U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x 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

 

o TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

 

From the transition period from ____________ to ___________.

 

Commission File Number 000-50541

 

Breitling Energy Corporation

(Exact name of small business issuer as specified in its charter)

N/A

(Former Name if Applicable)

 

Nevada		88-0507007
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

 

1910 Pacific Ave, Suite 12000

Dallas, Texas 75201

(Address of principal executive offices)

 

(214) 716-2600

(Issuer's telephone number)

 

Indicate by check mark whether the issuer has (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 (ss. 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 the 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	☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒

 

As of November 13, 2014, there were outstanding 499,083,626 shares of common stock, $0.001 par value per share.

 

 

 

BREITLING ENERGY CORPORATION AND SUBSIDIARIES

INDEX TO FORM 10-Q

September30, 2014

 

Part I	Financial Information
	Item 1.	Financial Statements	3
		Consolidated and Combined Balance Sheets – September 30, 2014 (unaudited) and December 31, 2013	3
		Consolidated and Combined Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2014 and 2013	4
		Consolidated and Combined Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2014 and 2013	5
		Notes to Unaudited Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	10
	Item 4.	Controls and Procedures	10
Part II	Other Information
	Item 1.	Legal Proceedings	10
	Item 1A.	Risk Factors	10
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	10
	Item 3.	Defaults Upon Senior Securities	10
	Item 4.	Mine Safety Disclosure	11
	Item 5.	Other Information	11
	Item 6.	Exhibits	11

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1   FINANCIAL STATEMENTS

 

BREITLING ENERGY CORPORATION

 

CONSOLIDATED AND COMBINED BALANCE SHEETS

 

		September 30, 2014				December 31, 2013
		Unaudited
ASSETS
Current assets
Cash		$	1,930,555			$	606,715
Other			-				898
Total current assets			1,930,555				607,613
Other assets
Equity investment			62,862				3,561
Other property and equipment, net of depreciation			158,495				153,621
Total other assets			221,357				157,182
Total assets		$	2,151,912			$	764,795
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable and accrued liabilities		$	2,427,440			$	3,119,727
Joint interest revenues payable			-				151,153
Deferred revenue from third party contracts			-				4,609,041
Current asset retirement obligations			24,770				16,495
Total current liabilities			2,452,210				7,896,416
Commitments and contingencies
Long-term liabilities
Asset retirement obligations			38,386				20,842
Stockholders’ deficit
Common stock, $.001 par value; 500,000,000 shares authorized; 499,083,626 and 498,883,626 shares issued and outstanding, respectively			499,084				498,884
Additional paid in capital			19,800				-
Accumulated deficit			(857,568	)			(7,651,347	)
Total stockholders’ deficit			(338,684	)			(7,152,463	)
Total liabilities and stockholders’ deficit		$	2,151,912			$	764,795

  

See accompanying notes to the unaudited consolidated and combined financial statements.

 

 

BREITLING ENERGY CORPORATION

 

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

 

		For the three months ended  September 30,								For the nine months ended  September 30,
		2014 Unaudited				2013 Unaudited				2014 Unaudited				2013 Unaudited
Revenues
Third party drilling		$	6,593,060			$	4,244,145			$	24,456,653			$	9,645,784
Gain on sale of oil and natural gas royalties			9,579,685				6,178,362				24,323,814				14,041,732
Oil, natural gas, and related product sales			309,060				190,441				644,419				432,820
Total revenues			16,481,805				10,612,948				49,424,886				24,120,336
Expenses
Third party drilling and completion			8,467,587				1,689,365				18,491,676				3,839,465
General and administrative			2,925,728				5,504,605				6,214,643				12,510,468
Marketing			4,856,874				930,468				11,713,107				2,114,700
Professional fees			204,165				1,859,409				5,079,510				4,225,928
Lease operating			293,543				200,677				382,036				456,084
Depreciation and amortization			9,313				3,705				38,993				11,113
Total expenses			16,757,210				10,188,229				41,919,965				23,157,758
Operating (loss) income			(275,405	)			424,719				7,504,921				962,578
Other expense
Interest expense			-				1,009				-				2,294
(Loss) Income before income taxes			(275,405	)			423,710				7,504,921				960,284
Income tax expense
Income tax provision			483,824				7,697				711,142				17,493
Net (loss) income		$	(759,229	)		$	416,013			$	6,793,779			$	942,791
Net (loss) income per basic and diluted common share		$	(0.00	)		$	0.00			$	0.01			$	0.00
Weighted average basic and diluted common shares outstanding			499,083,626				498,883,626				499,083,626				498,883,626

 

See accompanying notes to the unaudited consolidated and combined financial statements.

 

 

BREITLING ENERGY CORPORATION

 

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

 

		For the nine months ended September 30,
		2014 (Unaudited)				2013 (Unaudited)
Cash flows from operating activities
Net income		$	6,793,779			$	942,791
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			28,416				11,113
Accretion of asset retirement obligation			10,577				2,294
Additions to ARO charged to turnkey drilling costs			15,242				(11,000	)
Net (gain) loss from equity investment			(59,301	)			11,000
Increase (decrease) in cash attributable to changes in operating assets and liabilities:
Other current assets			898				(8,150	)
Accounts payable and accrued liabilities			(692,287	)			(559,823	)
Joint interest revenues payable			(151,153	)			39,414
Deferred revenues			(4,609,041	)			1,541,955
Net cash provided by operating activities			1,337,130				1,969,594
Cash flows from investing activities
Acquisition of other property and equipment			(33,290	)			(121,725	)
Investment in equity investment			-				(10,500	)
Net cash used in investing activities			(33,290	)			(132,225	)
Cash flows from financing activities
Proceeds from the exercise of warrants			20,000				-
Net increase in cash			1,323,840				1,837,369
Cash, beginning of period			606,715				4,668,839
Cash, end of period		$	1,930,555			$	6,506,208

 

See accompanying notes to the unaudited consolidated and combined financial statements.

 

 

Breitling Energy Corporation

 

Notes to the Unaudited, Consolidated and Combined Financial Statements

 

1. Basis of Presentation

 

In the opinion of management, the accompanying unaudited consolidated and combined financial statements include all necessary adjustments (consisting of normal recurring adjustments) and present fairly the consolidated financial position of Breitling Energy Corporation and its subsidiaries (the “Company” or “Breitling”) as of September 30, 2014, the results of their operations for the three and nine months ended September 30, 2014 and 2013 and the results of their cash flows for the nine months ended September 30, 2014 and 2013, in conformity with generally accepted accounting principles for interim financial information applied on a consistent basis. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K, as filed with the Securities and Exchange Commission on March 31, 2014, as well as all subsequent reports on Form 8-K and Schedule 14C. Certain reclassifications have been made to the consolidated financial statements for prior periods in order to conform to the current period presentation.

 

Principles of Consolidation and Combination

 

The consolidated and combined financial statements reflect the historical combined results of the Predecessors (defined below) prior to the reverse recapitalization completed on December 9, 2013, and the consolidated results of the Company thereafter. All intercompany and inter-entity transactions have been eliminated in the consolidation and combination.

 

Recently adopted accounting pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on the Company’s accounting and reporting. The Company believes that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations and cash flows when implemented.

 

2. Organization and Nature of Operations

 

Breitling Energy Corporation was incorporated in the State of Nevada on December 13, 2000 under the name “Folix Technologies, Inc.” On August 18, 2004, the Company changed its name to Dragon Gold Resources, Inc. On June 22, 2007, the Company changed its name to Edgeline Holdings, Inc. and on March 11, 2008 to Oncolin Therapeutics, Inc. On September 7, 2010, the Company changed its name to Bering Exploration, Inc. and on January 20, 2014, to Breitling Energy Corporation.

 

On December 9, 2013, the Company entered into an Asset Purchase Agreement  with Breitling Oil and Gas Corporation, a Texas corporation (“O&G”) and Breitling Royalties Corporation, a Texas corporation (“Royalties,” and collectively with O&G, the “Predecessors”). Pursuant to the Purchase Agreement, the Company issued to the Predecessors 461,863,084 shares of the Company’s common stock, par value $.001 per share (“Common Stock”), in exchange for substantially all of the oil and gas assets owned by the Predecessors (the “Transaction”). In connection with the closing of the Transaction (the “Closing”), all of the Company’s outstanding convertible notes were converted into shares of Common Stock. The shares of Common Stock issued to the Predecessors represent approximately 92.5% of the shares of Common Stock outstanding following the Closing. The Transaction results in the owners of the Predecessors (the “accounting acquirer”) having actual or effective operating control of the Company after the Transaction, with the stockholders of the Company (the “legal acquirer”) continuing only as passive investors. The Closing did not affect the number of shares of Common Stock held by the Company’s existing public stockholders.

 

 

The Predecessors were considered the accounting acquirer for accounting purposes because they obtained effective control of the Company.  The Predecessors did not have a change in control since the Predecessors’ operations comprised the ongoing operations of the combined entity, their senior management became the senior management of the combined entity, and their former owners own a majority of the voting interest in the combined entity and are able to elect a majority of the combined entity’s board of directors. Accordingly, the Transaction does not constitute the acquisition of a business for purposes of Financial Accounting Standards Board’s Accounting Standard Codification 805, “Business Combinations,” or ASC 805. As a result, the assets and liabilities of the Predecessors’ are carried at historical cost and the Company has not recorded any step-up in basis or any intangible assets or goodwill as a result of the Transaction. The historical financial statements presented herein for the periods prior to December 9, 2013 are those of the Predecessors.  Historical financial statements for periods after December 9, 2013 include the combined business of the Company and the Predecessors.

 

3. Asset Retirement Obligation

 

The following table presents a summary of the Company’s Asset Retirement Obligation:

 

Balance as of December 31, 2013		$	37,337
Additions			15,242
Accretion			10,577
Balance as of September 30, 2014		$	63,156

 

4. Commitment and Contingencies

 

Legal

 

From time to time, the Company may become subject to proceedings, lawsuits and other claims in the ordinary course of business including working interest rescissions and operator disputes. Such matters are subject to many uncertainties, and outcomes are not predictable with any assurance. As of September 30, 2014 and December 31, 2013, the Company accrued $166,000 to settle working interest rescissions.

 

Oil and Natural Gas Regulations

 

The Company is subject to various possible contingencies that arise primarily from interpretation of federal and state laws and regulations affecting the oil and natural gas industry. Such contingencies include differing interpretations as to the prices at which oil and natural gas sales may be made, the prices at which royalty owners may be paid for production from their leases, environmental issues and other matters. Although management believes that it has complied with the various laws and regulations, administrative rulings and interpretations thereof, adjustments could be required as new interpretations and regulations are issued. In addition, environmental matters are subject to regulation by various federal and state agencies.

  

5. Income Tax Expense

 

For the three months ended September 30, 2014, we recorded an income tax expense of $483,824 compared to $7,697 during the same period last year. For the nine months ended September 30, 2014, we recorded an income tax expense of $711,142 compared to an expense of $17,493 during the 2013 period.

 

For the nine months ended September 30, 2014, the increase in income tax expense is primarily due to increased income, offset by the utilization of our net operating loss carryovers (“NOLs”).  We continue to recognize a full valuation allowance against the deferred tax asset related to our NOLs until there is greater assurance of our ability to utilize these in the future.

 

Our effective tax rates were different than our federal statutory tax rate due to utilization of our deferred tax asset and Texas state margin taxes. Estimates of future taxable income can be significantly affected by changes in oil and natural gas prices, the timing, and amount, of future operating expenses and capital costs.

 

   

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report contains forward-looking statements. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation, statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words “believe,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, our inability to obtain adequate financing, insufficient cash flows and resulting illiquidity, our inability to expand our business, government regulations, lack of diversification, volatility in the price of oil and/or natural gas, increased competition, results of arbitration and litigation, stock volatility and illiquidity, our failure to implement our business plans or strategies and general economic conditions. A description of some of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this Quarterly Report on Form 10-Q appears in the section captioned “Risk Factors” in our 2013 Annual Report on Form 10-K.

 

Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

Overview

 

We are an oil and gas exploration and production company that seeks to acquire and develop lower risk onshore oil and gas working interests and royalty interests in proven basins in the United States, such as the Permian Basin in Texas, the Bakken / Three Forks formations located in North Dakota and the Mississippi Lime and Hunton / Woodford / Cleveland formations located in Oklahoma. A portion of our oil and gas interests were acquired as royalty interests or non-operated working interests, and our asset base is primarily comprised of rights to the revenue interests. Accordingly, our revenues are primarily derived from sales of royalty interests and third party drilling. Our strategy is to use these revenues to acquire acreage we will explore and develop ourselves, particularly in the Permian Basin.

 

Results of Operations

 

For the three months ended September 30, 2014 compared to three months ended September 30, 2013:

 

Revenue. During the three months ended September 30, 2014, the Company generated revenues of $16,482,000, an increase of $5,869,000, or 55% as compared to the same period last year. The Company has increased revenues through sales of royalty interests and third party drilling in oil and gas properties due to increased available inventory and demand as compared to the same period in the prior year. Recently, there has been a significant change in oil prices and the Company cannot determine the impact in the short or long term.

 

 

Total Expenses. During the three months ended September 30, 2014, total expenses, which include costs of third party drilling, acquisitions of royalty interests, marketing, professional fees, depreciation, operating costs and general and administrative expenses, were $16,757,000 compared to $10,188,000 during the same period in 2013. This change represents an increase of $6,569,000, or 64%. The increase was primarily due to increased costs associated with developing inventory for sales and increased expenses associated with being a public company.

 

For the nine months ended September 30, 2014 compared to nine months ended September 30, 2013:

 

Revenue. During the nine months ended September 30, 2014, the Company generated revenues of $49,425,000, an increase of $25,305,000, or 105% as compared to the same period last year. The Company recognized deferred revenues of $4,609,000 and the Company has increased revenues through sales of royalty interests and third party drilling in oil and gas properties due to increased available inventory and demand as compared to the same period in the prior year. Recently, there has been a significant change in oil prices and the Company cannot determine the impact of such change in the short or long term.

 

Total Expenses. During the nine months ended September 30, 2014, total expenses, which include costs of third party drilling, acquisitions of royalty interests, marketing, professional fees, depreciation, operating costs and general and administrative expenses, were $41,920,000 compared to $23,158,000 during the same period in 2013. This change represents an increase of $18,762,000, or 81%. The increase was primarily due to increased costs associated with developing inventory to sell and expenses associated with being a public company.

 

Liquidity and Capital Resources

 

The Company has improved its net working capital as of September 30, 2014 by $7.2 million from a deficit of $7.3 million as of December 31, 2013. The improvement was generated by the reversal of deferred revenue and cash flow generated from operations.

 

Net cash provided in operating activities of $1,337,000 for the nine months ended September 30, 2014 decreased from $1,970,000 for the same period last year, a decrease of $633,000. The decrease was primarily due to increased payments on the Company’s current liabilities as compared to the same period last year.

 

Net cash used in investing activities of $33,000 for the nine months ended September 30, 2014 was primarily utilized to acquire office equipment as the Company added additional staff necessary to support its growing operations. This is compared to $132,225 for the same period in 2013 and the Company added staff to prepare for the Transaction

 

The Company has incurred losses and negative cash flows from operations in recent years and expects to continue to incur operating losses until revenues from all sources reach a level sufficient to support its on-going operations. The Company’s liquidity will largely be determined by its ability to raise capital from debt, equity, or other forms of financing, by the success of its product offerings, by developing additional product offerings, and by reducing expenses associated with operations. The Company’s management believes that its cash resources at September 30, 2014 will be sufficient to meet current obligations and fund its operating activities through December 31, 2014.

 

In the absence of a sufficient increase in revenues, the Company will need to do one or more of the following in the next 12 months to meet its planned level of expenditures: (a) raise additional capital; (b) reduce spending on operations; or (c) restructure its operations. A capital raise could take any number of forms including but not limited to: additional debt, additional equity, asset sales, or other forms of financing as dictated by its needs and its view toward its overall capital structure. However, additional financing might not be available on acceptable terms, if at all, and such financing might only be available on terms dilutive or otherwise detrimental to its stockholders or its business.

 

 

Off-Balance Sheet Arrangements

 

From time to time, the Company enters into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of September 30, 2014, the off-balance sheet arrangements and transactions that the Company had entered into included operating lease agreements and gas transportation commitments. The Company does not believe that these arrangements are reasonably likely to materially affect its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or availability of, or requirements for, capital resources currently or in the future.

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4 - CONTROLS AND PROCEDURES

 

Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which the Company refers to as disclosure controls, are controls and procedures designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

As of September 30, 2014, an internal evaluation was carried out under the supervision and with the participation of our management, including the CEO and the CFO, of the effectiveness of the design and operation of our disclosure controls. Based upon that evaluation, the CEO and the CFO concluded that, as of such date, the design and operation of these disclosure controls were effective to accomplish their objectives at the reasonable assurance level.

 

There was no change in our internal control over financial reporting during the quarter ended September 30, 2014 and as of the date of this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

  

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

The Company is not a party to any material pending legal or governmental proceedings, other than ordinary routine litigation incidental to the industry. While the ultimate outcome and impact of any proceeding cannot be predicted with certainty, management believes that the resolution of any proceeding will not have a material adverse effect on the financial condition or results of operations.

 

Item 1A. Risk Factors.

 

During the third quarter of 2014, there were no material changes to the Risk Factors disclosed in “Part I, Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

 

Item 4.  Mine Safety Disclosures.

 

Not applicable.

 

Item 5.  Other Information.

 

None.

 

Item 6.  Exhibits.

 

31.1*		Certification of the Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of the Chief Executive Officer and Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		XBRL Instance Document.
101.SCH*		XBRL Taxonomy Extension Schema Document.
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.

 

*	Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act or Section 18 of the Exchange Act, and otherwise are not subject to liability.

 

**	Furnished herewith.

  

 

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.

 

	By:	/s/ Chris Faulkner
		Chris Faulkner, President, Chief Executive Officer, Chairman of the Board of Directors, and duly authorized Officer
	By:	/s/ Rick Hoover
		Chief Financial Officer, principal accounting officer, and duly authorized Officer
Date: November 13, 2014

 

 

12

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