NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Significant Accounting Policies
Organization and Nature of Operations
FieldPoint
Petroleum Corporation (the “Company”, “we”
or “our”) is incorporated under the laws of the state
of Colorado. We are engaged in the acquisition, operation and
development of oil and natural gas properties, which are located in
Louisiana, New Mexico, Oklahoma, Texas and Wyoming as of December
31, 2018 and 2017.
Consolidation Policy and Basis of Presentation
The
accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States of America, and include the accounts of the Company
and its wholly owned subsidiaries, Bass Petroleum, Inc. and Raya
Energy Corp. All material intercompany accounts and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
We
consider all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. At times,
we maintain deposit balances in excess of FDIC insurance limits. We
have not experienced any losses in such accounts and believe we are
not exposed to any significant credit risk on cash and cash
equivalents.
Oil and Natural Gas Properties
Our oil
and natural gas properties consisted of the following at December
31:
|
|
|
|
|
Mineral interests
in properties:
|
|
|
|
Unproved
properties
|
$
250,217
|
$
250,217
|
|
Proved
properties
|
9,755,983
|
9,762,108
|
|
Wells and related
equipment and facilities
|
23,791,895
|
23,741,508
|
|
Total
costs
|
33,798,095
|
33,753,833
|
|
Less accumulated
depletion, depreciation and impairment
|
(30,384,325
)
|
(27,319,847
)
|
|
|
$
3,413,770
|
$
6,433,986
|
We
follow the successful efforts method of accounting for our oil and
natural gas producing activities. Costs to acquire mineral
interests in oil and natural gas properties, to drill and equip
exploratory wells that find proved reserves and to drill and equip
development wells and related asset retirement costs are
capitalized. Costs to drill exploratory wells are capitalized
pending determination of whether the wells have found proved
reserves. If we determine that the wells have not found proved
reserves, the costs are charged to expense. There were no
exploratory wells capitalized pending determinations of whether the
wells found proved reserves at December 31, 2018 or 2017.
Geological and geophysical costs, including seismic studies and
costs of carrying and retaining unproved properties are charged to
expense as incurred.
We
capitalize interest on expenditures for significant exploration and
development projects that last more than six months while
activities are in progress to bring the assets to their intended
use. Through December 31, 2018, we have capitalized no
interest costs because our exploration and development projects
generally last less than six months. Costs to maintain wells and
related equipment are charged to expense as incurred.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On the
sale or retirement of a complete unit of a proved property, the
cost and related accumulated depletion and depreciation are
eliminated from the property accounts, and the resulting gain or
loss is recognized. On the sale of a partial unit of proved
property, the amount received is treated as a reduction of the cost
of the interest retained.
Capitalized amounts
attributable to proved oil and natural gas properties are depleted
by the unit-of-production method of proved reserves using the unit
conversion ratio of 6 Mcf of gas to 1 bbl of oil. Depletion and
depreciation expense for oil and natural gas producing property and
related equipment was $466,400 and $680,000 for the years ended
December 31, 2018 and 2017, respectively.
Capitalized costs
related to proved oil and natural gas properties, including wells
and related equipment and facilities, are evaluated for impairment
based on an analysis of undiscounted future net cash flows. If
undiscounted cash flows are insufficient to recover the net
capitalized costs related to proved properties, then we recognize
an impairment charge in income from operations equal to the
difference between the net capitalized costs related to proved
properties and their estimated fair values based on the present
value of the related future net cash flows, which is a
non-recurring fair value measurement classified as Level 3 in the
fair value hierarchy. We recorded impairment of $2,601,714 during
the year ended December 31, 2018, but recorded no impairment on our
proved oil and natural gas properties during the year ended
December 31, 2017.
Unproved oil and
natural gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is
recognized at the time of impairment by providing an impairment
allowance. No impairment of unproved properties was recorded during
the years ended December 31, 2018 and 2017.
On the
sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into
consideration the amount of any recorded impairment if the property
had been assessed individually. If a partial interest in an
unproved property is sold, the amount received is treated as a
reduction of the cost of the interest retained.
Oil and Natural Gas Sales Receivable
Oil and
natural gas sales receivable principally consist of accrued oil and
natural gas sales proceeds receivable and are typically collected
within 20 to 56 days. We ordinarily do not require collateral for
such receivables, nor do we charge interest on past due balances.
As of December 31, 2018 and 2017, our accounts receivable were
primarily with several independent purchasers of our crude oil and
natural gas production. At December 31, 2018, we had balances due
from three purchasers which were greater than 10% of our accounts
receivable related to crude oil and natural gas production. These
three purchasers accounted for 84% of accounts receivable at
December 31, 2018. At December 31, 2017, we had balances due from
three purchasers which were greater than 10% of our accounts
receivable related to crude oil and natural gas production. These
three purchasers accounted for 66% of accounts receivable at
December 31, 2017. In the event one or more of these significant
purchasers cease doing business with us, we believe that there are
potential alternative purchasers with whom we could establish new
relationships and that those relationships will result in the
replacement of one or more lost purchasers.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We
periodically review accounts receivable for collectability and
reduce the carrying amount of any accounts receivable deemed
potentially uncollectible by establishing an allowance for doubtful
accounts. On January 12, 2018, one of our purchasers, First River
Energy, LLC (“FEL”), notified us that they had filed
for Chapter 11 bankruptcy and that we would not be receiving
payment for our December 2017 production in the amount of
approximately $27,000. We have filed a proof of claim in this
matter. Since there is no guarantee that we will recover all or any
of the amounts owed, the Company has recorded an allowance for
doubtful accounts for the same amount as of December 31,
2018.
Joint Interest Billings Receivable and Oil and Natural Gas Revenues
Payable
Joint
interest billings receivable represents amounts receivable for
lease operating expenses and other costs due from third party
working interest owners in the wells that the Company operates. The
receivable is recognized when the cost is incurred and the related
payable and the Company’s share of the cost is recorded. We
often have the ability to offset amounts due against the
participant’s share of production revenue from the related
property.
The
Company uses the reserve for bad debt method of valuing doubtful
joint interest billings receivable based on historical experience,
coupled with a review of the current status of existing
receivables. The balance of the reserve for doubtful accounts was
approximately $265,000 and $237,000 at December 31, 2018 and 2017,
respectively.
Oil and
natural gas revenues payable represents amounts due to third party
revenue interest owners for their share of oil and natural gas
revenue collected on their behalf by the Company. The payable is
recorded when the Company recognizes oil and natural gas sales and
records the related oil and natural gas sales
receivable.
Other Property
Other
assets classified as property and equipment are primarily office
furniture and equipment and vehicles, which are carried at cost.
Depreciation is provided using the straight-line method over
estimated useful lives ranging from three to five years. Gain or
loss on retirement or sale or other disposition of assets is
included in income in the period of disposition. Depreciation
expense for other property and equipment was $3,016 and $18,337 for
the years ended December 31, 2018 and 2017,
respectively.
Asset Retirement Obligations
Our
financial statements reflect our asset retirement obligations,
consisting of future plugging and abandonment expenditures related
to our oil and natural gas properties, which can be reasonably
estimated. The asset retirement obligation is recorded at fair
value on a discounted basis as a liability at the asset's
inception, with an offsetting increase to producing properties on
the consolidated balance sheets. Significant inputs to determining
fair value include applying a credit adjusted risk free rate which
is a Level 3 measurement in the fair value hierarchy. Periodic
accretion of the discount of the estimated liability is recorded as
an expense in the consolidated statements of
operations.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is a reconciliation of the Company’s asset
retirement obligations for the years ended December
31:
|
|
|
|
|
Asset retirement
obligation at January 1,
|
$
1,824,486
|
$
1,741,907
|
|
Accretion of
discount
|
109,000
|
105,000
|
|
Liabilities settled
during the year
|
(1,403
)
|
(15,170
)
|
|
Liabilities
sold
|
(6,596
)
|
(42,418
)
|
|
Revision in
estimated cash flows
|
15,090
|
35,167
|
|
Asset retirement
obligation at December 31,
|
1,940,577
|
1,824,486
|
|
Less: current asset
retirement obligations
|
(154,560
)
|
(146,066
)
|
|
Long-term asset
retirement obligations
|
$
1,786,017
|
$
1,678,420
|
Income Taxes
Income
taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due, if
any, plus net deferred taxes related to differences between the
bases of assets and liabilities for financial and income tax
reporting. Deferred tax assets and liabilities represent the future
tax consequences of those differences, which will either be taxable
or deductible when the assets and liabilities are recovered or
settled. Valuation allowances are recognized to limit recognition
of deferred tax assets where appropriate. Such allowances may be
reversed when circumstances provide evidence that the deferred tax
assets will more likely than not be realized.
On
December 22, 2017, the President of the United States signed into
law what is informally called the Tax Cuts and Jobs Act of 2017
(the “Act”), a comprehensive U.S. tax reform package
that, effective January 1, 2018, among other things, lowered the
corporate income tax rate from 35% to 21%, repealed the Alternative
Minimum Tax and made the AMT credit refundable. Accounting rules
require companies to recognize the effects of changes in tax laws
and tax rates on deferred tax assets and liabilities in the period
in which the new legislation is enacted. We recorded a total income
tax benefit of $157,227 in the year ended December 31, 2017, the
amount of our AMT credit that will be refundable in tax years
beginning after 2017. For the tax year ended December 31, 2017, the
Company owed $20,191 in alternative minimum tax. The tax liability
was reduced $18,990 by the AMT credit from prior years, leaving a
balance due of $1,201 on Form 1120. The net amount of AMT paid by
the Company increased the AMT credit refundable by $1,201 to
$158,428. Half of this refund is expected to be refundable for the
tax year ended December 31, 2018 and is reported as a short-term
asset included in income tax receivable - current. The remaining
$79,214 is reported as a long-term asset in income tax receivable
– long-term on the consolidated balance sheet as of December
31, 2018.
The
Company also reassessed the realizability of our deferred tax
assets but determined that it continues to be more likely than not
that the deferred tax assets will not be utilized in the future and
continue to record a full valuation allowance of the deferred tax
assets.
At
December 31, 2017, the Company reported provisional amounts, as
allowed by SAB 118, which we believe represented a reasonable
estimate of the accounting implications of this tax reform. We
completed our review of the Act during the year ended December 31,
2018, and made no adjustments to its provisional
amounts.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Production Taxes and Ad Valorem Taxes
Production taxes
and ad valorem taxes are included in production expense. Total
production and ad valorem taxes were $223,843 and $348,195 for the
years ended December 31, 2018 and 2017, respectively.
Use of Estimates and Certain Significant Estimates
The
preparation of the Company’s financial statements in
conformity with accounting principles generally accepted in the
United States of America requires the Company’s management to
make estimates and assumptions that affect the amounts reported in
these financial statements and accompanying notes. Actual results
could differ from those estimates. Significant assumptions are
required in the valuation of proved oil and natural gas reserves,
which as described above may affect the amount at which oil and
natural gas properties are recorded. The Company’s allowance
for doubtful accounts is a significant estimate and is based on
management’s estimates of uncollectible receivables. The
asset retirement obligations require estimates of future plugging
and abandonment expenditures. It is at least reasonably possible
these estimates could be revised in the near term and the revisions
could be material.
Our
estimates of proved reserves materially impact depletion and
impairment expense. If proved reserves decline, then the rate at
which we record depletion expense increases, reducing net income. A
decline in estimates of proved reserves may result from lower
prices, evaluation of additional operating history, mechanical
problems at our wells and catastrophic events such as explosions,
hurricanes and floods. Lower prices also may make it uneconomical
to drill wells or produce from fields with high operating costs. In
addition, a decline in proved reserves may impact our assessment of
our oil and natural gas properties for impairment.
Our
proved reserve estimates are a function of many assumptions, all of
which could deviate materially from actual results. As such,
reserve estimates may vary materially from the ultimate quantities
of oil and natural gas actually produced.
Revenue Recognition
On
January 1, 2018, the Company adopted Accounting Standards
Codification (“ASC”) Topic 606 “Revenue from
Contracts with Customers” (“ASC 606”) using the
modified retrospective approach, which only applies to contracts
that were not completed as of the date of the adoption. The
adoption did not require an adjustment to operating retained
earnings for the cumulative effect adjustment and does not have a
material impact on the Company’s ongoing consolidated balance
sheet, statement of operations, statement of stockholders’
equity or statement of cash flows.
The
Company recognizes revenues from the sales of oil, natural gas and
natural gas liquids (“NGL”) to its customers in
accordance with the five-step revenue recognition model prescribed
in ASC 606. Specifically, revenue is recognized when the
Company’s performance obligations under contracts with
customers (purchasers) are satisfied, which generally occurs with
the transfer of control of the products to the purchasers. Control
is generally considered transferred when the following criteria are
met: (i) transfer of physical custody, (ii) transfer of title,
(iii) transfer of risk of loss and (iv) relinquishment of any
repurchase rights or other similar rights. Given the nature of the
sales, revenue is recognized at a point in time based on the amount
of consideration the Company expects to receive in accordance with
the price specified in the contracts. Consideration under the
marketing contracts is typically received from the purchaser one to
two months after production and, as a result, the Company is
required to estimate the amount of production that was delivered to
the purchaser and the price that will be received for the sale of
the product. The Company records the differences between estimates
and the actual amounts received for product sales once payment is
received from the purchaser. Such differences have historically not
been significant as the Company uses knowledge of its properties
and their historical performance, spot market prices and other
factors as the basis for these estimates. At December 31, 2018, the
Company had receivables related to contracts with customers of
$459,384, net of the foregoing allowance for doubtful accounts of
approximately $27,000.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes revenue by major source for the years
ended December 31, 2018 and 2017. There was no impact related to
the adoption of ASC 606 as compared to the previous revenue
recognition standard, ASC Topic 605, “Revenue
Recognition” (“ASC 605”):
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
Oil
|
$
1,875,330
|
$
2,621,019
|
|
Natural Gas and
NGL
|
222,357
|
321,641
|
|
Total oil, natural
gas and NGL
|
$
2,097,687
|
$
2,942,660
|
Oil Contracts
. Under its oil sales
contracts, the Company sells oil at the delivery point specified in
the contract and collects an agreed-upon index price, net of
pricing differentials. At the delivery point, the purchaser takes
custody, title and risk of loss of the product and, therefore,
control as defined under ASC 606 passes at the delivery point. The
Company recognizes revenue at the net price received when control
transfers to the purchaser.
Natural Gas and NGL Contracts
. The
majority of the Company’s natural gas and NGL is sold at the
lease location, which is generally when control of the natural gas
and NGL has been transferred to the purchaser, and revenue is
recognized as the amount received from the purchaser.
The
Company does not disclose the value of unsatisfied performance
obligations under its contracts with purchasers as it applies the
practical exemption in accordance with ASC 606. The exemption, as
described in ASC 605-10-50-14(a), applies to variable consideration
that is recognized as control of the product is transferred to the
purchaser. Since each unit of product represents a separate
performance obligation, future volumes are wholly unsatisfied and
disclosure of the transaction price allocated to remaining
performance obligations is not required.
Comprehensive Income
The
Company has no elements of comprehensive income other than net
income.
Share-Based Compensation
We
measure and record compensation expense for all share-based payment
awards to employees and directors based on estimated fair values.
Additionally, compensation costs for share-based awards are
recognized over the requisite grant-date service period based on
the grant-date fair value.
Financial Instruments
The
Company’s financial instruments are cash, accounts
receivable, accounts payable and the line of credit. Management
believes the fair values of these instruments, with the exception
of the line of credit, approximate the carrying values, due to the
short-term nature of the instruments. Management believes the fair
value of the line of credit also reasonably approximates its
carrying value, based on expected cash flows and interest
rates.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards 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. The new standard applies to
all leases with a term greater than one year. This authoritative
guidance is effective for fiscal years beginning after December 15,
2018, and interim periods within those fiscal years. The Company
adopted the standard on January 1, 2019.
The
Company has completed the process of reviewing and determining the
contracts to which this new guidance applies. Upon adoption, on
January 1, 2019, the Company had no leases greater than one year.
The Company does not believe this standard will have a material
impact on our financial statements. Accordingly, the Company did
not recognize any right-of-use assets, or any associated lease
liabilities on adoption.
In
January 2018, the FASB issued ASU No. 2018-01, “Land Easement
Practical Expedient for Transition to Topic 842,” which
provides an optional practical expedient to not evaluate land
easements that existed or expired before the adoption of ASU
2016-02 and that were not previously accounted for as leases under
Topic 840. The Company enters into land easements on a routine
basis as part of its ongoing operations and has many such
agreements currently in place; however, the Company does not
currently account for any land easements under Topic 840. As this
guidance serves as an amendment to ASU 2016-02, the Company will
elect this practical expedient, which becomes effective upon the
date of adoption of ASU 2016-02. After the adoption of ASU 2016-02,
the Company will assess any new land easements to determine whether
the arrangement should be accounted for as a lease.
In July 2018, the FASB issued ASU No. 2018-11,
“Targeted Improvements,” which provides a transition
election to not restate comparative periods for the effects of
applying the new lease standard. This transition election permits
entities to change the date of initial application to the beginning
of the year of adoption and to
recognize the effects of applying the new standard
as a cumulative-effect adjustment to the opening balance of
retained earnings. The Company elected this transition approach,
however the cumulative impact of adoption in the opening balance of
retained earnings as of January 1, 2019 was
zero.
In July
2018, the FASB issued ASU No. 2018-09, “Codification
Improvements,” (“ASU 2018-09”) which makes
amendments to multiple codification topics to clarify, correct
errors in, or make minor improvements to the accounting standards
codification. The effective date of the standard is dependent on
the facts and circumstances of each amendment. Some amendments do
not require transition guidance and will be effective upon the
issuance of this standard. Many of the amendments in ASU 2018-09
will be effective in annual periods beginning after December 15,
2018. The Company will be required to adopt this standard in the
first quarter of fiscal 2019. The Company is currently assessing
the effect that this ASU will have on its financial position,
results of operations, and disclosures.
On
August 17, 2018, the SEC issued a final rule that amends certain of
its disclosure requirements that have become redundant,
duplicative, overlapping, outdated or superseded, in light of other
disclosure requirements, U.S. GAAP or changes in the information
environment. The amendments are intended to facilitate the
disclosure of information to investors and simplify compliance
without significantly altering the total mix of information
provided to investors. The final rule amends numerous SEC rules,
items and forms covering a diverse group of topics, including, but
not limited to, changes in stockholders’ equity. The final
rule extends to interim periods the annual disclosure requirement
in SEC Regulation S-X, Rule 3-04, of presenting changes in
stockholders’ equity. The registrants will be required to
analyze changes in stockholders’ equity in the form of a
reconciliation for the current quarter and year-to-date interim
periods and comparative periods in the prior year. The final rule
became effective for all filings submitted on or after November 5,
2018.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In
November 2018, the FASB issued ASU No. 2018-18,
“Collaborative Arrangements (Topic 808): Clarifying the
Interaction between Topic 808 and Topic 606,” (“ASU
2018-18”) which, among other things, clarifies that (i)
certain transactions between collaborative arrangement participants
should be accounted for as revenue under Topic 606 when the
collaborative arrangement participant is a customer in the context
of a unit of account, (ii) adds unit-of-account guidance in Topic
808 to align with the guidance in Topic 606 and (iii) requires that
in a transaction with a collaborative arrangement participant that
is not directly related to sales to third parties, presenting the
transaction together with revenue recognized under Topic 606 is
precluded if the collaborative arrangement participant is not a
customer. ASU 2018-18 is effective for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years
and early adoption is permitted. The amendments in this update
should be applied retrospectively to the date of initial
application of Topic 606. An entity should recognize the cumulative
effect of initially applying the amendments as an adjustment to the
opening balance of retained earnings of the later of the earliest
annual period presented and the annual period that includes the
date of the entity’s initial application of Topic 606. The
Company is currently assessing the effect that ASU 2018-18 will
have on its financial position, results of operations and
disclosures.
2.
Liquidity and Going Concern
Our
accompanying consolidated financial statements have been 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 that these consolidated financial
statements are issued. Crude oil and natural gas prices during 2018
and 2017 have remained considerably lower than their historical
highs and these lower prices have had a significant adverse impact
on our business and, as a result, on our financial condition and
our working capital. Accordingly, substantial doubt exists that we
will be able to continue as a “going
concern”.
As of
December 31, 2018 and 2017, the Company had a working capital
deficit of approximately $3,166,000 and $3,122,000, respectively,
primarily due to the classification of our line of credit with
Citibank as a current liability. The line of credit agreement
(“the Loan Agreement”) provides for certain financial
covenants and ratios measured quarterly, which include a current
ratio, leverage ratio and interest coverage ratio
requirements. The Company was out of compliance with all three
ratios as of December 31, 2018 and 2017, and we do not expect to
regain compliance in 2019. A Forbearance Agreement (“the
Forbearance Agreement”) was executed in October 2016 and
amended on December 29, 2017, March 30, 2018, June 30, 2018,
September 30, 2018 and March 29, 2019, as discussed
below.
Citibank is in a
first lien position on all of our oil and natural gas properties
under the terms of the Loan Agreement. Citibank lowered our
borrowing base from $11,000,000 to $5,500,000 on December 1, 2015,
and lowered it again to $2,761,632 on December 29, 2017. Our
borrowing base was lowered again on June 30, 2018 to
$2,585,132.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In
October 2016, we executed the sixth amendment to the Loan
Agreement, and also executed a Forbearance Agreement which provided
for Citibank’s forbearance from exercising remedies relating
to the existing defaults, including the principal payment
deficiencies. The Forbearance Agreement ran through January 1,
2018, and required 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 and
monthly accounts payable reports, The Forbearance Agreement also
required us to pay all of Citibank’s associated legal
expenses. Furthermore, under the Forbearance Agreement, Citibank
was allowed to sweep any excess cash balances exceeding a net
amount of $800,000 less equity offering proceeds, which would be
applied towards the outstanding principal balance of the line of
credit.
On
December 29, 2017, we executed the seventh amendment to the Loan
Agreement and the first amendment to the Forbearance Agreement,
which reduced our borrowing base to $2,761,632 (our line of credit
balance at December 31, 2017), and provided for Citibank’s
forbearance from exercising remedies relating to the existing
defaults, including the principal payment deficiencies. This
amended Forbearance Agreement ran through March 31, 2018, and
required that we adhere to certain reporting requirements, such as
weekly cash reports, and that we pay all fees and expenses of
Citibank’s counsel invoiced on or before the effective date.
On March 30, 2018, we executed the eighth amendment to the Loan
Agreement and the second amendment to the Forbearance Agreement
which extended it to June 30, 2018. The terms of the second
amendment to the Forbearance Agreement remained the same as under
the foregoing first amendment. On July 25, 2018, we executed the
ninth amendment to the Loan Agreement and the third amendment to
the Forbearance Agreement which extended it to September 30, 2018.
The terms of the ninth amendment to the Loan Agreement and the
third amendment to the Forbearance Agreement increased the interest
rate 2% and reduced our borrowing base $176,500 to our current line
of credit balance of $2,585,132. On November 7, 2018, we executed
the tenth amendment to the Loan Agreement and the fourth amendment
to the Forbearance Agreement which extended it to March 31, 2019.
The terms of the fourth amendment to the Forbearance Agreement
remained the same as the foregoing third amendment. On March 29,
2019, we executed the eleventh amendment to the Loan Agreement and
the fifth amendment to the Forbearance Agreement, which extended it
to June 30, 2019. The terms of the fifth amendment to the
Forbearance Agreement are substantially the same as under the
forgoing fourth amendment.
We are
taking the following steps to mitigate our current financial
situation. We are actively meeting with investors for possible
equity investments, including business combinations. We are
continuing our effort to identify and market all possible
non-producing or low producing assets in our portfolio to maximize
cash in-flows while minimizing a loss of cash flow. We are also
investigating other possible sources to refinance our debt as we
continue to pay down our outstanding line of credit balance with a
minimal effect on cash flow. Finally, we are continuing discussions
with various individuals and groups that could be willing to
provide capital to fund the operations and growth of the
Company.
The
Company was not in compliance with the NYSE American continued
listing standards and received an official delisting notice on
November 16, 2017, which could have a significant adverse impact on
our ability to raise additional equity capital.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our
warrants were also delisted from the NYSE American on November 17,
2017, and subsequently expired on March 23, 2018.
Our
shares are now traded on the over-the-counter market under the
symbol FPPP, which is more volatile than the NYSE and may result in
a continued diminution in value of our shares. The delisting also
resulted in the loss of other advantages to an exchange listing,
including marginability, blue sky exemptions and
others.
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 Loan Agreement, our ability to
cure any defaults that occur under our Loan Agreement 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 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 to generate positive cash flow from operations, our
business and shareholders may be materially and adversely
affected.
3.
Oil and Natural Gas
Properties
The
Company sold its net interest in the Buchanan wells and associated
acreage in the Spraberry field during 2018 that were not economic
to our interests. Gross proceeds from the sale were $370,000 and
the Company recognized a gain of $345,399 from the sale of these
oil and natural gas properties during the year ended December 31,
2018.
The
Company sold its net interest in non- producing leasehold and net
interest in the Hermes, Cronos and Mercury wells which were not
economic to our interests and also sold its net interest in the
unproved Bilbrey acreage that was held by production during 2017.
The gross proceeds from the sale of our net interest in these two
oil and natural gas properties was $2,145,000. In addition, the
Company sold 401 net acres of non-producing leasehold in Lea
County, New Mexico for gross proceeds of $1,200,000 during 2017. We
also sold our interest in the Apache Bromide field for $603,607,
net of liabilities of $296,393, and our interest in Rush Springs
for $11,700 during 2017. We recognized aggregate gains of
$3,831,837 from the sale of oil and natural gas properties during
the year ended December 31, 2017.
We
continue to evaluate our portfolio for other properties we could
divest in order to regain compliance with the Loan
Agreement’s debt covenants.
The
Company made no purchases of oil and natural gas properties during
the years ended December 31, 2018 and 2017. The Company did not
drill or complete any development wells during 2018 and
2017.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company recorded impairment charges of $2,601,714 during the year
ended December 31, 2018, as a result of writing down the carrying
value of certain oil and natural gas properties to fair value. The
Company had no impairment to properties during the year ended
December 31, 2017. 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.
4.
Fair Value Measurements
The
Company follows fair value measurement authoritative guidance,
which defines fair value, establishes a framework for using fair
value to measure assets and liabilities, and expands disclosures
about fair value measurements. The authoritative accounting
guidance defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The statement establishes a hierarchy for inputs used in measuring
fair value that maximizes the use of observable inputs and
minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. Observable inputs are
inputs that market participants would use in pricing the asset or
liability developed based on market data obtained from sources
independent of the Company. Unobservable inputs are inputs that
reflect the Company’s assumptions of what market participants
would use in pricing the asset or liability developed based on the
best information available in the circumstances. The hierarchy is
broken down into three levels based on the reliability of the
inputs as follows:
●
Level
1 – Quoted prices are available in active markets for
identical assets or liabilities as of the reporting
date.
●
Level 2:
Quoted prices in active markets for similar assets and liabilities,
quoted prices for identical or similar instruments in markets that
are not active, and model-derived valuations whose inputs are
observable or whose significant value drivers are
observable.
●
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. The fair value of
oil and gas properties used in estimating our recognized impairment
loss represents a non-recurring Level 3 measurement.
Financial and
non-financial assets and liabilities are to be classified based on
the lowest level of input that is significant to the fair value
measurement. The Company’s assessment of the significance of
a particular input to the fair value measurement requires judgment
and may affect the valuation of the fair value of assets and
liabilities and their placement within the fair value hierarchy
levels.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following tables present the Company’s financial and
non-financial assets and liabilities that were accounted for at
fair value as of December 31, 2018, and their classification
within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved properties
(1)
|
$
-
|
$
-
|
$
178,064
|
|
Unproved properties
(1)
|
$
-
|
$
-
|
$
-
|
(1)
This
represents non-financial assets that are measured at fair value on
a nonrecurring basis due to impairments. This is the fair value of
the asset base that was subjected to impairment and does not
reflect the entire asset balance as presented on the accompanying
balance sheets. Please refer to the
Proved Oil and Gas Properties
and
Unproved Oil and Gas
Properties
sections below for additional
discussion.
Proved Oil and Gas Properties
Proved
oil and natural gas properties are evaluated for impairment and
reduced to fair value whenever events and circumstances indicate
the carrying value exceeds the sum of the undiscounted cash flows.
We estimate the expected net future cash flows of our oil and
natural gas properties using management's expectations of
economically recoverable proved reserves and compare such future
net cash flows to the carrying amount of our oil and natural gas
properties to determine if the carrying amount is recoverable. If
the carrying amount exceeds the estimated undiscounted future cash
flows, we adjust the carrying amount of the oil and natural gas
properties to their fair value. We estimated the fair value of the
proved oil and natural gas properties and equipment using a
discounted cash flow model, which is a non-recurring Level 3 fair
value measurement. Significant inputs used to determine the fair
value include estimates of (i) future sales prices for oil and
gas based on NYMEX strip prices, (ii) pricing adjustments for
differentials, (iii) production costs, (iv) capital
expenditures, (v) future oil and natural gas reserves to be
recovered and the timing thereof, and (vi) discount rate. The
Company impaired two proved oil and natural gas properties which
had a total carrying value of $2,779,778 to their fair value of
$178,064 as of December 31, 2018. The carrying value was less than
the fair market value of the proved oil and natural gas properties
as of December 31, 2017.
Unproved Oil and Gas Properties
Unproved oil and
natural gas property costs are evaluated for impairment and reduced
to fair value when there is an indication that the carrying costs
may not be fully recoverable.
The fair
value of unproved oil and gas properties used in estimating our
recognized impairment loss represents a non-recurring Level 3
measurement.
To measure the fair value of unproved
properties, the Company used inputs including, but not limited to,
future development plans, risk weighted potential resource
recovery, remaining lease life and estimated per acreage value. The
carrying value was less than the fair market value of the unproved
oil and natural gas properties as of December 31, 2018 and
2017.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company has a line of credit with Citibank with a borrowing base
and outstanding principal balance of $2,585,132 and $2,761,632 at
December 31, 2018 and 2017, respectively.
The
line of credit agreement (“the Loan Agreement”)
requires quarterly interest-only payments until maturity on March
31, 2019. 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. On July 25,
2018, we executed the ninth amendment to the Loan Agreement which
increased the interest rate 2% for the term of the loan. On
November 7, 2018, we executed the tenth amendment to the Loan
Agreement with no change in borrowing rate from the ninth amendment
to the Loan Agreement. Currently, we have elected the LIBOR
interest rate option in which our interest rate was approximately
8% as of December 31, 2018.
The
bank’s commitment fee is .50% of the unused borrowing base.
The Loan Agreement 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 was out of compliance with all three ratios as of December
31, 2018 and 2017, and is in technical default of the Loan
Agreement. The Company made payments of $176,500 and
$3,716,701 toward the line of credit principal balance during the
years ended December 31, 2018 and 2017, respectively. Citibank
lowered our borrowing base from $5,500,000 to $2,761,632 on
December 29, 2017, which was equal to our outstanding loan balance
at that date. Our borrowing base was lowered again on June 30,
2018, to $2,585,132, which was equal to our outstanding loan
balance at that date and also at December 31, 2018. Citibank is in
a first lien position on all of our oil and natural gas
properties.
In
October 2016, we executed a sixth amendment to the Loan Agreement,
and also executed a Forbearance Agreement which provided for
Citibank’s forbearance from exercising remedies relating to
the existing defaults, including the principal payment
deficiencies. The Forbearance Agreement ran through January 1,
2018, and required 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 and
monthly accounts payable reports. The Forbearance Agreement also
required us to pay all of Citibank’s associated legal
expenses. Furthermore, under the Forbearance Agreement, Citibank
was allowed to sweep any excess cash balances exceeding a net
amount of $800,000 less equity offering proceeds, which would be
applied towards the outstanding principal balance.
On
December 29, 2017, we executed the seventh amendment to the Loan
Agreement and the first amendment to the Forbearance Agreement,
which reduced our borrowing base to $2,761,632 (our loan balance at
December 31, 2017) and provided for Citibank’s forbearance
from exercising remedies relating to the existing defaults,
including the principal payment deficiencies. The first amendment
to the Forbearance Agreement ran through March 31, 2018, and
required that we adhere to certain reporting requirements such as
weekly cash reports, and to pay all fees and expenses of
Citibank’s counsel invoiced on or before the effective date.
On March 30, 2018, we executed the eighth amendment to the Loan
Agreement and the second amendment to the Forbearance Agreement,
which extended it to June 30, 2018. The terms of the second
amendment to the Forbearance Agreement were the same as under the
foregoing first amendment. On July 25, 2018, we executed the ninth
amendment to the original Loan Agreement and the third amendment to
the Forbearance Agreement, which extended it to September 30, 2018.
The terms of the ninth amendment to the Loan Agreement increased
the interest rate 2% and reduced our borrowing base $176,500 to our
current loan balance of $2,585,132. The terms of the third
amendment to the Forbearance Agreement remain the same as under the
foregoing second amendment. On November 7, 2018, we executed the
tenth amendment to the Loan Agreement and the fourth amendment to
the Forbearance Agreement, which extended it to March 31, 2019. The
terms of the fourth amendment to the Forbearance Agreement are
substantially the same as under the forgoing third amendment. On
March 29, 2019, we executed the eleventh amendment to the Loan
Agreement and the fifth amendment to the Forbearance Agreement,
which extended it to June 30, 2019. The terms of the fifth
amendment to the Forbearance Agreement are substantially the same
as under the forgoing fourth amendment.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our
provision for income taxes comprised the following (expense)
benefit during the years ended December 31:
|
|
|
|
|
Current:
|
|
|
|
Federal
|
$
(20,191
)
|
$
-
|
|
State
|
5,796
|
(6,206
)
|
|
Total
current
|
(14,395
)
|
(6,206
)
|
|
|
|
|
|
Deferred:
|
|
|
|
Federal
|
20,191
|
157,227
|
|
State
|
-
|
-
|
|
Total
deferred
|
20,191
|
157,227
|
|
|
|
|
|
Total income tax
provision
|
$
5,796
|
$
151,021
|
Total
income tax (expense) benefit differed from the amounts computed by
applying the U.S. Federal statutory tax rates and estimated state
rates to pre-tax income for the years ended December 31, 2018 and
2017 as follows:
|
|
|
|
|
Statutory rate
(benefit)
|
(21
%)
|
(34
%)
|
|
State taxes, net of
federal benefit
|
(2
%)
|
(1
%)
|
|
Permanent
differences
|
-
|
(1
%)
|
|
Impact of U.S. tax
reform
|
-
|
(36
%)
|
|
Change in valuation
allowance on deferred tax assets
|
23
%
|
78
%
|
|
Effective rate
(benefit)
|
0
%
|
6
%
|
Deferred tax assets
and liabilities are the result of temporary differences between the
financial statement carrying values and tax bases of assets and
liabilities. 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. Significant components of net
deferred tax assets and liabilities are:
|
|
|
|
|
|
|
|
Deferred tax
assets:
|
|
|
|
Asset retirement
obligation
|
$
462,000
|
$
434,000
|
|
Allowance for
doubtful accounts
|
71,000
|
57,000
|
|
State taxes and
other
|
2,000
|
(1,000
)
|
|
Difference in
depreciation, depletion and capitalization methods – oil and
gas properties
|
320,000
|
(161,000
)
|
|
Net operating loss
carryforward
|
1,538,000
|
1,320,000
|
|
Total deferred tax
assets
|
2,393,000
|
1,649,000
|
|
Valuation allowance
on deferred tax assets
|
(2,393,000
)
|
(1,649,000
)
|
|
Total deferred tax
assets, net of valuation allowance
|
-
|
-
|
|
|
|
|
|
Deferred tax
liability:
|
|
|
|
Difference in
depreciation, depletion and capitalization methods – oil and
gas properties
|
-
|
-
|
|
Total deferred tax
liabilities
|
-
|
-
|
|
|
|
|
|
Net deferred tax
liability
|
$
-
|
$
-
|
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our net
deferred tax assets and liabilities are recorded as
follows:
|
|
|
|
|
Non-current
asset
|
$
-
|
$
-
|
|
Non-current
liability
|
-
|
-
|
|
Total
|
$
-
|
$
-
|
The
Company had no material uncertain tax positions as of December 31,
2018 and 2017.
The
decrease in deferred tax assets before the valuation allowance was
primarily due to the federal tax rate decreasing from 34% to 21%
under the Tax Cuts and Jobs Act signed into law in 2017. Also, the
Company had an AMT credit of approximately $157,000 for alternative
minimum tax paid in prior years that will be refundable under the
same tax reform act. The AMT credit was increased by approximately
$1,200 due to additional AMT tax paid in 2018 when it filed its the
federal corporate income tax return for the year ended December 31,
2017. The AMT credit is approximately $158,000 at December 31,
2018. Half of this refund, approximately $79,000, is expected to be
refundable for the tax year ended December 31, 2018, and is
reported as a short-term asset included in income tax receivable.
Approximately $79,000 is reported as a long-term asset in income
tax receivable – long-term on the consolidated balance
sheet.
At
December 31, 2018, the Company expects to have net operating loss
carryforwards of approximately $6.6 million. Losses from the years
ended December 31, 2015 and 2016, expire at various dates from
December 31, 2035 to 2036. Losses from the year ended December 31,
2018, will be carried forward indefinitely. As a result of the net
operating losses, our deferred tax assets exceeded our deferred tax
liabilities. The Company reassessed the realizability of our
deferred tax assets but determined that it continues to be more
likely than not that the deferred tax assets will not be utilized
in the future. The Company established a valuation allowance of
$2,393,000 and $1,649,000 against our deferred tax assets for the
years ended December 31, 2018 and 2017, respectively.
The
Company’s policy regarding income tax interest and penalties
is to record those items as general and administrative expense.
During the years ended December 31, 2018 and 2017, there were no
significant income tax interest and penalty items in the income
statement, nor as a liability on the balance sheet at December 31,
2018 and 2017.
The
Company files income tax returns in the U.S. federal jurisdiction
and various state jurisdictions. Generally, the Company is no
longer subject to U.S. federal or state income tax examination by
tax authorities for years before 2015. The Company is not currently
involved in any income tax examinations.
7.
Earnings (Loss) Per Share
Basic
earnings per share are computed based on the weighted average
number of shares of common stock outstanding during the year.
Diluted earnings per share take common stock equivalents (such as
options and warrants) into consideration using the treasury stock
method. The Company distributed warrants as a dividend to
stockholders as of the record date, March 23, 2012. The Company had
7,177,010 warrants outstanding with an exercise price of $4.00 at
December 31, 2017. The Warrants expired on March 23, 2018. The
dilutive effect of the warrants for the twelve months ended
December 31, 2018 and 2017, is presented below.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$
(3,252,258
)
|
$
2,666,253
|
|
|
|
|
|
Weighted average
common stock outstanding
|
10,669,229
|
10,656,506
|
|
Weighted average
dilutive effect of stock warrants
|
-
|
-
|
|
Dilutive weighted
average shares
|
10,669,229
|
10,656,506
|
|
|
|
|
|
Loss per
share:
|
|
|
|
Basic
|
$
(0.30
)
|
$
0.25
|
|
Diluted
|
$
(0.30
)
|
$
0.25
|
We
approved a stock warrant dividend of one warrant per one common
share in March 2012. The warrants had an exercise price of $4.00
and were exercisable over 6 years from the record date. Our
warrants were delisted from the NYSE American (formerly NYSE MKT)
on November 17, 2017, and then subsequently expired on March 23,
2018. The following table summarizes the warrant activity for the
year ending December 31, 2018:
|
|
|
Weighted Average
Exercise Price
|
Weighted Average
Expected Life (Years)
|
|
|
|
|
|
|
Outstanding,
December 31, 2017
|
7,177,010
|
$
4.00
|
0.25
|
|
Issued
|
-
|
-
|
|
|
Exercised
|
-
|
-
|
|
|
Expired
|
(7,177,010
)
|
-
|
|
|
Outstanding,
December 31, 2018
|
-
|
$
0.00
|
0.00
|
The
Company entered into an “at will” employment agreement
with Phillip Roberson as President and Chief Financial Officer
(“CFO”) for a three-year period beginning July 1, 2014.
Mr. Roberson was awarded, as part of his annual compensation, 5,000
shares on his third anniversary date, 6,000 shares on his fourth
anniversary date, 7,000 shares on his fifth anniversary date, 8,000
shares on his sixth anniversary date, 9,000 shares on his seventh
anniversary date, and 10,000 shares on each annual anniversary date
thereafter. However, Mr. Roberson declined the 5,000 and 6,000
shares that would have been awarded on his third and fourth
anniversary dates, July 1, 2017 and 2018, respectively. On August
10, 2018, the Compensation Committee ratified the automatic
extension of Mr. Roberson’s contract to July 1,
2019.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 purchased 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
SMPA, 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 for 884,564 shares of unregistered common stock. Half
of the second tranche was purchased on December 29, 2016, for gross
proceeds of $199,027 paid in consideration for 442,282 shares of
unregistered common stock. The remaining 442,282 shares of the
second tranche were purchased in January 2017 for net proceeds of
$187,220 paid in consideration for 442,282 shares of unregistered
common stock. 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. Also, the Buyer was
granted the right to nominate one member of the Board of
Directors.
9.
Environmental
Issues
We are
engaged in oil and natural gas exploration and production and may
become subject to certain liabilities as they relate to
environmental cleanup of well sites or other environmental
restoration procedures as they relate to the drilling of oil and
natural gas wells and the operation thereof. In our acquisition of
existing or previously drilled well bores, we may not be aware of
what environmental safeguards were taken at the time such wells
were drilled or during such time the wells were operated. Should it
be determined that a liability exists with respect to any
environmental clean-up or restoration, the liability to cure such a
violation could fall upon the Company. No claim has been made, nor
are we aware of any liability which we may have, as it relates to
any environmental cleanup, restoration or the violation of any
rules or regulations relating thereto.
10.
Commitments and Contingencies
As of
December 31, 2018 and 2017, we had a $30,000 outstanding standby
letter of credit in favor of the State of Wyoming as a plugging
bond. As of December 31, 2018 and 2017, we had a $25,000
outstanding letter of credit in the favor of the Bureau of Land
Management.
In January 2014, the Company entered into a
two-year operating lease for office space in Austin, Texas, which
was renewed for another two years until January 31, 2018.
On
February 1, 2018, the Company executed an amendment to extend the
lease until July 31, 2018. On August 1, 2018, the Company executed
an amendment to extend the lease until July 31, 2019. Rent expense
under this lease was approximately $38,300 and $45,100 for the
years ended December 31, 2018 and 2017, respectively. As of
December 31, 2018, minimum future rentals during 2019 on this
non-cancelable operating lease are $23,443.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company entered into an “at will” employment agreement
with Phillip Roberson as President and CFO for a three-year period
beginning July 1, 2014, with a beginning base salary of $200,000
annually. Beginning January 1, 2015, the Board of Directors may in
its sole discretion award an annual performance-based bonus award
to Mr. Roberson.
The
Board of Directors adopted a resolution effective as of January 1,
2016, to temporarily accept voluntary reductions in annual
retainers for executive and all non-executive directors until such
time as economic conditions shall improve and the Board determines
that the voluntary reductions shall cease. Annual reductions in
annual retainers is approximately $75,000 per year, for a
cumulative savings of approximately $225,000 from January 1, 2016,
to December 31, 2018. All voluntary reductions shall be
retroactively reinstated and payable in the case of (and only in
the case of) a Change of Control Event as defined in the
resolution.
Occasionally, we
are involved in various legal and regulatory proceedings arising in
the normal course of business. Management cannot predict the
outcome of these proceedings with certainty and does not believe
that an adverse result would be material to the Company’s
financial position or results of operations.
In the
fourth quarter of 2017, we were notified that the former operator
of our Ranger and Taylor Serbin fields, Riley Exploration Group,
Inc. (“REG”), sold all of its working and revenue
ownership interests in those fields to Trivista Operating LLC
(“Trivista”), which is controlled by Natale Rea (2013)
Trust, one of our major shareholders. Along with acquiring the
working interest in those fields, Trivista also claims to have
acquired a joint interest billing invoice from REG aggregating
approximately $84,000, which we had previously disputed with REG.
We received a demand letter from Trivista’s counsel for this
sum. We responded that the joint interest billing invoice was in
dispute and that we had previously sent a letter to REG demanding
an audit of their operations and the joint interest billing but had
received no response. Trivista claims to have taken over operations
of these fields in October 2017, but has failed to provide revenue,
expense and operating information to us since April 2018, which is
in direct violation of the joint operating agreements which govern
these wells. Trivista filed suit for non-payment of outstanding
disputed invoices of approximately $107,000 plus attorney fees and
court costs on February 26, 2018. We are vigorously defending
ourselves against these claims and are performing discovery to
potentially seek legal remedies of our own. See Footnote 12-Related
Party Transactions for additional disclosures regarding how the
transactions with Trivista with respect to these wells impacted our
2018 and 2017 consolidated financial statements.
11.
Oil and Natural Gas Producing Activities
The
following table sets forth the costs incurred for oil and natural
gas property activities of the Company:
|
|
|
|
|
|
|
|
Costs incurred in
oil and natural gas producing activities:
|
|
|
|
Acquisition of
unproved properties
|
$
-
|
$
-
|
|
Acquisition of
proved properties
|
-
|
-
|
|
Exploration
costs
|
-
|
-
|
|
Development
costs
|
157,626
|
160,914
|
|
Total costs
incurred
|
$
157,626
|
$
160,914
|
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table includes certain information regarding the results
of operations for oil and natural gas producing
activities:
|
|
|
|
|
|
|
|
Revenues
|
$
2,097,687
|
$
2,942,660
|
|
Expenses
|
|
|
|
Production
expense
|
1,213,770
|
2,181,377
|
|
Depletion and
depreciation
|
469,416
|
698,337
|
|
Impairment of oil
and natural gas properties
|
2,601,714
|
-
|
|
Accretion of
discount on asset retirement obligations
|
109,000
|
105,000
|
|
Total
expenses
|
4,393,900
|
2,984,714
|
|
Loss before income
taxes
|
(2,296,213
)
|
(42,054
)
|
|
Income tax benefit,
net of valuation allowance
(1)
|
-
|
-
|
|
Results of
operations for oil and natural gas producing activities (excluding
corporate overhead and interest costs)
|
$
(2,296,213
)
|
$
(42,054
)
|
(1)
Reflects the
Company’s effective tax rate.
12.
Related Party Transactions
During
2017, the Company received notification that Trivista, an entity
controlled by Natale Rea, a beneficial owner of approximately 7.00%
of our common stock, had become the operator of certain oil and
natural gas properties where we have both working and revenue
ownership interests. See Footnote 10- Commitments and Contingencies
for more disclosures and information regarding
Trivista.
During
2017, the Company received joint interest billing statements
related to our working interest in these properties subsequent to
Trivista becoming the operator aggregating approximately $58,000,
which represented 2.6% of our production expenses for theyear ended
December 31, 2017 and 32.5% of our lease operating expense accrual
as of December 31, 2017. In addition, during 2017, we recorded oil
and natural gas revenues associated with our revenue ownership
interest in these wells subsequent to Trivista becoming the
operator aggregating $82,000, which represented 2.8% of our oil and
natural gas sales for the year ended December 31, 2017 and 21.8% of
our oil and natural gas sales accounts receivable as of December
31, 2017.
During
2018, the Company accrued approximately $123,000 for joint interest
billings associated with our working interest in these oil and
natural gas properties, which represented 10.2% of our production
expenses for the year ended December 31, 2018 and 81.1% of our
lease operating expense accrual as of December 31, 2018. In
addition, during 2018, we recorded oil and natural gas revenues
associated with our revenue ownership interest in these wells
aggregating $212,000, which represented 10.1% of our oil and
natural gas sales for the year ended December 31, 2018 and 53.7% of
our oil and natural gas sales accounts receivable as of December
31, 2018.
Director and
Committee fees were accrued but have not been paid during the year
ended December 31, 2018. In addition, Committee fees for December
2017 were accrued but have not been paid. The amounts accrued but
not paid as of December 31, 2018 and 2017, were approximately
$172,000 and $19,000, respectively.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During
October 2018, the Company sold used surplus production tubing to an
entity controlled by a shareholder, Mike Herman, for
$24,000.
On
March 29, 2019, we executed the eleventh amendment to the Loan
Agreement and the fifth amendment to the Forbearance Agreement,
which extended it to June 30, 2019. See Note 5 Line of Credit for
further information on the Forbearance Agreement. As part of the
eleventh amendment to the Loan Agreement and the fifth amendment to
the Forbearance Agreement, Citibank will apply the balance of a
Collateral Account with a balance of approximately $59,000 first to
accrued and unpaid interest and then to the unpaid principal
balance of the line of credit. To the extent that the funds are
used to reduce the outstanding principal balance, the Borrowing
Base will be automatically reduced by the same amount.
14.
Disclosures About Oil and Natural Gas Producing Activities
(Unaudited)
The
following table summarizes changes in the estimates of the
Company’s net interest in total proved reserves of crude oil
and condensate and natural gas and liquids, all of which are
domestic reserves. There can be no assurance that such estimates
will not be materially revised in subsequent periods.
|
|
|
|
|
|
|
|
|
Balance, January 1,
2017
|
490,226
|
756,512
|
|
Revisions of
previous estimates
|
33,784
|
86,221
|
|
Extensions and
discoveries
|
-
|
-
|
|
Sale of
reserves
|
(42,085
)
|
(19,657
)
|
|
Purchase of
minerals in place
|
-
|
-
|
|
Production
|
(53,913
)
|
(111,816
)
|
|
Balance, December
31, 2017
|
428,012
|
711,260
|
|
Revisions of
previous estimates
|
(46,166
)
|
107,828
|
|
Extensions and
discoveries
|
-
|
-
|
|
Sale of
reserves
|
-
|
-
|
|
Purchase of
minerals in place
|
-
|
-
|
|
Production
|
(32,097
)
|
(82,472
)
|
|
Balance, December
31, 2018
|
349,749
|
736,616
|
|
|
|
|
|
Proved developed
reserves, December 31, 2018
|
349,749
|
736,616
|
|
Proved developed
reserves, December 31, 2017
|
428,012
|
711,260
|
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proved
oil and natural gas reserves are the estimated quantities of crude
oil, condensate, natural gas and natural gas liquids which
geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed
oil and natural gas reserves are reserves that can be expected to
be recovered through existing wells with existing equipment and
operating methods. The above estimated net interests in proved
reserves are based upon subjective engineering judgments and may be
affected by the limitations inherent in such estimation. The
process of estimating reserves is subject to continual revision as
additional information becomes available as a result of drilling,
testing, reservoir studies and production history, and market
prices for oil and natural gas. Significant fluctuations in market
prices have a direct impact on recoverability and will result in
changes in estimated recoverable reserves without regard to actual
increases or decreases in reserves in place.
Year Ended December 31, 2017
The
average natural gas price used in our proved reserves estimate at
December 31, 2017, was $4.55 per Mcf, which is higher than market
because of the inclusion of NGLs. The average oil price used in our
proved reserves estimate at December 31, 2017, was $47.03 per
barrel. We did not drill any new wells or purchase any reserves
during the year ended December 31, 2017. We sold one unproved
property, one non-producing property, and three producing
properties.
Year Ended December 31, 2018
The
average natural gas price used in our proved reserves estimate at
December 31, 2018, was $4.81 per Mcf, which is higher than market
because of the inclusion of NGLs. The average oil price used in our
proved reserves estimate at December 31, 2018, was $62.17 per
barrel. We did not drill any new wells or purchase any reserves
during the year ended December 31, 2018. We sold one producing
property.
Standardized Measure of Discounted Future Net Cash
Flows
The
standardized measure of discounted future net cash flows at
December 31, 2018 and 2017, relating to proved oil and natural gas
reserves is set forth below. The assumptions used to compute the
standardized measure are those prescribed by the Financial
Accounting Standards Board and, as such, do not necessarily reflect
our expectations of actual revenues to be derived from those
reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process are equally applicable to the
standardized measure computations since these estimates are the
basis for the valuation process.
The
standardized measure of discounted future net cash flows relating
to proved oil and natural gas reserves and the changes in
standardized measure of discounted future net cash flows relating
to proved oil and natural gas reserves were prepared in accordance
with prescribed accounting and SEC standards. Future cash inflows
were computed by applying the unweighted, arithmetic average of the
closing price on the first day of each month for the 12-month
period prior to December 31, 2018 and 2017, to estimated future
production. Future production and development costs are computed by
estimating the expenditures to be incurred in developing and
producing the proved oil and natural gas reserves at year end,
based on year-end costs and assuming continuation of existing
economic conditions.
FIELDPOINT PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future
income tax expenses are calculated by applying appropriate year-end
tax rates to future pre-tax net cash flows relating to proved oil
and natural gas reserves, less the tax basis of properties
involved. Future income tax expenses give effect to permanent
differences, tax credits and loss carryforwards relating to the
proved oil and natural gas reserves. Future net cash flows are
discounted at a rate of 10% annually to derive the standardized
measure of discounted future net cash flows. This calculation
procedure does not necessarily result in an estimate of the fair
market value of our oil and natural gas properties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future cash
inflows
|
$
28,639
|
$
24,866
|
|
Future production
costs
|
(13,630
)
|
(13,105
)
|
|
Future development
cost
|
(14
)
|
(86
)
|
|
Future income
taxes
|
(2,303
)
|
(1,848
)
|
|
|
|
|
|
Future net cash
flows
|
12,692
|
9,827
|
|
10% annual
discount
|
(6,218
)
|
(4,202
)
|
|
|
|
|
|
Standardized
measure of discounted future net cash flows
|
$
6,474
|
$
5,625
|
The
following are the principal sources of change in the standardized
measure of discounted future net cash flows, in
thousands:
|
|
|
|
|
|
|
|
Balance, beginning
of year
|
$
5,625
|
$
5,501
|
|
Sales of oil and
natural gas produced, net of production costs
|
(857
)
|
(696
)
|
|
Sale of
reserves
|
-
|
(573
)
|
|
Extensions and
discoveries
|
-
|
-
|
|
Net changes in
prices and production costs
|
3,137
|
1,820
|
|
Net changes in
future development costs
|
37
|
41
|
|
Revisions and other
changes
|
118
|
139
|
|
Accretion of
discount
|
686
|
557
|
|
Net change in
income taxes
|
(2,272
)
|
(1,164
)
|
|
Balance, end of
year
|
$
6,474
|
$
5,625
|
* * * *
* * *