Brushy Resources, Inc. - FORM 10-Q

Attached files

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EX-32.1 - CERTIFICATION - Brushy Resources, Inc.	bri_ex321.htm
EX-31.1 - CERTIFICATION - Brushy Resources, Inc.	bri_ex311.htm
EX-31.2 - CERTIFICATION - Brushy Resources, Inc.	bri_ex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30. 2015

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-54967

BRUSHY RESOURCES, INC.

(Exact name of registrant as specified in its charter)

Delaware		45-5634053
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

300 E. Sonterra Blvd, Suite 1220 San Antonio, Texas		78258
(Address of principal executive offices)		(Zip Code)

(210) 999-5400

(Registrant’s telephone number, including area code)

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. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o 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	þ
(Do not check if a smaller reporting company)

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

As of November 11, 2015 there were 12,711,986 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

BRUSHY RESOURCES, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015

INDEX

		Page
PART I — FINANCIAL INFORMATION		3

Item 1. — Financial Statements		3

Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014		3

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014		5

Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2015 and 2014		6

Notes to the Condensed Consolidated Financial Statements		8

Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. — Quantitative and Qualitative Disclosures About Market Risk		26

Item 4. — Controls and Procedures		26

PART II — OTHER INFORMATION		28

Item 1. — Legal Proceedings		28

Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds		30

Item 3. — Defaults Upon Senior Securities		30

Item 4. — Mine Safety Disclosures		30

Item 5. — Other Information		30

Item 6. — Exhibits and Reports on Form 8-K		31

SIGNATURES		33

Part I – Financial Information

Item 1. Financial Statements

BRUSHY RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value and share data)

	September 30,		December 31,
	2015		2014
	(Unaudited)		(Audited)
ASSETS

Current assets
Cash	$	5,779	$	3,574
Trade receivables		879		1,860
Joint interest receivables		229		508
Current derivative assets		918		1,699
Prepaid expenses		300		284

Total current assets		8,105		7,925

Oil and natural gas properties and other equipment
Oil and natural gas properties, successful efforts method, net of accumulated depletion		86,974		91,766
Other property and equipment, net of depreciation		75		104

Total oil and natural gas properties and other equipment, net		87,049		91,870

Other assets

Goodwill		960		960
Derivative assets		59		67
Other		884		981

Total other assets		1,903		2,008

Total assets	$	97,057	$	101,803

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

BRUSHY RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value and share data)

	September 30,			December 31,
	2015			2014
	(Unaudited)			(Audited)
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable and accrued liabilities	$	6,092		$	5,835
Joint interest revenues payable		791			829
Current maturities of related party notes payable		20,071			-
Current maturities of notes payable		16,421			2,353
Current asset retirement obligations		452			428

Total current liabilities		43,827			9,445

Long-term liabilities
Derivative liabilities		-			-
Notes payable		41			23,162
Related party note payable		-			10,180
Deferred tax liabilities		10,740			14,040
Asset retirement obligations		3,197			3,177

Total long-term liabilities		13,978			50,559

Commitments and contingencies

Stockholders’ equity
Preferred stock, $.001 par value, authorized 10,000,000 shares;
none issued and outstanding		-			-
Common stock, $.001 par value, authorized 150,000,000 shares;
12,711,986 shares issued at September 30, 2015 and 12,362,336 shares issued at December 31, 2014		13			12
Paid-in capital		56,838			55,920
Accumulated deficit		(17,599	)		(14,133	)

Total stockholders’ equity		39,252			41,799

Total liabilities and stockholders’ equity	$	97,057		$	101,803

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

BRUSHY RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014

Oil, natural gas, and related product sales	$	1,745		$	5,783		$	7,029		$	15,485

Expenses
Depreciation, depletion and amortization		1,934			2,858			6,576			7,287
Lease operating		884			1,633			2,963			3,946
General and administrative		797			956			2,885			2,737
Professional fees		96			220			525			737
Production taxes		83			176			289			514
Accretion of discount on asset retirement obligation		58			66			187			255
Exploration		8			27			48			60
Impairment of oil and gas properties		863			-			863			-

Total expenses		4,723			5,936			14,336			15,536

Operating income (loss)		(2,978	)		(153	)		(7,307	)		(51	)

Other income (expense)
Interest expense		(1,068	)		(803	)		(2,814	)		(1,820	)
Gain (loss) from derivative contracts		1,100			(51	)		867			61
Gain on sale of assets, net		2,373			827			2,375			1,546
Other Income		141			-			141			-
Total other income (expense)		2,546			(27	)		569			(213	)

Income (loss) before income taxes		(432	)		(180	)		(6,738	)		(264	)

Income tax benefit / (expense):
Current income tax benefit / (expense)		(23	)		(7	)		(23	)		(7	)
Deferred income tax benefit / (expense)		683			87			3,296			171
Net income (loss)	$	228		$	(100	)	$	(3,465	)	$	(100	)

Net income (loss) per basic and diluted
common share	$	0.02		$	(0.01	)	$	(0.27	)	$	(0.01	)

Weighted average basic
common shares outstanding		12,711,986			12,362,336			12,636,421			12,362,336

Weighted average diluted
common shares outstanding		12,711,986			12,362,336			12,636,421			12,362,336

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

BRUSHY RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands, except per share amounts)

	Nine Months Ended September 30,
	2015			2014
Cash flows from operating activities
Net loss	$	(3,465	)	$	(100	)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and depletion		6,576			7,287
Impairment of oil and gas properties		863			-
Deferred income taxes		(3,296	)		(171	)
Stock-based compensation		918			968
Accretion of asset retirement obligation		187			255
Cash received (paid) for settlement of derivative instruments		-			(89	)
Unrealized loss (gain) from derivative contracts		789			(61	)
(Gain)on asset sales		(2,375	)		(1,546	)
Amortization of debt issuance costs		249			141
Increase (decrease) in cash attributable to
changes in operating assets and liabilities:
Trade receivables		981			729
Joint interest receivables		279			(1,902	)
Prepaid expenses and other assets		1			117
Accounts payable and accrued liabilities		(1,408	)		(1,133	)
Joint interest revenues payable		(38	)		518
Net cash provided by operating activities		261			5,013

Cash flows from investing activities
Acquisition and development of oil and natural gas properties		(3,913	)		(14,107	)
Acquisition of White Oak Resources VI, LLC and Permian Atlantis LLC oil and natural gas properties		-			(16,803	)
Proceeds from sales of oil and natural gas properties		7,084			1,000
Oil and natural gas abandonment costs		-			-
Net cash provided (used) in investing activities		3,171			(29,910	)

Cash flows from financing activities
Proceeds from notes payable		8,000			24,060
Debt issuance costs		(167	)		(209	)
Repayments of notes payable		(9,053	)		(539	)
Deferred offering costs		(7	)		(77	)
Net cash (used) provided by financing activities		(1,227	)		23,235

Net increase (decrease) in cash		2,205			(1,662	)
Cash, beginning of period		3,574			5,794
Cash, end of period	$	5,779		$	4,132

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

BRUSHY RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2015		2014

Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	626	$	1,505

Supplemental disclosure of non-cash investing transactions
Payables related to oil and natural gas capitalized expenditures	$	3,551	$	923
Capitalized asset retirement cost	$	-	$	(855	)
Settlement of accounts payable through sale of oil and natural gas properties	$	-	$	3,873

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

BRUSHY RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - NATURE OF OPERATIONS

We were originally formed as Starboard Resources LLC in Delaware on June 2, 2011 as a limited liability company to acquire, own, operate, produce, and develop oil and natural gas properties primarily in Texas and Oklahoma. On June 28, 2012, Starboard converted from a Delaware limited liability company to a Delaware C-Corporation and was named Starboard Resources, Inc. The membership units of Starboard Resources LLC were exchanged on a 1:1 basis for common shares of the Company. On July 31, 2015 we sold all of our Oklahoma properties and are now focused on our Texas properties. On August 25, 2015 we changed our name to Brushy Resources, Inc. (the “Company”).

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revision of prior period financial statements

In November 2015, during the preparation of our condensed financial statements, the Company discovered an error in the computation of impairment of Oklahoma properties for the quarterly period ended June 30, 2015. Specifically, the impairment calculation included in the Company’s financial statements for period ended June 30, 2015 did not take into account previously recorded impairment on the Oklahoma properties resulting in improper recording of $1,350,000 in impairment – which was the entirety of the impairment recorded in the quarterly period ended June 30, 2015. The changes in the impairment resulted in a non-cash reduction of the loss to the financial statements. The Company has determined that the impact of non-cash item on its quarterly financial statements for the quarter ended June 30, 2015 to be sufficiently material to warrant restatement of the Company’s Quarterly Report on Form 10-Q.

The line items that have been amended and restated are set forth below:

Balance Sheets

	June 30, 2015
	As Previously
	Reported			Adjustment		As Restated
ASSETS
Oil and natural gas properties, successful efforts method, net of accumulated depletion	$	88,955			1,350	$	90,305
Total oil and natural gas properties and other equipment, net
Total assets	$	96,809			1,350	$	98,159

LIABILITIES AND STOCKHOLDERS' EQUITY
Accumulated deficit	$	(19,176	)		1,350	$	(17,826	)
Total stockholders' equity		37,469			1,350		38,819
Total liabilities and stockholders' equity	$	96,809			1,350	$	98,159

Statements of Operations

	Three Months Ended June 30, 2015									Six Months Ended June 30, 2015
	As Previously									As Previously
	Reported			Adjustment			As Restated			Reported			Adjustment			As Restated

Impairment of oil and gas properties	$	1,350			(1,350	)	$	-		$	1,350			(1,350	)	$	-
Net income (loss)	$	(2,354	)		1,350		$	(1,004	)	$	(5,043	)		1,350		$	(3,693	)
Net income (loss) per basic and diluted common share	$	(0.19	)				$	(0.08	)	$	(0.40	)				$	(0.29

Statements of Cash Flows

	Six Months Ended June 30, 2015
	As Previously
	Reported				Adjustment			As Restated

Net loss		$	(5,043	)		1,350			$	(3,693	)
Impairment of oil and gas properties			1,350			(1,350	)		$	-

Basis of Presentation

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Additionally, the accompanying unaudited condensed consolidated financial statements as of September 30, 2015 and for the nine months ended September 30, 2015 and 2014 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q, and reflect, in the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods. Operating results for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2014.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, ImPetro Resources, LLC (“ImPetro”) and ImPetro Operating (“Operating”) (Collectively the “Company”). All intercompany transactions and balances have been eliminated in consolidation.

Oil and Gas Natural Gas Properties

The Company uses the successful efforts method of accounting for oil and natural gas producing activities, as further defined under ASC 932, Extractive Activities - Oil and Natural Gas. Under these provisions, costs to acquire mineral interests in oil and natural gas properties, to drill exploratory wells that find proved reserves, and to drill and equip development wells are capitalized.

Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves. A determination of whether a well has found proved reserves is made shortly after drilling is completed. The determination is based on a process that relies on interpretations of available geologic, geophysic and engineering data. If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well. Capitalized costs of producing oil and natural gas interests are depleted on a unit-of-production basis at the field level.

If an exploratory well is determined to be unsuccessful, the capitalized drilling costs are charged to expense in the period the determination is made. If a determination cannot be made as to whether the reserves that have been found can be classified as proved, the cost of drilling the exploratory well is not carried as an asset for more than one year following completion of drilling. If, after that year has passed, a determination that proved reserves exist cannot be made, the well is assumed to be impaired and its costs are charged to expense. Its cost can, however, continue to be capitalized if a sufficient quantity of reserves is discovered in the well to justify its completion as a producing well and the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project.

The carrying value of oil and gas properties is assessed for possible impairment on a field by field basis and on at least an annual basis, or as circumstances warrant, based on geological analysis or changes in proved reserve estimates. When impairment occurs, an adjustment is recorded as a reduction of the asset carrying value. For the nine months ended September 30, 2015 and the year December 31, 2014, the Company’s impairment charge was $863,028 and $4,428,378.

Other Property and Equipment

Other property and equipment, which includes field equipment, vehicles, and office equipment, is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. Vehicles and office equipment are generally depreciated over a useful life of five years and field equipment is generally depreciated over a useful life of twenty years.

Revenue Recognition and Natural Gas Imbalances

The Company utilizes the accrual method of accounting for natural gas and crude oil revenues, whereby revenues are recognized based on the Company’s net revenue interest in the wells upon delivery to third parties. The Company will also enter into physical contract sale agreements through its normal operations.

Gas imbalances are accounted for using the sales method. Under this method, revenues are recognized based on actual volumes of oil and gas sold to purchasers. However, the Company has no history of significant gas imbalances.

Income Taxes

Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.

The Company is required to determine whether its tax positions are more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. De-recognition of a tax benefit previously recognized results in the Company recording a tax liability that increases expense in that period. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2015. The Company’s conclusions may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof.

The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense and other expenses, respectively. No interest expense or penalties have been recognized as of September 30, 2015. The Company’s tax returns for the last four years remain subject to examination.

Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated in the same manner, but also considers the impact to common shares for the potential dilution from stock options, non-vested share appreciation rights and non-vested restricted shares. For the nine month period ended September 30, 2015, there were 900,000 potentially dilutive non-vested and vested stock options and 2,542,397 stock warrants. For the nine month period ended September 30, 2014, there were 349,650 potentially dilutive non-vested restricted shares and stock options. The potentially dilutive shares, options,and warrants for September 30, 2015 and 2014, are considered antidilutive since the Company is in a net loss position and thus result in the basic net income (loss) per common share equaling the diluted net income (loss) per common share.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company’s estimates of oil and natural gas reserves are, by necessity, projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of natural gas and oil that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable natural gas and oil reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effect of regulations by governmental agencies, and assumptions governing future natural gas and oil prices, future operating costs, severance taxes, development costs and workover costs, all of which may in fact vary considerably from actual results. The future drilling costs associated with reserves assigned to prove undeveloped locations may ultimately increase to the extent that these reserves are later determined to be uneconomic. For these reasons, estimates of the economically recoverable quantities of expected natural gas and oil attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity of the reserves, which could affect the carrying value of the Company’s oil and natural gas properties and/or the rate of depletion related to the oil and natural gas properties.

New Accounting Pronouncement

In May 2014, the Financial Accounting Standards Board issued a new accounting pronouncement regarding revenue from contracts with customers. This new standard provides guidance on recognizing revenue, including a five step model to determine when revenue recognition is appropriate. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Adoption of the new standard is effective for reporting periods beginning after December 15, 2017 with early adoption not permitted. The Company is currently evaluating the potential impact that the adoption of this standard will have on its financial position, results of operations, and related disclosures, and will adopt the provisions of this new standard in the first quarter of 2018.

NOTE 3 – FAIR VALUE MEASUREMENTS

The following tables present information about the Company’s financial assets and liabilities measured at fair value as of September 30, 2015 and December 31, 2014:

							Balance as of
							September 30,
($ in thousands)	Level 1		Level 2		Level 3		2015
Assets (at fair value):
Derivative assets (oil collar and put options)	$	-	$	977	$	-	$	977

Liabilities (at fair value):
Derivative liabilities (oil collar and put options)	$	-	$	-	$	-	$	-

							Balance as of
							December 31,
($ in thousands)	Level 1		Level 2		Level 3		2014
Assets (at fair value):
Derivative assets (oil put options)	$	-	$	1,766	$	-	$	1,766

NOTE 4 – PROPERTY ACQUISITION AND SALE

On March 26, 2014 (the “Acquisition Date”), the Company completed the purchase of oil and natural gas leases and leasehold interests (the “Oil and Natural Gas Properties”) from White Oak Resources VI, LLC and Permian Atlantis LLC (collectively the “Seller”) for the purpose of increasing the Company’s oil and natural gas operations in the Permian Basin. The assets acquired are: (a) oil and natural gas leases and leasehold interests in Winkler and Loving Counties in Texas and Lea County, New Mexico; (b) twenty-nine wellbores; and (c) any contracts or agreements related to the foregoing lands, leases and wells. The Oil and Natural Gas Properties include total acreage held by production of 5,160 gross developed acres (1,983.61 net developed acres). Additionally, producing wells and surrounding acreage have been unitized under Texas Railroad Commission regulations. Under the terms of the agreement, the Company purchased the Oil and Natural Gas Properties for $16,803,000 in cash, including before purchase price adjustments.

On July 31, 2015, the Company sold all of its Oklahoma properties, which were located in Logan and Kingfisher Counties, Oklahoma, to Remora Petroleum, LP (Austin, TX) for $7,249,390. The purchaser is not affiliated with any Company officers, directors or material stockholders.

The following table summarized the results of operation from the properties sold:

($ in thousands)	Nine Month Period Ended September 30, 2015		Nine Month Period Ended September 30, 2014
Oil, natural gas, and related product sales	$	1,368	$	5,470
Expenses		261		624
Operating income	$	1,107	$	4,846

As part of this transaction, the Company entered into the Fifth Amendment to its Credit Agreement with Independent Bank (“Amendment”). The Amendment provides that $4,000,000 of the purchase price was paid to Independent Bank to pay down its credit facility with Independent Bank. The Amendment requires that an additional $2,000,000 would be held by Independent Bank in a control account.

The Amendment further states that the Credit Agreement’s $21,000,000 borrowing base is reduced to $17,000,000 and that the Company cannot demand further funds under this Credit Agreement until the next redetermination of the borrowing base and the cure of any deficiency loan amount over the adjusted borrowing base.

The Amendment also places limits on the use of the $2,000,000 in the control account. It provides that the control account funds shall be applied, first, to any borrowing base deficiency after redetermination, and second, to any remaining amount on the loan or to the Company in the sole discretion of Independent Bank. The Amendment also requires the Company to use the funds it has received from the Oklahoma properties transaction (after payment of the $4,000,000 to Independent Bank and the $2,000,000 to the control account) to its outstanding third party accounts payables. Independent Bank took that $2,000,000 from the control account and applied it to the Independent Bank Credit Facility on October 30, 2015.

NOTE 5 – OIL AND NATURAL GAS PROPERTIES

The following table presents a summary of the Company’s oil and natural gas properties at September 30, 2015 and December 31, 2014:

($ in thousands)	Nine Month period Ended September 30, 2015			Year Ended December 31, 2014
Oil and natural gas properties
Proved-developed producing properties	$	87,256		$	96,691
Proved-developed non-producing properties		4,850			2,880
Proved-undeveloped properties		13,275			13,330
Unproved properties		2,072			1,996
Less: Accumulated depletion		(20,479	)		(23,131	)
Total oil and natural gas properties, net of accumulated depletion	$	86,974		$	91,766

NOTE 6 – ASSET RETIREMENT OBLIGATIONS

The Company has recognized the fair value of its asset retirement obligations related to the future costs of plugging, abandonment, and remediation of oil and natural gas producing properties. The present value of the estimated asset retirement obligations has been capitalized as part of the carrying amount of the related oil and natural gas properties. The liability has been accreted to its present value as of the end of each period. At September 30, 2015 and December 31, 2014, the Company has determined a range of abandonment dates through March 2061. The following table represents a reconciliation of the asset retirement obligations:

($ in thousands)	Nine month period Ended September 30, 2015			Year Ended December 31, 2014
Asset retirement obligations, beginning of period	$	3,605		$	2,436
Additions to asset retirement obligation		-			859
Liabilities settled during the period		(143	)		-
Accretion of discount		187			320
Revision of estimate		-			(10	)
Asset retirement obligations, end of period	$	3,649		$	3,605

The asset retirement liability is measured using primarily Level 3 inputs. The significant unobservable inputs to this fair value measurement include estimates of plugging costs, remediation costs, inflation rate and well life. The inputs are calculated based on historical data as well as current estimated costs.

NOTE 7 – GOING PUBLIC DELAY FEE

We entered a “Securities Purchase and Exchange Agreement” dated June 10, 2011, with Longview Marquis Master Fund, L.P., Summerview Marquis Fund, L.P., Longview Marquis Fund, L.P., LMIF Investments, LLC, SMF Investments, LLC, and Summerline Capital Partners, LLC (collectively “Summerline”). The Agreement provides that the Company, for any reason, does not go public on or before that date that is one hundred fifty days after the June 13, 2011 (the “Going Public Delay Date”), the Company shall pay to each applicable stockholder an aggregate amount equal to the product of (i) such stockholder’s allocation percentage multiplied by (ii) $60,715 (the “Going Public Delay Fee”) on the last business day of each calendar month, for each such calendar month following the Going Public Delay Date through and including the date of going public (the “Going Public Delay Period”). For any partial calendar months during the Going Public Delay Period, the Going Public Delay Fee shall be pro-rated appropriately. For the year ended December 31, 2013, the Company incurred a delay fee of approximately $425,000 which is currently included in accrued liabilities on the accompanying condensed consolidated balance sheets.

Effective August 6, 2013, the Company ceased to incur Going Public Delay Fees due to an effective Form 10 filing.

NOTE 8 – DERIVATIVES

We use derivatives to hedge our oil production. Our current hedge position consists of put options, of which some have deferred premiums paid at settlement. These contracts and any future hedging arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or oil prices increase. In addition, these arrangements may limit the benefit to us of increases in the price of oil. Accordingly, our earnings may fluctuate significantly as a result of changes in the fair value of our derivative instrument, which we utilize entirely to hedge our production and do not enter into for speculative purposes. We have not designated the derivative contracts as hedges for accounting purposes, and accordingly, we record the derivative contracts at fair value and recognize changes in fair value in earnings as they occur.

At September 30, 2015, we had the following open crude oil derivative contracts:

	Instrument	Commodity	Volume (bbl / month)		Floor Price		Ceilings Price		Purchased Put Option Price		Fair Value (in thousands)
Oct 2015	Put	Crude Oil		6,000						50.00 - 80.00		161
Nov 2015 - Dec 2015	Put	Crude Oil		2,800						80.00		173
Oct 2015 - Dec 2015	Put	Crude Oil		4,000						70.00		291
Jan 2016 - Mar 2016	Put	Crude Oil		1,500						75.00		108
Jan 2016 - Dec 2016	Put	Crude Oil		3,000						50.00		94
Jan 2016 - Dec 2016	Collar	Crude Oil		3,000		54.00		79.30				150

The following tables identify the fair value amounts of derivative instruments included in the accompanying consolidated balance sheets as derivative contracts, categorized by primary underlying risk. Balances are presented on a gross basis, prior to the application of the impact of counterparty and collateral netting. The following tables also identify the net gain (loss) amounts included in the accompanying consolidated statements of operations as gain (loss) from derivative contracts.

Fair Value of Derivative Financial Instruments

($ in thousands)	September 30, 2015		December 31, 2014
Derivative financial instruments - Current asset		918		1,699
Derivative financial instruments - Long-term assets		59		67
Derivative financial instruments - Current liabilities				-
Derivative financial instruments - Long-term liabilities				-
Net derivative financial instruments		977		1,766

Effect of Derivative Financial Instruments

	September 30,			December 31
($ in thousands)	2015			2015

Realized gain/(loss) on settlement of derivative contracts	$	1,656		$	(19	)
Unrealized gain/(loss) from derivative contracts		(789	)		17
Realized/Unrealized gain/(loss) from derivative contracts	$	867		$	(2	)

NOTE 9 – NOTES PAYABLE

On June 27, 2013, the Company entered into a credit agreement (“Credit Agreement”) with Independent Bank to borrow up to $100,000,000 at a current rate of 4.00% annum. The Credit Agreement was obtained to fund the development of the Company’s oil and natural gas properties and refinance the prior bank facility. At September 30, 2015 and December 31, 2014, the Company had approximately $21,000,000 and $22,500,000 in borrowings outstanding under the Credit Agreement, respectively.

The Credit Agreement provides for a borrowing base of $16,400,000 as of September 30, 2015, which is re-determined semi-annually and upon requested special redeterminations. Further, under the April 15, 2015 Amendment to the Credit Agreement, the borrowing base is reduced by $250,000 per month before September 1, 2015 and $350,000 per month thereafter, unless re-determined after 150 days from the date of the Amendment. The Company is obligated to provide Independent Bank an engineering report acceptable to the Bank as of September 1, 2015 showing proven and producing and proven undeveloped oil and gas reserves, discounted present value of future net income for the Company’s oil and gas properties as of September 1, 2015, projections of annual rate of production, gross income and net income relating to these reserves and take-or-pay, prepayment and gas balancing obligations. Additionally, the borrowing base may be adjusted at the financial institution’s discretion which is based in part upon external factors over which the Company has no control. If the re-determined borrowing base were to be less than outstanding borrowings under the Credit Agreement, the Company would be required to repay the deficit. The Company incurs a commitment fee of 0.5% on the unused portion of the credit facility or if less, the borrowing base. The Credit Agreement matures on June 1, 2016.

Loans under the Credit Agreement bear interest at the greater of: (1) the prime rate, the annual rate of interest announced by the Wall Street Journal as its “prime rate”, or (2) the floor rate of 4.00%.

The Credit Agreement is collateralized by the oil and natural gas properties and contains several restrictive covenants including, among others: (1) a requirement to maintain a current ratio, of not less than 1.0 to 1.0; (2) a maximum permitted ratio of debt to adjusted EBITDAX of not more than 3.5 to 1.0; (3) a maximum permitted ratio of adjusted EBITDAX to interest expense of not more than 3.0 to 1.0; and (4) a prohibition against incurring debt, subject to permitted exceptions. The Company is not in compliance with its debt covenants at September 30, 2015 however, it is currently working with Independent bank on a waiver for these violations.

The Amendment also allows the assignment of an overriding royalty interest as stated in the related amendment to the Intercreditors’ Agreement between Independent Bank, the Company and SOSventures, LLC.

The Company is obligated to commence drilling a well in the Crittenden Field within 45 days of the date of the Amendment and a second well in the Crittenden Field within 90 days of the date of the Amendment.

The Amendment includes a suspension of Independent Bank’s rights to exercise its remedies prior to 150 days after the Amendment caused solely by the occurrence of a borrowing base deficiency. It also includes a suspension of Independent Bank’s obligation to extend loans, letters of credit or renewals or extensions of letters of credit agreement under the Credit Agreement for 150 days after the date of the Amendment.

The Amendment further provides that the Company will be required execute and maintain crude oil hedges on a minimum of 80.0% of Projected Production on a rolling 20 months basis.

The Company repaid its term loan at closing with both principal and interest, repaid the note principal to reduce the note to no more than the borrowing base, including the repayment of interest, pay certain fees, deposit $5,000,000 into a special account and SOSventures provided an additional $2,000,000 of availability under the Subordinated credit facility with SOSventures, LLC for drilling capital.

On March 26, 2014, the Company entered into a term loan agreement with Independent Bank totaling $4,000,000 at a current rate of 6.75% annum. The agreement was obtained to fund the development of the Company’s acquisition of oil and natural gas properties. The term loan had an outstanding balance of approximately $2,941,000 outstanding at December 31, 2014. The term loan was paid in full on April 15, 2015.

NOTE 10 – STOCK BASED COMPENSATION AND CONDITIONAL PERFORMANCE AWARDS

On April 1, 2012, the Company entered into employment agreements (the “Employment Agreement”) which provided a restricted stock grant and a conditional performance award to key members of management.

The restricted stock grant of 349,650 shares had a grant date fair value of $10.00 per share and vests in full upon the earlier of an initial public offering (“IPO”) which includes the sale of shares to the public, a business combination whereas 50% or more of the voting power is transferred to the new owners, or March 1, 2015. Those 349,650 shares were earned by the employee recipients and issued to them during the three month period ending March 31, 2015.

During the nine months ended September 30, 2015 and 2014, the Company incurred a stock-based compensation expense of approximately $300,000 and $900,000, respectively, related to the restricted stock grant, which is included in the accompanying condensed consolidated statements of operations in general and administrative expenses.

Additionally, the employment agreements provide for a conditional performance award where if an IPO occurs, the employee will receive: (1) a cash payment of 1% of the difference between the Company market capital and the book value at the time of the IPO, (2) common stock options to purchase 1.0% of the fully-diluted capital stock as of the IPO date and IPO price which will vest over a four year period and contain a cashless exercise, (3) common stock options to purchase 1.0% of the fully-diluted capital stock as of the 2nd anniversary of the IPO date at the closing price of the common stock on the 2nd anniversary date of the IPO and will vest six years after the grant and contain a cashless exercise. As of the nine month period ended September 30, 2015 and 2014, the conditional performance feature is not probable and as such, no compensation expense related to the conditional performance feature has been recognized.

On August 30, 2014, the Company amended and restated the Employment Agreement which provided for additional stock options.

The equity award of options to purchase 900,000 shares at the exercise price of $4.75 per share and vesting over three years from September 4, 2014 with a one-year cliff (in respect of 300,000 shares) and monthly vesting thereafter of 25,000 shares over the remaining two years. During the nine months ended September 30, 2015, the Company incurred a stock-based compensation expense of approximately $619,000 related to stock option, which is included in the accompanying condensed consolidated statements of operations in general and administrative expenses. As of September 30, 2015, there was approximately $1,581,000 of unrecognized stock-based compensation related to the non-vested stock options.

The assumptions used in the Black-Scholes Option Pricing Model for the stock options granted were as follows:

	2014
Risk-free interest rate		1.87	%
Expected volatility of common stock		92	%
Dividend yield	$	0.00
Expected life of options	5.72 years

The following table summarizes information about stock option activity and related information for the nine months ended September 30, 2015

	Number of Shares Underlying Options		Weighted Average Exercise Price per Share		Weighted Average Grant Date Fair Value per Share		Weighted Average Remaining Contractual Life (in Years)
Outstanding at December 31, 2014		900,000	$	-	$	-		-
Granted		-		4.75		2.75		9
Exercised		-		-		-		-
Forfeited		-		-		-		-
Outstanding at September 30, 2015		900,000		4.75		2.75		9
Exercisable at September 30, 2015		350,000		4.75		-		-

NOTE 11 – RELATED PARTY TRANSACTIONS

Related Party Credit Agreement

On March 29, 2013, the Company entered a credit agreement with SOSventures, LLC providing for a term loan through February 16, 2016 in an amount up to $10,000,000 at a 17.00% interest rate through March 29, 2014 and 22.00% interest rate thereafter. The Company may not incur further indebtedness beyond this loan and the Credit Agreement without the consent of SOS Ventures, until such time as the SOS Ventures loan is fully repaid.

On May 30, 2014, the Company amended its credit agreement with SOSventures, LLC providing for a term loan through February 1, 2016 in an amount up to $20,000,000 at an 18.00% interest rate. As of September 30, 2015, the Company has borrowed $15,500,000 under this agreement.

The term loan is collateralized under a second lien by the oil and natural gas properties and contains several restrictive covenants including, among others: (1) a requirement to maintain a current ratio, of not less than 1.0 to 1.0; (2) a maximum permitted ratio of debt to adjusted EBITDAX of not more than 4.0 to 1.0; (3) a maximum permitted ratio of adjusted EBITDAX to interest expense of not more than 3.0 to 1.0; and (4) a prohibition against incurring debt, subject to permitted exceptions.

On April 15, 2015 the Company entered the Second Amendment to the First Amendment and Restated Credit Agreement and several other agreements which provided that SOSventures, LLC will provide an additional $3 million on its credit facility to be used to pay the outstanding balance of the Independent Bank term loan, pay on the Independent Bank credit facility and for operations. Additionally, SOSventures deposit $5 million into a controlled account at Independent Bank to be used to drill two wells in the Crittenden Field referenced in the Independent Bank Amendment. Further, SOSventures, LLC will receive interest on its credit facility and a 1% overriding royalty interest on the Company’s Crittenden Field properties effective upon the drilling of these two oil and gas wells until such time as the credit facility is repaid. Finally, SOSventures, LLC shall receive warrants to purchase 2,542,397 of the Company's common shares for $1.00 per share with a two-year term. The Company utilized a standard option pricing model, (Black Scholes), to measure the fair value of the warrants to SOSventures. If fully purchased 2,542,397 would equal 20% of our currently outstanding common stock.

NOTE 12 – LEGAL PROCEEDINGS

From time-to-time, the Company may become subject to proceedings, lawsuits and other claims in the ordinary course of business including proceedings related to environmental and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance.

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.

Stockholder Lawsuit

On April 17, 2015, we were served with a lawsuit filed in Bexar County, Texas by William F. Pettinati, Jr., Nicholas Garofolo, Sigma Gas Barbastella Fund and Sigma Gas Antrozous Fund against Starboard Resources, Inc. (now Brushy Resources, Inc.), its directors, its Chief Operating Officer, Edward Shaw, its former Chief Financial Officer, Eric Alfuth, our stockholder, Bradford Higgins, and Sean O’Sullivan, the managing director of our stockholder, SOSventures, LLC. Mr. Pettinati, Mr. Garofalo and the Sigma Gas Antrozous Fund are stockholders. Mr. Pettinati owns 145,112 shares, Mr. Garofalo owns 226,680 common stock shares and Sigma Gas Antrozous Fund owns 44,610 common stock shares. Combined these stockholders account for approximately 3.3% of our outstanding common stock. These stockholders became our stockholders in February 2014.

The Plaintiffs allege several derivative and direct causes of action, many of which relate to alleged actions that pre-date their becoming stockholders in February 2014. These derivative claims include, breach of fiduciary duty, waste of corporate assets, concerted action and conspiracy, joint enterprise, agency, alter ego, exemplary damages, and unjust enrichment. The direct claims include, breach of fiduciary duty, conversion, shareholder oppression, concerted action and conspiracy, declaratory judgment that the distribution of stock to the plaintiffs was invalid, joint enterprise, agency, alter ego, exemplary damages, concerted action and conspiracy and failure to allow for inspection of books and records.

Many of the allegations relate to events that allegedly happened before the plaintiffs became stockholders, including the distributions from certain partnerships that led to the Plaintiffs becoming stockholders in February 2014. For actions after February 2014, Plaintiffs complain that our common stock still lacks a trading venue, that a books and records request was not honored, that we “delayed” our public offering, that SOSventures LLC had allegedly taken steps to “foreclose” on our assets under our subordinated credit agreement with SOSventures, LLC and that we filed for an extension to the filing date for our Form 10-K for the year ending December 31, 2014. On October 6, 2015 Plaintiffs withdrew the claim about not honoring a books and records request.

The matter is styled Sigma Barbastella Fund et al v. Charles S. Henry, III et al. and it is Cause No. 20105-CI-05672 in the 224th District Court in Bexar County, Texas.

Item 2— Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our 10-K filed under the Securities Act of 1934, as amended, with the Securities and Exchange Commission on April 16, 2015. Our discussion and analysis includes forward-looking information that involves risks and uncertainties, and should be read in conjunction with the below section entitled “Forward-Looking Statements.” For a discussion about the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements, see Part II. Item 1A. “Risk Factors.”

In this Quarterly Report on Form 10-Q, references to “we,” “our” or “the Company” refer to Brushy Resources Inc. and its subsidiaries.

Forward-Looking Statements

This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements other than historical fact and give our current expectations or forecasts of future events. They may include estimates of natural gas and oil reserves, expected natural gas and oil production and future expenses, assumptions regarding future natural gas and oil prices, planned capital expenditures, and anticipated asset acquisitions and sales, as well as statements concerning anticipated cash flow and liquidity, business strategy and other plans and objectives for future operations.

Although we believe the expectations and forecasts reflected in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that could cause actual results to differ materially from expected results include, but are not limited to: any statements regarding personnel, business strategy, estimated current and future net reserves and present values of such reserves, drilling and completion of wells including our identified locations, financial strategy, budget projections, operating results, marketing and realized prices for oil, natural gas and natural gas liquids, timing and amount of future production of oil and natural gas, availability and cost of drilling and production equipment, availability and cost of oilfield labor, the amount, nature and timing of capital expenditures, including future development costs, our ability to fund our 2014 and 2015 capital expenditure budget, liquidity, capital resources, the cost and availability of transportation of our hydrocarbon products, available refinery capacity, amount of stockpiles of hydrocarbon products, the cost and availability of competing sources of energy such as wind, solar, nuclear and hydro energy, technology developments affecting users of hydrocarbon products, such as electric cars, government transportation policies, availability and terms of capital, development results from our identified drilling locations, property acquisitions, property development and operating costs, general economic conditions, the commodity price environment, the effectiveness and extent of our risk management activities, our insurance coverage, estimates of future potential impairments, environmental liabilities, technology, counterparty credit risk, government regulation of and tax treatment for the oil and gas industry, non-historical plans, objectives, expectations and intentions contained in this report, future revenues, future costs and expenses, earnings, earnings per share, margins, cash flows, liquidity and dividends. Important factors which may affect the actual results include, but are not limited to, the final resolution of the litigation involving Giddings Oil & Gas LP, Hunton Oil Partners LP and Asym Energy Fund III LP, political developments, market and economic conditions, changes in raw material, transportation and energy costs, inflation, industry competition, lack of availability of drilling and production equipment and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating oil and natural gas reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures, cost of services, service and equipment providers and the ability to execute and realize the expected benefits from strategic initiatives, including revenue and reserve growth plans, mergers and acquisitions and their integration, changes in financial markets and changing legislation and regulations, including changes in tax law or tax regulations.

Reserve engineering is a process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reservoir engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil and natural gas that are ultimately recovered.

We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report, and we undertake no obligation to update this information. Should one or more of the risks or uncertainties described in this report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All forward-looking statements in this report are expressly qualified by the statements in this section to reflect events or circumstances after the date of this report. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

We urge you to carefully review and consider the disclosures made in this Quarterly Report and our other filings with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.

Overview

Brushy is an independent energy company engaged primarily in the exploration for, and development of, natural gas and crude oil reserves. We generate our revenues and cash flows from two primary sources: investing activities and the proceeds from the sale of oil and gas production on properties we hold or participate in.

As of November 5, 2015, we owned interests in 121 producing oil and natural gas wells. We operate 117 or 97% of those wells. Our oil and natural gas production for 2014 consisted of 180,898 bbls of oil and 779,012 Mcf of gas.

We began 2014 with estimated proved reserves of 5,091 MBOE and ended the year with 6,264 MBOE.

Strategy

We produce from operated oil and natural gas wells in the liquids rich, oil-bearing window of the Eagle Ford trend of South Texas and the nearby, oil-prone Giddings field where in combination we control 16,189 gross acres (15,880 net acres). We also completed a transaction to acquire acreage in West Texas, which we call the Crittenden Field and where we control 5,160 gross acres (2,759 net acres). In addition, we have material non-operated working interests in producing properties and conventional prospects located throughout Logan and McClain counties in Oklahoma, which account for 5,055 gross acres (1,229 net acres). The combined reserve base and net production are each over 70% oil-weighted and are currently approximately 82% held by production.

Our total proved reserves, based on our January 1, 2015 independent reserve estimate report, were 5,788 MBOE, consisting of 10,771 MMcf of natural gas, 3,993 Mbbl of oil. The PV-10 of our proved reserves at January 1, 2015 was $128.4 million based on the average of the beginning of each month prices through December 2014 of $95.28 per Bbl for oil and condensate and $4.36 per MMBtu for natural. At January 1, 2015, 23% of our estimated proved reserves were proved developed reserves and 69% of our estimated proved reserves were oil and condensate. Our average daily production for the nine month period ending September 30, 2014 was 914 BOE per day. We grew our average daily production 76% from 563 BOE per day at year-end 2013 to 990 BOE per day at year-end 2014.

PV-10 estimated proved reserves is a non-GAAP financial measure as defined in Item 10(e) of Regulation S-K and is defined on page 32 of the annual report on Form 10-K. Reconciliation to the most directly comparable GAAP financial measure (standardized measure of discounted future net cash flows) is found in the table on page 33 of the annual report on Form 10-K. We believe that PV-10 value provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and natural gas companies.

As part of this strategy, we focus on the following areas:

Bigfoot - Texas

We control about 3,000 gross acres across Frio and Atascosa counties in southern Texas, comprising less than 1% of our total proved reserves.

Giddings – Bastrop - Texas

Giddings is our largest acreage position with just over 13,000 gross acres located within the Eagle Ford trend. Our acreage is spread across Bastrop, Burleson, Brazos, Fayette, Lee, and Gonzales counties. From a reserve perspective, Giddings comprises the largest portion of our total proved reserves at 81%.

Delaware Basin - Winkler Counties – Texas and Lea County, New Mexico

In Winkler and Loving Counties, Texas we control about 5,160 gross acres (3,264 net acres). Our position comprises 19% of our total proved reserves.

In Lea County, New Mexico we started producing the Mexico P #1 Federal well on September 12, 2015 and now hold 520 gross acres (504.7 net acres) by production.

Recent Oil and Gas Activities

We recently drilled or re-entered and completed its first three wells on our Delaware Basin properties in Winkler County, Texas and Lea County, New Mexico.

We vertically re-entered and horizontally drilled, frac’ed and completed the Kudu #1H well in the Wolfcamp formation in Winkler County, Texas. We started producing the well on August 12, 2015 with a peak 24-hour production rate 653 barrels of oil equivalent per day, comprised of 392 barrels of oil and 1.6 million cubic feet of natural gas flowing on a 18/64’’ choke at 2,500 psi up 4.5” casing.

We performed a behind-pipe completion of the vertical wellbore and completed the well with a frac in the Wolfcamp Formation for the Mexico P #1 Federal well in Lea County, New Mexico. We started producing the well on September 12, 2015 with a peak 24-hour production rate of 244 barrels of oil equivalent per day, comprised of 219 barrels of oil and 0.2 million cubic feet of natural gas flowing on a 10/64” choke at 500 psi up 10.75” casing. Further the economic production of the Mexico P #1 Federal well increases the Company’s held-by-production acreage by 520 gross acres (504.7 net acres) in the Delaware Basin. We now own approximately 3,264 net acres in Winkler and Loving Counties, Texas and Lea County, New Mexico.

We vertically re-entered and horizontally, drilled, frac’ed and completed the Wolfe #3H well in the Brushy Canyon formation in Winkler County Texas and are awaiting initial production tests.

Any reference to “peak production” or “initial production” should not be viewed as an indication of what any of the wells are expected to produce in the long run. These production numbers stem from production under test conditions and investors should expect the peak production or initial production to decline over the long-term.

Results of Operations

Our revenue is principally derived from the sale of oil and natural gas and generally attributable to working interests owned and held directly by us in wells on producing oil and gas properties (which generate monthly revenue to the extent such wells produce natural gas and oil) and carried working interests in such wells (which also generate monthly revenue to the extent such wells produce natural gas and oil), as well as overriding royalty interests and reversionary interests (which may generate additional monthly revenue to the extent such wells produce natural gas and oil).

Total Revenues. Total revenues decreased $8,456 thousand to $7,029 thousand for the nine months ended September 30, 2015 from $15,485 thousand for the nine months ended September 30, 2014, driven primarily by decrease in oil and natural gas price. Our average sales price received for natural gas decreased to $2.51 per Mcf for the nine months ending September 30, 2015 from $5.41 per Mcf for the same period in 2014. Our average sales price received for oil decreased to $48.02 per bbl for the nine months ending September 30, 2015 from $97.83 per bbl for the same period in 2014. Changes in natural gas and oil prices can significantly impact our natural gas and oil sales and related cash flows. Lower prices may materially adversely affect the sales prices we receive and our revenues and cash flow.

Total natural gas and oil production for the nine months ending September 30, 2015 consisted of 584,626 Mcf of natural gas and 115,847 bbls of oil, as compared to total natural gas and oil production for nine months ending September 30, 2014, which consisted of 527,033 Mcf of natural gas and 129,162 bbls of oil.

Costs and Expenses. Total costs and expenses (excluding depreciation, depletion, and impairment) decreased $354 thousand to $9,711 thousand for the nine months ending September 30, 2015 from $10,065 thousand for the same period in 2014. Lease operating expenses decreased $983 thousand to $2,963 thousand for the nine months ending September 30, 2015 from $3,946 thousand for the same period in 2014. General and administrative expenses and professional fees decreased $64 thousand to $3,410 thousand for the nine month period ending September 30, 2014 from $3,474 thousand for the same period in 2014. Interest expense increased $994 thousand to $2,814 thousand for the nine months ending September 30, 2015 from $1,820 thousand from the same period in 2014 due primarily from the reduction of bank credit facility resulting increase borrowing from the SOS credit facility. Depletion and depreciation expense decreased to $6,576 thousand for the nine month period ending September 30, 2014 from $7,287 thousand for the same period in 2014, due primarily to decreased depletion expenses associated with sales of Oklahoma properties. Impairment of oil and gas properties for the nine months ending September 30, 2015 was $863 thousands and $0 for the same period in 2014.

Net Income. Net loss was ($3,465) thousand, or ($0.27) per basic and diluted common share, for the nine month period ending September 30, 2015 as compared to ($100) thousand, or ($.01) per basic and diluted common share, for the same period in 2014. The increase in net loss was attributable primarily to lower oil and natural gas price.

Liquidity and Capital Resources

During the nine months ended September 30, 2015 net cash flow provided by operating activities decreased by $4,752 thousand from $5,013 thousand for the nine months ended September 30, 2014 to $261 thousand for the nine months ending September 30, 2015. Changes in cash flows from operations are largely due to the same factors that affect our net income, excluding various non-cash items such as impairments of assets, depreciation, depletion and amortization and deferred income taxes. For example, changes in production volumes and market prices for natural gas and oil directly impact the level of our cash flow from operations. See the discussion under "Results of Operations."

Cash from investing activities decreased by $33,081 thousand from the nine months ending September 30, 2015 from the same period last year. The decrease was due primarily to cash outflow of $3,913 thousand used to purchase oil and natural gas properties during the nine months ending September 30, 2015 as compared to $30,903 thousand for the same period in 2014.

Net cash used by financing activities was ($1,227) thousand for the nine month period ending September 30, 2014, compared to net cash provided of $23,235 thousand for the nine month period ending September 30, 2014. These financing activities primarily reflect refinancing of the term loan for the nine months ended September 30, 2015 compared to proceeds from loans for the nine month period ending September 30, 2014.

As of September 30, 2015, we had a working capital deficit of $35,722 thousand, which consisted $8,105 thousand of current assets offset by $43,827 thousand of current liabilities. Current assets as of September 30, 2015 included cash of $5,779 thousand and accounts receivable of $879 thousand compared to cash of $3,574 thousand and accounts receivable of $1,860 thousand at December 31, 2014. Current liabilities as of September 30, 2015 included accounts payable and accrued liabilities of $6,092 thousand and revenue payable of $791 thousand as compared to accounts payable and accrued liabilities of $5,835 and revenue payable of $829 at December 31, 2014. Included in the current liabilities are the Independent Bank note of $16,400 thousand and SOS Venture note and interest of $20,071 thousand as of September 30, 2015.

Working capital was a deficit of $35,722 thousand at September 30, 2015 compared to a deficit of $1,520 thousand at December 31, 2014. Our primary sources of liquidity are cash provided by operating activities, a subordinated credit facility, sales of non-core properties and access to capital markets.

The consolidated financial statements continue to reflect an ongoing drilling program which amounted to $3,913 thousand during the nine month period ending September 30, 2015. Our capital program is designed to increase production through exploration and workovers within our fields and through joint venture programs. This strategy will involve industry partners in these efforts so as to reduce our upfront cash requirements and reduce risk dollars expended.

Although we typically retain a significant degree of control over the timing of our capital expenditures, we may not always be able to defer or accelerate certain capital expenditures to address any potential liquidity issues. In addition, changes in drilling and field operating costs, drilling results that alter planned development schedules, acquisitions or other factors could cause us to revise our drilling program, which is largely discretionary.

Senior Secured Credit Facility with Independent Bank

On June 27, 2013 we entered into a senior secured credit facility from Independent Bank, providing for a $100.0 million revolving credit facility, subject to scheduled or elective collateral borrowing base redeterminations based on our oil and natural gas reserves. The credit facility matures on June 1, 2016. As of September 30, 2015, our borrowing base was $23.5 million. The outstanding borrowings bear interest at a rate that is currently based on the prime with a 4.00% floor. We also must pay an unused commitment fee of 0.5% per year on the undrawn amount of the borrowing base. As of September 30, 2015 we have borrowed approximately $22.5 million on the credit facility.

On March 26, 2014, we entered into a term loan agreement with Independent Bank totaling $4,000,000 at a current rate of 6.75% annum. The agreement was obtained to fund our development and acquisition of oil and natural gas properties. The loan requires 18 equal monthly payments of approximately $194,000 starting on October 1, 2014 and maturing on March 1, 2016 and is subject to the same covenants as the credit facility with Independent Bank. The term loan agreement is Exhibit 10.9 to this annual report.

On April 15, 2015 we entered into the Fourth Amendment to the Credit Agreement with Independent Bank (“Amendment”),. The agreement provides that the borrowing base is $21,750,000 as of the date of the Amendment that will be reduced by $250,000 per month before September 1, 2015 and $350,000 per month thereafter, unless re-determined after 150 days from the date of the Amendment. The Company is obligated to provide Independent Bank an engineering report acceptable to the Bank before September 1, 2015 showing proven and producing and proven undeveloped oil and gas reserves, discounted present value of future net income for the Company’s oil and gas properties as of September 1, 2015, projections of annual rate of production, gross income and net income relating to these reserves and take-or-pay, prepayment and gas balancing obligations. Forrest Garb & Associates is deemed to be acceptable to the Bank for an engineering report.

On March 26, 2014, we entered into a term loan agreement with Independent Bank totaling $4,000,000 at a current rate of 6.75% per annum. The Company has repaid its term loan at closing on April 15, 2015 with both principal and interest. It also repaid the note principal to reduce the note to no more than the borrowing base, including the repayment of interest, payment of certain fees, deposited $5,000,000 into a special account and deliver a commitment letter from SOSventures to provide an additional $2,000,000 of availability under the Subordinated credit facility with SOSventures, LLC for drilling capital.

The April 15, 2015 Amendment also requires us to obtain the following hedges.

Period

Commodity

Hedge Product

Bbl Vol (Per Month)

Price

% Hedge

Average Floor Price

2015

March '15 - Oct '15

Crude

Swap

2,200 bbl

$77.00

84.5% (includes

$72.60 (includes

March '15 - Dec '15

Crude

Put

4,000 bbl

$70.00

executed and

March '15 - Dec '15

Crude

Put

2,800 bbl

$80.00

required hedges)

Additional Required

March '15 - Oct '15

Crude

Put, Collar, Swap

1,000 bbl

$50.00 Floor

2016

Jan. '16 - Mar '16

Crude

Swap

1.500 bbl

$75.00

83.7% (includes

$53.35 (includes

Calendar 2016

Crude

Collar

3,000 bbl

$54.00

executed and

Additional Required

Calendar 2016

Crude

Put, Collar, Swap

3,000 bbl

$50.00 Floor

required hedges)

On July 31, 2015, we sold all of our Oklahoma properties, which were located in Logan and Kingfisher Counties, Oklahoma, to Remora Petroleum, LP for $7,249,390. As part of this transaction, the Company entered into the Fifth Amendment to its Credit Agreement with Independent Bank (“Amendment”). (Exhibit 10.6.16). The Amendment provides that $4,000,000 of the purchase price was paid to Independent Bank to pay down its credit facility with Independent Bank. The Amendment requires that an additional $2,000,000 would be held by Independent Bank in a control account. Independent Bank took that $2,000,000 from the control account and applied it to the Independent Bank Credit Facility on October 30, 2015.

In a letter dated October 20, 2015, counsel for Independent Bank notified the Company of the following defaults under our Credit Agreement with Independent Bank, as amended: i) the interest coverage ratio covenant set forth in Section 7.15.1 of the Credit Agreement for the fiscal quarter ended June 30, 2015, (ii) the current ratio covenant set forth in Section 7.15.2 of the Credit Agreement for the fiscal quarter ended June 30, 2015, (iii) the leverage ratio covenant set forth in Section 7.15.3 of the Credit Agreement for the fiscal quarter ended June 30, 2015, and (iv) the Borrower is not currently maintaining the minimum Commodity Hedging Transactions required by Section 7.21 of the Credit Agreement.

The letter from Independent Bank’s counsel further stated:

The Lender is considering what actions to take in respect of the Listed Defaults. The Lender expressly retains and reserves all rights and remedies now or hereafter available to it under the Credit Agreement and the other Loan Documents. The Lender does not, and does not intend to, waive the Listed Defaults or any other Default or Event of Default or agree to forbear from any rights or remedies with respect thereto; any such waiver or forbearance, if done, would only be effective to the extent, and subject to terms and conditions, set forth in a separate written instrument executed and delivered in accordance with the Credit Agreement.

Negotiations with Independent Bank are ongoing. We do not anticipate a renewal of the credit facility in 2016 and are seeking alternative financing. If negotiations with Independent Bank and obtaining alternative financing are not successful, we may be required to take actions to preserve corporate assets.

Subordinated Credit Facility with SOSventures, LLC

On June 3, 2014 we agreed to amend our credit agreement with SOSventures, LLC, originally entered into on July 25, 2013, providing for a term loan through February 16, 2016 in an amount up to $20,000,000 at an 18.00% interest rate for drilling activities. The loan under this agreement is secured by a second lien on our assets.

The SOSventures, LLC credit agreement requires us to maintain certain financial ratios. First, we must maintain an interest coverage ratio of 3:1 at the end of each quarter so that our consolidated net income less our fees under the credit facility, lender expenses, non-cash charges relating to the hedge agreements, interest, income taxes, depreciation, depletion, amortization, exploration expenditures and costs and other non-cash charges (netted for noncash income) (“EBITDAX”) is greater than 3 times our interest expense under the credit facility. Second, we must maintain a debt to EBITDAX ratio of less than 3.5:1 at the end of each quarter. Third, we must maintain a current ratio of greater than 1:1 at the end of each quarter, meaning that our consolidated current assets (including the unused amount of the credit facility by excluding non-cash assets under ASC 410 and 815) must be greater than our consolidated current liabilities (excluding non-cash obligations under ASC 410 and 815 and current maturities under the credit facility.)

The credit agreement prevents us from incurring indebtedness to banks or lenders, other than Independent Bank, without the consent of SOSventures, LLC. It also prevents us from incurring most contingent obligations or liens (other than to Independent Bank). It restricts our ability to pay dividends, issue options and warrants and repurchase our common stock shares. The options and warrants limitations do not apply to equity compensation plans.

On April 15, 2015 we entered the Second Amendment to the First Amendment and Restated Credit Agreement and several other agreements which provided that SOSventures, LLC will provide an additional $3 million on its credit facility to be used to pay the outstanding balance of the Independent Bank term loan, pay on the Independent Bank credit facility and for operations. Additionally, SOSventures deposit $5 million into a controlled account at Independent Bank to be used to drill two wells in the Crittenden Field referenced in the Independent Bank Amendment. Further, SOSventures, LLC will receive interest on its credit facility and a 1% overriding royalty interest on the Company’s Crittenden Field properties effective upon the drilling of these two oil and gas wells until such time as the credit facility is repaid. Finally, SOSventures, LLC shall receive warrants to purchase 2,542,397 of our common shares for $1.00 per share with a two-year term. If fully purchased 2,542,397 would equal 20% of our currently outstanding common stock.

As of September 30, 2015, we have $18 million drawn against the SOSventures, LLC credit facility. As of October 12, 2015 we have an approximate $20 million balance on the SOSventures, LLC credit facility. The SOSventures, LLC borrowing base is also subject to possible redetermination and corresponding liquidity issues as stated above in connection with the Independent Bank.

Hedging Activities

Our current hedge position consists of put options. These contracts and any future hedging arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or oil prices increase. In addition, these arrangements may limit the benefit to us of increases in the price of oil. Accordingly, our earnings may fluctuate significantly as a result of changes in the fair value of our derivative instrument, which we use entirely to hedge our production and do not enter into for speculative purposes.

At September 30, 2015, we had the following open crude oil derivative contracts:

	Instrument	Commodity	Volume (bbl / month)		Floor Price		Ceilings Price		Purchased Put Option Price		Fair Value (in thousands)
Oct 2015	Put	Crude Oil		6,000		-		-		50.00 - 80.00		161
Nov 2015 - Dec 2015	Put	Crude Oil		2,800						80.00		173
Oct 2015 - Dec 2015	Put	Crude Oil		4,000						70.00		291
Jan 2016 - Mar 2016	Put	Crude Oil		1,500						75.00		108
Jan 2016 - Dec 2016	Put	Crude Oil		3,000						50.00		94
Jan 2016 - Dec 2016	Collar	Crude Oil		3,000		54.00		79.30				150

Outlook

Our ability to meet our debt covenants and our capacity to incur additional indebtedness will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. Indeed, on October 20, 2015 we received notice from Independent Bank of a breach of debt covenants and our financial results for the quarter ending September 30, 2015 as stated in this Form 10-Q do not place us back in covenant compliance for both Independent Bank and SOSventures – which functionally both have the same financial covenants. Moreover, our borrowing base with Independent Bank is overdue a reassessment. We have recently put two wells into production and are completing a third well. The Lea County, New Mexico well also added more than 500 net acres to our held by production acreage. But low oil and gas prices may mitigate the value of these recent additions for proved developed producing reserve acreage and borrowing base calculations. Further, the impact of these new wells on our borrowing bases are still to be determined. Over the longer term, we expect that our strategy and our investments will result in increased production and reserves, lower lease operating costs and more abundant drilling opportunities. As a consequence, we constantly monitor our liquidity and capital resources, endeavor to achieve covenant compliance issues and work with the lenders under our Bank Credit Facility and SOSventures, LLC Credit Agreement to address any our financing issues.

Further, our credit facilities with Independent Bank and SOSventures, LLC expire in May 2016 and we anticipate that we will need to find other financing, particularly in the case of Independent Bank. Such new financing could result in a significant restructuring of our capital structure. While negotiations with Independent Bank and others are ongoing, we have not entered into any agreements, letters of intent or term sheets regarding Independent Bank or such financing. Further, we are unlikely to make significant new operational capital expenditures until such time as negotiations over our credit facilities are concluded.

If, in the future, we are unable to obtain compliance or comply with these covenants going forward and the lenders under our Bank Credit Facility and SOSventures, LLC Credit Agreement are unwilling to provide us with covenant flexibility, we will likely be forced to repay or refinance amounts then outstanding under the Bank Credit Facility and SOSventures, LLC Credit Agreement and seek alternative sources of capital to fund our business and anticipated capital expenditures. In the event that we are unable to access sufficient capital to fund our business and planned capital expenditures, we may be required to curtail our drilling, development, land acquisition and other activities, which could result in a decrease in our production of oil and natural gas, may be subject to forfeitures of leasehold interests to the extent we are unable or unwilling to renew them, and may be forced to sell some of our assets on an untimely or unfavorable basis, each of which could adversely affect our results of operations and financial condition. Further, the failure to comply with the restrictive covenants relating to our indebtedness could result in the declaration of a default and cross default under the instruments governing our indebtedness, potentially resulting in acceleration of our obligations and adversely impacting our financial condition. If our obligations are accelerated, we may be required to take actions designed to preserve our corporate assets.

Our future capital resources and liquidity depend, in part, on our success in developing our leasehold interests, growing reserves and production and finding additional reserves. We may sell assets to achieve liquidity in pursuit of these goals. Cash is required to fund capital expenditures necessary to offset inherent declines in our production and proven reserves, which is typical in the capital-intensive oil and natural gas industry. We therefore continuously monitor our liquidity and the capital markets and evaluate our development plans in light of a variety of factors, including, but not limited to, our cash flows, capital resources, acquisition opportunities and drilling success.

We strive to maintain financial flexibility while pursuing our drilling plans and evaluating potential acquisitions, and will therefore consider accessing capital markets (if on acceptable terms) as necessary to, among other things, maintain substantial borrowing capacity under our Bank Credit Facility and SOSventures, LLC Credit Agreement, facilitate drilling on our undeveloped acreage position and permit us to selectively expand our acreage position while sustaining sufficient operating cash levels. Our ability to complete future debt and equity offerings and maintain or increase our borrowing base is subject to a number of variables, including our level of oil and natural gas production, reserves and commodity prices, as well as various economic and market conditions that have historically affected the oil and natural gas industry. Prices for oil and natural gas have historically been subject to seasonal fluctuations characterized by peak demand and higher prices in the winter heating season; however, the impact of other risks and uncertainties have influenced prices throughout recent years. Even if we are otherwise successful in growing our reserves and production, if oil and natural gas prices decline for a sustained period of time, our ability to fund our capital expenditures, complete acquisitions, reduce debt, meet our financial obligations and become profitable may be materially impacted.

Critical Accounting Policies and Estimates

The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate such estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements. Below, we have provided expanded discussion of the more significant accounting policies, estimates and judgments. We believe these accounting policies reflect the more significant estimates and assumptions used in preparation of our consolidated financial statements. Please read the notes to our most recent audited consolidated financial statements filed with the SEC for a discussion of additional accounting policies and estimates made by management.

Oil and Gas Producing Activities

Our oil and gas producing activities were accounted for using the successful efforts method of accounting as further defined under FASB ASC 932, Extractive Activities – Oil and Natural Gas. Costs to acquire leasehold rights in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, delay rentals and geological and geophysical costs are expensed.

Depletion and Depreciation

Estimates of natural gas and oil reserves utilized in the calculation of depletion are prepared using certain assumptions. Reserve estimates are based upon existing economic and operating conditions with no provision for price and cost escalations except by contractual arrangements. Natural gas and oil reserve estimates are inherently imprecise and are subject to change as more current information becomes available. Capitalized costs are depleted and amortized using the units of production method, based upon reserve estimates.

Impairments

The carrying value of oil and gas properties is assessed for possible impairment on a field by field basis and on at least an annual basis, or as circumstances warrant, based on geological analysis, changes in proved reserve estimates or the sale of the properties. When impairment occurs, an adjustment is recorded as a reduction of the asset carrying value.

Asset Retirement Obligations

The Company records for the estimated liability for the plugging and abandonment of natural gas and oil wells at the end of their productive lives following the provisions of ASC 410-20, Asset Retirement Obligations. Asset retirement obligations are estimated at the present value of expected future net cash flows based on reserve estimates and federal and state regulatory requirements and are discounted using the Company’s credit adjusted risk free rate. Because the Company uses unobservable inputs in estimating asset retirement obligations, it considers such obligations a Level 3 measurement under ASC 820. At the time of abandonment, we recognize a gain or loss on abandonment to the extent that actual costs do not equal the estimated costs.

Goodwill

At September 30, 2015 and December 31, 2014 the Company had goodwill of $960 thousand.

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The Company follows FASB ASC Topic 350 Goodwill and Intangible Asset Impairment Testing. Our analysis consists of two steps. Step 1 tests the company for impairment by comparing the fair value of equity to the book value of equity. If the fair value is less than the book value, then Step 2 analysis must be performed. If the fair value of goodwill is less than its carrying amount, impairment is recorded based on the difference. The Company annually assesses the carrying value of goodwill for impairment.

Pricing mechanism for oil and gas reserves estimation

The SEC’s rules require reserve estimates to be calculated using a 12-month average price. Price changes can still be incorporated to the extent defined by contractual arrangements. The use of a 12-month average price rather than a single-day price is expected to reduce the impact on reserve estimates.

The SEC rules also amend the definition of proved oil and gas reserves to include reserves located beyond development spacing areas that are immediately adjacent to developed spacing areas if economic recoverability can be established with reasonable certainty. These revisions are designed to permit the use of alternative technologies to establish proved reserves in lieu of requiring companies to use specific tests. In addition, they establish a uniform standard of reasonable certainty that applies to all proved reserves, regardless of location or distance from producing wells. Because the revised rules generally expand the definition of proved reserves, proved reserve estimates could increase in the future based upon adoption of the revised rules.

Estimated proved oil and gas reserves

The evaluation of our oil and gas reserves is critical to management of our operations and ultimately our economic success. Decisions such as whether development of a property should proceed and what technical methods are available for development are based on an evaluation of reserves. These oil and gas reserve quantities are also used as the basis of calculating the unit-of-production rates for depreciation, evaluating impairment and estimating the life of our producing oil and gas properties in our asset retirement obligations. Our total reserves are classified as proved, possible and probable. Proved reserves are classified as either proved developed or proved undeveloped. Proved developed reserves are those reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Estimated proved undeveloped reserves include reserves expected to be recovered from new wells from undrilled proven reservoirs or from existing wells where a significant major expenditure is required for completion and production. Probable reserves are those additional reserves that are less certain to be recovered than proved reserves and when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the proved plus probable estimates. Possible reserves are those additional reserves that are less certain to be recovered than probable reserves and when probabilistic methods are used, there should be at least a 10% probability that the total quantities ultimately recovered will equal or exceed proved plus probable plus possible reserve estimates.

Independent reserve engineers prepare the estimates of our oil and gas reserves presented in this prospectus based on guidelines promulgated under GAAP and in accordance with the rules and regulations of the Securities and Exchange Commission. The evaluation of our reserves by the independent reserve engineers involves their rigorous examination of our technical evaluation and extrapolations of well information such as flow rates and reservoir pressure declines as well as other technical information and measurements. Reservoir engineers interpret these data to determine the nature of the reservoir and ultimately the quantity of total oil and gas reserves attributable to a specific property. Our total reserves in this prospectus include only quantities that we expect to recover commercially using current prices, costs, existing regulatory practices and technology. While we are reasonably certain that the total reserves will be produced, the timing and ultimate recovery can be affected by a number of factors including completion of development projects, reservoir performance, regulatory approvals and changes in projections of long-term oil and gas prices. Revisions can include upward or downward changes in the previously estimated volumes or proved reserves for existing fields due to evaluation of (1) already available geologic, reservoir or production data or (2) new geologic or reservoir data obtained from wells. Revisions can also include changes associated with significant changes in development strategy, oil and gas prices or production equipment/facility capacity.

Standardized measure of discounted future net cash flows

The standardized measure of discounted future net cash flows relies on these estimates of oil and gas reserves using commodity prices and costs at year-end. The benchmark oil and gas prices used are the preceding 12-month averages of the first-day-of-the month spot prices posted for the WTI oil and Henry Hub natural gas. Oil prices are based on a benchmark price of $96.90 per barrel and have been adjusted by lease for gravity, transportation fees, and regional price differentials. Gas prices per thousand cubic feet are based on a benchmark price of $3.67 per million British thermal units and have been adjusted by lease for Btu content, transportation fees, and regional price differentials. The adjustments are based on the differential between historic oil and gas sales and the corresponding benchmark price. While we believe that future operating costs can be reasonably estimated, future prices are difficult to estimate since the market prices are influenced by events beyond our control. Future global economic and political events will most likely result in significant fluctuations in future oil prices.

Consent requirements for material Company actions before we obtain an exchange listing

We have yet to apply for a listing on a national securities exchange. Under Section 6 of the put option waiver agreement referenced at Exhibit 4.3, until such time as we obtain a listing on a national securities exchange, we are required to obtain the consent of the Longview Marquis Master Fund, L.P., LMIF Investments, LLC and SMF Investments, LLC to take any of the following actions:

a. consummate a sale of the equity securities of the Company to the extent that the valuation of all equity securities of the Company at the time of such sale is more than thirty percent (30%) below the then present value of the Company’s estimated proved future oil and gas net revenues calculated at an annual discount rate of ten percent (10%);

b. issue, or authorize the issuance of, any class of equity security that is not identical to the class of equity securities held by the Summerline Parties;

c. issue any equity securities without providing preemptive rights to Longview Marquis Master Fund, L.P., LMIF Investments, LLC, SMF Investments, LLC and Summerline Capital Partners, LLC as will enable them to maintain, post-issuance, their percentage equity ownership of the Company owned pre-issuance;

d. amend, modify or waive any provision of the Company’s certificate of incorporation or bylaws; or

e. sell all or substantially all of the assets of the Company or its subsidiaries

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is a Smaller Reporting Company as defined by SEC Rules 405 and 12b-2 and is not required to disclose the information required by Regulation S-K, Item 305 pursuant to the Smaller Reporting Company exemption in Regulation S-K, Item 305(e).

Item 4. Controls and Procedures

Management’s Evaluation of Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and disposition of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The scope of management’s assessment of the effectiveness of internal control over financial reporting includes all of our Company’s subsidiaries.

The Company’s Chief Executive Officer and Chief Accounting Officer evaluated the Company’s disclosure controls and procedures as of September 30, 2015. In making their assessment, the Company's Chief Executive Officer and Chief Financial Officer were guided by the releases issued by the SEC and to the extent applicable was based upon the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Our Annual Report on Form 10-K filed April 16, 2015 does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the exemption for an Emerging Growth Company under Section 404(b) of the Sarbanes-Oxley Act of 2002 (as amended by Section 103 of the JOBS Act.).

Disclosure controls and procedures. As of September 30, 2015, the Company was obligated to be a reporting company and file periodic or current reports with the Securities and Exchange Commission pursuant to the provisions of the Securities Exchange Act of 1934. Thus, the Company must assess its disclosure controls and procedures in connection with its presentation of its information for the period ending September 30, 2015, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, which is presented in this Form 10-Q. The Company maintains controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. The Company’s Chief Executive Officer and Chief Accounting Officer are responsible for establishing and maintaining these procedures and, as required by the rules of the SEC, evaluating their effectiveness.

Based on their evaluation the Company’s disclosure controls and procedures which took place as of the end of the period covered by this report, the Chief Executive Officer and Chief Accounting Officer have concluded that, as of such date, our disclosure controls and procedures were ineffective, due to the material weaknesses in our internal control over financial reporting described below.

Material weakness in internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of Brushy's annual or interim financial statements will not be prevented or detected on a timely basis. During the preparation of our condensed consolidated financial statements for the quarter ended September 30, 2014, we identified that our processes and procedures for the computation of deferred income taxes and stock option expenses were not effective. This control deficiency would have resulted in a material error in our condensed consolidated financial statements for the three months ended September 30, 2014. Accordingly, management has concluded this deficiency in internal control over financial reporting constituted a material weakness.

Further, while preparing our Form 10-K annual report, filed April 16, 2015, we identified an additional material weakness in the preparation of the reserve report for December 31, 2014. Specifically, an impairment of our reserves relates to the adoption of our development plan for our undeveloped oil and gas reserves which, for the purpose of booking such undeveloped reserves, must show that such reserves are scheduled to be drilled within five years under SEC Regulation S-X Rule 4-10(a)(31)(ii). We identified the impairment amount at $4,428,378 which has a material impact on our financial statements. This impairment is connected with the impact of lower oil and gas prices in the amount of capital available for the development plan.

During the preparation of our condensed financial statements for the period ending September 30, 2015 we identified that our process and procedures for the computation of impairment were not effective. The control deficiency resulted in a material error in our condensed consolidated financial statements for the six months ended June 30, 2015. The control failure allowed for the improper recording of $1,350,000 in impairment of our Oklahoma properties.

Moreover, on September 15, 2014, the Company's Chief Financial Officer informed the Company he was resigning, effective immediately. The open Chief Financial Officer position led to an insufficient number of experienced personnel to provide reasonable assurance that transactions are being recorded as necessary to ensure timely preparation of financial statements in accordance with GAAP, including the preparation of these interim financial statements. Management is in the process of evaluating various remedial actions relating to this material weakness, including hiring a new Chief Financial Officer. In the interim, management has hired a national accounting firm to serve as a technical resource during the financial statement close process and as needed until a qualified Chief Financial Officer is hired.

Management's remediation initiatives. The Company's accounting staff will be trained on the limits of capital available for five year development plans under SEC Regulation S-X Rule 4-10(a) (31)(ii) and we will add this issue as an item to review with petroleum engineers used for reserve estimates. The Company’s accounting staff will also be trained to track what properties were previously designated for impairment so that impairment will not be double-counted on the sale of the property. But, the conditions that led to the material weakness, including the lack of a Chief Financial Officer, remain.

Changes in control over financial reporting. In the nine months ending September 30, 2015 there have no changes in control over financial reporting that will have a material impact in control over financial reporting except as reported above.

Part II—Other Information

Item 1. Legal Proceedings

In addition to the below, see Part I, Item 1 – “Financial Statements,” “Note 11 – “Legal Proceedings” of this Quarterly Report on Form 10-Q which is incorporated by reference into this Part II, Item 1 – “Legal Proceedings.”

Stockholder Lawsuit

Most of the allegations relate to events that allegedly happened before the plaintiffs became stockholders, including the distributions from certain partnerships that led to the Plaintiffs becoming stockholders in February 2014. For actions after February 2014, Plaintiffs complain that our common stock still lacks a trading venue, that a books and records request was not honored, that we “delayed” our public offering, that SOSventures LLC had allegedly taken steps to “foreclose” on the our assets under our subordinated credit agreement with SOSventures, LLC and that we filed for an extension to the filing date for our Form 10-K for the year ending December 31, 2014. On October 6, 2015 Plaintiffs withdrew the claim about not honoring a books and records request. Further some of the claims relate to our following directions from the General Partner Giddings Oil & Gas LP, Asym Energy Fund III LP and Hunton Energy Partners LP to cancel our common stock shares to Giddings Oil & Gas LP, Asym Energy Fund III LP and Hunton Energy Partners LP and reissue the shares to designated limited partners with the remaining undistributed common stock shares being interpleaded into the registry of the Connecticut Superior Court as stated below.

The matter is styled Sigma Barbastella Fund et al v. Charles S. Henry, III et al. and it is Cause No. 20105-CI-05672 in the 224th District Court in Bexar County, Texas.

Lawsuit and Arbitration Relating to 17.23% of Our Common Stock Shares

We have interpleaded 2,190,891 common stock shares or approximately 17.2348% of our common stock shares into Connecticut Superior Court for the Judicial District of Stamford/Norwalk at Stamford, Cause No. FST-CV12-6015112-S. These are the residual common stock shares that belonged to Giddings Oil & Gas LP, Asym Energy Fund III LP and Hunton Energy Partners LP (the “Partnerships” after the distribution of the Partnerships’ shares.

Claims related to the Interpleader action were heard in an American Arbitration Association arbitration in 2015. The claimants were Gregory Imbruce; Giddings Investments LLC; Giddings Genpar LLC, Hunton Oil Genpar LLC, ASYM Capital Ill LLC, Glenrose Holdings LLC; ASYM Energy Investments LLC. “Certain” respondents and counterclaimants were Charles Henry, Ahmed Ammar; John P. Vaile, as Trustee of John P. Vaile Living Trust, John Paul Otieno, SOS Ventures LLC, Bradford Higgins, William Mahoney, Edward M. Conrads, Robert J. Conrads, Giddings Oil & Gas LP, Hunton Oil Partners LP, ASYM Energy Fund III LP. “PKG Respondents” and cross claimants were William F. Pettinati, Jr., Sigma Gas Barbastella Fund, Sigma Gas Antrozous Fund, Nicholas P. Garafolo (the plaintiffs in the above-referenced stockholder litigation) who made claims against Charles Henry, Bradford Higgins and SOS Ventures LLC. The relief respondents were Rubicon Resources LLC, Sean O'Sullivan, King Lee, Michael Rihner, Scott Decker, Andrew Gillick, Briana Gillick, Steve Heinemann, Stanley Goldstein, Sidney Orbach, James P. Ashman, and Patricia R. Ashman. The claims, counterclaims and cross claims relate to the governance, control and termination of the Partnerships, including the distribution by the Partnerships’ of our common stock shares to the limited partners in the Partnerships in a liquidating distribution in February 2014 as part of a “monetization” event.

On September 10, 2015, the American Arbitration Association issued an arbitration award (“Award”). A copy of the Award may be found by reference to Exhibit 10.9 to this Form 10-Q and was filed as Exhibit 99.1 to our Form 8-K filed September 14, 2015. The Award states as follows:

All claims asserted by Claimants, including Gregory Imbruce and various business entities controlled by Mr. Imbruce against all Respondents were denied and award was made in favor of the “Certain” respondents, including our director, Charles S. Henry, as well as SOSventures, LLC, Bradford Higgins, John Paul Otieno, Estate of William Mahoney, Ahmed Ammar, John P. Vaile, as Trusteee of John P. Vaile Living Trust, Edward M. Conrads, Robert J. Conrads, Giddings Oil & Gas LP, Asym Energy Fund III LP and Hunton Oil Partners LP.

All claims asserted by Claimants, Gregory Imbruce and various business entities controlled by Mr. Imbruce against Relief Respondents, including Rubicon Resources LLC, Sean O’Sullivan Revocable Living Trust, King Lee, Michael Rihner, Scott Decker, Andrew Gillick, Briana Gillick, Steve Heinemann, Stanly Goldstein, Sidney Orbach, James P. Ashman and Patricia R. Ashman, were denied.

An award was made in favor of the “Certain” respondents, including our director, Charles S. Henry, as well as SOSventures, LLC, Bradford Higgins, John Paul Otieno, Estate of William Mahoney, Ahmad Ammar, John P. Vaile, as Trustee of John P. Vaile Living Trust, Edward M. Conrads, Robert J. Conrads, Giddings Oil & Gas LP, Asym Energy Fund III LP and Hunton Oil Partners LP against Mr. Imbruce and his entities on the following claims:

a)	breach of fiduciary duty;

b)	breach of implied covenant of good faith and fair dealing;

c)	partnership dissolution;

d)	unjust enrichment;

e)	breach of contract;

f)	accounting;

g)	violation of Connecticut Unfair Trade Practices Act;

h)	civil theft; and

i)	piercing the corporate veil.

4)	All claims asserted by William F. Pettinati, Jr. Sigma Gas Barbastella Fund, Sigma Gas Antrozous Fund and Nicholas P. Garafolo against our director, Charles S. Henry, as well as SOSventures, LLC and Bradford Higgins were denied.

A declaratory award was entered declaring that the removal of Hunton Oil Genpar LLC, Giddings Genpar LLC and Asym Capital III LLC and/or Gregory Imbruce as the General Partner(s) of Giddings Oil & Gas LP, Asym Energy Fund III LP and Hunton Oil Partners LP was lawful and in compliance with all legal and contractual requirements, and thus was effective;

A declaratory award that the distribution of Company-issued common stock shares made in February 2014 to limited partners in Giddings Oil & Gas LP, Asym Energy Fund III LP and Hunton Oil Partners LP with remaining common stock shares ultimately being interpleaded into Court in Connecticut was lawful, met all legal requirements and is effective in that the distribution was the result of a “monetization” event under the Partnership agreements;

7)	A declaratory award that the Partnerships were effectively dissolved at the time of the distribution of the above-referenced common stock shares issued by the Company from the Partnerships to the limited partners in the Partnerships;

8)	A denial of any and all fees and expenses claimed by Mr. Imbruce and his entities due to “multiple and repeated violations of the Connecticut Uniform Securities Act;”

9)	A denial of fees and expenses claimed by Mr. Imbruce and his entities for the time periods subsequent to the 2011 rollup that formed our Company;

10)	An award of damages in favor of certain of the Respondents, in the amount of $1,602,235, subject to trebling under a Civil Theft finding to $4,806,705, plus attorney and expert fees of $2,998,839 for a total award of $7,805,544, payable by Claimants, including Mr. Imbruce and his business entities;

11)	Injunctive relief ordering an accounting of the sources and uses of all funds and other assets of the Partnerships during the time that Mr. Imbruce and his entities served as general partners of the Partnerships;

12)	Post-judgment interest at 10 percent per year payable by Mr. Imbruce and his business entities; and

13)	Arbitration administrative fees, expenses and compensation of the Arbitrator totaling $122,200 to be paid by Gregory Imbruce et al, and William F. Pettinati, Jr., Sigma Gas Barbastella Fund, Sigma Gas Antrozous Fund and Nicholas P. Garafolo.

The “Certain” respondents have filed in Connecticut Superior Court to confirm the Award. Likewise, Claimants have filed in Connecticut Superior Court to vacate the Award. If the Connecticut Superior Court confirms the Award, we anticipate that the Court will issue a related order as to ownership of the 2,190,891 common stock shares, which may result in modifying our ownership structure.

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

Employee Compensation:

Under our employment agreements dated April 1, 2012 and August 14, 2014, with Michael Pawelek, Edward Shaw and Kim Vo each earned 116,550 common stock shares as of March 1, 2015 under the employment agreements with the Company. These common stock grants were not made pursuant to an equity compensation or stock grant plan. The stock awards were valued at $10 per share under FASB ASC Topic 718 in 2012 when we were a private company. We currently had no market for its common stock shares at the time of the stock awards. Our stockholders ratified these common stock grants at our October 28, 2014 stockholder meeting. These common stock shares have been issued.

Under employment agreement with Michael J. Pawelek and Edward Shaw dated August 14, 2014, both Mr. Pawelek and Mr. Shaw each received options to purchase 450,000 common stock shares for a total of 900,000 options. These stock options carry an exercise price of $4.75 per share, customary cashless exercise provisions and a ten year term. The first 150,000 of these stock options each for Mr. Pawelek and Mr. Shaw will vest on August 14, 2015. Thereafter these stock options will vest at 12,500 per month each for Mr. Pawelek and Mr. Shaw over the following two years. If a “Business Combination” occurs before August 14, 2016, then Mr. Pawelek and Mr. Shaw will each receive an additional 150,000 common stock options.

SOSventures, LLC Credit Agreement Amendment – Issuance of Warrants

On July 25, 2013 we entered into an amended credit agreement with SOSventures, LLC providing for a term loan through February 16, 2016 in an amount up to $10,000,000 at a 17.00% interest rate through May 29, 2014 and 22.00% interest rate thereafter. The loan under this Agreement will be secured by a second lien on the Company’s assets. The credit agreement and the related intercreditor agreement are attached as Exhibits 10.6.1 and 10.6.2.

The SOSventures, LLC credit agreement requires us to maintain certain financial ratios. First, we must maintain an interest coverage ratio of 3:1 at the end of each quarter so that our consolidated net income less our fees under the credit facility, lender expenses, non-cash charges relating to the hedge agreements, interest, income taxes, depreciation, depletion, amortization, exploration expenditures and costs and other non-cash charges (netted for noncash income) (“EBITDAX”) is greater than 3 times our interest expense under the credit facility. Second, we must maintain a debt to EBITDAX ratio of less than 3.5:1 at the end of each quarter. Third, we must maintain a current ratio of at greater than 1:1 at the end of each quarter, meaning that our consolidated current assets (including the unused amount of the credit facility by excluding non-cash assets under ASC 410 and 815) must be greater than our consolidated current liabilities (excluding non-cash obligations under ASC 410 and 815 and current maturities under the credit facility.) The Company is not in compliance with its debt covenants at September 30, 2015.

The credit agreement prevents us from incurring indebtedness to banks or lenders, other than Independent Bank, without the consent of SOSventures, LLC. It also prevents us from incurring most contingent obligations or liens (other than to Independent Bank). It also restricts our ability to pay dividends, issue options and warrants and repurchase our common stock shares. The limitation on options and warrants does not apply to equity compensation plans.

As of November 12, 2015, with accrued and unpaid interest we have a $20 million balance on the SOSventures, LLC credit facility.

On April 15, 2015 we entered the Second Amendment to the First Amendment and Restated Credit Agreement (Exhibit 10.6.4) and several other agreements which provided that SOSventures, LLC will provide an additional $3 million on its credit facility to be used to pay the outstanding balance of the Independent Bank term loan, pay on the Independent Bank credit facility and for operations. Additionally, SOSventures deposit $5 million into a controlled account at Independent Bank to be used to drill two wells in the Crittenden Field referenced in the Independent Bank Amendment. Further, SOSventures, LLC will receive interest on its credit facility and a 1% overriding royalty interest on the Company’s Crittenden Field properties effective upon the drilling of these two oil and gas wells until such time as the credit facility is repaid. Finally, SOSventures, LLC shall receive warrants to purchase 2,542,397 of our common shares for $1.00 per share with a two-year term. If fully purchased 2,542,397 would equal 20% of our currently outstanding common stock.

SOSventures, LLC is part of a group that currently owns approximately 38% of our Company stock. SOSventures, LLC now has sufficient warrants to be able to increase its group ownership to a point where the SOSventures, LLC group becomes the Company’s controlling stockholder.

Item 3. Defaults Upon Senior Securities

The letter from Independent Bank’s counsel further stated:

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) The following documents are filed as part of this report:

1. Financial Statements. See Item 1.

2. Financial Statement Schedules. Not applicable.

All other schedules have been omitted because the required information is shown in the consolidated financials or notes thereto, or they are not applicable.

3. Exhibits. See Index to Exhibits for listing of exhibits which are filed herewith or incorporated by reference

(b) Reports on Form 8-K.

On April 15, 2015 the Company disclosed in its Item 9B “Other Information” in its Form 10-K the following:

Material Agreements

Independent Bank Credit Agreement

As stated above in Part II, the Company has entered into the Fourth Amendment to the Credit Agreement with Independent Bank Exhibit 10.5.15), the Fifth Amendment to the Credit Agreement with Independent Bank (Exhibit 10.5.16) the Second Amendment to the Credit Agreement with SOSventures, LLC (Exhibit 10.6.4) and the related Intercreditor Agreement amendment (Exhibit 10.6.5). These are material definitive agreements. These agreements are further described in Item 7 herein relating to Management’s Discussion and Analysis or Plan of Operations.

SOSventures, LLC Credit Agreement

Unregistered Sales of Equity Securities

In connection with the Second Amendment to our Credit Agreement with SOSventures, LLC, SOSventures, LLC will be issued warrants to purchase up to 2,542,397 of our common stock common stock shares at $1.00 per share with a two year term. If fully purchased, 2,542,397 common stock shares would equal 20% of our currently outstanding common stock.

Material Impairments

We reported an impairment of $4,428,378, which is material, in our Form 10-K for the year ending December 31, 2014. In the Form 10-K, the Company also reported a material weakness in its internal controls in connection with its accounting for this material impairment.

In the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 we report that as of July 31, 2015 we sold all of the Oklahoma properties for $7,249,390 and $1,349,693 impairment charge for the Oklahoma properties was record. We have amended the Quarterly Report on Form 10-Q/A for the quarterly period ended June 30, 2015 to correct this computation and also reported a material weakness in its internal controls in connection with its accounting for this material impairment.

In this Form 10-Q was reported an impairment of $863,028.

Changes in Control of Registrant

SOSventures, LLC is part of a group that currently owns approximately 38% of our Company stock. As described above, SOSventures, LLC now has warrants that could allow it to purchase a controlling interest in the Company. Further SOSventures, LLC and its affiliates will very likely receive a significant portion of the 2,190,891 common stock shares we interpleaded into Connecticut Superior Court should the Connecticut Superior Court enter judgment on the September 10, 2015 American Arbitration Association Award against Gregory Imbruce and his affiliates.

Forms 8-K

On August 5, 2015, we disclosed the sale of our Oklahoma properties for $7,249,390, the use of the proceeds of this sale, and the entry into the Fifth Amendment to our credit agreement with Independent Bank.

On September 14, 2015 we disclosed the Award dated September 10, 2015 from the American Arbitration Association described above in Part II, Item 1 relating to legal proceedings.

Schedule 14C Information Statement

On July 28, 2015 we distributed to stockholders and filed with the Securities and Exchange Commission our Schedule 14C Information Statement which notified stockholders of the election of Bill Liao, Peter Benz, Charles S. Henry, III, Craig Dermody and Michael J. Pawelek to our Board of Directors, our name change to Brushy Resources, Inc. through a Certificate of Amendment to our Certificate of Incorporation and an amendment to our by-laws to provide mandatory venue for stockholder derivative lawsuits against our officers and directors in the Delaware Chancery Court.

We filed the Certificate of Amendment to change our name to Brushy Resources, Inc. on August 25, 2015.

SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Brushy Resources, Inc.
	(Registrant)

Date: November 13, 2015	By:	/s/ Michael J. Pawelek
		Chief Executive Officer
		(Principal Executive Officer)


Date: November 13, 2015		/s/ N. Kim Vo
		Controller
		(Chief Accounting Officer)

EXHIBITS

EXHIBIT LIST

The following exhibits are included as part of this Form 10-K. References to “the Company” in this Exhibit List mean Brushy Resources, Inc., a Delaware corporation.

Exhibit No.		Description

3.1.1		Certificate of Incorporation.(1)

3.1.2		Certificate of Conversion.(2)

3.1.3		Certificate of Amendment.(3)

3.2.1		Amended and Restated Bylaws.(4)

3.2.2		Starboard Resources Amended and Restated Operating Agreement dated January 20, 2012.(5)

4.1		Securities Purchase and Exchange Agreement between Starboard Resources, LLC, Longview Marquis Master Marquis Fund, L.P., Summerview Marquis Fund, L.P., Longview Marquis Fund, L.P., LMIF Investments, LLC, SMF Investments, LLC, and Summerline Capital Partners, LLC dated June 10, 2011.(6)

4.2		Agreement between Asym Capital III LLC, Giddings Genpar LLC, Hunton Oil Genpar LLC and SOSventures, LLC regarding Starboard Resources, LLC dated January 20, 2012.(7)

4.3		Agreement between Starboard Resources, LLC, Longview Marquis Master Marquis Fund, L.P., Summerview Marquis Fund, L.P., Longview Marquis Fund, L.P., LMIF Investments, LLC, SMF Investments, LLC, and Summerline Capital Partners, LLC dated July 20, 2012 (Relating to Waiver of Put Option).(8)

4.4		2014 Equity Compensation Plan.(9)

10.1		Amended and Restated Employment Agreement, dated as of August 14, 2014, between Starboard Resources, Inc. and Michael Pawelek.(10)

10.2		Amended and Restated Employment Agreement, dated as of August 14, 2014, between Starboard Resources, Inc. and Edward Shaw.(11)

10.3		Employment Agreement, dated as of April 1, 2012, between Starboard Resources, Inc. and N. Kim Vo.(12)

10.4		Participation Agreement with Husky Ventures, LLC.(13)

10.5.01		Credit Agreement dated as of June 27, 2013 between Starboard Resources, Inc. as borrower and Independent Bank as lender.(14)

10.5.02		Security Agreement dated as of June 27, 2013 between Starboard Resources, Inc. as debtor and Independent Bank as secured party. (15)

10.5.03		Mortgage, Deed of Trust, Security Agreement, Fixture Filing and Financing Statement for Texas oil and gas properties from Starboard Resources, Inc., Mortgagor, to John E. Davis, Trustee, and Independent Bank, mortgagee.(16)

10.5.04		Note from Starboard Resources, Inc. to Independent Bank dated July 27, 2012.(17)

10.5.05		Certificate of Ownership Interests – Starboard Resources, Inc. dated June 27, 2013.(18)

10.5.06		Omnibus Certificate – Starboard Resources, Inc. dated June 27, 2013.(19)

10.5.07		Guaranty dated June 27, 2013 from ImPetro Operating, LLC.(20)

10.5.08		Security Agreement dated June 27, 2013 between ImPetro Operating, LLC and Independent Bank.(21)

Exhibit No.		Description
10.5.09		Omnibus Certificate – ImPetro Operating, LLC dated June 27, 2013.(22)

10.5.10		Waiver of Operator’s Lien – ImPetro Operating, LLC dated June 27, 2013.(23)

10.5.11		Guaranty dated June 27, 2013 from ImPetro Resources, LLC.(24)

10.5.12		Security Agreement dated June 27, 2013 between ImPetro Resources, LLC and Independent Bank.(25)

10.5.13		Omnibus Certificate – ImPetro Resources, LLC dated June 27, 2013.(26)

10.5.14		Note dated June 27, 2013 – Starboard Resources, Inc.(27)

10.5.15		Fourth Amendment to Credit Agreement with Independent Bank dated April 15, 2015.(28)

10.5.16		Fifth Amendment to Credit Agreement with Independent Bank dated July 31, 2015.(29)

10.6.1		Credit Agreement dated July 25, 2013 between Starboard Resources, Inc. and SOSventures, LLC(.30)

10.6.2		Intercreditor Agreement dated July 25, 2013 between Independent Bank, and SOSventures LLC.(31)

10.6.3		Second Amendment to Credit Agreement between SOSventures, LLC and Starboard Resources dated April 15, 2015.(32)

10.6.4		Amendment to Intercreditor Agreement between Independent Bank, SOSventures, LLC and Starboard Resources, Inc. dated April 15, 2015.(33)

10.7.1		Sunoco – Texon LP Crude Purchase Agreemen.t(34)

10.7.2		Sunoco – Texon LP Crude Purchase Agreement Amendment.(35)

10.8		DCP Midstream, LP Gas Purchase Agreement.(36)

10.9		American Arbitration Association Award dated September 10, 2015.(37)

14		Code of Ethics.(38)

21		List of subsidiaries(39)

23.2		Consent of Forrest A. Garb & Associates, Inc., independent petroleum engineers.(40)

31.1		Management Certification – Principal Executive Officer.

31.2		Management Certification – Principal Accounting Officer.

32.1		Section 1350 Certification.

99.2		Reserve Report as of January 1, 2015 from Forrest Garb & Associates, Inc.(41)

99.3		Reserve Report as of January 1, 2014 from Forrest Garb & Associates, Inc.(42)

Reference No.		Reference Description
(1)		Incorporated by reference to Exhibit 3.1.1 of the Company’s Form 10 filed with the SEC on June 7, 2013 which became effective August 6, 2013.

(2)		Incorporated by reference to Exhibit 3.1.2 of the Company’s Form 10 filed with the SEC on June 7, 2013 which became effective August 6, 2013.

(3)		Incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed with the SEC on November 13, 2014.

(4)		Incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed with the SEC on October 31, 2014.

(5)		Incorporated by reference to Exhibit 3.2.3 of the Company’s Form 10 filed with the SEC on June 7, 2013 which became effective August 6, 2013.

(6)		Incorporated by reference to Exhibit 4.1 of the Company’s Form 10 filed with the SEC on June 7, 2013 which became effective August 6, 2013.

(7)		Incorporated by reference to Exhibit 4.2 of the Company’s Form 10 filed with the SEC on June 7, 2013 which became effective August 6, 2013.

(8)		Incorporated by reference to Exhibit 4.3 of the Company’s Form 10 filed with the SEC on June 7, 2013 which became effective August 6, 2013.

(9)		Incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed October 31, 2014.

(10)		Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the SEC on September 4, 2014.

(11)		Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed with the SEC on September 4, 2014.

(12)		Incorporated by reference to Exhibit 10.3 of the Company’s Form 10 filed with the SEC on June 7, 2013 which became effective August 6, 2013.

(13)		Incorporated by reference to Exhibit 10.4 of the Company’s Form 10 filed with the SEC on June 7, 2013 which became effective August 6, 2013.

(14)		Incorporated by reference to Exhibit 10.5.01 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(15)		Incorporated by reference to Exhibit 10.5.02 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(16)		Incorporated by reference to Exhibit 10.5.03 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(17)		Incorporated by reference to Exhibit 10.5.04 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(18)		Incorporated by reference to Exhibit 10.5.05 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(19)		Incorporated by reference to Exhibit 10.5.06 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(20)		Incorporated by reference to Exhibit 10.5.07 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(21)		Incorporated by reference to Exhibit 10.5.08 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

Reference No.		Reference Description
(22)		Incorporated by reference to Exhibit 10.5.09 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(23)		Incorporated by reference to Exhibit 10.5.10 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(24)		Incorporated by reference to Exhibit 10.5.11 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(25)		Incorporated by reference to Exhibit 10.5.12 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(26)		Incorporated by reference to Exhibit 10.5.13 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(27)		Incorporated by reference to Exhibit 10.5.14 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(28)		Incorporated by reference to Exhibit 10.5.15 of the Company’s Form 10-K filed with the SEC on April 16, 2015.

(29)		Incorporated by reference to Exhibit 99.1 of the Company’s Form 8- filed with the SEC on August 5, 2015

(30)		Incorporated by reference to Exhibit 10.6.1 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(31)		Incorporated by reference to Exhibit 10.6.2 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(32)		Incorporated by reference to Exhibit 10.6.3 of the Company’s Form 10-K filed with the SEC on April 16, 2015.

(33)		Incorporated by reference to Exhibit 10.6.4 of the Company’s Form 10-K filed with the SEC on April 16, 2015.

(34)		Incorporated by reference to Exhibit 10.7.1 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(35)		Incorporated by reference to Exhibit 10.7.2 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(36)		Incorporated by reference to Exhibit 10.8 of the Company’s Form 10/A filed with the SEC on July 26, 2013 which became effective August 6, 2013.

(37)		Incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K filed with the SEC on September 14, 2015.

(38)		Incorporated by reference to Annex 3 of the Company’s Schedule 14A filed with the SEC on September 26, 2014.

(39)		Incorporated by reference to Exhibit 21 of the Company’s Form 10-K filed with the SEC on April 16, 2015.

(40)		Incorporated by reference to Exhibit 23.2 of the Company’s Form 10-K filed with the SEC on April 16, 2015.

(41)		Incorporated by reference to Exhibit 99.2 of the Company’s Form 10-K filed with the SEC on April 16, 2015.

(42)		Incorporated by reference to Exhibit 99.3 of the Company’s Form 10-K/A filed with the SEC on April 30, 2014

Brushy Resources, Inc. - FORM 10-Q - November 13, 2015

Attached files

Brushy Resources, Inc. Reports