UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark One)

For the quarterly period ended March 31, 2015 

or

For the transition period from _________to _______

Commission File Number 1-33571

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ESCALERA RESOURCES CO.

(Exact name of registrant as specified in its charter)

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303-794-8445

(Registrant’s telephone number, including area code)

None 

(Former name, former address, and former fiscal year, if changed since last report)

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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 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.

Indicate by checkmark 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.

 

 

 

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ESCALERA RESOURCES CO.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

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PART I. FINANCIAL INFORMATION 

ITEM 1. FINANCIAL STATEMENTS

ESCALERA RESOURCES CO.

CONSOLIDATED BALANCE SHEETS 

(Amounts in thousands of dollars except share data)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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ESCALERA RESOURCES CO.

CONSOLIDATED STATEMENTS OF OPERATIONS 

(Amounts in thousands of dollars except share and per share data)

(Unaudited)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

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ESCALERA RESOURCES CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(Amounts in thousands of dollars)

(Unaudited)

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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ESCALERA RESOURCES CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of dollars except share and per share data)

(Unaudited)

1.Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited interim consolidated financial statements and related notes were prepared by Escalera Resources Co. (“Escalera Resources” or the “Company”), in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and were prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in the annual audited consolidated financial statements have been condensed or omitted as allowed by such rules and regulations. These consolidated financial statements include all of the adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations. All such adjustments are of a normal recurring nature only. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.

The accounting policies followed by the Company are set forth in Note 1 to the Company’s consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2014, and are supplemented in the notes to this Quarterly Report on Form 10-Q. The unaudited interim consolidated financial statements presented herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on April 15, 2015.  

Going Concern

The Company’s financial statements for the three months ended March 31, 2015 have been prepared on a going concern basis.  The Company has reported net operating losses for the past three years and for the three months ended March 31, 2015, which may impact the Company’s access to capital. There is also uncertainty regarding both the outcome of the Company’s borrowing base redetermination during the second quarter of 2015 as a result of the recent decrease in commodity prices, as well as the Company’s ability to obtain additional financing. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts of liabilities that might result from the outcome of this uncertainty.

The Company is currently looking for potential merger candidates which may offer improved opportunities to obtain capital to develop its natural gas and oil properties, acquire natural gas properties and to cure any borrowing base deficiencies that result from the next borrowing base redetermination.  The Company is also focused on maintaining production while efficiently managing, and in some cases reducing, its operating and general and administrative expenses.  Additionally, the Company is also evaluating asset divestiture opportunities to provide capital to reduce its indebtedness. 

Principles of consolidation

The unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Petrosearch Energy Corporation and Eastern Washakie Midstream LLC (“EWM”). The Company has an agreement with EWM under which the Company pays a fee to EWM to gather, compress and transport gas produced at the Catalina Unit, in the eastern Washakie Basin of Wyoming. This fee is eliminated in consolidation. 

2.Earnings per share

Basic earnings per share is calculated by dividing net income (loss) attributable to common stock by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share incorporates the treasury stock method to measure the dilutive impact of potential common stock equivalents by including the effect of outstanding vested and unvested stock options and unvested stock awards in the average number of shares of common stock outstanding during the period. Income (loss) attributable to common stock is calculated as net income (loss) less the cumulative dividends, including dividends in arrears, related to the Company’s Series A

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Preferred Stock at a quarterly rate of $0.5781 per share. The Series A Preferred Stock dividend of $931 was undeclared and unpaid for the three months ended March 31, 2015. 

The following is the calculation of basic and diluted weighted average shares outstanding and earnings per share of common stock for the periods indicated:

 

 

The following options and unvested restricted shares, which could be potentially dilutive in future periods, were not included in the computation of diluted net income per share because the effect would have been anti-dilutive for the periods indicated:

 

 

 

3.Credit Facility

As of March 31, 2015, the Company had a $250,000 credit agreement in place ($50,000 borrowing base) with an outstanding balance of $47,515. The Company has utilized its credit facilities to fund the development of the Catalina Unit and other non-operated projects in the Atlantic Rim, and development projects on the Pinedale Anticline in the Green River Basin of Wyoming. 

The credit facility is collateralized by the Company’s natural gas and oil producing properties. Any balance outstanding on the credit facility is due August 29, 2017.

Borrowings under the credit facility bear interest daily based on the Company’s interest rate election of either the Base Rate or LIBOR Rate.  Under the Base Rate option, interest is calculated at an annual rate equal to the highest of (a) the base rate for Dollar loans for such day, Federal Funds rate for such day, plus 0.5%, or the LIBOR for such day plus (b) a margin ranging between 0.75% and 1.75% (annualized) depending on the level of funds borrowed.  Under the LIBOR Rate option, interest is calculated at an annual rate equal to LIBOR, plus a margin ranging between 1.75% and 2.75% (annualized) depending on the level of funds borrowed. The average interest rate on the facility at March 31, 2015 was 3.1%.

For the three months ended March 31, 2015 and 2014, the Company incurred interest expense on its credit facilities of $369 and $404, respectively. Of the total interest incurred, the Company capitalized interest costs of $19 and $17 for the three months ended March 31, 2015 and 2014, respectively.

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Under the credit facility, the Company is subject to both financial and non-financial covenants. The financial covenants, as defined in the credit agreement, include maintaining (i) a current ratio of 1.0 to 1.0; (ii) a ratio of earnings before interest, taxes, depreciation, depletion, amortization, exploration and other non-cash items (“EBITDAX”) to interest plus dividends of greater than 1.5 to 1.0; and (iii) a funded debt, less unencumbered cash, to EBITDAX ratio of less than 4.0 to 1.0. 

As of March 31, 2015, the Company was in violation of the funded debt to EBITDAX ratio.  In addition, the Company’s independent registered public accounting firm included in its audit opinion for the year ended December 31, 2014, a going concern explanatory paragraph. The inclusion of the going concern explanatory paragraph is a trigger of default under the Company’s credit facility. The Company is working with its lenders to obtain waivers and/or modify the covenant structure in the credit agreement.  As a result of these violations, the lender has the right to declare an event of default, terminate the remaining commitment and accelerate all principal and interest outstanding. Accordingly, the outstanding balance under the credit facility is shown as a current liability on the consolidated balance sheets as of March 31, 2015.

The Company is subject to semi-annual borrowing base redeterminations, the next of which is expected to be completed in May 2015.

 

4.Derivative Instruments

Commodity Contracts

The Company’s primary market exposure is adverse fluctuations in the price of natural gas and, to a lesser extent, oil. The Company uses derivative instruments, primarily swaps and costless collars, to manage the price risk associated with its production, and the resulting impact on cash flow, net income and earnings per share. The Company does not use derivative instruments for speculative purposes.

The extent of the Company’s risk management activities is controlled through policies and procedures that involve senior management and were approved by the Company’s board of directors (the “Board”). Senior management is responsible for proposing hedging recommendations, executing the approved hedging plan, overseeing the risk management process including methodologies used for valuation and risk measurement and presenting policy changes to the Board. The Board is responsible for approving risk management policies and for establishing the Company’s overall risk tolerance levels. The duration of the various derivative instruments depends on senior management’s view of market conditions, available contract prices and the Company’s operating strategy.  In accordance with the Company’s current credit agreement, the Company has hedged at least 85% of its projected production through 2016 based on its third-party prepared reserve report at December 31, 2014.

The Company accounts for its derivative instruments as mark-to-market derivative instruments. Under mark-to-market accounting, derivative instruments are recognized as either assets or liabilities at fair value on the Company’s consolidated balance sheets, and changes in fair value are recognized in the price risk management activities line on the consolidated statements of operations. Realized gains and losses resulting from the contract settlement of derivatives are also recorded in the price risk management activities line on the consolidated statements of operations.

On the consolidated statements of cash flows, the cash flows from these instruments are classified as operating activities.

Derivative instruments expose the Company to counterparty credit risk. The Company enters into these contracts with third parties and financial institutions that it considers to be creditworthy. In addition, the Company’s master netting agreements reduce credit risk by permitting the Company to net settle for transactions with the same counterparty.

As with most derivative instruments, the Company’s derivative contracts contain provisions which may allow for another party to require security from the counterparty to ensure performance under the contract. The security may

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be in the form of, but not limited to, a letter of credit, security interest or a performance bond. As of March 31, 2015, no party to any of the Company’s derivative contracts has required any form of security guarantee.

The Company had the following commodity volumes under derivative contracts as of March 31, 2015:

 

 

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The table below contains a summary of all of the Company’s derivative positions reported on the consolidated balance sheet as of March 31, 2015 and December 31, 2014 presented gross of any master netting arrangements:

 

 

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The before-tax effect of derivative instruments not designated as hedging instruments on the consolidated statements of operations for the three months ended March 31, 2015 and 2014 were as follows:

 

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(1)Included in price risk management activities on the consolidated statements of operations. Price risk management activities totaled $2,778 and $(2,516) for the three months ended March 31, 2015 and 2014, respectively.

Refer to Note 5 for additional information regarding the valuation of the Company’s derivative instruments.

5.Fair Value of Financial Instruments

Assets and Liabilities Measured on a Recurring Basis

The Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The recorded value of the Company’s credit facility also approximates fair value as it bears interest at a floating rate.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). A three-level valuation hierarchy has been established to allow readers to understand the transparency of inputs in the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

 

 

 

The following tables provides a summary as of March 31, 2015 and December 31, 2014 of assets and liabilities measured at fair value on a recurring basis:

 

 

 

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The Company did not have any transfers of assets or liabilities between Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during the three months ended March 31, 2015.

Derivative instruments

The Company determines its estimates of the fair values of derivative instruments using a market approach based on several factors, including quoted prices in active markets, market-corroborated inputs, such as NYMEX forward-strip pricing, the credit rating of each counterparty, and the Company’s own credit rating.

In consideration of counterparty credit risk, the Company assessed the possibility of whether each counterparty to the derivative would default by failing to make any contractually required payments. Additionally, when appicable the Company considers its own credit quality and financial resources and ability to meet its potential repayment obligations associated with the derivative transactions.

At March 31, 2015, the Company had various types of derivative instruments, which included swaps and costless collars. The natural gas and oil derivative markets are highly active. Although the Company’s economic hedges are valued using public indices, the instruments themselves are traded with third party counterparties and are not openly traded on an exchange. As such, the Company has classified these instruments as Level 2.

Refer to Note 4 for additional information regarding the Company’s derivative instruments.

Concentration of credit risk

Financial instruments that potentially subject the Company to credit risk consist of accounts receivable and derivative financial instruments. Substantially all of the Company’s receivables are within natural gas and oil industry, including those from a third party gas marketing company. Collectability is dependent upon the financial wherewithal of each counterparty as well as the general economic conditions of the industry. The receivables are not collateralized.

The Company currently uses two counterparties for its derivative financial instruments. The Company continually reviews the credit worthiness of its counterparties, which are generally other energy companies or major financial institutions. In addition, the Company uses master netting agreements which allow the Company, in the event of default, to elect early termination of all contracts with the defaulting counterparty. If the Company chooses to elect early termination, all asset and liability positions with the defaulting counterparty would be “net settled” at the time of election. “Net settlement” refers to a process by which all transactions between counterparties are resolved into a single amount owed by one party to the other.

6.Impairment of Long-Lived Assets

The Company reviews the carrying values of its long-lived assets annually or whenever events or changes in circumstances indicate that such carrying values may not be recoverable. If, upon review, the sum of the undiscounted pretax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value. Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, generally on a field-by-field basis. The fair value of impaired assets is determined based on quoted market prices in active markets, if available, or upon the present values of expected future cash flows using discount rates commensurate with the risks

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involved in the asset group. The impairment analysis performed by the Company may utilize Level 3 inputs. The long-lived assets of the Company consist primarily of proved natural gas and oil properties and undeveloped leaseholds.

Proved property impairment expense in the three months ended March 31, 2015 and 2014 totaled $95, and $675, respectively. In 2015 and 2014, the Company wrote-off non-operated properties in the Atlantic Rim. Production from the wells at these properties has been limited and the operator has begun plugging and abandoning these wells.

The Company also expensed $198 during the three months ended March 31, 2015, respectively, related to expiring undeveloped acreage in Wyoming, as the Company determined there is no a longer a plan to develop this acreage.    

7.Compensation Plans

The Company recognized stock-based compensation expense totaling $139 and $205, for the three months ended March 31, 2015 and 2014, respectively.

Compensation expense related to stock options is calculated using the Black-Scholes valuation model. Expected volatilities are based on the historical volatility of the Company’s common stock over a period consistent with that of the expected terms of the options. The expected terms of the options are estimated based on factors such as vesting periods, contractual expiration dates, historical trends in the Company’s common stock price and historical exercise behavior. The risk-free rates for periods within the contractual life of the options are based on the yields of U.S. Treasury instruments with terms comparable to the estimated option terms.

A summary of stock option activity under the Company’s various stock option plans as of March 31, 2015 and changes during the three months ended March 31, 2015 is presented below:

 

 

The Company measures the fair value of stock awards based upon the fair market value of its common stock on the date of grant and recognizes the resulting compensation expense ratably over the associated service period, which is generally the vesting term of the stock awards. The Company recognizes the compensation expenses, net of an estimated forfeiture rate, for only those shares expected to vest. The Company typically estimates forfeiture rates based on historical experience, while also considering the duration of the vesting term of the award.

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Nonvested stock awards as of March 31, 2015 and changes during the three months ended March 31, 2015 were as follows:

 

 

In March 2014, the Company’s board of directors granted long-term incentive shares to its chief executive officer (“CEO”) in conjunction with his appointment as an officer. The Compensation Committee of the Board approved two restricted stock awards, under which the Company granted the CEO an aggregate of 528,634 shares of restricted stock, which are included in the table above. One-third of the shares awarded will vest at the end of three years if the CEO is continuously employed by the Company during such period, and the remaining two-thirds of the shares awarded will vest at the end of three years if the CEO is continuously employed by the Company during such period and certain performance goals related to reserve growth and the Company’s common stock price are achieved, as defined for purposes of the awards. The Company used a simplified binomial model to estimate the fair value of the performance and market based component of the award. If the CEO ultimately achieves the service requirements and full performance objectives determined by the agreement, the associated total stock-based compensation expense would be approximately $881, based on the grant date fair value. The Company’s stock-based compensation expense for the three months ended March 31, 2015 and 2014 includes approximately $57 and $6, respectively, related to these plans.

8.Income Taxes

The Company is required to record income tax expense for financial reporting purposes and apply an estimated effective tax rate (“ETR”) for calculating income tax provisions for interim periods. The Company has not recorded any income tax expense/(benefit) for the three months ended March 31, 2015 as a result of the Company recording a valuation allowance on its net deferred tax assets due to the uncertainty of the realization of these assets.  The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which the use of such net operating losses are allowed. Among other items, management considers the scheduled reversal of deferred tax liabilities, tax planning strategies asset dispositions and projected future taxable income. Some or all of this valuation allowance may be reversed in future periods against any potential future income.  

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of March 31, 2015, the Company made no provision for interest or penalties related to uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various states. There are currently no federal or state income tax examinations of the Company underway for these jurisdictions. Furthermore, the Company is no longer subject to U.S. federal income tax examinations by the Internal Revenue Service for tax years before 2011 and for state and local tax authorities for tax years before 2010.

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9.Equity

Preferred stock

In 2007, the stockholders of the Company approved an amendment to the Company’s Articles of Incorporation to provide for the issuance of 10,000,000 shares of preferred stock, and the Company subsequently completed a public offering of 1,610,000 shares of 9.25% Series A Cumulative Preferred Stock (the “Series A Preferred Stock”) at a price of $25.00 per share.

Holders of the Series A Preferred Stock are entitled to receive, when and as declared by the Company’s Board of Directors, dividends at a rate of 9.25% per annum ($2.3125 per annum per share)(the “Dividend Rate”). The Series A Preferred Stock does not have any stated maturity date and will not be subject to any sinking fund or mandatory redemption provisions except, under certain circumstances, upon a change of ownership or control. The Company may redeem the Series A Preferred Stock for cash at its option, in whole or from time to time in part, at a redemption price of $25.00 per share, plus accrued and unpaid dividends (whether or not earned or declared) to the redemption date.

The shares of Series A Preferred Stock are classified outside of permanent equity on the consolidated balance sheets due to the change of control redemption provision applicable to such shares. Following a change of ownership or control of the Company by a person or entity in which the common stock of the Company is no longer traded on a national exchange, the Company will be required to redeem the Series A Preferred Stock within 90 days after the date on which the change of ownership or control occurred for cash. In the event of liquidation, the holders of the Series A Preferred Stock will have the right to receive $25.00 per share, plus all accrued and unpaid dividends, before any payments are made to the holders of the Company’s common stock. 

 

If the Company fails to pay cash dividends on the Series A Preferred Stock in full for any six quarterly dividend periods, whether consecutive or non-consecutive (a “Dividend Default”), then:

 

 

In March 2015, the Board elected to suspend the Series A Preferred Stock dividend payment for the quarter ended March 31, 2015. As of March 31, 2015, the total arrearage on the Company’s Series A Preferred Stock is $931, or $0.5781 per share. 

Holders of the Series A Preferred Stock generally have limited voting rights. However, if a Dividend Default occurs, or if the Company fails to maintain a National Market Listing for the Series A Preferred Stock, the holders of the Series A Preferred Stock, voting separately as a class, will have the right to elect two directors to serve on the Board

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in addition to those directors then serving on the Board until such time as the National Market Listing is obtained or the dividend arrearage is eliminated.

Private placement of common stock

In early 2014, the Company completed a private offering of its common stock to accredited inventors. The gross proceeds from the private offering were $4,825, or $4,158 net of placement agent and legal fees.  The offering was effected through a private placement transaction with accredited investors. The Company used the net proceeds of the offering to fund working capital needs, capital expenditures, and for general corporate purposes. On April 7, 2014, the Company issued a total of 2,018,826 shares of common stock at a price of $2.39 per share to investors in the offering.  

10.Contingencies

Legal proceedings

From time to time, the Company is involved in various legal proceedings, which are subject to the uncertainties inherent in any litigation, including the matters below. The Company is defending itself vigorously in all such matters, and 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 Company’s financial condition or results of operations. 

Gas-to-liquids project

In May 2014, the Company entered into a letter agreement (“Letter Agreement”) to jointly initiate the development, construction and operations of a gas-to-liquids ("GTL") plant to be located in Wyoming. Under the terms of the Letter Agreement, the Company advanced total of $1,362, of which $202 was advanced during the quarter ended March 31, 2015. These funds were advanced on behalf of Wyoming GTL, LLC and its affiliate (collectively "WYGTL") to partially fund the feasibility studies and completion of the initial engineering and development plans for the GTL plant. In return, WYGTL assigned all development and engineering plans, contracts, rights, technical relationships, among other rights (collectively, the "Rights") to the Company.

 

The Letter Agreement expired effective January 31, 2015, as the Company was unable to agree on terms for a definitive agreement with WYGTL, as contemplated by the Letter Agreement. In accordance with the provisions of the Letter Agreement, the Company requested WYGTL to repay to the Company the total amount advanced, or $1,362. The Company filed a lawsuit in the State of Colorado on March 24, 2015, against WYGTL for breach of the Letter Agreement terms, seeking recovery of the total amount advanced under the Letter Agreement. On April 14, 2015, WYGTL filed a lawsuit against the Company in the U.S. District Court for Colorado, an action entitled Alan Eugene Humphry and Wyoming GTL, LLC v. Escalera Resources Co., alleging the Company breached its contract with WYGTL, among other claims. The Company does not believe the case has merit and is defending the cases vigorously. The Company subsequently filed counterclaims against WYGTL on May 5, 2015 in United States District Court seeking recovery of the total advances, and subsequently dismissed its action filed in the State of Colorado.

As the future collection of this receivable from WYGTL is uncertain, the Company has recorded a provision to fully reserve for the amount advanced for this project. The provision recorded during the quarter ended March 31, 2015 totaled $202. 

Former employee lawsuits

On January 29, 2015, two former employees each filed claims against the Company in the District Court of Harris, Texas, which generally assert breach of contract in connection with their termination from the Company (actions known as William Sidwell v. Escalera Resources Co. and Greg Whiting v. Escalera Resources Co.). In April 2015, the Company filed certain counterclaims, including breach of fiduciary duty and business disparagement, against the former employees. A trial has been set for May 2016 in one of these suits. The Company does not believe the plaintiffs’ cases have merit and intends to vigorously defend the cases and pursue its counterclaims.

 

 

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

The terms “Escalera Resources,” “Company,” “we,” “our,” and “us” refer to Escalera Resources Co. and its subsidiaries, as a consolidated entity, unless the context suggests otherwise. Unless the context suggests otherwise, the amounts set forth herein are in thousands, except units of production, dollar per unit of production, ratios, and share or per share amounts.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and other publicly available documents, including those incorporated herein and therein by reference, contain, and our management may from time to time make “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 (“PSLRA”). We make these forward-looking statements in reliance on the safe harbor protections provided under Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the PSLRA. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. When used in this report, the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “should,” and words or phrases of similar import, as they relate to the Company or its subsidiaries or management, are intended to identify forward-looking statements. These forward-looking statements are based on assumptions which we believe are reasonable based on current expectations and projections about future events and industry conditions and trends affecting our business. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties that, among other things, could cause actual results to differ materially from those contained in the forward-looking statements, including without limitation the Risk Factors set forth in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 and the following factors:

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We may also make material acquisitions or divestitures or enter into financing or other transactions. None of these events can be predicted with certainty, and the possibility of such events occurring is not taken into consideration in the forward-looking statements.

New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for us to predict all such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement. We assume no obligation to publicly update or revise any such forward-looking statements, whether as a result of new information, future events, or otherwise.

Company Overview

We are an independent energy company currently engaged in the exploration, development, production and sale of natural gas and crude oil, primarily in the Rocky Mountain Basins of the western United States. We were incorporated in Wyoming in 1972 and reincorporated in Maryland in 2001. Our common stock and Series A Cumulative Preferred are both publicly traded on the NASDAQ Global Select Market under the symbols “ESCR” and “ESCRP”, respectively. Our corporate offices are located at 1675 Broadway, Suite 2200, Denver, Colorado 80202, telephone number (303) 794-8445. Our executive offices are located at 675 Bering, Suite 850, Houston, TX 77057. Our website is www.escaleraresources.com.

Our current production primarily consists of natural gas from our two core properties in Wyoming. We have coalbed methane (“CBM”) reserves and production in the Atlantic Rim area of the eastern Washakie Basin and tight gas reserves and production on the Pinedale Anticline in the Green River Basin. 

Business Strategy

As a result of lower market prices for natural gas and our depleting asset base, our cash flow from operations has decreased over the past several years, while our level of indebtedness has increased.  As of March 31, 2015, we had $47,515 outstanding on our credit facility. The borrowing base on our credit facility is redetermined on a semi-annual basis and given the recent declines in natural gas and oil commodity prices, it is likely that our borrowing base will be reduced effective May 2015.  

Given the decreases in our operating cash flows, due primarily to the recent declines in natural gas prices, our depleting asset base and our anticipated borrowing base deficiency, we are focused on the following near-term business strategies: 1) identifying potential merger candidates which we believe offer improved opportunities to obtain capital to develop our natural gas and oil properties, to acquire natural gas properties and to cure our borrowing base deficiency; 2) maintaining production while efficiently managing, and in some cases reducing, our operating and general and administrative (“G&A”) costs; and 3) evaluating asset divestiture opportunities which would allow us to reduce our indebtedness. The Company has explored raising additional capital in order to pursue its objective of acquiring and developing natural gas properties,

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however, given our current capital structure and the recent declines in natural gas and oil commodity prices, raising such capital is unlikely. Our current capital structure is prohibitive for raising capital due primarily to certain terms and provisions of our Series A Preferred Stock. 

In the event we are able to raise additional capital with which to make acquisitions and fund the development of our properties, our objective is to increase long-term shareholder value by profitably growing our reserves, production, revenues, and cash flow. To meet this objective, we would primarily focus on (i) selectively pursuing acquisitions of abundant, low cost natural gas assets that are currently undervalued or underutilized; (ii) identifying alternative ways to enhance the value of our natural gas reserves; (iii) investing in and enhancing our existing production wells and field facilities on operated and non-operated properties in the Atlantic Rim; (iv) continuing participation in the development of tight sands gas wells at the Mesa Units on the Pinedale Anticline; and (v) pursuing high quality exploration and strategic development projects with potential for providing long-term drilling inventories that generate above average returns. 

RESULTS OF OPERATIONS

Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014 

The following analysis provides comparison of the three months ended March 31, 2015 and the three months ended March 31, 2014.  

Natural gas and oil sales

Natural gas and oil sales decreased 59% to $4,325, due to a 26% decrease in natural gas production, primarily at our Atlantic Rim and Pinedale Anticline properties, compounded by a  50% decrease in the Colorado Interstate Gas (“CIG”) market price, which is the index on which most of our natural gas volumes are sold. 

As shown in the table below, our average realized natural gas price decreased 24% to $3.16 per Mcf.  We calculate our average realized natural gas price by summing (1) production revenues received from third parties for the sale of our gas, which is included within natural gas and oil sales on the consolidated statements of operations, and (2) realized gain on our commodity derivatives, which is included within price risk management activities, net on the consolidated statements of operations, totaling $1,202 and $(941) for the three months ended March 31, 2015 and 2014, respectively. 

 

Our total net production decreased 26% to 1.6 Bcfe for the three months ended March 31, 2015 primarily due to lower production from our properties in the Atlantic Rim. 

Our total average daily net production at the Atlantic Rim decreased 29% to 13,465 Mcfe. Our Atlantic Rim production comes from two operating units: the Catalina Unit and the Spyglass Hill Unit (which includes the Sun Dog, Doty Mountain, and Grace Point participating areas (“PA”)). We operate the Catalina Unit and have non-operated working interests in the Spyglass Hill Unit.

Average daily net production at our Catalina Unit decreased 35% to 9,015 Mcfe. During the first quarter 2015, we had approximately 25 wells generating lower than expected production as a result of mechanical problems; however we deferred maintenance on these wells as we were in process of replacing our electric compressors with more cost efficient natural gas burning compressors in order to reduce operating costs in the field.  The compressor change-out was completed in late April 2015, and we plan to begin a strategic work over program focused on improving production from these wells. We also realized a decrease in production due to the normal field production decline. 

Average daily production, net to our interest, at the Spyglass Hill Unit decreased 12% to 4,450 Mcfe.  Although the operator drilled 59 new production wells in the Spyglass Hill Unit since the third quarter of 2013, we have not realized an

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increase in production volumes due to infrastructure constraints in the unit. The operator has informed us that it does not currently plan to drill additional wells in 2015 due to current economic conditions. 

On the Pinedale Anticline, our average daily net production decreased 16% to 3,485 Mcfe as a result of normal production decline, which is no longer offset by initial production from new wells. The initial production rates from wells in this field are very strong and then decline quickly. The operator drilled the final well in this field in early 2014, and therefore we expect to continue to see decreases as there is no new production to offset this decline.  The operator is currently drilling in the Mesa “A” PA and once fully drilled, the operator is expected to move to the Mesa “C” PA.  The drilling in the Mesa “A” PA is not expected to have a material impact on our production as we only have a small overriding royalty interest in the Mesa “A” wells. At the Mesa “C” PA, we have an approximate 6% reversionary carried interest.  

Transportation and gathering revenue

We receive fees for gathering and transporting third-party gas through our intrastate gas pipeline, which connects the Catalina Unit with the interstate pipeline system owned by Southern Star Central Gas Pipeline, Inc. Transportation and gathering revenue decreased 33% to $649  for the three months ended March 31, 2015, due to the decrease in Catalina production volumes as compared to the prior-year period.

Price risk management activities

We recorded a net gain on our derivative contracts of $2,778. This consisted of an unrealized non-cash gain of $1,576, which represents the change in the fair value of our commodity derivatives at March 31, 2015 based on the expected future prices of the related commodities, and a net realized gain of $1,202 related to the cash settlement of our economic hedges. 

Oil and gas production costs, production taxes, depreciation, depletion and amortization

 

Overall well production costs decreased 3% to $3,199, while production costs on a per Mcfe basis increased 30% or $0.45, to $1.94. Production costs decreased at the Catalina Unit as the Company deferred maintenance wells due to the compressor replacement. Production costs on a per Mcfe basis were higher due to the decrease in production volumes, as a portion of our production costs are fixed, or partially fixed.

Production taxes decreased 61% to $484 for the three months ended March 31, 2015 and production taxes, on a per Mcfe basis, decreased $0.27 to $0.29 per Mcfe. We are required to pay taxes on the revenue generated upon the physical sale of our gas to counterparties, which` represent approximately 12% of natural gas sales. Production taxes decreased due to the decline in oil and natural gas revenue. Production taxes in 2015 were lower both in total and on a per Mcfe basis, as a portion of our revenue was generated from the settlement of commodity derivatives, which is not subject to production taxes. In 2014, we realized a loss on our commodity derivatives, yet paid taxes on the prevailing commodity market prices.  

Total depreciation, depletion and amortization expenses (“DD&A”) decreased 30% to $3,695, and depletion and amortization related to producing assets decreased 30% to $3,607. Expressed on a per Mcfe basis, depletion and amortization related to producing assets decreased 6%, or $0.14, to $2.19. The decrease in DD&A on a per Mcfe basis

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was the result of a lower depletion rate at the Catalina, Spyglass Hill, and Pinedale Units due to a decrease in our production.

Pipeline operating costs 

Pipeline operating costs decreased 23% to $921. Our power charges and compression rental costs were lower during the three months ended March 31, 2015 as a result of our change from electrical compressors to natural gas. 

Impairment and abandonment of equipment and properties

We recorded impairment and abandonment expense in the three months ended March 31, 2015 of $293, primarily related to the write-off of expiring undeveloped acreage in Wyoming as we determined there is no a longer a plan to develop this acreage. 

General and administrative expenses

General and administrative expenses decreased 20% to $1,664. In 2014, we recorded severance payable to our former chief executive officer of $691; there was no severance expense recorded in the three months of 2015.  Additionally stock-based compensation expense was lower by $66 as there were fewer outstanding awards during the three months ended March 31, 2015. These decreases were offset, in part, by an increase $296 in salary and salary-related expense due to an increase in headcount in 2015 and a $40 increase in directors fees due to the expansion of our Board to six outside directors versus four during the comparable period.  The Board reduced the size of its Board to include only four outside directors effective April 2015.

Provision for gas-to-liquids advance

We recorded a provision of $202 for the reimbursement of amounts advanced for the GTL plant by us in 2015.  In May 2014, we entered into a Letter Agreement to jointly initiate the development, construction and operations of a GTL plant to be located in Wyoming.  The Letter Agreement expired effective January 31, 2015 as we were unable to agree on terms for a definitive agreement with WYGTL, as contemplated by the Letter Agreement.  In accordance with the provisions of the Letter Agreement, we requested WYGTL to repay to us the total amount we advanced, or $1,362, of which $202 was advanced in 2015.  As the future collection of this amount is uncertain, we have recorded a provision to fully allow for the outstanding advances as of March 31, 2015.   

Income taxes

We did not record an income tax benefit for the three months ended March 31, 2015 as a result of recording a full valuation against our net deferred tax assets. 

OVERVIEW OF FINANCIAL CONDITION AND LIQUIDITY

Liquidity and Capital Resources

Our sources of liquidity and capital resources historically have been net cash provided by operating activities, funds available under our credit facilities and proceeds from offerings of equity securities. The primary uses of our liquidity and capital resources have been in the development and exploration of oil and gas properties.

Credit Facility

As of March 31, 2015 we had a $250,000 revolving line of credit (the “Credit Facility”) in place with a $50,000 borrowing base. As of March 31, 2015, the Company had $47,515 outstanding on the facility, which matures August 28, 2017. We have depended on our credit facilities over the past five years to supplement our operating cash flow in the development of the Company-operated Catalina Unit and other non-operated projects in the Atlantic Rim and projects in the Pinedale Anticline. We are subject to a semi-annual borrowing based redetermination; the next of which is expected to be completed in May 2015. Although we experienced reserve growth in 2014 as compared to 2013, the redetermination is based on our proved reserves, using price assumptions determined by our lenders, with consideration given to our derivative positions. As a result of the recent decline in natural gas prices, we expect our borrowing base will be reduced. The magnitude of this reduction is uncertain. If, as a result of the redetermination, our borrowing base is reduced, we may be required to repay any amounts outstanding in excess of the newly-determined borrowing base immediately, or in monthly installments of a six-month period. A decrease in our borrowing base will likely impact our ability to execute our 2015 capital expenditures and/or fund dividend payments on our Series A Preferred Stock (which payments were suspended in March

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2015), or if significant, fund our operations. We are pursuing options to obtain additional financing into the Company, and are considering disposing of assets. In the event that any such borrowing base reduction cannot be fully funded by cash on hand and cash flow generated from operations, our ability to fund such deficiency would be uncertain.

Borrowings under our credit facility bear interest daily based on the Company’s interest rate election of either the Base Rate or LIBOR Rate.  Under the Base Rate option, interest is calculated at an annual rate equal to the highest of (a) the base rate for Dollar loans for such day, Federal Funds rate for such day, plus 0.5%, or the LIBOR for such day plus (b) a margin ranging between 0.75% and 1.75% (annualized) depending on the level of funds borrowed. Under the LIBOR Rate option, interest is calculated at an annual rate equal to LIBOR, plus a margin ranging between 1.75% and 2.75% (annualized) depending on the level of funds borrowed.  The average interest rate on the facility at March 31, 2015 was 3.1%.

We are subject to both financial and non-financial covenants. The financial covenants, as defined in the credit agreement, include maintaining (i) a current ratio of 1.0 to 1.0; (ii) a ratio of earnings before interest, taxes, depreciation, depletion, amortization, exploration and other non-cash items (“EBITDAX”) to interest plus dividends of greater than 1.5 to 1.0; and (iii) a funded debt, less unencumbered cash, to EBITDAX ratio of less than 4.0 to 1.0. As of March 31, 2015, the Company was in violation of the funded debt to EBITDAX ratio, which was 5.7 to 1.0. 

Additionally, our independent registered public accounting firm has included in our audit opinion for the year ended December 31, 2014, a statement that there is substantial doubt as to our ability to continue as a going concern.  The inclusion of the going concern explanatory paragraph by our independent registered public accounting firm triggers an event of default under our credit facility.  We are working with our lenders to obtain waivers and/or modify the covenant structure in the credit agreement.  Unless a waiver is obtained, the lender could elect to declare all principal and interest outstanding to be due and payable.  Accordingly, the outstanding balance on our credit facility is shown as a current liability on the consolidated balance sheet for the three months ended March 31, 2015.   

Other

Our future success in growing proved reserves and production will be highly dependent on the capital resources available to us, natural gas prices and our success in finding or acquiring additional reserves. As part of our strategy, we are also actively seeking merger and acquisition opportunities, as well as additional financing. The timing, structure, terms, size, and pricing of any such financing or transaction will depend on investor interest and market conditions. We can provide no assurance that we will be able to do so on favorable terms or at all. We may issue equity or debt in private placements or obtain additional debt financing, which may be secured by our natural gas and oil properties, or unsecured.

We currently have an effective Form S-3 shelf registration statement on file with the SEC, which contemplates up to $200,000 of securities available for issuance, and could provide us the ability to raise additional funds through registered offerings of equity, debt or other securities. However, in March 2015 we suspended the quarterly dividend payment on our Series A Preferred Stock, and as a result we are unable to issue common stock under our Form S-3 shelf registration statement until the fiscal year after our dividend payments are made current.

In January 2015, we received notice from the Nasdaq Stock Market (“Nasdaq”) indicating that our common stock is subject to potential delisting from the Nasdaq because our common stock had closed below the minimum $1.00 per share requirement for 30 consecutive days.  We have been provided until July 20, 2015, to regain this compliance.  If we fail to regain compliance before July 20, 2015, but meet all of the other applicable standards for initial listing on the Nasdaq Capital Market with the exception of the minimum bid price rule, then we may be eligible to have an additional 180 calendar days, or until January 17, 2016, to regain compliance.

In April 2015, we received an additional notice from the Nasdaq indicating that our common stock is subject due to listing because market value of our common stock was below the required $5,000 required for listing on the Global Select Market.  We have been provided until October 27, 2015 to regain compliance.  If we are unable to regain compliance, we may need to move to another market, such as the Nasdaq Capital Markets exchange. 

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Information about our financial position is presented in the following table:

 

 

 

Working capital (deficit)

Our working capital (deficit) as of March 31, 2015, includes the impact of our debt reclassification to a current liability, due to the covenant violations described above. Excluding the impact of this reclassification, our working capital was lower as of March 31, 2015, as a result of a $2,602 decrease in cash and a $1,449 decrease in accounts receivable as a result of lower production and natural gas prices.  This was offset by a $982 increase in the fair value of our commodity derivatives and a decrease in accounts payable and accrued expense of $2,465 as compared to December 31, 2014.

We expect our working capital to continue to decrease as a result of the low commodity prices, and as a result, we may need to extend the timing of certain payments, which may include operating expenses and property taxes.  

Cash flow activities

The table below summarizes our cash flows for the three months ended March 31, 2015 and 2014, respectively:

 

During the three months ended March 31, 2015, net cash provided by operating activities was $322, as compared to $2,915 in the same prior-year period. The cash we generated during the three months ended March 31, 2015 resulted from a net loss of $(3,160), which was net of non-cash charges of $3,745 related to DD&A and accretion expense, a $1,576 unrealized net gain related to the change in fair value of our derivative contracts and $1,449 decrease in accounts receivable.  Our cash flow from operations for the quarter ended March 31, 2015, was lower, largely due to a decrease in production volumes of 26%, or approximately 600 Mcfe. In addition, our average realized price decreased $0.98 per Mcfe due to lower market prices and less favorable economic hedges.

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Our operating cash flow is highly sensitive to fluctuations in the price of natural gas. Our hedging program helps to mitigate fluctuations due to price volatility. However, the structure of the hedges in place in 2015 do not fully limit the downside of price fluctuations.  Natural gas prices have continued to fall through 2015, which will negatively impact our cash flow.  Taking into account our economic hedges, for the three months ended March 31, 2015, our income before income taxes and cash flow would have decreased by approximately $704 for each $0.50 change per Mcf in natural gas prices.

During the three months ended March 31, 2015, net cash used in investing activities was $2,922, as compared to $1,148 in the same prior-year period. Our 2015 capital spending was primarily related to payment of costs associated with the 2014 drilling program at the Spyglass Hill Unit. Our 2014 capital spending was primarily related to payment of costs associated with the Spyglass Hill and Mesa “B” 2013 drilling programs.

Cash used by financing activities was $2 for the three months ended March 31, 2015, as compared to cash provided by financing activities of $2,100 for the three months ended March 31, 2014. In 2014 we completed an offering of our common stock through a private placement for net proceeds of $4,158, of which $2,575 had been received as March 31, 2014. In 2014, we also paid the quarterly dividend payment on our Series A Preferred Stock totaling $931. We suspended the dividend payment for the quarter ended March 31, 2015. 

Capital Requirements 

The Company has historically assessed active and potential development projects to determine the best use for available capital. Such assessment has included analyzing the risk and estimated return for each proposed project, including our non-operated assets (primarily the Pinedale Anticline and the Spyglass Hill Unit in the Atlantic Rim). Due to our current cash situation and the current market and commodity price conditions, we have not budgeted for any capital projects in 2015, and we will assess any potential opportunities on an individual basis. If economic conditions were to improve, we may drill and complete up to five producing wells and two injection wells (1.2 wells, net) located in the Catalina Unit during the second half of 2015. The expected cost, net to our interest, for this program would be approximately $1.5 million. The proposed wells are located largely on another working interest owner’s leases.  If this owner does not consent to drilling, we would have to bear the full cost of the drilling program in order to complete the wells (approximately $6.5 million).  Our ability to execute the program is primarily dependent on our ability to secure additional funding (of which there can be no assurance).   

We also continue to evaluate acquisition opportunities that we believe will complement our existing operations, offer economies of scale and/or provide further development, exploitation and exploration opportunities. In addition to potential acquisitions, we also may decide to divest certain non-core assets, enter into strategic partnerships or form joint ventures related to our assets that are not currently considered in our expected 2015 capital expenditures.

DERIVATIVE INSTRUMENTS

Contracted gas volumes

Changes in the market price of oil and natural gas can significantly affect our profitability and cash flow. We have entered into various derivative instruments to mitigate the risk associated with downward fluctuations in the natural gas price. Typically, these derivative instruments have consisted of swaps and costless collars. The duration and size of our various derivative instruments varies, and depends on our view of market conditions, available contract prices and our operating strategy.

Our outstanding derivative instruments as of March 31, 2015 are summarized below (volume and daily production are expressed in Mcf). All of our natural gas contracts are indexed to the NYMEX. The prevailing natural gas market prices in the Rockies, including CIG which is the index on which most of our gas volumes are sold, tend to be sold at a discount relative to other U.S. natural gas markets, including NYMEX. This discount is typically referred to as a “basis differential”

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and reflects, to some extent, the costs associated with transporting the natural gas in the Rockies to markets in the other regions. It also reflects the general excess supply and lack of pipeline capacity in the region.

 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We refer you to the corresponding section in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014, and to the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and are not required to provide the information under this Item.

ITEM 4.CONTROLS AND PROCEDURES

In accordance with the Exchange Act and Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer) have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and such information was accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

From time to time, we are involved in various legal proceedings, including the matters below, which are subject to the uncertainties inherent in any litigation. We are defending itself vigorously in all such matters, and 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 Company’s financial condition or results of operations. 

Gas-to-liquids project

In May 2014, we entered into a letter agreement (“Letter Agreement”) to jointly initiate the development, construction and operations of a gas-to-liquids ("GTL") plant to be located in Wyoming. Under the terms of the Letter Agreement, the Company advanced total of $1,362 to WYGTL, of which $202 was advanced during the quarter ended March 31, 2015 on behalf of Wyoming GTL, LLC and its affiliate (collectively "WYGTL") to partially fund the feasibility studies and completion of the initial engineering and development plans for the GTL plant. In return, WYGTL assigned all development and engineering plans, contracts, rights, technical relationships, among other rights (collectively, the "Rights") to the Company.

The Letter Agreement expired effective January 31, 2015, as we was unable to agree on terms for a definitive agreement with WYGTL, as contemplated by the Letter Agreement. In accordance with the provisions of the Letter Agreement, we requested WYGTL to repay to us the total amount advanced, or $1,362.  We filed a lawsuit in the state of Colorado on March 24, 2015, against WYGTL for breach of the Letter Agreement terms, seeking recovery of the total amount advanced under the Letter Agreement. We were unable to serve WYGTL with the complaint due to unknown whereabouts of WYGTL’s owner. On April 14, 2015, WYGTL filed a lawsuit against the Company in the U.S. District Court for Colorado, an action entitled Alan Eugene Humphry and Wyoming GTL, LLC v. Escalera Resources Co., alleging the Company breached its contract with WYGTL, among other claims. We do not believe the case has merit and are defending the case vigorously.  We subsequently filed counterclaims against WYGTL on May 5, 2015 in United States District Court seeking recovery of the total advances, and subsequently dismissed its action filed in the State of Colorado.

Former employee lawsuits 

On January 29, 2015, two former employees each filed claims against the Company in the District Court of Harris, Texas, which generally assert breach of contract in connection with their termination from the Company (actions known as William Sidwell v. Escalera Resources Co. and Greg Whiting v. Escalera Resources Co.). In April 2015, the Company filed certain counterclaims, including breach of fiduciary duty and business disparagement, against the former employees. A trial has been set for May 2016 in one of these suits. The Company does not believe the plaintiffs’ cases have merit and intends to vigorously defend the cases and pursue its counterclaims.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below summarizes repurchases of our common stock in the first quarter of 2015:

 

 

(1) None of the shares were repurchased as part of publicly announced plans or programs. All such purchases were from employees for settlement of payroll taxes due at the time of restricted stock vesting. All repurchased shares were subsequently retired.

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ITEM 6.EXHIBITS

The following exhibits are filed as part of this report:

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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.

 

 

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EXHIBIT INDEX

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*Filed within this Form 10-Q.

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