UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark
One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended: September 30, 2014
Or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from to
Commission
File Number: 333-164856
STRATEX
OIL & GAS HOLDINGS, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Colorado |
|
94-3364776 |
(State
or Other Jurisdiction of
Incorporation or Organization) |
|
(I.R.S.
Employer
Identification No.) |
30
Echo Lake Road, Watertown, CT |
|
06795 |
(Address
of principal executive offices) |
|
(Zip
Code) |
(713)
353-4786 |
(Registrant’s
telephone number, including area code) |
N/A
(Former
Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act:
Large
accelerated filer ☐ |
Accelerated
filer ☐ |
|
|
Non-accelerated
filer ☐ |
Smaller
reporting company ☒ |
(Do
not check if a smaller reporting company) |
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐ No ☒
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 56,687,556
shares of common stock, $0.01 par value per share, as of November 5, 2014
Item
1. Financial Statements
Stratex Oil & Gas Holdings, Inc. |
Condensed Consolidated Balance Sheets |
(unaudited) |
| |
September 30,
2014 | | |
December 31,
2013 | |
| |
| | |
| |
Assets |
| |
| | |
| |
Current Assets: | |
| | | |
| | |
Cash | |
$ | 6,072,037 | | |
$ | 609,061 | |
Accounts receivable | |
| 360,712 | | |
| 18,220 | |
Other receivables | |
| 197,735 | | |
| - | |
Prepaid expenses | |
| 151,273 | | |
| 2,800 | |
Notes receivable and accrued interest | |
| 3,633,609 | | |
| - | |
Total Current Assets | |
| 10,415,366 | | |
| 630,081 | |
| |
| | | |
| | |
Deposits | |
| 35,025 | | |
| 10,025 | |
Debt issuance costs | |
| 2,258,889 | | |
| - | |
Oil and gas property, plant and equipment: | |
| | | |
| | |
Proven property - net | |
| 4,378,369 | | |
| 893,763 | |
Unproven property | |
| 2,158,296 | | |
| 1,520,870 | |
Vehicles, furniture and equipment - net | |
| 88,854 | | |
| 2,380 | |
Total Assets | |
$ | 19,334,799 | | |
$ | 3,057,119 | |
| |
| | | |
| | |
Liabilities and Stockholders' Equity (Deficit) |
| |
| | | |
| | |
Current Liabilities: | |
| | | |
| | |
Accounts payable and accrued liabilities | |
$ | 1,822,364 | | |
$ | 904,615 | |
Liability to be issued in stock | |
| - | | |
| 9,000 | |
Due to former officer - current | |
| - | | |
| 715,000 | |
Demand notes payable | |
| 120,000 | | |
| 216,000 | |
Current maturities of notes payable - net of debt discount | |
| 79,649 | | |
| - | |
Derivative liability - warrants | |
| 132,473 | | |
| 76,675 | |
Other current liabilities | |
| 33,857 | | |
| - | |
Total Current Liabilities | |
| 2,188,343 | | |
| 1,921,290 | |
| |
| | | |
| | |
Long-term Liabilities: | |
| | | |
| | |
Due to former officer | |
| - | | |
| 84,000 | |
Asset retirement obligations | |
| 36,612 | | |
| 34,000 | |
Notes payable - net of debt discount | |
| 1,134,796 | | |
| 790,528 | |
Convertible notes payable, net of debt discount | |
| 14,937,422 | | |
| - | |
| |
| | | |
| | |
Total Long-Term Liabilities | |
| 16,108,830 | | |
| 908,528 | |
| |
| | | |
| | |
Total Liabilities | |
| 18,297,173 | | |
| 2,829,818 | |
| |
| | | |
| | |
Commitments and Contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders' Equity (Deficit): | |
| | | |
| | |
Series A, preferred stock, $0.01 par value; 400 shares authorized; | |
| | | |
| | |
40 and 100 shares issued; and 0 and 60 shares outstanding, respectively | |
| - | | |
| 1 | |
Common stock, $0.01 par value; 750,000,000 shares authorized; | |
| | | |
| | |
and 56,687,376 and 46,692,376 shares issued and outstanding | |
| 566,874 | | |
| 466,924 | |
Additional paid in capital | |
| 21,235,733 | | |
| 13,680,474 | |
Accumulated deficit | |
| (20,744,981 | ) | |
| (13,900,098 | ) |
Less: Treasury stock, 40 shares Series A, preferred stock, at cost | |
| (20,000 | ) | |
| (20,000 | ) |
Total Stockholders' Equity (Deficit) | |
| 1,037,626 | | |
| 227,301 | |
| |
| | | |
| | |
Total Liabilities and Stockholders' Equity (Deficit) | |
$ | 19,334,799 | | |
$ | 3,057,119 | |
See accompanying notes to the condensed consolidated financial
statements.
Stratex Oil & Gas Holdings, Inc. |
Condensed Consolidated Statements of Operations |
(unaudited) |
| |
For The Three Months Ended | | |
For The Nine Months Ended | |
| |
September 30, | | |
September 30, | | |
September 30, | | |
September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | 294,311 | | |
$ | 221,681 | | |
$ | 713,361 | | |
$ | 675,861 | |
| |
| | | |
| | | |
| | | |
| | |
Operating Expenses: | |
| | | |
| | | |
| | | |
| | |
Production expenses | |
| 120,025 | | |
| 66,201 | | |
| 301,755 | | |
| 164,852 | |
Depletion, depreciation and amortization | |
| 72,379 | | |
| 26,492 | | |
| 114,086 | | |
| 132,425 | |
General and administrative | |
| 1,661,037 | | |
| 1,008,494 | | |
| 5,327,433 | | |
| 1,981,793 | |
Loss on abandonment of oil and gas assets | |
| - | | |
| - | | |
| 318,800 | | |
| - | |
Total Operating Expenses | |
| 1,853,441 | | |
| 1,101,187 | | |
| 6,062,074 | | |
| 2,279,070 | |
| |
| | | |
| | | |
| | | |
| | |
Loss From Operations | |
| (1,559,130 | ) | |
| (879,506 | ) | |
| (5,348,713 | ) | |
| (1,603,209 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other Income and (Expense): | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 33,109 | | |
| - | | |
| 41,180 | | |
| - | |
Interest expense | |
| (780,627 | ) | |
| (409,701 | ) | |
| (2,868,302 | ) | |
| (1,254,707 | ) |
Change in fair value - derivative liabilities | |
| 16,296 | | |
| 515,470 | | |
| (55,798 | ) | |
| 526,715 | |
Warrant amendment expense | |
| (3,452 | ) | |
| - | | |
| (18,207 | ) | |
| - | |
Gain on sale of oil and gas interests | |
| - | | |
| 275,000 | | |
| 450,000 | | |
| 275,000 | |
Gain (loss) on settlement of liabilities | |
| - | | |
| - | | |
| 83,600 | | |
| - | |
Income from forgiveness of debt | |
| 25,000 | | |
| - | | |
| 25,000 | | |
| - | |
Other income | |
| 807,100 | | |
| - | | |
| 846,357 | | |
| 12,960 | |
Total Other Income and (Expense) | |
| 97,426 | | |
| 380,769 | | |
| (1,496,170 | ) | |
| (440,032 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net Loss | |
$ | (1,461,704 | ) | |
$ | (498,737 | ) | |
$ | (6,844,883 | ) | |
$ | (2,043,241 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net Loss Per Common Share - Basic and Diluted | |
$ | (0.03 | ) | |
$ | (0.01 | ) | |
$ | (0.14 | ) | |
$ | (0.05 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average Number of Common Shares Outstanding -
Basic and Diluted | |
| 52,589,550 | | |
| 44,542,376 | | |
| 49,515,947 | | |
| 44,432,692 | |
See accompanying notes to the condensed consolidated financial
statements.
Stratex Oil & Gas Holdings, Inc. |
Condensed Consolidated Statements of Cash Flows |
(unaudited) |
| |
For The Nine Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Cash Flows From Operating Activities: | |
| | | |
| | |
Net loss | |
$ | (6,844,883 | ) | |
$ | (2,043,241 | ) |
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: | |
| | | |
| | |
Depletion, depreciation and amortization | |
| 82,551 | | |
| 83,424 | |
Accretion of asset retirement obligation | |
| 374 | | |
| - | |
Bad debt | |
| 5,808 | | |
| - | |
Stock based compensation | |
| 2,432,199 | | |
| 339,221 | |
Warrant amendment expense | |
| 18,207 | | |
| - | |
Amortization of debt issue costs | |
| 583,334 | | |
| - | |
Accretion of debt discount | |
| 1,196,724 | | |
| 1,215,261 | |
Loss on abandonment of oil and gas assets | |
| 318,800 | | |
| - | |
Gain on settlement of liabilities | |
| (83,600 | ) | |
| - | |
Income from forgiveness of debt | |
| (25,000 | ) | |
| - | |
Gain on sale of oil and gas interests | |
| (450,000 | ) | |
| (275,000 | ) |
Change in fair value of derivative liabilities | |
| 55,798 | | |
| (526,715 | ) |
Accounts receivable | |
| (348,300 | ) | |
| 60,215 | |
Prepaid expenses | |
| (148,473 | ) | |
| 35,782 | |
Deposits | |
| (25,000 | ) | |
| - | |
Interest receivable | |
| (41,180 | ) | |
| - | |
Increase (decrease) in: | |
| | | |
| | |
Accounts payable and accrued liabilities | |
| 1,098,842 | | |
| 447,885 | |
Due to former officer | |
| (799,000 | ) | |
| 799,000 | |
Asset retirement obligations | |
| - | | |
| 49,000 | |
Other current liabilities | |
| 33,857 | | |
| - | |
Net Cash Provided By (Used In) Operating Activities | |
| (2,938,942 | ) | |
| 184,832 | |
| |
| | | |
| | |
Cash Flows From Investing Activities: | |
| | | |
| | |
Purchase of oil and gas properties | |
| (4,512,554 | ) | |
| (571,209 | ) |
Proceeds from sale of oil and gas interests | |
| 450,000 | | |
| - | |
Proceeds from sale of oil and gas properties | |
| - | | |
| 815,000 | |
Purchase of vehicles | |
| (36,000 | ) | |
| - | |
Purchase of furniture and equipment | |
| (5,700 | ) | |
| (2,314 | ) |
Increase in other receivables | |
| (197,735 | ) | |
| - | |
Increase in note receivable | |
| (3,592,429 | ) | |
| - | |
Net Cash Provided By (Used In) Investing Activities | |
| (7,894,418 | ) | |
| 241,477 | |
| |
| | | |
| | |
Cash Flows From Financing Activities: | |
| | | |
| | |
Proceeds from notes payable | |
| 400,000 | | |
| 605,000 | |
Repayments on notes payable | |
| (173,675 | ) | |
| (688,750 | ) |
Proceeds from convertible notes payable | |
| 18,002,210 | | |
| - | |
Debt issuance costs paid in cash | |
| (1,932,199 | ) | |
| - | |
Sale of common stock for cash | |
| - | | |
| 35,000 | |
Purchase of treasury stock | |
| - | | |
| (25,000 | ) |
Net Cash Provided By (Used In) Financing Activities | |
| 16,296,336 | | |
| (73,750 | ) |
| |
| | | |
| | |
Net change in cash | |
| 5,462,976 | | |
| 352,559 | |
| |
| | | |
| | |
Cash at beginning of period | |
| 609,061 | | |
| 75,103 | |
| |
| | | |
| | |
Cash at end of period | |
$ | 6,072,037 | | |
$ | 427,662 | |
| |
| | | |
| | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid for interest | |
$ | 546,766 | | |
$ | 39,067 | |
Cash paid for taxes | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Supplemental disclosure of non-cash investing and financing activities: | |
| | | |
| | |
| |
| | | |
| | |
Conversion of notes payable and accrued interest to common stock | |
$ | - | | |
$ | 36,000 | |
Issuance of common stock to settle liabilities | |
$ | 196,200 | | |
$ | - | |
Original issue discount on notes payable | |
$ | 160,000 | | |
$ | 605,000 | |
Original issue discount on convertible notes payable | |
$ | 4,028,285 | | |
$ | - | |
Debt issuance costs paid in the form of warrants | |
$ | 903,917 | | |
$ | - | |
Debt issuance costs accrued | |
$ | 6,107 | | |
$ | - | |
Increase in asset retirement obligation | |
$ | 2,238 | | |
$ | - | |
Vehicles purchased through issuance of notes payable | |
$ | 53,365 | | |
$ | - | |
Reclass convertible note to demand note | |
$ | - | | |
$ | 36,000 | |
See accompanying notes to the condensed consolidated financial
statements.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
Note 1 Nature of Operations and Basis
of Presentation:
Nature of Operations
Stratex Oil & Gas Holdings, Inc. (“we”
or the “Company”) was incorporated on August 15, 2003 as Poway Muffler and Brake Inc. in California to enter the muffler
and brakes business. On December 15, 2008, a merger was effected with Ross Investments Inc., a Colorado shell corporation. Ross
Investments was the acquirer and the surviving corporation. Ross Investments Inc. then changed its name to Poway Muffler and Brake,
Inc. On May 25, 2012, we filed an Amendment to our Certificate of Incorporation by which we changed our name from Poway Muffler
and Brake, Inc., a Colorado corporation, to Stratex Oil & Gas Holdings, Inc., with the Secretary of the State of Colorado.
On July 6, 2012, Stratex Acquisition Corp.,
a wholly-owned subsidiary of Stratex Oil & Gas Holdings, Inc. merged with and into Stratex Oil & Gas, Inc., a Delaware
corporation (“SOG”). SOG was the surviving corporation of that Merger. As a result of the merger, we acquired the business
of SOG, and continue the business operations of SOG as a wholly-owned subsidiary.
The Company is engaged in the sale of oil and
gas and the exploration for and development of oil and gas reserves in south Texas as well as Kansas, North Dakota, Utah and Montana.
Basis of Presentation- Unaudited Interim
Financial Information
The accompanying unaudited interim condensed
consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and
regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article
8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial
statements. The unaudited interim condensed consolidated financial statements furnished reflect all adjustments (consisting of
normal recurring accruals) which are, in the opinion of management, necessary to fairly present the results for the interim periods
presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended
December 31, 2013 and notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31,
2013, as filed with the SEC on March 31, 2014.
Note 2 Summary of Significant Accounting Policies:
Principles of Consolidation
All significant intercompany accounts and transactions
have been eliminated in consolidation.
Reclassification
Certain amounts in the prior period financial
statements have been reclassified to conform to the current period presentation. These reclassifications had no
effect on reported losses.
Use of Estimates
The preparation of condensed consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported
in the condensed consolidated financial statements and accompanying notes. Such estimates and assumptions impact, among others,
the following: allowance for bad debt, inventory obsolescence, the fair value of share-based payments, fair value of
derivative liabilities, estimates of the probability and potential magnitude of contingent liabilities and the valuation allowance
for deferred tax assets due to continuing operating losses.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
Making estimates requires management to exercise
significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances
that existed at the date of the consolidated financial statements, which management considered in formulating its estimate could
change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly
from our estimates.
The accompanying condensed consolidated financial
statements contain estimates of the Company’s proved reserves and the estimated future net revenues from the proved reserves. These
estimates are based on various assumptions, including assumptions required by the United States Securities and Exchange Commission
(“SEC”) relating to oil and gas prices, drilling and operating expenses, capital expenditures, taxes and availability
of funds.
The process of estimating oil and gas reserves
is complex and involves significant decisions and assumptions in the evaluation of available geological, geophysical, engineering
and economic data for each reservoir. Actual future production, oil and gas prices, revenues, taxes, development expenditures,
operating expenses and quantities of recoverable oil and gas reserves most likely will vary from these estimates. Such
variations may be significant and could materially affect the estimated quantities and present value of our proved reserves. In
addition, the Company’s management may adjust estimates of proved reserves to reflect production history, results of exploration
and development drilling, prevailing oil and gas prices and other factors, many of which are beyond the Company’s control. The
Company’s properties may also be susceptible to hydrocarbon drainage from production by operators on adjacent properties.
The present value of future net cash flows
from the Company’s proved reserves is not necessarily the same as the current market value of the Company’s estimated
oil and natural gas reserves. The estimated discounted future net cash flows from the Company’s proved reserves
is based on the average, first-day-of-the-month price during the 12-month period preceding the measurement date. Actual
future net cash flows from oil and natural gas properties also will be affected by factors such as actual prices received for oil
and gas, actual development and production costs, the amount and timing of actual production, the supply of and demand for oil
and gas, and changes in governmental regulations or taxes.
The timing of the Company’s production
and incurrence of expenses in connection with the development and production of oil and natural gas properties will affect the
timing of actual future net cash flows from proved reserves, and thus their actual present value. In addition, the 10% discount
factor used when calculating discounted future net cash flows for financial statement disclosure may not be the most appropriate
discount factor based on interest rates in effect from time to time and risks associated with the Company or the oil and natural
gas industry in general.
Risks and Uncertainties
The Company operates in an industry that is
subject to intense competition and change in consumer demand. The Company's operations are subject to significant risk and uncertainties
including financial and operational risks including the potential risk of business failure.
The Company’s future success depends
largely on its ability to find and develop or acquire additional oil and gas reserves that are economically recoverable. Unless
the Company replaces the reserves produced through successful development, exploration or acquisition activities, proved reserves
will decline over time. Recovery of any additional reserves will require significant capital expenditures and successful
drilling operations. The Company may not be able to successfully find and produce reserves economically in the future. In
addition, the Company may not be able to acquire proved reserves at acceptable costs.
Cash and Cash Equivalents
The Company considers all highly liquid instruments
purchased with an original maturity of three months or less to be cash equivalents. There were no cash equivalents at
September 30, 2014 and December 31, 2013.
The Company minimizes its credit risk associated with cash by periodically
evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable consist primarily of oil
and gas receivables, net of a valuation allowance for doubtful accounts. As of September 30, 2014 and December 31, 2013,
the allowance for doubtful accounts was $0.
Oil and Gas Properties, Successful Efforts
Method
The Company uses the successful efforts method
of accounting for oil and gas producing activities. Under the successful efforts method, costs to acquire mineral interests in
oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells
are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs
of carrying and retaining unproved properties are expensed as incurred. The Company evaluates its proved oil and gas
properties for impairment on a field-by-field basis whenever events or changes in circumstances indicate that an asset’s
carrying value may not be recoverable. The Company follows FASB ASC 360 - Property, Plant, and Equipment, for these evaluations.
Unamortized capital costs are reduced to fair value if the undiscounted future net cash flows from our interest in the property’s
estimated proved reserves are less than the asset’s net book value.
Support Facilities and Equipment
Our support facilities and equipment are generally
located in proximity to certain of our principal fields. Depreciation of these support facilities is provided on the straight-line
method based on estimated useful lives of 7 to 10 years.
Maintenance and repair costs that do not extend
the useful lives of property and equipment are charged to expense as incurred.
Proved Reserves
Estimates of the Company’s proved reserves
included in this report are prepared in accordance with U.S. GAAP and guidelines from the SEC. The Company’s engineering
estimates of proved oil and natural gas reserves directly impact financial accounting estimates, including depreciation, depletion
and amortization expense and impairment. Proved oil and natural gas reserves are the estimated quantities of oil and natural gas
reserves that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known
reservoirs under period-end economic and operating conditions. The process of estimating quantities of proved reserves is very
complex, requiring significant subjective decisions in the evaluation of all geological, engineering and economic data for each
reservoir. The accuracy of a reserve estimate is a function of: (i) the quality and quantity of available data; (ii) the interpretation
of that data; (iii) the accuracy of various mandated economic assumptions; and (iv) the judgment of the persons preparing the estimate.
The data for a given reservoir may change substantially over time as a result of numerous factors, including additional development
activity, evolving production history and continual reassessment of the viability of production under varying economic conditions.
Changes in oil and natural gas prices, operating costs and expected performance from a given reservoir also will result in revisions
to the amount of the Company’s estimated proved reserves. The Company engages independent reserve engineers to estimate its
proved reserves.
Asset Retirement Obligations
The Company follows the provisions of the FASB
ASC 410 - Asset Retirement and Environmental Obligations. The fair value of an asset retirement obligation is recognized in the
period in which it is incurred if a reasonable estimate of fair value can be made. As of September 30, 2014 and 2013,
the Company’s obligations were $36,612 and $34,000, respectively. The present value of the estimated asset retirement
costs is capitalized as part of the carrying amount of the long-lived asset. The Company’s asset retirement obligations relate
to the abandonment of oil and gas producing facilities. The amounts recognized are based upon numerous estimates and assumptions,
including future retirement costs, future recoverable quantities of oil and gas, future inflation rates and the credit-adjusted
risk-free interest rate. Accretion of asset retirement costs were immaterial for the nine months ended September 30, 2014 and 2013.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
Debt Issue Costs and Debt Discount
The Company may pay debt issue costs, and record
debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized over the life
of the debt to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts
is immediately expensed.
Original Issue Discount
For certain debt issued in 2014, 2013 and 2012,
the Company provided the debt holder with an original issue discount. The original issue discount was equal to simple
interest at 10% - 20% of the proceeds raised. The original issue discount was recorded to debt discount reducing the
face amount of the note and is being amortized to interest expense over the maturity period of the debt. For certain debt the original
issue discount exceeded face value bringing the carrying value to $0 and the remainder charged to interest expense.
Beneficial Conversion Feature
For
conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion
feature” (“BCF”) and related debt discount.
When the Company records a BCF the relative
fair value of the BCF would be recorded as a debt discount against the face amount of the respective debt instrument. The debt
discount attributable to the BCF is amortized over the period from issuance to the date that the debt matures.
Derivative Financial Instruments
Fair value accounting requires bifurcation
of embedded derivative instruments such as ratchet provisions or conversion features in convertible debt or equity instruments,
and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company utilized an
option pricing model. In assessing the Company’s convertible debt instruments, management determines if the convertible debt
host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement.
If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments
as derivative financial instruments.
Once determined, the derivative liabilities
are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded
in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative
instruments such as warrants, are also valued using the option pricing model.
Revenue Recognition
Revenues from the sale of oil and natural gas
are recognized when the product is delivered at a fixed or determinable price, title has transferred, and collectability is reasonably
assured and evidenced by a contract. The Company follows the “sales method” of accounting for oil and natural gas revenue,
so it recognizes revenue on all natural gas or crude oil sold to purchasers, regardless of whether the sales are proportionate
to its ownership in the property. A receivable or liability is recognized only to the extent that the Company has an imbalance
on a specific property greater than its share of the expected remaining proved reserves.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
Share-Based Payments
Generally, all forms of share-based payments,
including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at their fair value
utilizing an option pricing model on the awards’ grant date, based on the estimated number of awards that are ultimately
expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair
value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expenses
resulting from share-based payments are recorded in cost of goods sold or general and administrative expense in the statement of
operations, depending on the nature of the services provided.
Income Taxes
The Company is a taxable entity and recognizes
deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be in effect when the temporary differences reverse. The effect on the deferred tax assets
and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date of the rate change.
A valuation allowance is used to reduce deferred tax assets to the amount that is more likely than not to be realized. Interest
and penalties associated with income taxes are included in selling, general and administrative expense.
The
Company follows ASC 740 “Accounting for Uncertainty in Income Taxes” which prescribes a comprehensive model of how
a company should recognize, measure, present, and disclose in its condensed consolidated financial statements uncertain tax positions
that the Company has taken or expects to take on a tax return. ASC 740 states that a tax benefit from an uncertain position may
be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The
tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized
upon ultimate settlement with a taxing authority having full knowledge of all relevant information. After review of the
Company’s tax positions, no liabilities were recorded for unrecognized tax benefits as of September 30, 2014 or December
31, 2013.
None of the Company’s federal or state
income tax returns is currently under examination by the Internal Revenue Service (“IRS”)or state authorities. However,
years 2010 and later remain subject to examination by the IRS and respective states.
Earnings Per Share
Basic earnings (loss) per share is computed
by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted
earnings (loss) per share is computed by dividing net income (loss), adjusted for changes in income or loss that resulted from
the assumed conversion of convertible shares, by the weighted average number of shares of common stock, common stock equivalents
and potentially dilutive securities outstanding during the period.
The Company had the following potential common
stock equivalents at September 30, 2014:
Convertible debt – face amount of $120,000, conversion price of $0.70 | |
| 171,429 | |
Convertible debt – face amount of $18,002,210, conversion price of $0.30 | |
| 60,007,367 | |
Common stock options, exercise price of $0.08 - $0.50 | |
| 15,100,000 | |
Common stock warrants, exercise price of $0.15 - $0.85 | |
| 26,439,116 | |
Total common stock equivalents | |
| 101,717,912 | |
The Company had the
following potential common stock equivalents at September 30, 2013:
Convertible debt – face amount of $216,000, conversion price of $0.70 | |
| 308,571 | |
Common stock options, exercise price of $0.50 | |
| 1,500,000 | |
Common stock warrants, exercise price of $0.70 - $1.65 | |
| 3,206,250 | |
Common stock to be issued | |
| 2,500,000 | |
Total common stock equivalents | |
| 7,514,821 | |
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
Since the Company reflected a net loss during the three and nine
month periods ended September 30, 2014 and 2013, the effect of considering any common stock equivalents, would have been anti-dilutive. A
separate computation of diluted earnings (loss) per share is not presented.
Fair Value of Financial Instruments
Fair value is 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 (exit price). The
Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions
about risk inherent in the inputs to the valuation technique. The authoritative guidance establishes a fair value hierarchy that
prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are as follows:
Level 1 |
|
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date. |
|
|
|
Level 2 |
|
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. |
|
|
|
Level 3 |
|
Pricing inputs that are generally unobservable inputs and not corroborated by market data. |
Financial assets and liabilities are considered
Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and
at least one significant model assumption or input is unobservable.
The fair value hierarchy gives the highest
priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable
inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described
above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amounts of the Company’s
financial assets and liabilities, such as cash, inventory, prepaid expenses and other current assets, accounts payable and accrued
liabilities approximate their fair values because of the short maturity of these instruments.
The Company’s Level 3 financial liabilities
consist of the derivative warrants issued with the 2011 notes payables for which there is no current market for this security such
that the determination of fair value requires significant judgment or estimation. The Company valued the reset adjustments in the
warrant on subsequent potential equity offerings using an option pricing model, for which management understands the methodologies.
These models incorporate transaction details such as the Company’s stock price, contractual terms, maturity, risk-free rates,
as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet
date.
Transactions involving related parties cannot
be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not
exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were
consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
The Company uses Level 3 of the fair value
hierarchy to measure the fair value of the derivative liabilities and revalues its derivative warrant liability and derivative
feature of convertible notes at every reporting period and recognizes gains or losses in the statements of operations attributable
to the change in the fair value of the derivatives.
Financial instruments measured at fair value
on a recurring basis are summarized below and disclosed on the balance sheets as follows:
September 30, 2014 | |
Fair Value Measurement Using | |
| |
| Level 1 | | |
| Level 2 | | |
| Level 3 | | |
| Total | |
| |
| | | |
| | | |
| | | |
| | |
Derivative warrant liabilities | |
$ | - | | |
$ | - | | |
$ | 132,473 | | |
$ | 132,473 | |
December 31, 2013 | |
Fair Value Measurement Using | |
| |
| Level 1 | | |
| Level 2 | | |
| Level 3 | | |
| Total | |
Derivative warrant liabilities | |
$ | - | | |
$ | - | | |
$ | 76,675 | | |
$ | 76,675 | |
The table below provides a summary of the
changes in fair value, including net transfers in and/or out, of all financial instruments measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) during the period January 1, 2013 to March 31, 2014:
| |
Fair Value Measurement Using Level 3 Inputs | |
| |
Derivative Liabilities | | |
Total | |
| |
| | | |
| | |
Balance, January 1, 2013 | |
$ | 593,555 | | |
$ | 593,555 | |
| |
| | | |
| | |
Purchases, issuances and settlements | |
| - | | |
| - | |
| |
| | | |
| | |
Total gains or losses (realized/unrealized) included in net loss | |
| (516,880 | ) | |
| (516,880 | ) |
| |
| | | |
| | |
Transfers in and/or out of Level 3 | |
| - | | |
| - | |
| |
| | | |
| | |
Balance, December 31, 2013 | |
$ | 76,675 | | |
$ | 76,675 | |
| |
| | | |
| | |
Purchases, issuances and settlements | |
| - | | |
| - | |
| |
| | | |
| | |
Total gains or losses (realized/unrealized) included in net loss | |
| 55,798 | | |
| 55,798 | |
| |
| | | |
| | |
Transfers in and/or out of Level 3 | |
| - | | |
| - | |
| |
| | | |
| | |
Balance, September 30, 2014 | |
$ | 132,473 | | |
$ | 132,473 | |
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
Fair Value of Financial Assets and Liabilities Measured on
a Non-Recurring Basis
For periods in which impairment has occurred,
the Company is required to write down the value of the impaired asset to its fair value. No impairment charges were recorded during
the nine months ended September 30, 2014 and 2013.
Recent Accounting Pronouncements
In May 2014, the FASB issued a standard on
revenue recognition providing a single, comprehensive revenue recognition model for all contracts with customers. The revenue standard
is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
standard is effective beginning January 1, 2017, with no early adoption permitted. The amendments may be applied retrospectively
to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application.
We are currently evaluating the adoption method options and the impact of the new guidance on our consolidated financial statements.
Note 3 Oil and Gas Assets:
The following table summarizes the Company’s oil and gas
assets:
Balance – January 1, 2013 | |
$ | 2,527,249 | |
Additions | |
| 1,141,503 | |
Depletion | |
| (98,335 | ) |
Impairment | |
| (753,865 | ) |
Abandonments | |
| - | |
Dispositions | |
| (540,000 | ) |
| |
| | |
Balance – December 31, 2013 | |
| 2,276,552 | |
Additions | |
| 4,188,451 | |
Asset retirement obligations | |
| 36,238 | |
Depletion | |
| (84,503 | ) |
Impairment | |
| - | |
Abandonments | |
| (318,800 | ) |
Dispositions | |
| - | |
| |
| | |
Balance – September 30, 2014 | |
$ | 6,097,938 | |
The Company owns support facilities and equipment
which serve its oil and gas production activities. The following table details these properties and equipment, together with their
estimated useful lives:
Balance – January 1, 2013 | |
$ | 114,495 | |
Additions | |
| 40,424 | |
Depreciation | |
| (16,838 | ) |
Impairment | |
| - | |
| |
| | |
Balance – December 31, 2013 | |
| 138,081 | |
Additions | |
| 324,103 | |
Depreciation | |
| (23,457 | ) |
Impairment | |
| - | |
Balance – September 30, 2014 | |
$ | 438,727 | |
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
During the nine months ended September 30,
2014, the Company abandoned certain working and net revenue interests in oil and gas property located in Callahan County, Texas.
In connection with the abandonment, the Company recognized losses totaling $318,800.
During the nine months ended September 30,
2014 and 2013, the Company recorded $107,960 and $82,825, respectively to depletion and depreciation expense.
Note 4 Vehicles, Furniture and Equipment:
The following table summarizes furniture and
equipment:
Balance – January 1, 2013 | |
$ | 994 | |
Additions | |
| 2,314 | |
Depreciation | |
| (928 | ) |
Impairment | |
| - | |
| |
| | |
Balance – December 31, 2013 | |
| 2,380 | |
Additions | |
| 95,065 | |
Depreciation | |
| (8,591 | ) |
Impairment | |
| - | |
Balance – September 30, 2014 | |
$ | 88,854 | |
During the nine months ended September 30,
2014 and 2013, the Company recorded $8,591 and $599, respectively to depreciation expense.
Note 5 Notes Receivable and Accrued Interest:
(A)
On May 6, 2014, the Company, Richfield, and
certain of Richfield’s subsidiaries entered into a Note and Security Agreement (the “Loan Agreement”) providing
for advances of up to $3,000,000 by the Company to Richfield and its subsidiaries. Of the total amount that may be advanced by
us under the Loan Agreement, up to $2,000,000 is available to fund those costs of Richfield’s Kansas Work Program which are
approved by the Company and the remaining $1,000,000 ($500,000 of which was advanced upon the entry into the Merger Agreement)
will be used by Richfield for general corporate purposes approved by the Company.
On July 17, 2014 the Loan Agreement
and Security Agreement was amended. Pursuant to the Amended and Restated Note and Security Agreement, the amount which the Company
may advance to Richfield and its subsidiaries, was increased by $1,000,000 to a total of $4,000,000. Of the additional $1,000,000,
$200,000 may be used by Richfield for general corporate purposes and $800,000 is to be used solely in connection with the Kansas
Work Program. As of September 30, 2014 approximately $3,392,659 has been advanced by the Company to Richfield of which $1,200,000
had been advanced for general corporate purposes and $2,192,659 to develop Richfield’s Kansas properties.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
Advances made under the Loan Agreement bear
interest at an annual rate of 6% and must be repaid upon the earlier of (1) November 30, 2014, (2) ten business days after the
consummation of the Merger, and (3) Richfield’s entry into a Superior Proposal (as defined in the Merger Agreement).
The obligations of Richfield and its subsidiaries
under the Loan Agreement are secured by security interests and mortgages in all of their assets.
During the nine months ended September 30,
2014 advances on and interest accrued on the Loan Agreement amounted to $3,392,659 and $40,260, respectively. As of September 30,
2014, the aggregate principal and accrued interest due was $3,432,919.
The foregoing descriptions of the Amendments
to the Note and Security Agreement reflected in the Amended and Restated Note and Security Agreement do not purport to be complete,
and are qualified in their entirety by reference to the full text of the Amended and Restated Note and Security Agreement, included
as an exhibit with the Company’s Form 8-K filed on July 23, 2014.
(B)
On September 3, 2014, the Company and Richfield
entered into a note and security agreement whereby the Company loaned Richfield $199,770. The loan will be used by Richfield for
expenditures for its Moroni well located near Moroni, Utah. The Note bears interest at 6.00% per annum and will be due and payable
on the earlier of (i) the date six months after the effective date of the merger between the Company and Richfield and (ii) June
30, 2015. The note is secured by all assets of Richfield. As of September 30, 2014, the aggregate principal and accrued interest
due was $200,690.
Note 6 Demand Notes Payable:
As of December 31, 2013, three (3) convertible
notes for an aggregate principal amount of $216,000 matured. These notes were reclassified and are recorded as due on demand. During
the nine months ended September 30, 2014, two (2) of these notes in the aggregate principal amount of $96,000 were repaid in full.
The balance due to the remaining note holder as of September 30, 2014 was $120,000.
Note 7 Notes Payable:
(A)
During the three months ended September 30,
2014, the Company repaid a note in the principal amount of $100,000 for consideration of $75,000 and the re-pricing of 125,000
warrants that were issued with the original note. The warrants were re-priced from an exercise price of $0.85 to an exercise price
of $0.30. As a result the Company recognized debt forgiveness income of $25,000 and additional interest expense of $3,452 during
the three months ended September 30, 2014.
(B)
On September 23, 2014, the Company issued a
promissory note in the principal amount of $24,855 for the purchase of a vehicle. Monthly principal and interest payments
are $449.56. The note bears interest at 8.99% per annum and matures on September 7, 2020. The note is secured by a vehicle.
Notes payable as of September 30, 2014 and
December 31, 2013 is as follows:
| |
September 30,
2014 | | |
December 31,
2013 | |
| |
| | |
| |
Notes payable | |
$ | 1,580,690 | | |
$ | 1,230,000 | |
Discount on notes | |
| (366,245 | ) | |
| (439,472 | ) |
Notes payable, net of debt discount | |
| 1,214,445 | | |
| 790,528 | |
Less: Current maturities | |
| (79,649 | ) | |
| - | |
| |
| | | |
| | |
Notes payable, net of debt discount and current maturities | |
$ | 1,134,796 | | |
$ | 790,528 | |
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
Future minimum debt repayments under these
obligations at September 30, 2014 are as follows:
Year ending December 31: | |
| |
| |
| |
2014 (remainder of year) | |
$ | 1,715 | |
| |
| | |
2015 | |
| 113,372 | |
| |
| | |
2016 | |
| 1,034,506 | |
| |
| | |
2017 | |
| 410,116 | |
| |
| | |
2018 and thereafter | |
| 20,981 | |
| |
| | |
| |
$ | 1,580,690 | |
Note 8 Convertible Notes Payable:
(A) |
Series A Senior Secured Convertible Promissory Notes |
From February 11, 2014 through April 10, 2014,
the Company raised gross proceeds of $9,987,650 through the sale of units (the “Series A Units”) in a private offering
(the “Series A Offering”). The purchase price for each Series A Unit was $50,000 and each Series A Unit consisted of
(i) a 12% Series A Senior Secured Convertible Promissory Note in the principal amount of $50,000 (the “Series A Notes”)
convertible into shares of common stock of the Company at a conversion price of $0.30 per share and (ii) a Series A warrant to
purchase 33,333 shares of common stock of the Company at an exercise price of $0.30 (the “Series A Warrant”). All outstanding
principal and interest of each Series A Note is due on February 11, 2016. The Series A Notes may be redeemed by the Company at
any time following six (6) months after their respective issuance. If however, the Company elects to redeem the Series A Notes
prior to the one (1) year anniversary date of the issuance of such Series A Note, the Company shall pay the holder all unpaid interest
on the portion of the principal redeemed that would have been earned through such one (1) year anniversary date. The holder of
each Series A Note may elect to convert the principal balance of the Series A Note into shares of common stock at any time following
six (6) months after the issuance of such note.
The Series A Notes are secured by a first lien
on substantially all of the assets of the Company, including all present and future wells and working interests, on a pro-rata
basis.
Each Series A Note bears interest at 12% per
annum and is due and payable quarterly, in arrears, with the initial interest payment due March 31, 2014.
Beneficial Conversion Feature
The intrinsic value of certain convertible
notes, when issued, gave rise to a beneficial conversion feature which was recorded as a discount to the notes of $1,613,642 to
be amortized over the period from issuance to the date that the debt matures.
Warrants
Each investor participating in the Series A
Offering received a Series A Warrant, exercisable for up to 33,333 shares of common stock for every $50,000 invested. The Series
A Warrants are exercisable at $0.30 per share. The Series A Warrants expire five (5) years from the date of issuance. During the
nine months ended September 30, 2014, we issued Series A Warrants exercisable for up to 6,658,374 shares of our common stock to
investors participating in the Series A Offering. The issuance of the Series A Warrants was recorded as a debt discount of $1,424,236
and is being amortized over the life of the Series A Note.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
The following is a summary of Series A Notes:
Balance – January 1, 2014 | |
$ | - | |
Issuance of convertible notes payable | |
| 9,987,650 | |
Discount recorded on beneficial conversion feature at issuance | |
| (1,613,642 | ) |
Discount recorded on warrants at issuance | |
| (1,424,236 | ) |
Repayments | |
| - | |
Converted to common stock | |
| - | |
Note matured – reclassified to due on demand | |
| - | |
Accretion of debt discount | |
| 844,469 | |
| |
| | |
Convertible notes payable, net of debt discount | |
$ | 7,794,241 | |
Less current maturities | |
| - | |
Balance – September 30, 2014 | |
$ | 7,794,241 | |
(B) |
Series B Senior Secured Convertible Promissory Notes |
From June 6, 2014 through August 20, 2014,
the Company raised gross proceeds of $8,014,560 through the sale of units (the “Series B Units”) in a private offering
(the “Series B Offering”). The purchase price for each Series B Unit was $50,000 and each Series B Unit consisted of
(i) a 12% Series B Senior Secured Convertible Promissory Note in the principal amount of $50,000 (the “Series B Notes”)
convertible into shares of common stock of the Company at a conversion price of $0.30 per share and (ii) a Series B warrant to
purchase 33,333 shares of common stock of the Company at an exercise price of $0.30 (the “Series B Warrant”). All outstanding
principal and interest of each Series B Note is due on June 6, 2016. The Series B Notes may be redeemed by the Company at any time
following six (6) months after their respective issuance. If however, the Company elects to redeem the Series B Notes prior to
the one (1) year anniversary date of the issuance of such Series B Note, the Company shall pay the holder all unpaid interest on
the portion of the principal redeemed that would have been earned through such one (1) year anniversary date. The holder of each
Series B Note may elect to convert the principal balance of the Series B Note into shares of common stock at any time following
six (6) months after the issuance of such note.
The Series B Notes are secured by a first lien
on substantially all of the assets of the Company, including all present and future wells and working interests, on a pro-rata
basis. The lien is pari-passu with the lien granted in favor of the holders of the Company’s outstanding Series A Notes.
Each Series B Note bears interest at 12% per
annum and is due and payable quarterly, in arrears, with the initial interest payment due September 30, 2014.
Warrants
Each investor participating in the Series B
Offering received a Series B Warrant, exercisable for up to 33,333 shares of common stock for every $50,000 invested. The Series
B Warrants are exercisable at $0.30 per share. The Series B Warrants expire five (5) years from the date of issuance. During the
six months ended June 30, 2014, we issued Series B Warrants exercisable for up to 5,342,742 of our common stock to investors participating
in the Series B Offering. The issuance of the Series B Warrants was recorded as a debt discount of $990,408 and is being amortized
over the life of the Series B Note.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
The following is a summary of Series B Notes:
Balance – January 1, 2014 | |
$ | - | |
Issuance of convertible notes payable | |
| 8,014,560 | |
Discount recorded on beneficial conversion feature at issuance | |
| - | |
Discount recorded on warrants at issuance | |
| (990,408 | ) |
Repayments | |
| - | |
Converted to common stock | |
| - | |
Note
matured – reclassified to due on demand | |
| - | |
Accretion of debt discount | |
| 119,029 | |
| |
| | |
Convertible notes payable, net of debt discount | |
$ | 7,143,181 | |
Less current maturities | |
| - | |
Balance – September 30, 2014 | |
$ | 7,143,181 | |
Future minimum debt repayments under these
obligations at September 30, 2014 are as follows:
Year ending December 31: | |
| | |
| |
| | |
2014 (remainder of year) | |
$ | - | |
| |
| | |
2015 | |
| - | |
| |
| | |
2016 | |
| 18,002,210 | |
| |
| | |
2017 and thereafter | |
| - | |
| |
| | |
| |
$ | 18,002,210 | |
Debt issuance costs, net are as follows:
Balance - January 1, 2014 | |
$ | - | |
Debt issue costs incurred in 2014 | |
| 2,842,223 | |
Amortization of debt issue costs | |
| (583,334 | ) |
Balance – September 30, 2014 | |
$ | 2,258,889 | |
Note 9 Stockholders’ Equity (Deficit):
Pursuant to the Company’s Agreement and
Plan of Merger with Richfield Oil & Gas Company (“Richfield”), dated as of May 6, 2014 (the “Merger Agreement”),
the exchange of all outstanding shares of our Series A Preferred Stock for 7,000,000 shares of our common stock is a condition
to the Company’s and Richfield’s obligation to effect the merger. Each share of our Series A Preferred Stock entitles
the holder thereof to cast 1,000,000 votes on all matters submitted to a vote of the stockholders. Accordingly, on August 20, 2014,
our board of directors (the “Board”) approved the issuance of 7,000,000 shares of our common stock to Rotary Partners
LLC, an entity in which Stephen Funk, our Chief Executive Officer, owns and controls one hundred percent (100%) of the membership
interests. Such shares were issued in exchange for the surrender by Rotary Partners of 60 shares (constituting all) of the Company’s
outstanding Series A Preferred Stock. Previously, such shares of Series A Preferred Stock had been issued to Mr. Funk who transferred
them to Rotary Partners on August 19, 2014.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
During the year ended December 31, 2013, the
Company issued 10 shares of preferred stock held in Treasury.
Transaction Type | |
Quantity of Shares | | |
Valuation | | |
Range of Value per Share | |
Services rendered – officers | |
| 10 | | |
$ | 830 | | |
$ | 83.00 | |
Total | |
| 10 | | |
$ | 830 | | |
$ | 83.00 | |
During the nine months ended September 30,
2014, the Company issued the following common stock:
Transaction
Type | |
Quantity
of Shares | | |
Valuation | | |
|
Range of
Value per Share |
Common stock issued to settle liabilities | |
| 320,000 | | |
$ | 112,600 | | |
$ |
0.20-0.38 |
Common stock issued for preferred stock | |
| 7,000,000 | | |
| - | | |
|
- |
Common stock issued for services | |
| 2,025,000 | | |
| 605,854 | | |
|
0.23-0.38 |
Common stock issued with promissory notes | |
| 800,000 | | |
| 160,000 | | |
|
0.20 |
Total | |
| 10,145,000 | | |
$ | 878,454 | | |
$ |
0.20-0.38 |
During the nine months ended September 30,
2014, the Company granted common stock to a consultant for future services. The Company recognizes the fair value of the shares
in the statement of operations in the period earned. As of September 30, 2014, the Company has $43,146 in stock compensation related
to common stock issuance that is yet to be earned.
During the year ended December 31, 2013, the
Company issued the following common stock:
Transaction Type | |
Quantity of
Shares | | |
Valuation | |
| |
Range of Value per Share |
Common stock issued for cash | |
| 70,000 | | |
$ | 35,000 | |
| $ |
0.50 |
Common stock issued for services | |
| 140,000 | | |
| 35,000 | |
| |
0.25 |
Conversion of debt and interest | |
| 51,249 | | |
| 36,000 | |
| |
0.70 |
Common stock issued with promissory notes | |
| 2,000,000 | | |
| 290,000 | |
| |
0.14-0.15 |
Common stock issued to acquire oil and gas assets | |
| 150,000 | | |
| 18,000 | |
| |
0.12 |
Total | |
| 2,411,249 | | |
$ | 414,000 | |
| $ |
0.12-0.70 |
(C) Warrants
The following is a summary of the Company’s
warrant activity:
| |
Warrants | | |
Weighted Average Exercise Price | |
| |
| | |
| |
Outstanding – January 1, 2013 | |
| 2,075,000 | | |
$ | 0.43 | |
Exercisable – January 1, 2013 | |
| 2,075,000 | | |
$ | 0.43 | |
Granted | |
| 7,321,250 | | |
$ | 0.26 | |
Exercised | |
| - | | |
$ | - | |
Forfeited/Cancelled | |
| - | | |
$ | - | |
Outstanding – December 31, 2013 | |
| 9,306,250 | | |
$ | 0.30 | |
Exercisable – December 31, 2013 | |
| 9,306,250 | | |
$ | 0.30 | |
Granted | |
| 17,132,866 | | |
$ | 0.31 | |
Exercised | |
| - | | |
$ | - | |
Forfeited/Cancelled | |
| - | | |
$ | - | |
Outstanding – September 30, 2014 | |
| 26,439,116 | | |
$ | 0.28 | |
Exercisable – September 30, 2014 | |
| 26,439,116 | | |
$ | 0.28 | |
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
Warrants Outstanding | |
Warrants Exercisable |
Range of exercise price | |
Number Outstanding | | |
Weighted Average Remaining Contractual Life (in years) | |
Weighted Average Exercise Price | | |
Number Exercisable | |
Weighted Average Exercise Price | |
$0.15 - $0.85 | |
| 26,439,116 | | |
4.32 years | |
$ | 0.28 | | |
26,439,116 | |
$ | 0.28 | |
At September 30, 2014 and December 31, 2013,
the total intrinsic value of warrants outstanding and exercisable was $697,500 and $61,000, respectively.
During the nine months ended September 30,
2014 the Company re-priced warrants to purchase an aggregate of 875,000 common shares in the capital of the Company from an exercise
price of $0.85 to an exercise price of $0.15. All other warrant terms remain the same including the expiry date. (March through
May 2018).
The Company recorded interest expense related
to the re-priced warrants of $14,755 during the nine months ended September 30, 2014 calculated as the fair value of the re-priced
warrants minus the current fair value of the surrendered warrants.
During the nine months ended September 30,
2014 the Company re-priced warrants to purchase an aggregate of 125,000 common shares in the capital of the Company from an exercise
price of $0.85 to an exercise price of $0.30. All other warrant terms remain the same including the expiry date. (July 2018).
The Company recorded interest expense related
to the re-priced warrants of $3,452 during the nine months ended September 30, 2014 calculated as the fair value of the re-priced
warrants minus the current fair value of the surrendered warrants.
During year ended December 31, 2013 the Company
re-priced warrants to purchase an aggregate of 1,400,000 common shares in the capital of the Company from an exercise price of
$1.65 to an exercise price of $0.30. All other warrant terms remain the same including the expiry date of October 31, 2017.
The Company recorded compensation expense related
to the re-priced warrants of $27,427 during 2013 calculated as the fair value of the re-priced warrants minus the current fair
value of the surrendered warrants.
On the dates of grant during the nine months
ended September 30, 2014, the Company valued warrant issuances at fair value, utilizing a Black-Scholes option valuation model. The
Company utilized the following management assumptions:
Exercise price |
$0.30 – $0.37 |
Expected dividends |
0% |
Expected volatility |
151% – 168% |
Risk free interest rate |
1.53% – 1.73% |
Expected life of warrants |
5 years |
Expected forfeitures |
0% |
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
On the dates of grant during the year ended
December 31, 2013, the Company valued warrant issuances at fair value, utilizing a Black-Scholes option valuation model. The
Company utilized the following management assumptions:
Exercise price |
$0.15 – $1.65 |
Expected dividends |
0% |
Expected volatility |
172% |
Risk free interest rate |
0.62% – 1.46% |
Expected life of warrants |
3.9 years – 5 years |
Expected forfeitures |
0% |
(D) Options
The following is a summary of the Company’s
option activity:
| |
Options | | |
Weighted Average Exercise Price | |
| |
| | |
| |
Outstanding – January 1, 2013 | |
| 3,000,000 | | |
$ | 0.50 | |
Exercisable – January 1, 2013 | |
| 750,000 | | |
$ | 0.50 | |
Granted | |
| 11,100,000 | | |
$ | 0.13 | |
Exercised | |
| - | | |
$ | - | |
Forfeited/Cancelled | |
| (1,500,000 | ) | |
$ | 0.50 | |
Outstanding – December 31, 2013 | |
| 12,600,000 | | |
$ | 0.17 | |
Exercisable – December 31, 2013 | |
| 8,975,000 | | |
$ | 0.16 | |
Granted | |
| 5,250,000 | | |
$ | 0.30 | |
Exercised | |
| - | | |
$ | - | |
Forfeited/Cancelled | |
| - | | |
$ | - | |
Outstanding – September 30, 2014 | |
| 17,850,000 | | |
$ | 0.21 | |
Exercisable – September 30, 2014 | |
| 15,100,000 | | |
$ | 0.19 | |
Options Outstanding | |
Options Exercisable |
Range of exercise price | |
Number Outstanding | | |
Weighted Average Remaining Contractual Life (in years) | |
Weighted Average Exercise Price | | |
Number Exercisable | |
Weighted Average Exercise Price | |
$0.08-$0.50 | |
| 17,850,000 | | |
5.08 years | |
$ | 0.21 | | |
15,100,000 | |
$ | 0.19 | |
At September 30, 2014, the total intrinsic
value of options outstanding and exercisable was $1,362,000.
At December 31, 2013, the total intrinsic value
of options outstanding and exercisable was $363,000 and $333,000, respectively.
During the nine months ended September 30,
2014, the Company's board of directors authorized the grant of 5,250,000 stock options, having a total fair value of approximately
$1,170,503, with vesting periods ranging from immediate to 2.00 years. These options expire between April 2019 and September 2019.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
As of September 30, 2014, the Company has $623,634
in stock-based compensation related to stock options that is yet to be vested. The weighted average expensing period of the unvested
options is 1.35 years.
On the dates of grant during the nine months
ended September 30, 2014, the Company valued option issuances at fair value, utilizing a Black-Scholes option valuation model. The
Company utilized the following management assumptions:
Exercise price |
$0.30– $0.39 |
Expected dividends |
0% |
Expected volatility |
151% – 158% |
Risk free interest rate |
1.58%–1.80% |
Expected life of options |
2.5– 3.5 years |
Expected forfeitures |
0% |
On the dates of grant during the year ended
December 31, 2013, the Company valued option issuances at fair value, utilizing a Black-Scholes option valuation model. The
Company utilized the following management assumptions:
Exercise price |
$0.08 – $0.19 |
Expected dividends |
0% |
Expected volatility |
172% |
Risk free interest rate |
1.66% – 2.69% |
Expected life of options |
3 years – 5 years |
Expected forfeitures |
0% |
(E) Treasury Stock
During the nine months ended September 30,
2014 150,000 shares of common stock was returned to the Company and retired. The stock was originally issued in November 2013 as
partial consideration for working and net revenue interests in oil and gas property located in Callahan County, Texas.
During the year ended December 31, 2013, the
Company repurchased 50 shares of preferred stock at cost of $25,000 and issued 10 shares of preferred stock from treasury for compensation.
Note 10 Commitments and Contingencies:
Litigations, Claims and Assessments
From time to time, the Company may become involved
in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent
uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. The Company
is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a
material adverse effect on its business, financial condition or operating results.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
On September 18, 2014, the Westchester County
Superior Court of the State of New York (the “Court”) (i) awarded the Company a judgment against Timothy Kelly (“Kelly)
in the amount of $3,164,000 and (ii) dismissed “with prejudice”, all counterclaims previously asserted by Kelly against
the Company.
By virtue of the Court’s ruling in our
favor, we intend to vigorously pursue the enforcement of the $3,164,000 judgment awarded to us against Kelly.
In September 2014 we removed from the Company’s financial statements, a liability of $799,000 of separation expenses recorded
during the year ended December 31, 2013.
On April 10, 2014, we accepted service of process
from a group of seven plaintiffs who commenced litigation against Timothy Kelly, the former President and a director of the Company,
for several of the same matters that are currently the subject of the Company’s current pending litigation against Mr. Kelly
in Superior Court, Westchester County, New York. While the litigation was brought for alleged theft, conversion and other malfeasance
by Mr. Kelly, the plaintiffs also named the Company as a defendant in the Complaint, seeking monetary damages from the Company
under the theory of respondeat superior. The Company does not believe that it should be held responsible for Mr. Kelly’s
alleged malfeasance and we intend to assert a cross claim against Mr. Kelly and to vigorously defend the Company in this matter.
On August 7, 2014, the Company filed a Motion to Dismiss the action.
Oil and Gas Prices
The prices of oil, natural gas, methane gas and other fuels have
been, and are likely to continue to be, volatile and subject to wide fluctuations in response to numerous factors, including but
not limited to the worldwide and domestic supplies of oil and gas, changes in the supply of and demand for such fuels, political
conditions in fuel-producing and fuel-consuming regions, weather conditions, the development of other energy sources, and the effect
of government regulation on the production, transportation and sale of fuels. These factors and the volatility of energy markets
make it extremely difficult to predict future oil and gas price movements with any certainty. A decline in prices could adversely
affect the Company’s financial position, financial results, cash flows, access to capital and ability to grow.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
Environmental Liabilities
Oil and gas operations are subject to many
risks, including well blowouts, cratering and explosions, pipe failure, fires, formations with abnormal pressures, uncontrollable
flows of oil, natural gas, brine or other well fluids, and other environmental hazards and risks. Our drilling operations involve
risks from high pressures and from mechanical difficulties such as stuck pipes, collapsed casings, and separated cables. If any
of these circumstances occur, the Company could sustain substantial losses as a result of injury or loss of life, destruction
of property and equipment, damage to natural resources, pollution or other environmental damages, clean-up responsibilities, regulatory
investigations and penalties, suspension of operations, and compliance with environmental laws and regulations relating to air
emissions, waste disposal and hydraulic fracturing, restrictions on drilling and completion operations and other laws and regulations.
The Company’s potential liability for environmental hazards may include those created by the previous owners of properties
purchased or leased prior to the date we purchase or lease the property. The Company maintains insurance against some, but not
all, of the risks described above. Insurance coverage may not be adequate to cover casualty losses or liabilities.
Employment Agreement
On
August 8, 2014, the Company entered into an Employment Agreement with Matthew S. Cohen to serve as our Executive Vice President
& General Counsel. The terms of the Agreement are as follows:
● |
Term - 4 years, |
|
|
● |
Compensation - $230,000 salary per annum, subject to 10% increase per annum, |
● |
Bonus Eligibility – Target Bonus equal to 80% of base salary based on performance criteria to be established |
|
|
● |
400,000 shares of restricted common stock |
|
|
● |
Option Grant - 2,000,000 options to acquire restricted stock at an exercise price of $0.30 per share. Such stock options vest over a 2 year period, expire in 5 years from the date of the grant and provides for cashless exercise and “piggy-back” registration rights. |
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
Employment Agreement
On September 15, 2014, the Company entered
into an Employment Agreement with Michael J. Thurz to serve as our Chief Administrative Officer. Since July 2014, Mr. Thurz has
served as a member of our Board of Directors. The terms of the Agreement are as follows:
● |
Term - 4 years, |
|
|
● |
Compensation - $200,000 salary per annum, subject to 10% increase per annum, |
● |
Option Grant - 1,500,000 options to acquire restricted stock at an exercise price of $0.30 per share. Such stock options vest over a 2 year period, expire in 5 years from the date of the grant and provides for cashless exercise and “piggy-back” registration rights. |
Agreements with Placement Agents and Finders
(A)
The Company entered into a Financial Advisory
and Investment Banking Agreement with Radnor Research & Trading Company, LLC (“Radnor”) effective January 24, 2014
(the “Radnor Advisory Agreement”). Pursuant to the Radnor Advisory Agreement, Radnor will act as the Company’s
exclusive financial advisor and placement agent to assist the Company in connection with a best efforts private placement (the
“Financing”) of up to $10 million of the Company’s equity and/or debt securities and/or convertible instruments
(the “Securities”).
The Company upon closing of the Financing shall
pay consideration to Radnor, in cash, a fee in an amount equal to 10% of the aggregate gross proceeds raised in the Financing.
The Company shall grant and deliver to Radnor at the closing of the Financing, for nominal consideration, five year warrants (the
“Warrants”) to purchase such number of shares of Common Stock as is equal to 10% of the Offering proceeds. The Warrants
shall be exercisable at any time during the five year period commencing on the closing to which they relate at an exercise price
of $0.30. If the Financing is consummated by means of more than one closing, Radnor shall be entitled to the fees provided herein
with respect to each such closing.
(B)
The Company entered into a Second Financial
Advisory and Investment Banking Agreement with Radnor Research & Trading Company, LLC (“Radnor”) in May 2014 (the
“Radnor Advisory Agreement 2”). Pursuant to the Radnor Advisory Agreement 2, Radnor will act as the Company’s
exclusive financial advisor and placement agent to assist the Company in connection with a best efforts private placement (the
“Financing”) of up to $15 million of the Company’s equity and/or debt securities and/or convertible instruments
(the “Securities”).
The Company upon closing of the Financing shall
pay consideration to Radnor, in cash, a fee in an amount equal to 10% of the aggregate gross proceeds raised in the Financing.
The Company shall grant and deliver to Radnor at the closing of the Financing, for nominal consideration, five year warrants (the
“Warrants”) to purchase such number of shares of Common Stock as is equal to 10% of the Offering proceeds. The Warrants
shall be exercisable at any time during the five year period commencing on the closing to which they relate at an exercise price
of $0.30. If the Financing is consummated by means of more than one closing, Radnor shall be entitled to the fees provided herein
with respect to each such closing.
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
During the nine months ended September 30,
2014 the Company paid to Radnor fees of $1,119,520 and issued Radnor 3,731,750 five year warrants with an exercise price of $0.30.
In addition to the fees paid to Radnor the
Company incurred financing fees of $680,700 during the nine months ended September 30, 2014 to JD Partners Co., Ltd in relation
to the 2014 private placement.
Agreement and Plan of Merger
On May 6, 2014, the Company, Richfield Oil
& Gas Company (“Richfield”) and Richfield Acquisition Corp., a wholly-owned subsidiary of the Company (“RAC”),
entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to the satisfaction
or waiver of certain conditions, RAC will merge with and into Richfield (the “Merger”), with Richfield surviving as
a wholly owned subsidiary of the Company.
Upon the consummation of the Merger, each outstanding
share of Richfield common stock (other than shares held by those Richfield stockholders properly exercising dissenters rights)
will be converted into the right to receive shares of the Company common stock in an amount to be determined by the application
of a formula set forth in the Merger Agreement. Based on the number shares of Richfield common stock outstanding on May 6, 2014,
each outstanding share of Richfield common stock (other than shares held by those Richfield stockholders properly exercising dissenters’
rights) would be converted into 1.009 shares of the Company’s common stock. However, the number of shares of the Company’s
common stock that may actually be issued with respect to a share of Richfield common stock is subject to decrease based on the
formula set forth in the Merger Agreement in the event additional shares of Richfield common stock are issued prior to the consummation
of the Merger, including, subject to certain limited exceptions, shares of Richfield common stock issued upon exercise of Richfield’s
outstanding warrants or upon conversion of Richfield’s outstanding convertible notes. No fractional shares of our common
stock will be issued in the Merger and Richfield’s stockholders will receive cash in lieu of fractional shares.
Under the Merger Agreement, Richfield is required
to take such action as may be necessary so that each outstanding warrant to purchase shares of Richfield common stock will be converted
into the right to purchase shares of the Company’s common stock, with an adjustment in the number of shares and exercise
price per share corresponding to the ratio of the number of shares of Company common stock issuable for each share of Richfield
common stock upon consummation of the Merger. Richfield is also required by the Merger Agreement to take such action as may be
necessary so that each outstanding convertible note which is convertible into shares of Richfield common stock will instead become
convertible into shares of our common stock, also adjust by the ratio of the number of shares of the Company’s common stock
issuable for each share of Richfield common stock upon consummation of the Merger.
The Company and Richfield each made customary
representations, warranties and covenants in the Merger Agreement, including, among others, covenants by each of the Company and
Richfield to, subject to certain exceptions, conduct its business in the ordinary course during the interim period between the
execution of the Merger Agreement and the consummation of the Merger.
Amendment to Agreement and Plan of Merger
On July 17, 2014, the Company, Richfield and
Richfield Acquisition Corp. entered into Amendment No. 1 (the “Amendment”) to the Merger Agreement.
Pursuant to the Amendment, certain conditions
to the obligations of the parties to consummate the Merger were amended as follows: (i) the condition that the Company have no
less than $5,000,000 in cash on hand at the time of the Merger was reduced to no less than $2,000,000 in cash on hand; (ii) the
condition that not more than 5% of Richfield’s stockholders shall have taken the steps required by the Appraisal Provisions
of the NRS to obtain payment for the value of their shares in connection with the Merger was increased to not more than 10% and
(iii) the condition that Richfield’s liabilities (excluding certain permitted exceptions) not exceed $6,500,000 was increased
to $6,650,000. In addition, the right of each party to terminate the Merger Agreement if the Merger has not been consummated by
the “end date” of September 30, 2014 was extended to November 30, 2014 (and until January 30, 2015 if all closing conditions
(other than receipt of Richfield’s shareholder approval or the failure of the Form S-4 registration statement to be declared
effective) have been satisfied by November 30, 2014).
Stratex Oil & Gas Holdings, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2014
(unaudited)
The foregoing description of the Amendment
to the Agreement and Plan of Merger does not purport to be complete, and is qualified in its entirety by reference to the full
text of the Amendment No. 1 to Agreement and Plan of Merger, included as an exhibit with the Company’s Form 8-K filed on
July 23, 2014.
Additionally, the amount of potential advances to Richfield by the Company (Note 5 – Notes Receivable and
Accrued Interest) was increased by $1,000,000 to a total of $4,000,000.
Note 11 Subsequent Events:
The Company has evaluated all events that occurred
after the balance sheet date through the date when the condensed consolidated financial statements were issued to determine if
they must be reported. The management of the Company determined that there were certain reportable subsequent events to be disclosed
as follow.
On August 26, 2014 the Company filed a registration
statement on Form S-4 with the Securities and Exchange Commission (“SEC”). The registration statement became effective
on October 24, 2014.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion will assist in the understanding the financial position, liquidity and results of operations of Stratex Oil
& Gas Holdings, Inc. (“we”, “our” or the “Company”). The information below should be read
in conjunction with the consolidated financial statements, the related notes to consolidated financial statements and our Annual
Report on Form 10-K for the year ended December 31, 2013.
Overview
We
are an independent energy company focused on the acquisition and subsequent exploitation and development of predominantly crude
oil in Texas and Kansas as well as varied non-operated working interests in North Dakota, Montana and Utah. In Texas, we have
an interest in a property located in Zavala County. Our Zavala County acreage lies within the established oil rim of the prolific
Eagle Ford Shale play, one of the most actively drilled formations in the United States. We intend to target multiple stacked
pay zones present on our Zavala County acreage, specifically the San Miguel, Austin Chalk and Buda formations, which all produce
locally.
Our
present corporate strategy is to internally identify certain opportunities which could take the form of the purchase of producing
properties with meaningful development drilling upside, bolt on acreage and/or production and farm-ins. We intend to evaluate
such opportunities utilizing subsurface geology, geophysical data, existing well control and analysis of well bore economics,
and may retain the services of outside consultants on a contract basis.
Historically,
the Company has only held small, non-operated working interests in North Dakota, Montana and Kansas. By virtue of our joint ventures
in Zavala County, we intend to actively exploit this property by serving as operator and owning much larger working interests.
By assuming the role of operator, subject to the terms of the underlying leases, we will be able to exert far greater control
over the timing of expenditures, drilling and completion costs, and operating budgets.
On
May 6, 2014, the Company, Richfield Oil & Gas Company (“Richfield”), and Richfield Acquisition Corp. (“RAC”),
a wholly-owned subsidiary of the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant
to which, subject to the satisfaction or waiver of certain conditions, RAC will merge with and into Richfield, with Richfield
surviving as a wholly owned subsidiary of the Company. Concurrently with the entry into the Merger Agreement, the Company, Richfield,
and certain of Richfield's subsidiaries entered into a Note and Security Agreement (the "Loan Agreement") providing
for pre-merger advances of up to $3,000,000 by the Company to Richfield and its subsidiaries. Up to $2,000,000 of this amount
will be dedicated specifically to developing Richfield's Kansas properties, under a mutually agreeable work program. The remaining
$1,000,000 ($500,000 of which was advanced upon the entry into the Merger Agreement) will be used by Richfield for general corporate
purposes approved by the Company. The obligations of Richfield and its subsidiaries under the Loan Agreement are secured by a
lien on substantially all of Richfield's assets.
On
July 17, 2014, the Company and Richfield entered into an Amended and Restated Note and Security Agreement, pursuant to which the
amount the Company has agreed to advance to Richfield and its subsidiaries, has been increased by $1,000,000 to a total of $4,000,000.
Of the additional $1,000,000, $200,000 may be used by Richfield for general corporate purposes and $800,000 is to be used solely
in connection with the Kansas Work Program. As of November 5, 2014, a total of $3,773,085 had been advanced by the Company to
Richfield, of which $1,200,000 has been utilized for general corporate purposes and $2,573,085 has been used to develop Richfield’s
Kansas properties.
Upon
the closing of the proposed merger, the Company intends to focus its development budget both on our existing Zavala County property
as well as Richfield’s Kansas properties. Management also intends to exploit, in conjunction with third-party partners,
Richfield’s Utah resource potential. Because the merger is subject to certain terms and conditions, there can be no assurances
that the merger will close or, that if it does so, we will be able to successfully integrate Richfield’s assets with those
of the Company.
In
addition to the foregoing, we continually review opportunities to acquire producing properties and leasehold acreage, and to enter
into joint development drilling arrangements primarily, but not limited to, our core operating areas. We intend to continue to
transition our operations from small, passive, non-operated working interests to assuming the role of operator with significant
or majority ownership interests. This will allow the Company to have substantial control over the timing of expenditures, drilling
and completion costs, and operating budgets.
Our
approach to acquiring leases and developing producing properties focuses on three types of development activities:
|
● |
Activities
involving the identification, acquisition and development of leases of property in which oil or natural gas is known to exist. |
|
|
|
|
● |
Activities
involving low or moderate exploration and development risk. These include leases of property where oil and natural gas has
been produced in the past but there are no existing wells. |
|
|
|
|
● |
Activities
involving the acquisition of properties where it is reasonably believed that potential hydrocarbon values exist based on analysis
involving geochemical, radiometric, gravitational and seismic data. This may include projects that have never been drilled
or tested for oil and natural gas in the past. |
Results
of Operations for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013:
Revenues:
Our
oil revenues increased by $72,630, or 32.8%, from $221,681 for the three months ended September 30, 2013 to $294,311 for the three
months ended September 30, 2014. The increase in revenue is primarily attributable to increased production. The majority of production
increase was the result of turning new wells on production in both Texas and Kansas. Overall, there was an increase of 1,228 barrels
of oil produced for the three months ended September 30, 2014 over the same period in 2013. This was partially offset by a decrease
of $11.01 in the weighted average price per barrel sold for the three months ended September 30, 2014 from the same period in
2013.
Our
net oil production for the three months ended September 30, 2014 averaged approximately 38 Bopd compared to approximately 24 Bopd
for the three months ended September 30, 2013. The increase in production in 2014 compared to 2013 is due to the additional production
on recently drilled or acquired wells in Texas and Kansas.
Operating
Expenses:
● |
Production
expense was $120,025 for the three months ended September 30, 2014 compared to $66,201 for the three months ended September
30, 2013. Production expenses increased due to the addition of newly drilled and acquired wells in Texas and Kansas, as well
as an increase in overall production from existing wells for the quarter. |
|
|
● |
General
and administrative expense was $1,661,037 for the three months ended September 30, 2014 compared to $1,008,494 for the three
months ended September 30, 2013. The increase of $652,543 is primarily attributable to the following approximate net increases
(decreases) in operating expenses: |
|
|
|
|
● |
An
increase in legal and professional fees of $410,200. In the current period the Company incurred higher legal and consulting
fees due to the Company negotiating and entering into various Joint Development Agreements, the Company’s private offering
and the potential merger with Richfield. |
|
|
|
|
● |
An
increase in travel and travel related expenses of $90,500 due to an increase in consultants
travel reimbursements, as well as additional travel required in connection with the above
transactions.
|
|
● |
An
increase in stock based compensation fees of $109,500. In the current period the Company incurred higher stock based compensation
due to increased consulting costs as part of the potential merger with Richfield, and for stock awarded as part of an employment
agreement for new employee. |
|
|
|
|
● |
An
increase in wages, taxes, and fringe benefits of $308,900 related to the hiring of additional
employees in the current period. This was offset by a decrease of separation expense
of ($799,000) that was included in the three months ended September 30, 2013.
|
|
● |
An
increase of stock options and warrants issued of $453,200 as a result of the Company
hiring a General Counsel, Chief Administrative Officer, and VP- Operations during the
current period. The Company also issued options to one of its Independent Directors.
|
|
● |
An
increase in accounting fees of $34,900. The increase was primarily due to additional services being provided for the three
months ended September 30, 2014 related to the potential merger with Richfield, that were not provided during the three months
ended September 30, 2013. |
|
|
|
● |
We
recorded depletion, depreciation, amortization and accretion of $72,379 during the three months ended September 30, 2014 compared
to $26,492 during the three months ended September 30, 2013. The increase of 173% or $45,877, in these expenses reflects an
increase in overall production compared to the three months ended September 30, 2013. There was also an increase in depreciation
expense of $10,251 during the three months ended September 30, 2014 on our well equipment as a result of $324,103 in equipment
additions since September 30, 2013. |
Other
Income and (Expense):
Other
Income (Expense)-net: Other income (expenses) consists primarily of gains and losses on the change in fair value of derivative
liabilities, gains and losses on sale of oil and gas properties/interests and interest expense all primarily related to the Company’s
convertible promissory notes, traditional notes and warrant issuances.
Other
income (expenses) - net decreased by ($283,343) to $97,426 for the three months ended September 30, 2014 as compared to other
income (expenses) - net of $380,769 for the three months ended September 30, 2013. For the three months ended September 30, 2014
other income (expenses) consisted of $33,109 in interest income, ($780,627) in interest expense, a gain on change in fair value
of derivative liabilities of $16,296, debt forgiveness income $25,000, warrant amendment expense $3,452, and other income of $807,100
as the Company received a favorable legal settlement with a past Officer of the Company for $799,000. For the three months ended
September 30, 2013 other income (expenses) consisted of ($409,701) in interest expense, a gain on change in fair value of derivative
liabilities of $515,470, and gain on sale of oil and gas interests of $275,000.
Results
of Operations for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013:
Revenues:
Our
oil revenues increased by 37,500, or 5.5%, from $675,861 for the nine months ended September 30, 2013 to $713,361 for the nine
months ended September 30, 2014. The increase was attributable to increased production for newly drilled and acquired wells in
Kansas and Texas. Overall, there was an increase of 543 barrels of oil produced for the nine months ended September 30, 2014 over
the same period in 2013. This increase was offset by a decrease of $5.91 in the weighted average price per barrel sold for the
nine months ended September 30, 2014 from the same period in 2013.
Our
net oil production for the nine months ended September 30, 2014 averaged approximately 29 Bopd compared to approximately 27 Bopd
for the nine months ended September 30, 2013. As mentioned above the increase in production in 2014 compared to 2013 is due to
increased production for newly drilled and acquired wells in both Texas and Kansas
Operating
Expenses:
● |
Production
expense was $301,755 for the nine months ended September 30, 2014 compared to $164,852 for the nine months ended September
30, 2013. The production expense increase of $136,903 or 83% was due to increased repair and maintenance costs on our existing
wells, the addition of newly drilled and acquired wells in Texas and Kansas for the nine months ended September 30, 2014 over
the same period in 2013. |
|
|
● |
Loss
on Abandonment of oil and gas assets was ($318,800) for the nine months ended September
30, 2014 and $0 for the period ended September 30, 2013. The abandonment loss was recognized
to reflect the Company’s termination of its Callahan County Joint Development Agreement.
|
● |
General
and administrative expense was $5,327,433 for the nine months ended September 30, 2014 compared to $1,981,793 for the nine
months ended September 30, 2013. The increase of $3,345,640 in operating expenses is primarily attributable to the following
approximate net increases (decreases) in operating expenses: |
|
|
|
|
● |
An
increase in legal and professional fees of $1,345,300. In the current period the Company
incurred higher legal and consulting fees due to the Company negotiating and entering
into multiple Joint Development Agreements, the Company’s private offering and
the potential merger with Richfield.
|
|
● |
An
increase in stock based compensation fees of $605,900. In the current period the Company incurred higher stock based compensation
due to increased consulting costs as part of the potential merger with Richfield, potential future acquisitions, investor
relations and new employee hires. |
|
|
|
|
● |
An
increase in travel and travel related expenses of $180,700 due to an increase in Consultants travel reimbursements, as well
as additional travel required in connection with the above transactions. |
|
|
|
|
● |
An
increase in wages, taxes, and fringe benefits of $298,820 related to the hiring of additional employees. This was offset by a
decrease of separation expense of ($799,000) that was included in the three months ended September 30, 2013. |
|
● |
An
increase of stock options and warrants issued of $1,522,100 as a result of the Company hiring a Corporate Counsel, Chief Administrative
Officer and Director of Field Operations during the current year. The Company also issued warrants to three consultants, and
options to an Independent Director during the nine months ended September 30, 2014. |
|
|
|
|
● |
An increase in insurance expenses of $24,800. The increase was related to increased coverage limits compared
to the nine months ended September 30, 2013. |
|
|
|
● |
We
recorded depletion, depreciation, amortization and accretion of $114,086 during the nine months ended September 30, 2014 compared
to $132,425 during the nine months ended September 30, 2013. The decrease of (14%) or ($18,339), was the result of a $34,000
Asset Retirement Obligation reduction during the year. This was slightly offset by an increase in overall production resulting
in increased depletion and accretion compared to the nine months ended September 30, 2013. There was also an increase in depreciation
expense of $20,000 during the nine months ended September 30, 2014 on the Company’s well equipment as a result of $324,103
in equipment additions since September 30, 2013. |
Other
Income and (Expense):
Other
Income (Expense)-net: Other income (expenses) consists primarily of gains and losses on the change in fair value of derivative
liabilities, gains and losses on sale of oil and gas properties/interests and interest expense all primarily related to the Company’s
convertible promissory notes, traditional notes and warrant issuances.
Other
income (expenses) - net increased by ($1,056,138) to ($1,496,170) for the nine months ended September 30, 2014 as compared to
other income (expenses) - net of ( $440,032) for the nine months ended September 30, 2013. For the nine months ended September
30, 2014 other income (expenses) consisted of $41,180 in interest income, ($2,868,302) in interest expense, a loss on change in
fair value of derivative liabilities of ($55,798), warrant amendment expense of ($18,207), a gain on sale of oil and gas interests
of $450,000, a gain on settlement of liabilities of $83,600, debt forgiveness income $25,000, and other income of $846,357. For
the nine months ended September 30, 2013 other income (expenses) consisted of ($1,254,707) in interest expense, a gain on change
in fair value of derivative liabilities of $526,715, gain on sale of oil and gas interests of $275,000 and other income of $12,960.
Liquidity
and Capital Resources:
We
have incurred net operating losses and operating cash flow deficits since inception, continuing through the third quarter of 2014.
We are in the early stages of acquisition and development of oil and gas leaseholds and properties, and we have been funded primarily
by a combination of equity issuances and debt, and to a lesser extent by operating cash flows, to execute on our business plan
of acquiring working interests in oil and gas properties and for working capital for production.
From
February 11, 2014 through September 30, 2014, the Company raised gross proceeds of $9,987,650 from the sale of our 12% Series
A Senior Secured Convertible Promissory Notes (the “Series A Notes”) and gross proceeds of $8,014,560 from the sale
of our 12% Series B Senior Secured Convertible Promissory Notes (the “Series B Notes”) to investors in a private offering.
At September 30, 2014, we had cash and cash equivalents totaling $6,072,037.
We
believe that our working capital on hand as of the date of this report will be sufficient to fund our plan of operations over
the next 12 months, as well as to make any additional required advances to Richfield pursuant to the terms of the Loan Agreement.
However, there can be no assurance that we will not require additional capital within the next 12 months. Our ability to obtain
additional financing may be impaired by many factors outside of our control, including the capital markets (both generally and
in the crude oil and natural gas industry in particular), our limited operating history, the location of our crude oil and natural
gas properties and prices of crude oil and natural gas on the commodities markets (which will impact the amount of asset-based
financing available to us) and other factors. Further, if crude oil or natural gas prices on the commodities markets decline,
our revenues will likely decrease and such decreased revenues may increase our requirements for capital.
Any
new debt or equity financing arrangements may not be available to us, or may be available only on unfavorable terms. Additionally,
these alternatives could be highly dilutive to our existing stockholders, and may not provide us with sufficient funds to meet
our long-term capital requirements. We have and may continue to incur substantial costs in the future in connection with raising
capital to fund our business, including investment banking fees, legal fees, accounting fees, securities law compliance fees,
printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with
certain securities we may issue, which may adversely impact our financial condition. If the amount of capital we are able to raise
from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs (even to
the extent that we reduce our operations), we will be required to reduce operating costs, which could jeopardize our future strategic
initiatives and business plans, and we may be required to sell some or all of our properties (which could be on unfavorable terms),
seek joint ventures with one or more strategic partners, strategic acquisitions and other strategic alternatives, cease our operations,
sell or merge our business, or file a petition for bankruptcy.
The following
table summarizes our total current assets, total current liabilities and working capital surplus (deficit) as of September 30,
2014 compared to December 31, 2013:
| |
September 30 | | |
December 31 | |
| |
2014 | | |
2013 | |
Current Assets | |
$ | 10,415,366 | | |
$ | 630,081 | |
Current Liabilities | |
| 2,188,343 | | |
| 1,921,290 | |
Working Capital Surplus (Deficit) | |
$ | 8,227,023 | | |
$ | (1,291,209 | ) |
Cash
and cash equivalents were $6,072,037 as of September 30, 2014, compared to $ 609,061 as of December 31, 2013. Changes in the net
cash provided by and (used in) our operating, investing and financing activities for the nine months ended September 30, 2014
and 2013 are set forth in the following table:
| |
Nine Months Ended | | |
Net Cash | |
| |
September 30 | | |
Increase | |
| |
2014 | | |
2013 | | |
(Decrease) | |
Net cash (used in) provided by operating activities | |
$ | (2,938,942 | ) | |
$ | 184,832 | | |
$ | (3,123,774 | ) |
Net cash (used in) provided by investing activities | |
| (7,894,418 | ) | |
| 241,477 | | |
| (8,135,895 | ) |
Net cash provided by (used in) financing activities | |
| 16,296,336 | | |
| (73,750 | ) | |
| 16,370,086 | |
Increase (decrease) in cash and cash equivalents | |
$ | 5,462,976 | | |
$ | 352,559 | | |
$ | 5,110,417 | |
Cash
Flows from Operating Activities:
Net
cash from operating activities is derived from net loss from operations adjusted for non-cash items, changes in the balances of
accounts receivables, deposits and prepaid expenses, accounts payables, accrued expenses and other payables. For the nine months
ended September 30, 2014, we used net cash in operating activities in the amount of ($2,938,942) compared to $184,832 of cash
provided by operating activities for the nine months ended September 30, 2013. The decrease in cash provided by operating activities
during the nine months ended September 30, 2014 as compared to September 30, 2013 is primarily due to increases in legal, professional
fees and travel expenses related to the proposed merger during the period. This was partially offset by the Company receiving
$450,000 in proceeds from the sale of oil and gas interests during 2014.
Cash
Flows from Investing Activities:
Cash
used in investing activities for the nine months ended September 30, 2014 was ($7,894,418) as compared to $241,477 provided during
the nine months ended September 30, 2013. The net increase is primarily due to a significant increase in capital acquisition costs,
and joint development costs and increases in note receivable as part of the proposed merger agreement with Richfield during the
first nine months of 2014 as compared to the comparable period ended 2013.
Cash
Flows from Financing Activities:
Total
net cash provided by financing activities was $16,296,336 for the nine months ended September 30, 2014, as compared to ($73,750)
used during the nine months ended September 30, 2013. The net increase was derived from various debt and equity offerings. For
more details about these debt and equity financings, see Notes to the Condensed Consolidated Financial Statements for the nine
months ended September 30, 2014, incorporated by reference herein.
Planned
Capital Expenditures
Depending
on our ability to obtain sufficient financing, development plans for 2014 include identifying, acquiring and operating properties
as well as continued development of our existing leases. The Company plans to continue its Joint Development Programs in Texas
and to review opportunistic acquisitions when available. We will also to continue to participate in the ongoing Authorization
for Expense (AFE) process for the existing properties where these programs make economic sense for the Company.
The
Company incurred approximately $4,512,554 in development costs related to the purchase and development of working interest in
wells during the nine months ended September 30, 2014. Unrelated to any potential acquisitions or advances to be made to Richfield
under the Loan Agreement, the Company expects to incur maintenance and operating costs of approximately $45,000 to $60,000 per
month for the next twelve months to maintain these assets.
Effects
of Inflation and Pricing
The
oil and gas industry is cyclical and the demand for goods and services by oil field companies, suppliers and others associated
with the industry put significant pressure on the economic stability and pricing structure within the industry. Typically, as
prices for oil and natural gas increase all other associated costs increase as well. Conversely, in a period of declining prices,
associated cost declines are likely to lag and may not adjust downward in proportion to the declining prices. Material changes
in prices also impact our current revenue stream, estimates of future reserves, impairment assessments of oil and natural gas
properties, and values of properties in purchase and sale transactions. Material changes in prices can impact the value of oil
and gas companies and their ability to raise capital, borrow money and retain personnel. While we do not currently expect business
costs to materially increase, higher prices for oil and natural gas could result in increases in the costs of materials, services
and personnel.
Critical
Accounting Policies
The
establishment and consistent application of accounting policies is a vital component of accurately and fairly presenting our consolidated
financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”),
as well as ensuring compliance with applicable laws and regulations governing financial reporting. While there are rarely alternative
methods or rules from which to select in establishing accounting and financial reporting policies, proper application often involves
significant judgment regarding a given set of facts and circumstances and a complex series of decisions.
Asset
Retirement Obligations
We
have obligations to plug and abandon our oil and natural gas wells and related equipment. Liabilities for asset retirement obligations
are recorded at fair value in the period incurred. The related asset value is increased by the same amount. Asset retirement costs
included in the carrying amount of the related asset are subsequently allocated to expense as part of our depletion calculation.
Estimating
future asset retirement obligations requires us to make estimates and judgments regarding timing, existence of a liability, as
well as what constitutes adequate restoration. We use the present value of estimated cash flows related to our asset retirement
obligations to determine the fair value. Present value calculations inherently incorporate numerous assumptions and judgments,
which include the ultimate retirement and restoration costs, inflation factors, credit adjusted discount rates, timing of settlement,
and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions
impact the present value of our existing asset retirement obligation liability, a corresponding adjustment will be made to the
carrying cost of the related asset.
Revenue
Recognition
Revenue
from the sale of crude oil, natural gas and natural gas liquids is recorded when the significant risks and rewards of ownership
of the product is transferred to the buyer, which is usually when legal title passes to the external party. For crude oil and
natural gas liquids, delivery generally occurs upon pick up at the field tank battery and natural gas delivery occurs at the pipeline
delivery point. Revenue is not recognized for the production in tanks, or oil in pipelines that has not been delivered to the
purchaser. Revenue is measured net of discounts and royalties. Royalties and severance taxes are incurred based on the actual
price received from the sales. We use the sales method of accounting for imbalances related to differences between the volume
of gas sold and the volumes to which we are entitled based on our interest in various properties. We would recognize a liability
if the existing proven reserves were not adequate to cover the current imbalance situation. For all periods reported, we had no
natural gas production.
Stock-Based
Compensation
We
have accounted for stock-based compensation under the provisions of FASB ASC 718. This standard requires us to record an
expense associated with the fair value of stock-based compensation over the period in which it is earned, typically the vesting
period. We use the Black-Scholes option valuation model to calculate the value of options and warrants at the date of grant and
as of each reporting period. Option pricing models require the input of highly subjective assumptions, including the expected
price volatility. Changes in these assumptions can materially affect the fair value estimate.
Stock
Issuance
We
record the stock-based awards issued to consultants and other external entities for goods and services at either the fair market
value of the goods received or services rendered or the instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in FASB ASC 505.
Income
Taxes
We
account for income taxes under FASB ASC 740. Deferred income tax assets and liabilities are determined based upon differences
between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Accounting standards require the consideration of a valuation
allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred
tax assets will not be realized.
The
tax effects from an uncertain tax position can be recognized in the consolidated financial statements only if the position is
more likely than not to be sustained if the position were to be challenged by a taxing authority. We have examined the tax positions
taken in our tax returns and determined that there are no uncertain tax positions. As a result, we have recorded no uncertain
tax liabilities in our consolidated balance sheet.
Oil
and Gas Properties
We
account for oil and natural gas properties by the successful efforts method. Under this method of accounting, costs relating to
the acquisition and development of proved areas are capitalized when incurred. The costs of development wells are capitalized
whether productive or non-productive. Leasehold acquisition costs are capitalized when incurred. If proved reserves are found
on an unproved property, leasehold costs are transferred to proved properties. Exploration dry holes are charged to expense when
it is determined that no commercial reserves exist. Other exploration costs, including personnel costs, geological and geophysical
expenses and delay rentals for oil and natural gas leases, are charged to expense when incurred. The costs of acquiring or constructing
support equipment and facilities used in oil and natural gas producing activities are capitalized. Production costs are charged
to expense as incurred and are those costs incurred to operate and maintain our wells and related equipment and facilities.
Depletion
of producing oil and natural gas properties is recorded based on units of production. Acquisition costs of proved properties are
depleted on the basis of all proved reserves, developed and undeveloped, and capitalized development costs (wells and related
equipment and facilities) are depleted on the basis of proved developed reserves. As more fully described below, proved reserves
are estimated by our independent petroleum engineer and are subject to future revisions based on availability of additional information.
Asset retirement costs are recognized when the asset is placed in service, and are depleted over proved reserves using the units
of production method.
Oil
and natural gas properties are reviewed for impairment when facts and circumstances indicate that their carrying value may not
be recoverable. We compare net capitalized costs of proved oil and natural gas properties to estimated undiscounted future net
cash flows using management’s expectations of future oil and natural gas prices. These future price scenarios reflect our
estimation of future price volatility. If net capitalized costs exceed estimated undiscounted future net cash flows, the measurement
of impairment is based on estimated fair value, using estimated discounted future net cash flows based on management’s expectations
of future oil and natural gas prices. We have recorded no impairment on any of our properties.
Unproven
properties that are individually significant are assessed for impairment and if considered impaired are charged to expense when
such impairment is deemed to have occurred.
The
sale of a partial interest in a proved oil and natural gas property is accounted for as normal retirement and no gain or loss
is recognized as long as this treatment does not significantly affect the units-of-production depletion rate. If the units-of-production
rate is significantly affected, then the sale is accounted for as the sale of an asset, and a gain or loss is recognized. The
unamortized cost of the property or group of properties is apportioned to the interest sold and interest retained on the basis
of the fair values of those interests. A gain or loss is recognized for all other sales of producing properties and is included
in the results of operations. The sale of a partial interest in an unproved property is accounted for as a recovery of cost when
substantial uncertainty exists as to recovery of the cost applicable to the interest retained. A gain on the sale is recognized
to the extent the sales price exceeds the carrying amount of the unproved property. A gain or loss is recognized for all other
sales of nonproducing properties and is included in the results of operations.
Oil
and Gas Reserves
The
determination of depreciation, depletion and amortization expense as well as impairments that are recognized on our oil and natural
gas properties are highly dependent on the estimates of the proved oil and natural gas reserves attributable to our properties.
Our estimate of proved reserves is based on the quantities of oil and natural gas which geological and engineering data demonstrate,
with reasonable certainty, to be recoverable in the future years from known reservoirs under existing economic and operating conditions.
The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation,
and judgment. For example, we must estimate the amount and timing of future operating costs, production taxes and development
costs, all of which may in fact vary considerably from actual results. In addition, as the prices of oil and natural gas and cost
levels change from year to year, the economics of producing our reserves may change and therefore the estimate of proved reserves
may also change. Any significant variance in these assumptions could materially affect the estimated quantity and value of our
reserves.
The
information regarding present value of the future net cash flows attributable to our proved oil and natural gas reserves are estimates
only and should not be construed as the current market value of the estimated oil and natural gas reserves attributable to our
properties. Thus, such information includes revisions of certain reserve estimates attributable to our properties included in
the prior year’s estimates. These revisions reflect additional information from subsequent activities, production history
of the properties involved and any adjustments in the projected economic life of such properties resulting from changes in oil
and natural gas prices. Any future downward revisions could adversely affect our financial condition, our borrowing ability, our
future prospects and the value of our common stock.
Use
of Estimates
The
preparation of financial statements under GAAP in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. The most
significant estimates relate to proved oil and natural gas reserve volumes, certain depletion factors, future cash flows from
oil and natural gas properties, estimates relating to certain oil and natural gas revenues and expenses, valuation of equity-based
compensation, valuation of asset retirement obligations, estimates of future oil and natural gas commodity pricing and the valuation
of deferred income taxes. Actual results may differ from those estimates.
New
Accounting Pronouncements
From time
to time, new accounting pronouncements are issued by FASB that we adopt as of the specified effective date. If not discussed,
management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact
on our financial statements upon adoption. (See Note 2 to our Financial Statements)
Off-Balance
Sheet Arrangements
We
currently do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect
on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to investors.
Item
4. Controls and Procedures
We
maintain disclosure controls and procedures that are designed to provide reasonable assurance that material information required
to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized, and reported within the
time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated
and communicated to our management, including our chief executive and chief financial officer, to allow timely decisions regarding
required disclosure. As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision
and with the participation of our management, including our principal executive and principal financial officer, of the effectiveness
of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the Exchange Act.
Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 30,
2014, our disclosure controls and procedures were effective.
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control
over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the
preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles, or GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
With
the participation of our chief executive and chief financial officer, our management conducted an evaluation of the effectiveness
of our internal control over financial reporting as of September 30, 2014 based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon our
assessment we believe that as of September 30, 2014 the Company’s internal control over financial reporting was not effective
due to the existence of material weakness identified by management and disclosed below.
Lack
of Appropriate Independent Oversight. During the quarter covered by this report, there was only one independent member of the
Board of Directors who could provide an appropriate level of oversight, including challenging management’s accounting for
and reporting of transactions. Although an independent board of directors is not required by the OTC Markets (the electronic quotation
system that trades the Company’s securities), we have attempted to remediate this weakness and have added one independent
director to our Board of Directors. We have also engaged a consultant to assist the Company with certain, non-routine and unusual
accounting issues and transactions when they are encountered.
Our
management, including our chief executive and chief financial officer, does not expect that our disclosure controls and procedures
or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include,
but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions,
or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.
During
the fiscal quarter ended September 30, 2014, there have been no changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART
II - Other Information
Item
6. Exhibits
Exhibit
No. |
|
Description |
|
|
31.1 |
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith) |
31.2 |
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith) |
32.1 |
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act
of 2002. (Filed herewith) |
32.2 |
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act
of 2002. (Filed herewith) |
101 .INS |
|
XBRL Instance
Document |
101 .SCH |
|
XBRL Taxonomy
Schema |
101 .CAL |
|
XBRL Taxonomy
Calculation Linkbase |
101 .DEF |
|
XBRL Definition
Linkbase |
101 .LAB |
|
XBRL Taxonomy
Label Linkbase |
101 .PRE |
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XBRL Taxonomy
Presentation Linkbase |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
STRATEX
OIL & GAS HOLDINGS, INC. |
|
|
|
Date: November
13, 2014 |
By: |
/s/
Stephen Funk |
|
|
Stephen Funk |
|
|
Chief Executive
Officer and Director |
|
|
(Principal Executive
Officer) |
|
|
|
Date: November
13, 2014 |
By: |
/s/
Stephen Funk |
|
|
Stephen Funk |
|
|
Chief Financial
Officer |
|
|
(Principal Financial
Officer) |
36
Exhibit 31.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
I, Stephen Funk, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Stratex Oil & Gas Holdings, Inc.; |
|
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financing reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
|
|
|
b) |
Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 13, 2014 |
|
|
/s/ Stephen Funk |
|
Stephen Funk, Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
I, Stephen Funk, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Stratex Oil & Gas Holdings, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financing reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
|
|
|
b) |
Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 13, 2014 |
|
|
/s/ Stephen Funk |
|
Stephen Funk, Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Quarterly Report of
Stratex Oil & Gas Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30,
2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen Funk, Chief
Executive Officer of the Company, certify to the best of his knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to
Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
|
1. |
Such Quarterly Report on Form 10-Q for the period ended September 30, 2014, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
2. |
The information contained in such Quarterly Report on Form 10-Q for the period ended September 30, 2014 fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 13, 2014 |
|
|
/s/ Stephen Funk |
|
Stephen Funk |
|
Chief Executive Officer |
Exhibit 32.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with this Quarterly Report of
Stratex Oil & Gas Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014,
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen Funk, Chief Financial
Officer and Principal Accounting Officer of the Company, certify to the best of his knowledge, pursuant to 18 U.S.C. Sec. 1350,
as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
|
1. |
Such Quarterly Report on Form 10-Q for the period ended September 30, 2014, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
2. |
The information contained in such Quarterly Report on Form 10-Q for the period ended September 30, 2014 fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 13, 2014 |
|
|
/s/ Stephen Funk |
|
Stephen Funk |
|
Chief Financial Officer and Principal Financial Officer |
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