UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

For the Quarterly Period Ended September 30, 2015

Commission File Number 333-198881

PETROSHARE CORP.

(Exact name of registrant as specified in its charter)

7200 S. Alton Way, Suite B-220

Centennial, Colorado 80112

(Address of principal executive offices) (Zip Code)

Registrant's telephone number including area code: (303) 500-1160

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§203.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☐    No ý

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. (Check one):

 

                                                                 

                                                                 

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date:  17,348,191 shares outstanding as of November 13, 2015.

 

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PETROSHARE CORP.

FORM 10-Q

FOR THE QUARTER ENDED

SEPTEMBER 30, 2015

Table of Contents

Part I.  FINANCIAL INFORMATION

Part II.  OTHER INFORMATION

Please see Cautionary Language Regarding Forward-Looking Statements on page 19 of this report for important information contained herein.

 

 

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PART I.               FINANCIAL INFORMATION

Item 1.                 Financial Statements.

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

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

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NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS

The Company's independent registered public accounting firm raised substantial doubt about its ability to continue as a going concern in its report on the Company's financial statements for the year ended December 31, 2014. This doubt was based in part on the facts that the Company has suffered continued operating losses and generated only nominal revenue since inception and was dependent on raising capital from the sale of equity or other sources to continue in business. The Company had limited capital and was dependent upon achieving profitable operations and/or receipt of additional financing to continue operations. As of September 30, 2015, the Company had cash and cash equivalents of $219,586, working capital of $36,185, total shareholders' deficit of $385,281, and an accumulated deficit of $4,601,411.  For the three and nine months ended September 30, 2015, the Company realized net losses of $298,251 and $755,016, respectively.

On May 13, 2015, the Company entered into a revolving line of credit facility agreement with a third-party industry partner, under which the Company is permitted to borrow an amount up to $5,000,000 as discussed elsewhere. While the Company believes that the line of credit will alleviate the doubt about its ability to continue as a going concern as expressed by its independent registered public accounting firm, the Company is still dependent on improving operations to generate positive cash flow.

The unaudited condensed financial statements of the Company presented in this report have been prepared in accordance with Generally Accepted Accounting Principles in the United States ("US GAAP") and applicable rules of the US Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accounting policies conform to US GAAP. Certain significant policies are discussed below. Certain information and note disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to SEC rules and regulations. In the opinion of management, the unaudited condensed financial statements contained herein reflect all material normal and recurring adjustments that are necessary for the fair presentation of the Company's financial position, results of operations, and cash flows on a basis consistent with that of its audited financial statements for the year ended December 31, 2014.  However, the results of operations for the interim period ended September 30, 2015 may not be indicative of results of operations to be expected for the full fiscal year. The unaudited condensed financial statements should be read in conjunction with the Company's audited financial statements and related notes contained in its Special Report on Form 10-K for the year ended December 31, 2014. Unless otherwise noted, there have been no material changes to the footnotes from those accompanying the audited financial statements included in the Form 10-K. 

Subsequent events have been evaluated for financial reporting purposes through the date of the filing of this Form 10-Q.

6

PetroShare Corp.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2015

Loss Per Common Share

Loss per share attributable to PetroShare shareholders is computed by dividing net (loss) by the weighted average number of common shares outstanding during the period. During the three and nine months ended September 30, 2015 and 2014, the Company did not include 2,125,000 and 2,000,000, respectively, stock options outstanding and exercisable for purposes of calculating diluted net loss per share, as the effect of their inclusion would be anti-dilutive.

Cash and Cash Equivalents

PetroShare considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents. PetroShare's bank accounts periodically exceed federally insured limits. PetroShare maintains its deposits with high quality financial institutions and, accordingly, believes its credit risk exposure associated with cash is remote.

Accounts Receivable – Crude oil and natural gas

Accounts receivable – Crude oil and natural gas consists of amounts receivable from crude oil sold from the Company's well interests. All of the Company's accounts receivable is due from one party.  Management continually monitors accounts receivable for collectability.

Proved.

PetroShare follows the successful efforts method of accounting for its crude oil and natural gas properties. Under this method of accounting, all property acquisition costs and development costs are capitalized when incurred and depleted on a units-of-production basis over the remaining life of proved reserves and proved developed reserves, respectively. Costs of drilling exploratory wells (Wells in progress) are initially capitalized but are charged to expense if the well is determined to be unsuccessful.

Net carrying values of retired, sold or abandoned properties that constitute less than a complete unit of depreciable property are charged or credited, net of proceeds, to accumulated depreciation, depletion and amortization unless doing so significantly affects the unit-of-production amortization rate, in which case a gain or loss is recognized in the statement of operations. Gains or losses from the disposal of complete units of depreciable property are recognized in income (loss).

Unproved.

Unproved properties consist of costs to acquire undeveloped leases as well as costs to acquire unproved reserves. Undeveloped lease costs and unproved reserve acquisitions are capitalized, and individually insignificant unproved properties are amortized on a composite basis, based on past success, past experience and average lease-term lives. PetroShare evaluates significant unproved properties for impairment based on remaining lease term, drilling results, reservoir performance, seismic interpretation or future plans to develop acreage. When successful wells are drilled on undeveloped leaseholds, unproved property costs are reclassified to proved properties and depleted on a unit-of-production basis. Impairment expense for unproved properties is reported in exploration and impairment expense.

 

 

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Property, Plant and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using straight-line methods over the estimated useful lives of the related assets. Expenditures for renewals and betterments which increase the estimated useful life or capacity of the asset are capitalized; expenditures for repairs and maintenance are expensed when incurred.

Proved crude oil and natural gas properties are reviewed for impairment on a field-by-field basis each quarter, or when events and circumstances indicate a possible decline in the recoverability of the carrying value of such field. The estimated future undiscounted cash flows expected in connection with the field are compared to the carrying amount of the field to determine if the carrying amount is recoverable. If the carrying amount of the field exceeds its estimated undiscounted future cash flows, the carrying amount of the field is reduced to its estimated fair value. Due to the unavailability of relevant comparable market data, a discounted cash flow method is used to determine the fair value of proved properties. The discounted cash flow method utilizes the most recent third party reserve estimation report and estimates future cash flows based on management's estimates of future crude oil and natural gas production, commodity prices based on commodity futures price strips, operating and development costs, and a risk-adjusted discount rate. The Company recognized no impairment expense during the three and nine months ended September 30, 2015 and 2014.

Depreciation, depletion, amortization and accretion of capitalized drilling and development costs of producing crude oil and natural gas properties, including related support equipment and facilities, are computed using the unit-of-production method on a field basis based on total estimated proved developed crude oil and natural gas reserves. Amortization of producing leaseholds is based on the unit-of-production method using total estimated proved reserves. In arriving at rates under the unit-of-production method, the quantities of recoverable crude oil and natural gas reserves are established based on estimates made by the Company and external independent reserve engineers. Upon sale or retirement of properties, the cost and related accumulated depreciation, depletion and amortization are eliminated from the accounts and the resulting gain or loss, if any, is recognized. Unit of production rates are revised whenever there is an indication of a need, but at least in conjunction with annual reserve reports. Revisions are accounted for prospectively as changes in accounting estimates. Depletion expense for the three and nine months ended September 30, 2015 was $nil and $9,898 respectively; there was no such expense recorded in 2014.

The Company's drilling advances consist of cash provided to the Company from its joint interest partners for planned drilling activities. Advances are applied against the joint interest partner's share of expenses incurred. As of September 30, 2015 and December 31, 2014, drilling advances totaled $nil and $221,834, respectively.

Income Taxes

Asset retirement obligations associated with tangible long-lived assets are accounted for in accordance with ASC 410, "Accounting for Asset Retirement Obligations." The estimated fair value of the future costs associated with dismantlement, abandonment and restoration of crude oil and natural gas properties is recorded generally upon the completion of a well. The net estimated costs are discounted to present values using a risk adjusted rate over the estimated economic life of the crude oil and natural gas properties. Such costs are capitalized as part of the related asset. The asset is depleted on the units-of-production method.  The liability is periodically adjusted to reflect: (1) new liabilities incurred; (2) liabilities settled during the period; (3) accretion expense; and (4) revisions to estimated future cash flow requirements. The accretion expense is recorded as a component of depreciation, depletion, amortization and accretion expense in the accompanying statements of operations.

 

 

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PetroShare uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards in accordance with ASC 718, "Compensation." The option-pricing model requires the input of highly subjective assumptions, including the option's expected life, the price volatility of the underlying stock, and the estimated dividend yield of the underlying stock. PetroShare's expected term represents the period that stock-based awards are expected to be outstanding and is determined based on the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards. As there is limited historical data available to ascertain a forfeiture rate, the plain vanilla method is applied in calculating the expected term of options granted. As PetroShare's common stock is not currently fully reporting, the expected stock price volatility is based on the historical volatility of a group of publicly traded companies that share similar geographic attributes, operating metrics and histories. PetroShare has never paid dividends on its common stock and currently does not intend to do so, and as such, the expected dividend yield is zero.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). The core principle of ASU 2014-09 is that an entity should recognize 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. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification Topic No. 605, "Revenue Recognition," most industry-specific guidance throughout the industry topics of the accounting standards codification, and some cost guidance related to construction-type and production-type contracts. On July 9, 2015 the FASB delayed implementation of ASU 2014-09 for one year, ASU 2014-09 is now effective for public entities for annual periods and interim periods within those annual periods beginning after December 15, 2017. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company is currently evaluating the potential impact of adopting this guidance on its financial statements.

In June 2014, the FASB issued ASU No. 2014-12, "Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period". The standard requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition, and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. Early adoption is permitted.  The Company does not anticipate any impact from the adoption of this standard on its financial statements.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern" ("ASU 2014-15"). ASU 2014-15 is intended to define management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans and requires an express statement and other disclosures when substantial doubt is not alleviated. The new standard will be effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The Company will evaluate the going concern considerations in this ASU; however, as of the current period, management believes that is current disclosures meet the requirement under this ASU.

Various other accounting pronouncements have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries, and are not expected to have a material effect on the Company's financial position, results of operations, or cash flows.

 

 

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Property and equipment balances were comprised of furniture, fixtures, and equipment and are shown below:

Depreciation expense recorded for the three and nine months ended September 30, 2015 amounted to $241 and $722, respectively. Depreciation expense for the three and nine months ended September 30, 2014 amounted to $241 and $722, respectively.

Aggregate Capitalized Costs. The Company has recorded aggregate capitalized costs relating to its crude oil and natural gas activities as shown below:

Costs Incurred in Crude Oil and Natural Gas Activities.  Costs incurred in connection with PetroShare's crude oil and natural gas acquisition, exploration and development activities for each of the periods are shown below:

During the three and nine months ended September 30, 2015, the Company recorded depletion expense of $nil and $9,898 respectively. The Company recorded no depletion expense during the comparable prior periods.

PetroShare paid $785,630 and Kingdom conveyed to the Company an 80% net revenue interest in the acreage after accounting for landowner and other royalties. Pursuant to the provisions of a participation agreement, executed in connection with the Company's line of credit (See Note 7), PetroShare assigned the right to acquire up to 50% of its interest in the Todd Creek Farms prospect to Providence in part consideration for extending the Company the line of credit, which Providence exercised with an effective date of June 1, 2015. The Company recorded the exercise of the option by reducing its acquisition costs in the Kingdom Lease by 50%.  A reduction of acquisition costs in the amount of $287,815 was recorded, comprised of $392,815 net of $105,000 related to a one-time credit issued to the lender pursuant to the provisions of the participation agreement.  The Company has recorded the net assignment of interest to Providence as a $287,815 non-cash payment against the outstanding line of credit.

For the purpose of determining the fair value of the asset retirement obligation incurred during the nine months ended September 30, 2015, the Company assumed an inflation rate of 2.5%, an estimated average asset life of 5.1 years, and a credit adjusted risk free interest rate of 8.0%.

NOTE 8 - SHAREHOLDERS' EQUITY (DEFICIT)

Common Stock

As of September 30, 2015 and December 31, 2014, PetroShare had 100,000,000 shares of common stock authorized with a par value of $0.001 per share. As of September 30, 2015 and December 31, 2014, 17,348,191 and 17,008,191 shares were issued and outstanding, respectively.

Activity for the period from January 1, 2015 through September 30, 2015 included the following:

·

On various dates from March through June 2015, the Company sold 340,000 shares of common stock at $1.00 per share for gross proceeds of $340,000 under the terms of the offering.

·

Offering costs associated with this offering at September 30, 2015, totaled $325,425.

Preferred Stock

As of September 30, 2015 and December 31, 2014, PetroShare had 10,000,000 shares of preferred stock authorized with a par value of $0.01 per share. As of September 30, 2015 and December 31, 2014, there was no preferred stock issued or outstanding.

During the three months ended September 30, 2015, the Board of Directors of PetroShare granted non-qualified options to acquire 125,000 shares of PetroShare's common stock to a consultant to the Company. The options are exercisable at $1.00 and expire three years from the date of grant. The options vested immediately upon grant.

A summary of activity under the Plan through September 30, 2015 is as follows:

The fair value of each share-based award is estimated on the date of the grant using the Black-Scholes pricing model that incorporates the assumptions noted in the following table.  As PetroShare's common stock is not currently trading on any securities market, the expected stock price volatility is based on the historical volatility of a group of publicly traded companies that the Company believes share similar geographic attributes, operating metrics and histories.  The expected term of the awards represents the period of time that management anticipates awards to be outstanding.  As there was limited historical data available to ascertain a forfeiture rate, the plain vanilla method was applied in calculating the expected term of the options.  The risk-free rate for the periods within the contractual life of the option is based on the U.S. Treasury bond rate in effect at the time of the grant for bonds with maturity dates at the expected term of the options.  PetroShare has never paid dividends on its common stock and currently does not intend to do so, and as such, the expected dividend yield is zero.

The table below summarizes assumptions utilized in the Black-Scholes pricing model for nine-month period ended:

The effective income tax rates for the three and nine months ended September 30, 2015 and 2014 were nil%. Total income tax expense for the three and nine months ended September 30, 2015 and 2014, differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income due primarily to changes in the valuation allowance recorded against deferred tax assets.

 

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Item 2.                 Management's Discussion and Analysis of Financial Condition and Results of Operations

In the following discussion, "PetroShare Corp.," the "Company," "we," "our," and "us" refer to PetroShare Corp.

The following discussion updates and summarizes our plan of operation as of November 16, 2015 for the next twelve months. It also analyzes (i) our financial condition at September 30, 2015 and December 31, 2014, and (ii) our results of operations for the three and nine months ended September 30, 2015 and 2014. The following discussion and analysis should be read in conjunction with accompanying financial statements and related notes included elsewhere in this report and the audited financial statements and related notes contained in our Special Report on Form 10-K for the year ended December 31, 2014.

We were organized on September 4, 2012 under the laws of the State of Colorado to investigate, acquire and develop crude oil and natural gas properties in the Rocky Mountain and Mid-Continent region of the United States. We are currently the operator of two oil and gas wells in Moffat County, Colorado, which we refer to as the Buck Peak prospect. We also have acquired an oil and gas lease in Adams County, Colorado, which we intend to develop as part of our Todd Creek Farms prospect.

Our independent registered public accounting firm raised substantial doubt about our ability to continue as a going concern in its report on our financial statements as of and for the year ended December 31, 2014. This doubt was based in part that we have suffered continued operating losses and generated only nominal revenue since inception and were dependent on raising capital from the sale of equity or other sources to continue in business. We had limited capital and were dependent upon achieving profitable operations and receipt of additional financing to continue operations. As of September 30, 2015, we had cash and cash equivalents of $219,586, working capital of $36,185, total shareholders' deficit of $385,281, and an accumulated deficit of $4,601,411.  For the three and nine months ended September 30, 2015, we realized net losses of $298,251 and $755,016, respectively.

On May 13, 2015, we entered into a revolving line of credit facility agreement with Providence Energy Operators, LLC ("Providence"), under which we are permitted to borrow up to $5,000,000. While we believe that the line of credit will alleviate the doubt expressed by our independent registered public accounting, we are still dependent on improving operations to generate positive cash flow.

Our plan of operation for the next twelve months includes (i) maintaining our wells on the Buck Peak prospect, (ii) developing a drilling program on the Todd Creek Farms prospect and other leases that might be acquired under our services agreement, (iii) identifying working interest partners for the Todd Creek Farms prospect, and (iv) continuing our efforts to identify and acquire other economically viable leasing and drilling opportunities.

Under the terms of the participation agreements concerning the Buck Peak prospect as well as those affecting our interest in the Todd Creek Farms prospect, we are required to pay our proportionate share of the costs of the wells. Accordingly, the ultimate success of our business plan depends on our ability to generate sufficient revenue from the sale of produced crude oil and natural gas and to raise additional capital to cover our fixed and variable expenses. Moving forward, we believe the major components of our fixed expenses will include executive compensation, general office expenses, and legal and accounting fees, which we anticipate will be similar to our fixed expenses for the quarter ended September 30, 2015 (see further discussion in "Liquidity and Capital Resources"). We anticipate the variable expenses will primarily include acquiring acreage and costs of drilling activities. Cash flow from the initial drilling program is not currently sufficient to offset general and administrative expenses and fund additional drilling programs and acquisitions.

We have additional minor working interests in acreage offsetting the Buck Peak prospect (less than 10%) that are governed by a Joint Operating Agreement designating Southwestern Energy as successor to Quicksilver Resources, Inc. as the operator. If and when the operator decides to drill on the acreage in which we own these working interests, we would make a decision whether to incur the costs of participation.

The following provides selected financial information and averages for the three and nine months ended September 30, 2015 and 2014:

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Overview:  Our net loss for the three months ended September 30, 2015, was $298,251 or $0.02 per share compared to net loss of $171,488 or $0.01 per share for the three months ended September 30, 2014.  The decline in operations of $126,763 in the 2015 period resulted from a decrease in revenues of $6,314; an increase in general and administrative expense of $99,095; an increase in lease operating expenses of $3,377; an increase in depreciation, depletion, amortization and accretion of $765; and an increase in interest expense of $17,205 in the current period.

Revenues:  Crude Oil sales revenue was $nil and decreased $6,314 for the three months ended September 30, 2015, compared to the three months ended September 30, 2014, as described in "Volumes and Prices" below.

Volumes and Prices:  Crude oil sales volumes decreased 78.10 bbls or 100% for the three months ended September 30, 2015, compared to the three months ended September 30, 2014.  The oil sales volumes for the three months ended September 30, 2015, were the result of the Company only producing nominal volumes of oil and our election not to sell any volumes produced in during the quarter. In the 2014 period, we had initially commenced production.

Production Expense:  Production expense is comprised of the following items:

Total production expense increased $3,377 or 35% for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014, primarily due to ongoing lease operating costs related to the wells placed into production during the fourth quarter of 2014, partially offset by a decrease in production volume during the three months ended September 30, 2015.

Routine lease operating expense ("LOE"), consisting of field personnel, fuel/power, chemicals, disposal, transportation and other costs, per BOE was $nil and $122.84 for the three months ended September 30, 2015 and 2014, respectively.

General and administrative expenses: We incurred general and administrative expenses of $267,076 during the three months ended September 30, 2015 compared to $167,981 in the three months ended September 30, 2014, representing an increase of $99,095 or 59%. This increase is attributable to an increase in share based compensation expense; and increases in salary and wage expenses, legal expenses, and accounting fees associated with becoming a public company required to file reports with the SEC, compared to limited activity in the prior period as we were commencing operations.

Depreciation, depletion, amortization, and accretion expense:  Depreciation, depletion, amortization and accretion expense increased $765 or 317% for the three months ended September 30, 2015, compared to the three months ended September 30, 2014.  The increase in expense was a result of newly completed wells being placed into the pool of depletable property.

Interest income (expense): During the three months ended September 30, 2015, we recognized interest income of $7 compared to $14 in the three months ended September 30, 2014.  During the three months ended September 30, 2015, we recognized interest expense of $17,205 compared to $nil in the three months ended September 30, 2014 an increase of 100%.  The interest expense recognized in the current period relates to the line of credit advances recorded during the period.

 

 

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Overview:  Our net loss for the nine months ended September 30, 2015, was $755,016 or $0.04 per share, compared to net loss of $527,681 or $0.03 per share, for the nine months ended September 30, 2014.  The increase in net loss of $227,335 resulted from a decrease in revenues of $4,986; an increase in general and administrative expense of $174,856; an increase in lease operating expenses of $7,335; an increase in depreciation, depletion, amortization and accretion of $12,193; and an increase in interest expense of $27,944 in the current period.

Revenues:  Crude Oil sales revenue decreased $4,986 or 79% for the nine months ended September 30, 2015 from $6,314 for the nine months ended September 30, 2014, as described in "Volumes and Prices" below.

Volumes and Prices:  Crude oil sales volumes decreased 41.54 bbls or 53% for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014.  The oil sales volumes for the nine months ended September 30, 2015, were the result of the Company only producing nominal volumes of oil and our election not to sell any volumes produced in the most recent two quarters.  In the 2014 period, we had initially commenced production.

Production Expense:  Production expense is comprised of the following items:

Total production expense increased $7,335 or 58% for the nine months ended September 30, 2015, as compared to the expenses for the nine months ended September 30, 2014, primarily due to lease operating costs and transportation expense related to the wells placed into production during the fourth quarter of 2014, partially offset by decreased production volumes.

Routine lease operating expense ("LOE"), consisting of field personnel, fuel/power, chemicals, disposal, transportation and other costs, per BOE was $544.80 for the nine months ended September 30, 2015, compared to $160.97 for the nine months ended September 30, 2014. As a percent of crude oil and natural gas sales revenue, routine LOE was 1,499% for the nine months ended September 30, 2015, compared to 199% for the nine months ended September 30, 2014.

Production taxes for the nine months ended September 30, 2015 amounted to ($11); there were no production taxes in the corresponding prior period.  Negative production taxes for the nine months ended September 30, 2015 resulted from adjustments to a December 31, 2014 revenue accrual for the three months ended December 31, 2014.

Overall production costs (crude oil and natural gas production costs, including production taxes) per BOE was $544.50 for the nine months ended September 30, 2015, compared to $160.97 for the nine months ended September 30, 2014.

General and administrative expenses: We incurred general and administrative expenses of $695,587 during the nine months ended September 30, 2015 compared to $520,731 in the nine months ended September 30, 2014, representing an increase of $174,856, or 34%. This increase is attributable to an increase in share based compensation expense; and increases in salary and wage expenses, legal expenses, and accounting fees associated with becoming a public company required to file reports with the SEC, compared to limited activity in the prior period as we were commencing operations.

Depreciation, depletion, amortization, and accretion expense:  Depletion, depreciation, amortization and accretion increased $12,193, or 1,689%, for the nine months ended September 30, 2015, compared to $722 for the nine months ended September 30, 2014.  The increase in expense was a result of newly completed wells being placed into the pool of depletable property.

Bad debt expense (recovery): During the nine months ended September 30, 2015 and 2014, we had no bad debt expense. During the nine months ended September 30, 2014, we recorded bad debt expense of $424,591 related to certain amounts owed from one of our working interest partners. Pursuant to a settlement agreement, the working interest partner owing these amounts surrendered their interest in the wells, and we, with the three remaining working interest partners, acquired the surrendered interest. As such, during the nine months ended September 30, 2014, we recorded the recovery of the bad debt expense.

Interest income (expense): During the nine months ended September 30, 2015, we recognized interest income of $9 compared to $30 in the nine months ended September 30, 2014.  During the nine months ended September 30, 2015, we recognized interest expense of $27,944 compared to $nil in the nine months ended September 30, 2014 an increase of 100%.  The interest expense recognized in the current period relates to the line of credit advances recorded during the period.

To date, we have generated all of our capital resources through the sale of common stock, prospect fees received from working interest partners, drilling advances from working interest partners, and advances under our line of credit. During the nine months ended September 30, 2015, we received $340,000 from proceeds of our public offering. On May 13, 2015 we executed a drawdown of $1,000,000 on our line of credit. On July 17, 2015, we borrowed an additional $540,000 against the line of credit in anticipation of a proposed transaction; the transaction was never consummated and we repaid this amount on August 15, 2015. On September 14, 2015, we borrowed an additional $350,000 against the line of credit to pay for title diligence, surveying and permitting, and general and administrative expenses. During the three months ended September 30, 2015, we recorded a non-cash payment against the line of credit of $287,815 related to the assignment of interests in the Todd Creek Farms prospect to Providence.  To date, we have generated nominal cash from operations and negative cash flows from operating activities.

The line of credit provides us capital to pay for our general and administrative expenses as well as capital for development and additional drilling and leasing activities.  The amount we invest in development, drilling, and leasing activities will depend on, among other factors, opportunities presented to us and the success of our fundraising efforts. In the event we are successful in raising additional capital through equity fundraising efforts, we may elect to use some of those proceeds to pay down some or all of the borrowings under the line of credit. The most significant of our future capital requirements include (i) costs to acquire any additional acreage which we may identify in the areas surrounding the Kingdom Lease or other areas that we may identify; (ii) costs to drill additional wells; (iii) approximately $58,000 per month for salaries and other corporate overhead; and (iv) legal and accounting fees associated with our status as a public company required to file reports with the SEC. We anticipate funding these projected capital requirements with proceeds from the sale of common stock and/or the line of credit.

We financed the acquisition of the Kingdom Lease through our line of credit. Under the terms of the line of credit, we are able to borrow an amount not to exceed $5,000,000 for use in paying our general and administrative expenses as well as costs related to the acquisition and development of oil and gas properties. As partial consideration for extending us the line of credit, we entered into a participation agreement with Providence, pursuant to which Providence received the right to acquire up to a 50% interest in the Todd Creek Farms prospect and allows Providence to acquire a pro rata interest and participate in any oil and gas development on the Todd Creek Farms prospect and other potential leases that might be acquired within an area of mutual interest. During the three months ended September 30, 2015, Providence exercised its option and acquired a 50% interest in our Todd Creek prospect, effective June 1, 2015.

As of September 30, 2015, we had working capital of $36,185 comprised of current assets of $331,709 and current liabilities of $295,524. Working capital decreased by $235,310 from $271,495 as of December 31, 2014 due to nominal revenues in the first nine months of 2015 as well as increased general and administrative expenses, costs associated with completing and fracture stimulating our first two wells, costs associated with our public offering, costs associated with our status as a public company required to file reports with the SEC and production related expenses.

Our working capital may decrease in the future as we draw down amounts on the line of credit and invest those proceeds in acquisition or development of capital assets or pay our general and administrative and other expenses.  However, the line of credit provides us with additional liquidity to operate our business.

Net cash used in operating activities during the nine months ended September 30, 2015 was $631,876 compared to $2,397,597 during the nine months ended September 30, 2014, representing a decrease of $1,760,081. The significant decrease in the 2015 period is attributable to several factors, including satisfaction of accounts payable and accrued liabilities incurred in connection with drilling and completion of the Buck Peak wells, and payment of drilling advances on behalf of our working interest partners in the 2014 period.

 

 

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Net cash used in investing activities during the nine months ended September 30, 2015 was $938,471 compared to $794,869 during the nine months ended September 30, 2014, representing an increase of $143,602. During the 2015 period, we paid $806,416 for the acquisition of properties composed primarily of the Kingdom Lease. During the 2015 period we also paid $132,055 for our share of the development of our properties. During the 2014 period, investments totaling $1,730,406 related to the development and acquisition of oil and gas properties, together with acquisition of the interest of a former working interest partner, were partially offset by proceeds received from our working interest partners of $935,537.

During the nine months ended September 30, 2015, we borrowed $1,890,000 on the line of credit from Providence, and repaid $540,000 on the line of credit.

During the nine months ended September 30, 2015, we sold 340,000 shares of our common stock at $1.00 per share for gross proceeds of $340,000, less offering costs of $325,425.  This compares to the sale of 1,570,000 shares of our common stock at a price of $0.50 per share for gross proceeds of $785,000 during the nine months ended September 30, 2014.  In July 2014, we completed a private placement that commenced in the second quarter, selling an additional 650,003 shares of stock for proceeds of $325,002.

On July 6, 2015, our public offering expired by the terms of the prospectus. We have engaged a an underwriter for the offering. Pursuant to the engagement of the underwriter, on July 15, 2015, we filed a post-effective amendment to our registration statement on Form S-1. The registration statement, among other things discloses the compensation we will pay the underwriter for underwriting the offering and updates our prospectus with certain information related to our financial condition and business operations. On of November 12, 2015, the SEC declared our registration statement effective. We seek to raise $4,600,000 under the offering.

In February 2015, we acquired the Kingdom Lease covering approximately 1,280 gross (333 net) undeveloped acres in the Wattenberg Field of northeast Colorado. We intend to develop the Kingdom Lease as part of our Todd Creek Farms prospect. We plan to retain up to a 50% working interest on a pro rata basis in the Kingdom Lease.

The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "will," "would" and similar words or expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements and information are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties, risks and contingencies, and there can be no assurance that such statements and information will prove to be accurate. Therefore, actual results and future events could differ materially from those anticipated in such statements and information. We caution you not to put undue reliance on these statements, which speak only as of the date of this report.  Further, the information contained in this document or incorporated herein by reference is a statement of our present intention and is based on present facts and assumptions, and may change at any time and without notice, based on changes in such facts or assumptions. Readers should not place undue reliance on forward-looking statements.

Those factors discussed above and elsewhere in this report are difficult to predict and expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not have any intention or obligation to update forward-looking statements included in this report after the date of this report, except as required by law. The preceding outlines some of the risks and uncertainties that may affect our forward-looking statements.

As defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, the phrase "disclosure controls and procedures" means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.  We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2015.  This evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer.  Based on this evaluation, our Chief Executive Officer concluded that, as of September 30, 2015, our disclosure controls and procedures were effective.

Inherent Limitations Over Internal Controls

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We received gross proceeds of $340,000 from our public offering between the effective date of our registration statement and September 30, 2015. The following table illustrates the use of proceeds as of September 30, 2015:
 

 

 

 

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XBRL Taxonomy Extension Schema Document

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XBRL Taxonomy Extension Calculation Linkbase Document

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XBRL Taxonomy Extension Definition Linkbase Document.

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XBRL Taxonomy Extension Label Linkbase Document

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XBRL Taxonomy Extension Presentation Linkbase Document..

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In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.