue payables to a royalty owner. During the six months ended June 30, 2013 we also extended the repayment terms and rights on a related party note which qualified as debt extinguishment. The additional rights were valued at $39,953 and were recorded as a loss on debt extinguishment.

Liquidity and Capital Resources

General

To date, our production has not been sufficient to fund our operations and drilling program. At June 30, 2014, we do not have any available borrowing capacity and have negative working capital of approximately $10.0 million.

15



--------------------------------------------------------------------------------

We have substantial need for capital to develop our oil and gas prospects. Since 2001, we have funded our capital expenditures and operating activities through a series of debt and equity capital-raising transactions, drilling participations and through an increase in vendor payables and notes payable. We expect any future capital expenditures for drilling and development to be funded from the sale of drilling participations and equity capital. It is management's plan to raise additional capital through the sale of interests in our drilling activities or other strategic transaction; however, we currently have no firm commitment from any potential investors and such additional capital may not be available to us in the future.

A Comparison of Cash Flow For The Six Months Ended June 30, 2014 and June 30, 2013

Our net cash provided by operating activities was $476,000 for the six months ended June 30, 2014 as compared to net cash provided by operating activities of $77,000 for the six months ended June 30, 2013, an increase of $399,000. The increase in net cash provided by operating activities for the six months ended June 30, 2014 was due to an increase in working capital of $623,000 and an increase in net income of $1,083,000 and offset by a decrease in noncash items of $1,306,000. Changes in working capital items had the effect of increasing cash flows from operating activities by $754,000 during the six months ended June 30, 2014 mainly due to an increase in accounts payable and accrued liabilities of $689,000 and along with a decrease in accounts receivable and other current assets of $65,000. Changes in working capital items had the effect of increasing cash flows from operating activities by $132,000 during the six months ended June 30, 2013 due to a decrease in accounts receivable and other current assets of $68,000 along with an increase in accounts payable and accrued liabilities of $64,000.

We used $18,000 of net cash in investing activities during the six months ended June 30, 2014 compared to net cash used of $104,000 in 2013. The cash used in investing in 2014 and 2013 was for the purchase and development of oil and gas properties.

Our net cash used in financing activities was $541,000 for the six months ended June 30, 2014 compared to net cash provided of $105,000 for the same period in 2013. For the six months ended June 30, 2014, net cash outflows from financing activities were a result of the issuance of notes of $250,000 offset by payments against outstanding notes of $731,000, of which $45,000 was to related parties, and payments of deferred financing costs of $60,000. For the six months ended June 30, 2013, net cash inflows from financing activities were a result of the issuance of notes, net of fees, of $1,449,000, of which $505,000 was to related parties, offset by payments against outstanding notes of $1,294,000, of which $69,000 was to related parties, and payments of deferred financing costs of $50,000.

We have no other commitments to expend additional funds for drilling activities for the rest of 2014.

16



--------------------------------------------------------------------------------

How We Have Financed Our Activities

Our activities since 2002 have been financed primarily from sales of debt and equity securities and drilling participations. These transactions during this period of time included the following, among other previously reported financing transactions we entered into during the period:

We entered into a financing agreement with TCA Global Credit Master Fund, LP during the first quarter of 2012. Proceeds of the financing were used for the drilling and completion of wells included in the Company's inventory of proved undeveloped reserves ("PUD"). We have a commitment for a total amount of $3.0 million, before fees and expenses, through the issuance of a series of $1.0 million debentures. The debenture is secured by a first priority, perfected security interest and mortgage in oil and gas leases and properties. At no time shall the investor funds advanced exceed 65% of the drilling and completion cost of the PUD's with the balance provided by our generated funds. During the year ended December 31, 2012, three tranches of TCA debt totaling $3 million were issued. The total note principal balance of TCA debts and related unamortized debt discounts on December 31, 2012 are $1,608,973 and $186,791, respectively.

In March 2013, the fourth tranche TCA debt of $1 million was issued. The debt is due on March 1, 2014 and is payable monthly with a mandatory redemption fee equal to 10% and interest of 5%. Out of $1 million debt proceeds, $500,000 was withheld for the future development of wells, $55,550 was paid to TCA for various fees, and net proceeds of $944,450 were received by the Company. In July 2013 an additional tranche of $750,000 was drawn by the Company under the same terms with net proceeds of $705,825 received by the Company after the payment of fees.

The Company will also pay TCA $100,000 in cash in lieu of a stock bonus related to the issuance of the note. Fees paid and to be paid in cash totaling $155,550 to TCA Global Credit Master Fund, LP were recorded as a debt discount.

In July 2013, the fifth tranche TCA debt of $750,000 was issued. The debt is due on August 1, 2014 and is payable monthly with a mandatory redemption fee equal to 10% and interest of 5%. Fees totaling $44,175 were paid with net proceeds of $705,825 received by the Company. Along with the issuance of the fifth tranche TCA debt, the Company combined all the outstanding TCA debts into one debt by entering into an amended debt agreement with TCA. The amended debt has a principal of $2,290,548, accrues interest at 5% per annum, and is due on August 1, 2014. From August 1, 2013 through November we paid the amended TCA debt in monthly installments of $230,451.

On January 29, 2014, the Company entered into the Sixth Amendment to the Securities Purchase Agreement with TCA Global Credit Master Fund LP. The amendment provides for interest only payments pursuant to existing amended and restated debenture for the month of December 2013, that all previous outstanding principal and accrued and unpaid interest, an accommodation fee $200,000 for entering into this sixth Amendment and all outstanding Redemption Premium fees will comprise the agree upon outstanding amount of $2,196,609. Principal and interest in the amount of $371,459 is due monthly, inclusive of all fees and redemption amounts. The Company evaluated the amendment under FASB ASC 470-50 and determined that the modification was substantial and qualified as a debt extinguishment. The additional $200,000 accommodation fee and the remaining unamortized debt discount of $208,490 and were recorded as a loss on debt extinguishment. Principal payments of $645,211 for the six months ended June 30, 2014 along with accrued interest have been made.

17



--------------------------------------------------------------------------------

On July 31, 2012, we received final approval from the TSX Venture Exchange for the issuance of 7,000,000 shares of our common stock in a private placement. All such shares were sold at $0.06 in the private placement, resulting in gross proceeds of $420,000.

On August 13, 2012, we entered into a Securities Purchase Agreement with Palo Verde Acquisitions, LLC ("Palo Verde"), pursuant to which we sold to Palo Verde (1) a $2,000,000 12% unsecured Convertible Debenture due August 13, 2014 (the "First Palo Verde Debenture") and (2) warrants to purchase up to 20,000,000 shares of our common stock at a purchase price of $0.23 per share and expiring on August 13, 2014. The aggregate consideration received by us from Palo Verde for the First Palo Verde Debenture and the 20 million warrants was $2,000,000.

On December 31, 2012, we sold to Palo Verde (1) a $1,000,000 12% unsecured Convertible Debenture due December 31, 2014 (the "Second Palo Verde Debenture") and (2) warrants to purchase up to 10,000,000 shares of our common stock at a purchase price of $0.23 per share and expiring on December 31, 2014. The aggregate consideration received by us from Palo Verde for the Second Palo Verde Debenture and the 10 million warrants was $1,000,000. On July 1, 2014, the due date of the convertible debt was extended to January 2, 2016.

Future Capital Requirements and Resources

At June 30, 2014, we do not have any available borrowing capacity under existing credit facilities and our current assets are $239,000 compared with current liabilities of $10.3 million. Our current liabilities include accounts payable, revenues payable, notes payable (a portion of which is past due), and other current obligations. We have substantial needs for funds to pay our outstanding payables and debt due during 2014. In addition, we have substantial need for capital to develop our oil and gas prospects. At June 30, 2014, we have no commitments for additional capital to fund drilling activities in 2014.

Since 2001, we have funded our capital expenditures and operating activities through a series of debt and equity capital-raising transactions, drilling participations and, during the last two quarters of 2004 and all of 2005 and 2006, through an increase in vendor payables and notes payable. It is our intention to raise additional capital through the sale of interests in our drilling activities or other strategic transaction; however, we currently have no firm commitment from any potential investors and such additional capital may not be available to us in the future. We expect that any capital expenditures for drilling purposes during 2014 will be funded from the sale of drilling participations and equity capital.

18



--------------------------------------------------------------------------------

Our business strategy requires us to obtain additional financing and our failure to do so can be expected to adversely affect our ability to grow our revenues, oil and gas reserves and achieve and maintain a significant level of revenues and profitability. There can be no assurance we will obtain this additional funding. Such funding may be obtained through the sale of drilling participations, joint ventures, equity securities or by incurring additional indebtedness. Without such funding, our revenues will continue to be limited and it can be expected that our operations will not be profitable. In addition, any additional equity funding that we obtain may result in material dilution to the current holders of our common stock.

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995

With the exception of historical matters, the matters we discussed below and elsewhere in this Report are "forward-looking statements" as defined under the Securities Exchange Act of 1934, as amended that involve risks and uncertainties. The forward-looking statements appear in various places including under the headings Item 1. Financial Statements and Item 2. Management's Discussion and Analysis or Plan of Operation. These risks and uncertainties relate to

our ability to raise capital and fund our oil and gas well drilling and development plans,

our ability to fund the repayment of our current liabilities, and

our ability to negotiate and enter into any agreement relating to a merger or sale of all or substantially all our assets.

These risks and uncertainties also relate to our ability to attain and maintain profitability and cash flow and continue as a going concern, our ability to increase our reserves of oil and gas through successful drilling activities and acquisitions, our ability to enhance and maintain production from existing wells and successfully develop additional producing wells, our access to debt and equity capital and the availability of joint venture development arrangements, our ability to remain in compliance with the terms of any agreements pursuant to which we borrow money and to repay the principal and interest when due, our estimates as to our needs for additional capital and the times at which additional capital will be required, our expectations as to our sources for this capital and funds, our ability to successfully implement our business strategy, our ability to maintain compliance with covenants of our loan documents and other agreements pursuant to which we issue securities or borrow funds and to obtain waivers and amendments when and as required, our ability to borrow funds or maintain levels of borrowing availability under our borrowing arrangements, our ability to meet our intended capital expenditures, our statements and estimates about quantities of production of oil and gas as it implies continuing production rates at those levels, proved reserves or borrowing availability based on proved reserves and our future net cash flows and their present value.

19



--------------------------------------------------------------------------------

Readers are cautioned that the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2013 and other reports filed with the Commission, as well as those described elsewhere in this Report, in some cases have affected, and in the future could affect, our business plans and actual results of operations and could cause our actual consolidated results during 2014 and beyond, to differ materially from those expressed in any forward-looking statements made by or on our behalf.

Our common shares have no trading market in the United States, and there can be no assurance as to the liquidity of any markets that may develop for our common shares, the ability of the holders of common shares to sell their common shares in the United States or the price at which holders would be able to sell their common shares. Any future trading prices of the common shares will depend on many factors, including, among others, our operating results and the market for similar securities.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters