Attached files
| file | filename |
|---|---|
| EX-31.1 - CERTIFICATION - ARABELLA EXPLORATION, INC. | f10q0915ex31i_arabellaexp.htm |
| EX-32.1 - CERTIFICATION - ARABELLA EXPLORATION, INC. | f10q0915ex32i_arabellaexp.htm |
| EX-31.2 - CERTIFICATION - ARABELLA EXPLORATION, INC. | f10q0915ex31ii_arabellaexp.htm |
| EX-32.2 - CERTIFICATION - ARABELLA EXPLORATION, INC. | f10q0915ex32ii_arabellaexp.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
or
q 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 000-10690
ARABELLA EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
| Cayman Islands | 98-1162608 | |
| (State
or Other Jurisdiction of Incorporation or Organization) |
(I.R.S.
Employer Identification No.) |
509
Pecan Street, Suite 200
Fort Worth, Texas 76102
| (Address of Principal Executive Offices including zip code) |
432 897-4755
| (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 Exchange Act 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 þ No q
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every, Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No q
Indicate by check mark if the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting company
| Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes o No þ
As of November 23, 2015, 5,020,303 shares of the issuer’s common stock, par value $0.001, were outstanding.
TABLE OF CONTENTS
| Part I | FINANCIAL INFORMATION | 3 | |
| ITEM 1 | CONSOLIDATED FINANCIAL STATEMENTS | 3 | |
| ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 17 | |
| ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 23 | |
| ITEM 4 | CONTROLS AND PROCEDURES. | 23 | |
| Part II | OTHER INFORMATION | 24 | |
| ITEM 1 | LEGAL PROCEEDINGS | 24 | |
| ITEM 1A. | RISK FACTORS | 24 | |
| ITEM 2 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 24 | |
| ITEM 3 | DEFAULTS UPON SENIOR SECURITIES | 24 | |
| ITEM 4 | MINE SAFETY DISCLOSURES | 24 | |
| ITEM 5 | OTHER INFORMATION | 24 | |
| ITEM 6 | EXHIBITS | 24 | |
| 2 |
Part I
FINANCIAL INFORMATION
| ITEM 1 | CONSOLIDATED FINANCIAL STATEMENTS |
ARABELLA EXPLORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2015 | December 31, 2014 | |||||||
| ASSETS | (unaudited) | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 12,083 | $ | 3,002 | ||||
| Accounts receivable - oil and gas sales | 963,650 | 814,689 | ||||||
| Prepaid expenses | - | 417,617 | ||||||
| Total current assets | 975,733 | 1,235,308 | ||||||
| Deposits and other assets | 51,280 | 85,000 | ||||||
| Receivable from affiliate | - | 381,801 | ||||||
| Property and equipment, net | 215,277 | 315,826 | ||||||
| Oil and gas properties, successful efforts method - net | 28,383,360 | 28,305,172 | ||||||
| Total assets | $ | 29,625,650 | $ | 30,323,107 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 2,455,386 | $ | 1,001,058 | ||||
| Advances from affiliates | 1,943,298 | 32,550 | ||||||
| Notes payable, net of discount | 16,125,000 | 11,838,247 | ||||||
| Accrued joint interest billings payable, related party | 3,207,553 | 3,382,514 | ||||||
| Total current liabilities | 23,731,237 | 16,254,369 | ||||||
| Note payable to officer | 3,007,170 | 3,007,170 | ||||||
| Asset retirement obligation | 27,283 | 25,843 | ||||||
| Total liabilities | 26,765,690 | 19,287,382 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders’ equity | ||||||||
| Preferred shares, $0.001 par value, authorized 5,000,000 shares and none issued and outstanding | - | - | ||||||
| Ordinary shares, $0.001 par value, authorized 50,000,000 shares; issued and outstanding 5,020,303 at September 30, 2015 and December 31, 2014 | 5,020 | 5,020 | ||||||
| Additional paid-in-capital | 15,489,487 | 15,335,684 | ||||||
| Accumulated deficit | (12,634,547 | ) | (4,304,979 | ) | ||||
| Total shareholders’ equity | 2,859,960 | 11,035,725 | ||||||
| Total liabilities and shareholders’ equity | $ | 29,625,650 | $ | 30,323,107 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 3 |
ARABELLA EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Revenues: | ||||||||||||||||
| Oil and gas revenue | $ | 394,324 | $ | 953,896 | $ | 1,011,509 | $ | 2,716,093 | ||||||||
| Other revenue – administrative overhead | 4,200 | - | 24,000 | - | ||||||||||||
| Other operating revenue – gain on sale of oil and gas properties | - | 80,196 | - | 3,084,917 | ||||||||||||
| Total revenues | 398,524 | 1,034,092 | 1,035,509 | 5,801,010 | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Lease operating expenses | 52,072 | 335,720 | 316,132 | 888,072 | ||||||||||||
| Ad valorem and production taxes | 21,163 | 42,449 | 53,579 | 121,466 | ||||||||||||
| Depreciation, depletion and amortization | 103,593 | 383,556 | 415,315 | 954,930 | ||||||||||||
| Accretion of asset retirement obligation | 480 | 480 | 1,440 | 1,290 | ||||||||||||
| General and administrative expenses | 800,847 | 1,718,151 | 2,616,694 | 4,319,236 | ||||||||||||
| Total costs and expenses | 978,155 | 2,480,356 | 3,403,160 | 6,284,994 | ||||||||||||
| Loss from operations | (579,631 | ) | (1,446,264 | ) | (2,367,651 | ) | (483,984 | ) | ||||||||
| Other expenses | ||||||||||||||||
| Interest Expense, related party | - | (24,649 | ) | - | (40,722 | ) | ||||||||||
| Interest expense | (1,640,438 | ) | (720,219 | ) | (5,961,917 | ) | (720,219 | ) | ||||||||
| Other expenses | (1,640,438 | ) | (744,868 | ) | (5,961,917 | ) | (760,941 | ) | ||||||||
| Net loss before taxes | (2,220,069 | ) | (2,191,132 | ) | (8,329,568 | ) | (1,244,925 | ) | ||||||||
| Income tax benefit | - | 327,885 | - | - | ||||||||||||
| Net loss | $ | (2,220,069 | ) | $ | (1,863,247 | ) | $ | (8,329,568 | ) | $ | (1,244,925 | ) | ||||
| Loss per ordinary share: | ||||||||||||||||
| Basic | $ | (0.44 | ) | $ | (0.37 | ) | (1.66 | ) | $ | (0.25 | ) | |||||
| Diluted | $ | (0.44 | ) | $ | (0.37 | ) | (1.66 | ) | $ | (0.25 | ) | |||||
| Weighted average ordinary shares outstanding: | ||||||||||||||||
| Basic | 5,020,303 | 5,020,303 | 5,020,303 | 4,896,807 | ||||||||||||
| Diluted | 5,020,303 | 5,020,303 | 5,020,303 | 4,896,807 | ||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 4 |
ARABELLA EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the nine months ended September 30, 2015
(unaudited)
| Ordinary | Shares | Paid – In | Accumulated | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at December 31, 2014 | 5,020,303 | $ | 5,020 | $ | 15,335,684 | $ | (4,304,979 | ) | $ | 11,035,725 | ||||||||||
| Stock based compensation | - | - | 153,803 | - | 153,803 | |||||||||||||||
| Net loss | - | - | - | (8,329,568 | ) | (8,329,568 | ) | |||||||||||||
| Balance at September 30, 2015 | 5,020,303 | $ | 5,020 | $ | 15,489,487 | $ | (12,634,547 | ) | $ | 2,859,960 | ||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 5 |
ARABELLA EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the nine months ended | ||||||||
| September 30, 2015 | September 30, 2014 | |||||||
| (unaudited) | (unaudited) | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (8,329,568 | ) | $ | (1,244,925 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation, depletion and amortization | 415,315 | 954,930 | ||||||
| Accretion of asset retirement obligation | 1,440 | 1,290 | ||||||
| Amortization of interest expense | 400,000 | 200,000 | ||||||
| Amortization of deferred financing costs | 2,003,193 | 250,399 | ||||||
| Amortization of debt discount | 2,158,560 | 269,820 | ||||||
| Stock based compensation | 153,803 | 209,607 | ||||||
| Loss on disposal of fixed assets | - | 429 | ||||||
| Gain from sale of oil and gas properties | - | (3,084,917 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable - oil and gas sales | (148,960 | ) | 14,609 | |||||
| Prepaid expenses | 17,617 | 8,026 | ||||||
| Deposits | 33,720 | (35,000 | ) | |||||
| Receivable from affiliated companies | 381,801 | (591,246 | ) | |||||
| Payable to affiliated companies | - | 21,750 | ||||||
| Accrued joint interest billing payable | (174,961 | ) | (2,206,275 | ) | ||||
| Accounts payable and accrued liabilities | 1,579,326 | 565,920 | ||||||
| Net cash used in operating activities | (1,508,714 | ) | (4,665,583 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Additions to property and equipment | - | (496,969 | ) | |||||
| Additions to oil and gas properties | (392,953 | ) | (17,538,736 | ) | ||||
| Proceeds from sale of oil and gas properties | - | 5,665,121 | ||||||
| Net cash used in investing activities | (392,953 | ) | (12,370,584 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of ordinary shares | - | 2,000,009 | ||||||
| Proceeds from Senior Secured Notes | - | 16,000,000 | ||||||
| Proceeds from Directors’ Loans | - | 1,300,000 | ||||||
| Repayment of Directors’ Loans | - | (1,300,000 | ) | |||||
| Prepaid interest, Senior Secured Notes | - | (1,200,000 | ) | |||||
| Deferred financing cost | - | (1,787,000 | ) | |||||
| Proceeds from advances from affiliates | 1,910,748 | - | ||||||
| Net cash provided by financing activities | 1,910,748 | 15,013,009 | ||||||
| Net increase (decrease) in cash and cash equivalents | 9,081 | (2,023,158 | ) | |||||
| Cash and cash equivalents at beginning of period | 3,002 | 2,118,533 | ||||||
| Cash and cash equivalents at end of period | $ | 12,083 | $ | 95,375 | ||||
| Cash for: | ||||||||
| Interest | $ | - | $ | - | ||||
| Taxes | $ | - | $ | - | ||||
| Non-cash investing and financing activities: | ||||||||
| Accrued liability converted to term note | $ | 125,000 | $ | - | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 6 |
ARABELLA EXPLORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMNTS
1. Organization and Operations of the Company
Organization
Arabella Exploration, Inc. (formerly known as Lone Oak Acquisition Corporation) (the “Parent”) was incorporated in the Cayman Islands on June 17, 2010 as a blank check company whose objective was to acquire an operating business. Parent’s wholly owned subsidiary Arabella Exploration, Limited Liability Company (“Arabella LLC”) was formed in 2011, to acquire interests in low risk prospective and producing oil and gas properties primarily in the Permian Basin in West Texas. The Parent and Arabella LLC (collectively the “Company”) completed a reverse merger on December 24, 2013 as more fully described below in Note 2.
Arabella Operating, LLC (“AOC”), a wholly owned subsidiary of the Parent, was formed in 2014 to assume the operations role for the Parent. AOC posted a surety bond with the Texas Railroad Commission and is the operator of record for the Company’s oil and gas properties as of December 31, 2014. Prior to December 31, 2014 Arabella Petroleum Company, LLC, an affiliate of Jason Hoisager, the Parent’s Chief Executive Officer was the operating of record for the Company’s acreage.
Nature of Business
The Company is an independent exploration and production company focused on the acquisition and development of unconventional oil and natural gas resources in the Permian Basin in West Texas. The Company owns acreage leases and participates in the drilling of oil and natural gas wells with other working interest partners. Due to the capital intensive nature of oil and natural gas drilling activities, the operating company responsible for conducting the drilling operations may request advance payments from the working interest partners for their share of the costs.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries after all significant intercompany balances and transactions have been eliminated upon consolidation.
These financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). They reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted pursuant to such rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. This Quarterly Report on Form 10–Q should be read in conjunction with the Company’s most recent Annual Report on Form 10–K for the fiscal year ended December 31, 2014, which contains a summary of the Company’s significant accounting policies and other disclosures.
| 7 |
Revised Prior Period Amounts
The Company revised the presentation of oil and gas properties, successful efforts method - net, notes payable, net of discount and accrued joint interest billings payable – related party in its consolidated balance sheet for the year ending December 31, 2014 to reverse the effect of an over-accrual of joint interest billings payable – related party in the amount of $737,974, more fully discussed in Note 6 and to reflect a $125,000 liability as described more fully in Note 9. Tabular summaries of the revisions are presented below:
Consolidated Balance Sheet December 31, 2014 | ||||||||||||
| Previously Reported | Revisions | Revised Reported | ||||||||||
| Oil and gas properties, successful efforts method - net | $ | 29,043,146 | $ | (737,974 | ) | $ | 28,305,172 | |||||
| Accounts payable and accrued liabilities | 876,058 | 125,000 | 1,001,058 | |||||||||
| Accrued joint interest billings payable, related party | 4,120,488 | (737,974 | ) | 3,382,514 | ||||||||
| Accumulated deficit | (4,179,979 | ) | (125,000 | ) | (4,304,979 | ) | ||||||
Consolidated Income Statement Year ended December 31, 2014 | ||||||||||||
| Previously Reported | Revisions | Revised Reported | ||||||||||
| Net (loss) income | $ | (4,691,549 | ) | $ | (125,000 | ) | $ | (4,816,549 | ) | |||
| Net (loss) income per ordinary share: | ||||||||||||
| Basic | $ | (0.95 | ) | $ | (0.03 | ) | $ | (0.98 | ) | |||
| Diluted | $ | (0.95 | ) | $ | (0.03 | ) | $ | (0.98 | ) | |||
The Company analyzed the revisions under SEC staff guidance (Staff Accounting Bulletin 108) and determined that the revisions are immaterial on a quantitative and qualitative basis and that it is probable that the judgment of a reasonable person relying upon the financial statements would not have been changed or influenced by the inclusion or correction of the items in the year ended December 31, 2014. Therefore, amendment of the previously filed annual report on Form 10-K is not considered necessary. However, if the adjustments to correct the errors had been recorded in the first quarter of 2015, the Company believes the impact would have been significant to the first quarter and would impact comparisons to prior periods. The Company has also revised in this current Form 10-Q filing, and plans to revise in future filings of its reports on Form 10-K, the previously reported annual financial statements for 2014 on Form 10-K for these amounts.
2. Reverse Merger
Parent and Arabella LLC (the wholly owned subsidiary) entered into a reverse merger on December 24, 2013 where the Parent issued 3,125,000 ordinary shares to the holders of all of the issued and outstanding interests of Arabella LLC immediately prior to the time of the Acquisition in exchange for 100% of the units of Arabella LLC. In connection with the reverse merger, 1,704,826 of the Parent’s ordinary shares remained outstanding and the remaining funds in the trust account, in the amount of $5,183,417, were distributed to the Parent. With that exchange, the Company’s Chief Executive Officer Jason Hoisager owns the majority of the Company’s ordinary shares. In connection with the reverse merger, 1,705,002 of additional ordinary shares (“earnout shares”) will be awarded to certain individuals associated with Arabella LLC over the following three years if the Company achieves its earnout goals. The shares will be issue in equal thirds if on each of December 31, 2014, 2015 and 2016 the Company shall have increased its proved reserves over the immediately preceding year by 100%, 66% and 33%, respectively and conforms with certain cost metrics. The Company has not determined whether the goals have been met for 2014.
The merger was accounted for as a “reverse merger” and a recapitalization since the shareholders of Arabella LLC (i) owned a majority of the outstanding ordinary shares of the Company immediately following the completion of the transaction, and (ii) have the significant influence and the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity, and Arabella LLC’s senior management dominates the management of the combined entity in following the completion of the transaction in accordance with the provision of Financial Accounting Standards Board Accounting Standards Codification (“FASB-ASC”) Topic 805 Business Combinations. Accordingly, Arabella LLC is deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of Arabella LLC. Accordingly, the assets and liabilities and the historical operations that are reflected in the financial statements are those of Arabella LLC and are recorded at the historical cost basis of Arabella LLC. Parent’s assets, liabilities and results of operations were consolidated with the assets, liabilities and results of operations of Arabella LLC after the merger.
| 8 |
3. Recent Developments, Liquidity and Ability to Continue as a Going Concern
The accompanying financial statements have been prepared in U.S. dollars and in accordance with accounting principles generally accepted in the United States on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company commenced oil and gas exploration activities in 2011 and at September 30, 2015 had an accumulated deficit of approximately $12,635,000 and a working capital deficit of approximately $22,756,000 largely consisting of notes payable due in less than twelve months as well as accounts payable and advances from affiliates. The Company is not currently engaged in any new drilling for oil and gas due to the depressed price for oil. The current oil pricing environment and related conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on its ability to generate revenue from oil and gas operations or asset sales and achieve profitable operations and to generate sufficient cash flow from financing and operations to meet its obligations, as they become payable.
Management is exploring alternatives to its existing oil and gas activities in the current oil pricing environment. Although there are no assurances that management’s plans will be realized management believes that the Company will be able to continue operations in the future. Accordingly, no adjustment relating to the recoverability and classification of recorded asset amounts and the classification of liabilities has been made to the accompanying financial statements in anticipation of the Company not being able to continue as a going concern. The Company entered into a Purchase and Sale Agreement with a third party buyer (“Buyer”), dated as of July 1, 2015, and a letter agreement with McCabe Petroleum Corporation (“McCabe”), dated as of April 15, 2015, pursuant to which the Company would sell its ownership interest in certain of its properties for cash and properties. Pursuant to the agreements, the transactions would have closed simultaneously and the Company would transfer its Locker State, Graham, Woods, Jackson and Emily Bell prospects to the Buyer and would have received cash from the Buyer and certain properties from McCabe. On September 1, 2015, the Company received a text message and email from the Buyer terminating the PSA pursuant to Section 13.1 of the PSA. The Buyer cited several items to justify its unexpected cancelation of the PSA including a number of standard closing information items as well as certain third party approvals that had not been obtained as of that date. The letter agreement with McCabe remains in place but is dependent on a transaction similar to the one contemplated in the PSA being consummated simultaneously. The Company is currently searching for such a replacement or another strategic alternative.
In the event of a return to drilling, the Company expects that, depending on the pace of drilling and the pricing environment for oil and gas, it could need approximately $40 million to fund its operations during the first twelve months of activity, which will include minimum annual property lease payments, well expenditures and operating costs and expenses. There can be no assurance that the price of oil will improve to the point that drilling resumes. In the event that the Company begins new drilling operations, it may require additional funding in 2016. There can be no assurance that financing will be available on acceptable terms if at all.
On September 2, 2014 the Company sold the first $16,000,000 of Notes under its $45,000,000 Senior Secured Note Facility (See Note 8 – Senior Secured Notes), with further sales during the term of the facility to be based upon reserve based performance hurdles. The Notes were due on September 2, 2015; the Company was unable to repay them and is continuing to work with its Senior Lender to find the best alternative solution for the Notes.
Additionally, in the event that the Company is able to redeem its initial public offering warrants as discussed in Note 12 – Shareholders Equity, the initial public offering warrants would likely be exercised resulting in the receipt of proceeds up to $20,532,500 to further sustain the Company’s operations. There can be no assurance that the Company will redeem the initial public offering warrants.
| 9 |
4. Summary of Significant Accounting Policies
Principals of Consolidation
The accompanying consolidated financial statements of the Company include the accounts of Arabella Exploration Inc. and its wholly owned subsidiaries Arabella Exploration, Limited Liability Company, Arabella Operating, LLC and Arabella Midstream, LLC. All significant intercompany transactions have been eliminated in consolidation.
Use of Estimates
Preparation of the Company’s consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil and natural gas reserves and related cash flow estimates used in impairment tests of long-lived assets, estimates of future development, dismantlement and abandonment costs, estimates relating to certain oil and natural gas revenues and expenses, estimates of the valuation allowance for deferred tax assets and estimates of expenses related to legal, environmental and other contingencies. Certain of these estimates require assumptions regarding future commodity prices, future costs and expenses and future production rates. Actual results could differ from those estimates.
As an oil and natural gas producer, the Company’s revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which are dependent upon numerous factors beyond its control such as economic, political and regulatory developments and competition from other energy sources. The energy markets have historically been very volatile and there can be no assurance that oil and natural gas prices will not be subject to wide fluctuations in the future. A substantial or extended decline in oil and natural gas prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows and quantities of oil and natural gas reserves that may be economically produced.
Estimates of oil and natural gas reserves and their values, future production rates and future costs and expenses are inherently uncertain for numerous reasons, including many factors beyond the Company’s control. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, prevailing commodity prices, operating costs and other factors. These revisions may be material and could materially affect future depreciation, depletion and amortization expense, dismantlement and abandonment costs, and impairment expense.
5. Property and Equipment
Property and equipment include furniture and fixtures, computer equipment and software and transportation equipment:
| September 30, | December 31, | |||||||
| 2015 | 2014 | |||||||
| Property and equipment, gross | $ | 435,679 | $ | 435,679 | ||||
| Less: Accumulated depreciation and amortization | (220,402 | ) | (119,853 | ) | ||||
| Property and Equipment, net | $ | 215,277 | $ | 315,826 | ||||
Depreciation expense was $27,866 and $44,771 for the three months and $100,549 and $87,392 for the nine months ended September 30, 2015 and 2014, respectively.
| 10 |
6. Oil and Gas Properties
The following table sets forth the Company’s oil and gas properties:
| September 30, | December 31, | |||||||
| 2015 | 2014 | |||||||
| Proved oil and gas properties (1) | $ | 25,434,284 | $ | 25,168,514 | ||||
| Less: Accumulated depreciation, depletion, amortization and impairment | (2,078,497 | ) | (1,763,731 | ) | ||||
| Proved oil and gas properties, net | 23,355,787 | 23,404,783 | ||||||
| Unproved oil and gas properties | 5,027,573 | 4,900,389 | ||||||
| Total oil and gas properties, net | $ | 28,383,360 | $ | 28,305,172 | ||||
| (1) | Included in the Company’s proved oil and gas properties are estimates of future asset retirement costs of $23,575 at September 30, 2015 and December 31, 2014. |
Depletion expense was $75,726 and $338,785 for the three months ended September 30, 2015 and 2014, respectively. Depletion expense was $314,766 and $854,381 for the nine months ended September 30, 2015 and 2014, respectively.
The Company accrued certain amounts during 2014 to reflect estimated spending on oil and gas leases based upon the overall spending during 2014. As a result of declining oil prices, those amounts were overestimated and the Company revised certain accruals for the year ended December 31, 2014. The preceding table reflects the revisions described in Note 1.
7. Asset Retirement Obligations
The following table reflects the changes in the Company’s ARO during the nine months ended September 30, 2015 and the year ended December 31, 2014:
| September 30, | December 31, | |||||||
| 2015 | 2014 | |||||||
| Asset retirement obligation — beginning of period | $ | 25,843 | $ | 21,171 | ||||
| Additions to ARO from new properties | - | 6,030 | ||||||
| Sales or abandonments of properties | - | (3,128 | ) | |||||
| Accretion expense during period | 1,440 | 1,770 | ||||||
| Asset retirement obligation — end of period | $ | 27,283 | $ | 25,843 | ||||
8. Senior Secured Notes
On September 2, 2014 the Company entered into a $45,000,000 Senior Secured Note Facility with a one year borrowing period and one year term per draw (the “Notes”) with a New York based investor (the “Investor”). The initial sale of $16,000,000 in Notes occurred on September 2, 2014 with further sales to be based upon reserve based performance hurdles. The Notes bear interest at an annual rate of 15%, of which six months was prepaid at close. The Notes became due on September 2, 2015; the Company was unable to repay them and is continuing to work with its Senior Lender to find the best alternative solution for the Notes. The Company paid a 3% origination fee to the Investor and a 5% cash commission to its advisors on the transaction. In conjunction with the sale of the Notes, the Company issued warrants to purchase 1,300,000 of the Company’s ordinary shares at a price of $5.00 per share (the “Financing Warrants”). The Financing Warrants expire on September 2, 2019.
The Senior Secured Notes are carried at their face value less the amortized amount of the debt discount associated with the relative fair value at issuance of the Financing Warrants. The fair value of the Financing Warrants at issue was determined to be approximately $4,059,300 using the Black-Scholes option pricing model. Significant assumptions used in the valuation include an expected term of 5 years, an expected volatility of 51.0% based on historical value and corresponding volatility of the Company’s peer group stock price for a period consistent with the warrants term, a risk free interest rate of 1.69% based on the a U.S. Treasury Note with a similar term to the expected term on the date of the grant, and an expected dividend yield of 0.0% as the Company does not expect to pay dividends in the near future. The relative fair value of the Financing Warrants was then determined by applying the ratio of value of the Notes to the value of the Notes plus the fair value of the Financing Warrants to the amount of the Notes. Using this metric, the relative fair value of the Financing Warrants was determined to be $3,237,840. The debt discount is amortized using the straight line method over the one year term of the Notes. As of September 2, 2015, the Notes became due and the debt discount has been fully amortized, as such the Notes are presented at their full face value as of September 30, 2015.
| 11 |
The Company has elected early adoption of accounting Standards Update (ASU) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, as such deferred financing costs, net of amortization do not appear in current assets and are instead netted against the face value of the Notes.
| September 30, | December 31, | |||||||
| 2015 | 2014 | |||||||
| Senior Secured Notes Payable | $ | 16,000,000 | $ | 16,000,000 | ||||
| Less: | ||||||||
| Debt discount – Financing Warrants | (3,237,840 | ) | (3,237,840 | ) | ||||
| Deferred financing costs | (3,004,790 | ) | (3,004,790 | ) | ||||
| Add: | ||||||||
| Accretion of debt discount | 3,237,840 | 1,079,280 | ||||||
| Amortization of deferred financing cost | 3,004,790 | 1,001,597 | ||||||
| Senior Secured Notes Payable, net of discount | $ | 16,000,000 | $ | 11,838,247 | ||||
Interest expense for the three months ended September 30, 2015 was a total of $1,139,640 consisting of $600,000 of interest expense and $539,640 of accretion of the debt discount. Amortization of deferred financing costs was $500,798 for the same period. Interest expense for the three months ended September 30, 2014 was a total of $469,820 consisting of $200,000 of interest expense and $269,820 of accretion of the debt discount. Amortization of deferred financing costs was $250,399 for the same period. Interest expense for the nine months ended September 30, 2015 was a total of $3,958,560 consisting of $1,800,000 of interest expense and $2,158,560 of accretion of the debt discount. Amortization of deferred financing costs was $2,003,193 for the same period. Interest expense for the nine months ended September 30, 2014 was a total of $469,820 consisting of $200,000 of interest expense and $269,820 of accretion of the debt discount. Amortization of deferred financing costs was $250,399 for the same period. Pending discussions with its Senior Lender concerning the disposition of the Notes, the Company has continued to accrue $200,000 per month in interest expenses though there is no assurance that this will be the amount agreed to by the Company and the Senior Lender.
9. Term Note
On May 4, 2015 the Company reached a settlement agreement to pay Heartland Bank (“Heartland”) $125,000 to settle Heartland’s demands that the Company pay a break-up fee and certain costs relating to a financing that the Company explored with Heartland but ultimately rejected in favor of other financing. Under the settlement, the Company issued Heartland a $250,000 Term Note (the “Term Note”) and agreed to pay $10,000 on the 15th of every month towards that note. However, the full face amount of the Term Note is intended only to be punitive in the event of non-compliance and, upon the maturity of the Senior Secured Notes, the Company will pay an amount of $125,000, less payments made to date, in full satisfaction of the Term Note. The Term Note is not interest bearing.
Because the events leading to the Heartland lawsuit occurred during 2014, the Company has accounted for the liability as if it had been incurred during the year ended December 31, 2014 and adjusted its financials accordingly as described in Note 1.
10. Notes Payable to Directors
On May 1, 2014 the Company received a loan from Hauser Holdings, LLC an affiliate of Richard Hauser, one of our directors. The $800,000 loan was due August 31, 2014 and bore an interest rate of 10% per annum.
| 12 |
On June 10, 2014 the Company received a loan from BBS Capital Fund, LP an affiliate of Berke Bakay, one of our directors. The $500,000 loan was due August 31, 2014 and bore an interest rate of 10% per annum.
On September 4, 2014 the Company repaid its loans from BBS Capital Fund, LP and Hauser Holdings, LLC with accrued interest for total repayment of $512,500 and $828,222, respectively.
The Company accrued $24,649 and $40,722 in interest expenses for these loans in the three and nine months ended September 30, 2014, respectively.
11. Note Payable to Officer
As of September 30, 2015 and December 31, 2014, the Company’s note payable to officer is payable to Jason Hoisager, the founder of Arabella Exploration LLC, with an outstanding balance of $3,007,170. The founder is currently the President of the Company and is a director and majority shareholder of the Company. The note payable is non-interest bearing and matures in December of 2023.
12. Shareholders’ Equity
The Company is authorized to issue 50,000,000 ordinary shares and 5,000,000 preferred shares with a par value of $0.001 per share.
Ordinary Shares
On June 26, 2014 the Company’s Chief Executive Officer Jason Hoisager purchased 190,477 of the Company’s ordinary shares for $10.50 per share for an aggregate of $2,000,009 in a private placement.
Preferred Shares
The Company is authorized to issue up to 5,000,000 preferred shares with a par value of $0.001 and the characteristics of the preferred shares will be determined by the Board of Directors of the Company from time to time.
Warrants
In connection with Parent’s initial public offering (“Offering”) in March 2011, the Company issued 4,106,500 offering warrants, which entitles the holders to purchase ordinary shares at the price of $5.00 per share, commencing on the date of the business combination, if the Company has an effective and current registration statement covering the ordinary shares issuable upon exercise of the offering warrants and a current prospectus relating to such ordinary shares, and expiring three years from that date. The Company may redeem the offering warrants at a price of $0.01 per offering warrant upon 30 days’ notice while the offering warrants are exercisable, only when the last sale price of the ordinary shares is at least $10.50 per share for any 20 trading days within a 30 trading day period, provided that a current registration statement is in effect for the ordinary shares underlying the offering warrants. If not exercised, the offering warrants expire on December 24, 2016. If the Company redeems the offering warrants, management of the Company will have the option to require any holder that wishes to exercise his offering warrants to do so on a cashless basis.
Simultaneously with the Offering, certain of the shareholders purchased 6,600,000 insider warrants at the price of $0.35 per insider warrant (for an aggregate purchase price of $2,310,000) from the Company. These insider warrants have the same terms as the 4,106,500 offering warrants referred to in the preceding paragraph, except these insider warrants are not redeemable and the insider warrants are exercisable for cash or on a cashless basis.
In conjunction with the sale of the Notes, the Company issued the Financing Warrants to purchase 1,300,000 of the Company’s ordinary shares at a price of $5.00. The Financing Warrants expire on September 2, 2019.
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Unit Purchase Option
In connection with the Offering, the Company issued unit purchase options to purchase an aggregate of 400,000 units at an exercise price of $8.80 per unit to its underwriters and designees of the underwriter. Each unit consists of one ordinary share and one redeemable ordinary share purchase warrant, which contains a provision for cashless exercise and has the same terms as the 4,106,500 initial public offering warrants.
Stock-based Compensation
On May 5, 2014 the Company granted each non-employee director 30,000 stock options to purchase its ordinary shares for joining the board and 20,000 stock options to purchase its ordinary shares for the year of service commencing from January 30, 2014. All, 50,000 stock options in aggregate, vest ratably over two years and expire five years from the grant date. The stock options have an exercise price of $6.15 per share, which represents the closing price of the Company’s ordinary shares the day prior to the grant option date. The grant date fair value of the options granted was determined to be $558,950 using the Black-Scholes option pricing model. Significant assumptions used in the valuation include an expected term of 3.5 years utilizing the “Simplified Method” as the Company does not have sufficient historical experience to estimate an expected term, an expected volatility of 49.0% based on historical value and corresponding volatility of the Company’s peer group stock price for a period consistent with the stock option expected term, a risk free interest rate of 0.9% based on the a U.S. Treasury Note with a similar term to the expected term on the date of the grant, and an expected dividend yield of 0.0% as the Company does not expect to pay dividends in the near future. According to the terms of the option plan, vesting was retroactive to the beginning of service in January 2014; as such two quarters of vesting was recorded during the three months ended June 30, 2014. Messrs. Bush and Boyuls, two of the directors, resigned from the board on September 9, 2014. The remaining members of the board voted to allow them to continue in the vesting of their granted stock options as if they had served out their term. However, as no further service is required for the vesting, the Company expensed the entire amount of the grant in 2014. Accordingly, aggregated stock-based compensation expense under the 2014 grant for the nine months ended September 30, 2015 and 2014 was $125,764 and $209,606, respectively. Unrecognized compensation expense for the nine months ended September 30, 2014 was $349,344. Unrecognized compensation expense as of September 30, 2015, relating to non-vested common stock options is $41,921 and is expected to be recognized through the fourth quarter of 2015. At September 30, 2015, no options had been exercised and no options had been forfeited. As of September 30, 2015 the aggregate intrinsic value of these options was $0.
On February 2, 2015 the Company granted each non-employee director 20,000 stock options to purchase its ordinary shares for the year of service commencing from January 30, 2015. All, 20,000 stock options vest ratably over two years on a quarterly basis and expire five years from the grant date. The stock options have an exercise price of $3.35 per share, which represents the closing price of the Company’s ordinary shares the day prior to the grant date. The grant date fair value of the options granted was determined to be $74,772 using the Black-Scholes pricing model. Significant assumptions used in the valuation include an expected term of 3.5 years utilizing the “Simplified Method” as the Company does not have sufficient historical experience to estimate an expected term, an expected volatility of 51.0% based on historical value and corresponding volatility of the Company’s peer group stock price for a period consistent with the stock option expected term, a risk free interest rate of 0.8% based on the a U.S. Treasury Note with a similar term to the expected term on the date of the grant, and an expected dividend yield of 0.0% as the Company does not expect to pay dividends in the near future. Aggregated stock-based compensation expense under the 2015 grant for the nine months ended September 30, 2015 was $28,040. Unrecognized compensation expense as of September 30, 2015, relating to non-vested common stock options is $46,733 and is expected to be recognized through the fourth quarter of 2016. At September 30, 2015, no options had been exercised and no options had been forfeited. As of September 30, 2015 the aggregate intrinsic value of these options was $0.
A summary of stock option activity for the nine months ended September 30, 2015 is presented below:
| Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding at December 31, 2014 | 250,000 | $ | 6.15 | |||||
| Granted | 60,000 | $ | 3.35 | |||||
| Forfeited | - | - | ||||||
| Exercised | - | - | ||||||
| Outstanding at September 30, 2015 | 310,000 | $ | 5.61 | |||||
| Exercisable at September 30, 2015 | 241,250 | $ | 5.89 | |||||
| 14 |
13. Related Party Transactions
Mr. Jason Hoisager, the Company’s Chief Executive Officer, owns 100% of Arabella Petroleum Company LLC (“Petroleum”), which was the operating company for substantially all the wells that the Company has its working interest in prior to December 31, 2014. As Petroleum drilled and completed the wells, Petroleum billed the Company for its working ownership percentage of the capital costs. After the completion of each well, Petroleum sold the oil and gas and provided the Company its working interest revenue, net of production taxes and charges for the lease operating expenses.
As of September 30, 2015 and December 31, 2014, the Company owed Petroleum $2,894,396 and $3,382,514, respectively, in joint interest billings to vendors for the well costs. During the year ended December 31, 2014, the Company paid Petroleum $17,072,542 in capital costs for the wells. Petroleum was responsible for collecting the revenue from the purchasers and providing the Company its accounts receivable, which totaled $814,689 at December 31, 2014. As of December 31, 2014 Petroleum owed the Company $381,801, a portion of the costs from the expense sharing agreement between the companies. As of December 31, 2014, Petroleum has ceased to provide these services to the Company and Arabella Operating, LLC, a wholly owned subsidiary of the Company, is the operator of record for the Company’s wells.
During the nine months ended September 30, 2015, advances of $1,910,748 were received from affiliates and shareholders.
14. Other Operating Revenue – Gain on Sale of Oil and Gas Properties
During the third quarter of 2014, Arabella sold undeveloped leased acreage for $293,333 in cash and recognized a gain on the sale of the property of $80,196.
During the first nine months of 2014, Arabella sold undeveloped leased acreage (which includes the acreage identified in the immediately preceding paragraph) for $5,337,387 in cash and recognized a gain on the sale of the properties of $3,038,519. Contingent conditions on the sale of the Weatherby acreage may result in an additional $78,300 of revenue.
During the second quarter of 2014, Arabella sold developed, non-operated leased acreage for $327,734 in cash and recognized a gain on the sale of the properties of $46,398.
Total acreage sales resulted in $293,333 and $5,665,121 in cash and gains of $80,196 and $3,084,917 for the three and nine months ended September 30, 2014, respectively.
15. Income Taxes
As of December 23, 2013, Arabella LLC elected to be treated as a corporation for tax purposes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized. The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured.
The Company had no income tax expense due to operating losses incurred for the nine months ended September 30, 2015 and none for the nine months ended September 30, 2014 due to deductions available from intangible drilling costs.
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16. Earnings per Share
Basic earnings per share is computed by dividing net income available to shareholders by the weighted average number of shares outstanding for the periods presented.
The calculation of diluted earnings per share does not include the potential dilutive impact of the 4,106,500 offering warrants outstanding during the periods presented since in the three or nine months ended September 30, 2015 they were anti-dilutive and in the three or nine months ended September 30, 2014 the exercise of the offering warrants was contingent upon the effectiveness of a registration statement that had not yet been filed with the SEC. The calculation of diluted earnings per share does not include the potential dilutive impact of the Unit Purchase Option as it was not exercisable based on the Company’s average share and warrant prices.
The calculation of diluted earnings per share does not include the dilutive impact of the 6,600,000 Insider Warrants as they were sold pursuant to an exemption from the registration requirements of the Securities Act in the three and nine months ended September 30, 2014 and not in the three and nine months ended September 30, 2015 as they were anti-dilutive.
The calculation of diluted earnings per share does not include the impact of the 1,300,000 financing warrants as they were anti-dilutive in the three and nine months ended September 30, 2015 and 2014.
The calculation of diluted earnings per share does not include the impact of the 310,000 board of directors’ options as they were anti-dilutive in the three and nine months ended September 30, 2015 and 2014.
The following table sets forth the computation of the basic and diluted earnings per share for the three and nine months ended September 30, 2015 and 2014:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Numerator for basic and diluted earnings per share: | ||||||||||||||||
| Net loss | $ | (2,220,069 | ) | $ | (1,863,247 | ) | $ | (8,329,568 | ) | $ | (1,244,925 | ) | ||||
| Denominator: | ||||||||||||||||
| Denominator for basic earnings per ordinary shares – weighted average shares outstanding | 5,020,303 | 5,020,303 | 5,020,303 | 4,896,807 | ||||||||||||
| Effect of dilutive warrants | - | - | - | - | ||||||||||||
| Denominator for diluted earnings per ordinary share – weighted average shares outstanding | 5,020,303 | 5,020,303 | 5,020,303 | 4,896,807 | ||||||||||||
| Basic earnings per ordinary share | $ | (0.44 | ) | $ | (0.37 | ) | $ | (1.66 | ) | $ | (0.25 | ) | ||||
| Diluted earnings per ordinary share | $ | (0.44 | ) | $ | (0.37 | ) | $ | (1.66 | ) | $ | (0.25 | ) | ||||
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of this Report, including any projections of earnings, revenue or other financial items, any statements regarding the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, any statements regarding expected benefits from any transactions and any statements of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this Report are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Thus, investors should refer to and carefully review information in future documents the Company files with the Securities and Exchange Commission (“SEC”). Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risk and uncertainties, including, but not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2014 under “Part I, Item 1A – Risk Factors” and for the reasons described elsewhere in this Report. All forward looking statements and reasons why results may differ included in this Report are made as of the date hereof, and we do not intend to update any forward-looking statements except as required by law or applicable regulations. Except where the context otherwise requires, in this Report, the “Company,” “Arabella,” “we,” “us” and “our” refer to Arabella Exploration, Inc., a Cayman Islands company, and, where appropriate, its subsidiaries.
Business Overview
We are an independent oil and natural gas company focused on the acquisition, development, exploration and exploitation of unconventional, long-life, onshore oil and natural gas reserves in the Delaware Basin in West Texas, which is a part of the Permian Basin. Our activities have historically been directed at the Avalon, Bone Springs, and Wolfcamp formations, which we refer to collectively as the Wolfbone play.
When it is feasible to do so, we intend to grow our reserves and production through development drilling, exploitation and exploration activities on our multi-year inventory of identified potential drilling locations and through acquisitions that meet our strategic and financial objectives, targeting oil-weighted reserves. Substantially all of our revenues are generated through the sale of oil, natural gas liquids and natural gas production, though we do on occasion sell parcels of our land when the opportunity to generate profit presents itself. Our production was approximately 90% oil, no natural gas liquids and 10% natural gas for the three months ended September 30, 2015 and 85% oil, no natural gas liquids and 15% natural gas for the three months ended September 30, 2014. Our production was approximately 88% oil, no natural gas liquids and 12% natural gas for the nine months ended September 30, 2015 and 85% oil, no natural gas liquids and 15% natural gas for the nine months ended September 30, 2014. On September 30, 2015, our net acreage position in the Delaware Basin was approximately 4,972 net acres. On December 31, 2014, our net acreage position in the Delaware Basin was approximately 4,972 net acres. We are not currently engaged in any drilling activity due to the reduced price of oil.
We were organized on June 17, 2010 as an exempted company under the laws of the Cayman Islands. We were a blank check company formed to acquire through a merger, capital stock exchange, asset acquisition, stock purchase or similar business combination, or control through contractual arrangements, one or more operating businesses. On October 23, 2013, we entered into an Agreement and Plan of Merger and Reorganization to acquire Arabella Exploration, Limited Liability Company, a Texas limited liability company (the “Acquisition”). On December 24, 2013, we consummated the Acquisition with Arabella Exploration Limited Liability Company, as more fully described in our Annual Report on Form 20-F for the year ended December 31, 2013 filed on May 15, 2014. On February 4, 2013, we changed our name from Lone Oak Acquisition Corporation to Arabella Exploration, Inc.
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Future Activity
If oil prices improve in 2016, depending on the pace of drilling and our strategic direction at the time, we could drill and complete an estimated ten additional gross horizontal wells on our acreage. Based on this plan, we would estimate that our capital expenditures for the next twelve months would be approximately $40 million, which includes costs for infrastructure and non-operated wells, but does not include the cost of any land acquisitions. However, any future drilling and completion activity will be highly dependent on the recovery of prices for crude oil. If oil prices do not rebound significantly in a short time, it is highly unlikely that we will drill at such a high pace. We are not currently engaged in any drilling activity due to the reduced price of oil.
Operating Results Overview
During the three months ended September 30, 2015, our average daily production was approximately 54.3 BOE, consisting of 48.8 Bbls/d of oil, 32.8 Mcf/d of natural gas and no natural gas liquids, as compared to the three months ended September 30, 2014, when our average daily production was approximately 144.4 BOE, consisting of 122.1 Bbls/d of oil, 133.6 Mcf/d of natural gas and no natural gas liquids.
During the nine months ended September 30, 2015, our average daily production was approximately 71.9 BOE, consisting of 63.4 Bbls/d of oil, 51.1 Mcf/d of natural gas and no natural gas liquids, as compared to the nine months ended September 30, 2014, when our average daily production was approximately 124.4 BOE, consisting of 105.6 Bbls/d of oil, 112.7 Mcf/d of natural gas and no natural gas liquids.
The reduction in production during the 2015 periods is a direct result of the lack of availability of funds to maintain our wells. Without access to additional Senior Secured Notes funding and reduced revenue due to depressed prices for oil and natural gas we have had to delay regular maintenance items on our wells resulting in additional periods with wells offline and not producing.
Through September 30, 2015, we had participated in 8 gross (2.96 net) operated wells in the Delaware Basin.
Sources of Our Revenue
Our revenues are derived from the sale of oil and natural gas production, as well as the sale of natural gas liquids that are extracted from our natural gas during processing. For the three months ended September 30, 2015 and 2014 our revenues were derived 97% and 93%, respectively, from oil sales, 0% and 0%, respectively, from natural gas liquids sales and 3% and 7%, respectively, from natural gas sales. For the nine months ended September 30, 2015 and 2014 our revenues were derived 96% and 93%, respectively, from oil sales, 0% and 0%, respectively, from natural gas liquids sales and 4% and 7%, respectively, from natural gas sales. Our revenues may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices. Oil, natural gas liquids and natural gas prices have historically been volatile.
Results of Operations
The following table sets forth selected historical operating data for the three and nine month periods indicated.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Revenues: | ||||||||||||||||
| Oil and gas revenue | $ | 394,324 | $ | 953,896 | $ | 1,011,509 | $ | 2,716,093 | ||||||||
| Other revenue – administrative overhead | 4,200 | - | 24,000 | - | ||||||||||||
| Other operating revenue – gain on sale of oil and gas properties | - | 80,196 | - | 3,084,917 | ||||||||||||
| Total revenues | 398,524 | 1,034,092 | 1,035,509 | 5,801,010 | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Lease operating expenses | 52,072 | 335,720 | 316,132 | 888,072 | ||||||||||||
| Ad valorem and production taxes | 21,163 | 42,449 | 53,579 | 121,466 | ||||||||||||
| Depreciation, depletion and amortization | 103,593 | 383,556 | 415,315 | 954,930 | ||||||||||||
| Accretion of asset retirement obligation | 480 | 480 | 1,440 | 1,290 | ||||||||||||
| General and administrative expenses | 800,847 | 1,718,151 | 2,616,694 | 4,319,236 | ||||||||||||
| Total costs and expenses | 978,155 | 2,480,356 | 3,403,160 | 6,284,994 | ||||||||||||
| Loss from operations | (579,631 | ) | (1,446,264 | ) | (2,367,651 | ) | (483,984 | ) | ||||||||
| Other expense | ||||||||||||||||
| Interest expense, related party | - | (24,649 | ) | - | (40,722 | ) | ||||||||||
| Interest expense | (1,640,438 | ) | (720,219 | ) | (5,961,917 | ) | (720,219 | ) | ||||||||
| Total other expense | (1,640,438 | ) | (744,868 | ) | (5,961,917 | ) | (760,941 | ) | ||||||||
| Net loss before taxes | (2,220,069 | ) | (2,191,132 | ) | (8,329,568 | ) | (1,244,925 | ) | ||||||||
| Income tax benefit | - | 327,885 | ) | - | - | |||||||||||
| Net loss | $ | (2,220,069 | ) | $ | (1,863,247 | ) | $ | (8,329,568 | ) | $ | (1,244,925 | ) | ||||
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| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Production Data: | ||||||||||||||||
| Oil (Bbls) | 4,490.2 | 11,233.4 | 17,303.2 | 28,831.5 | ||||||||||||
| Natural gas (Mcf) | 3,018.4 | 12,293.4 | 13,951.1 | 30,778.5 | ||||||||||||
| Combined volumes (BOE) | 4,993.3 | 13,282.3 | 19,628.3 | 33,961.3 | ||||||||||||
| Daily combined volumes (BOE/d) | 54.3 | 144.4 | 71.9 | 124.4 | ||||||||||||
| Average Prices: | ||||||||||||||||
| Oil (per Bbl) | $ | 48.58 | $ | 79.32 | $ | 46.55 | 87.99 | |||||||||
| Natural gas (per Mcf) | 2.31 | 5.11 | 2.71 | 5.83 | ||||||||||||
| Combined (per BOE) | 45.09 | 71.82 | 42.96 | 79.98 | ||||||||||||
| Average Costs (per BOE): | ||||||||||||||||
| Lease operating expense | $ | 11.60 | $ | 25.28 | 18.27 | 26.15 | ||||||||||
| Production Taxes | 4.71 | 3.20 | 3.10 | 3.58 | ||||||||||||
| Production Taxes as a % of sales | 5.4 | % | 4.5 | % | 5.3 | % | 4.5 | % | ||||||||
| Depreciation, depletion and amortization | 23.07 | 28.88 | 24.00 | 28.12 | ||||||||||||
| General and Administrative | 178.35 | 129.36 | 151.23 | 127.18 | ||||||||||||
Three Months Ended September 30, 2015 Compared to the Three Months Ended September 30, 2014
Oil and Natural Gas Revenues. Our oil and natural gas revenues decreased by $559,572, or 59%, to $394,324 for the three months ended September 30, 2015, as compared to $953,896 for the three months ended September 30, 2014. Our revenues are a function of oil and natural gas production volumes sold and average sales prices received for those volumes. The decrease in revenues is due to the substantially lower price of oil realized in the period ended September 30, 2015 ($48.58 per barrel in the quarter ended September 2015 as compared to $86.25 in the prior year period) and to the decreased volumes of production.
Other Revenue. Other revenue relates to administrative overhead fees paid to Arabella Operating by other working interest owners to operate our wells. Arabella Operating was paid $4,200 for the three months ended September 30, 2015 and did not operate our wells for the three months ended September 30, 2014.
Other Operating Revenue. Other operating revenue in the three months ended September 30, 2014 relates to oil and gas property sales. In the three months ended September 30, 2014, we sold a non-producing property for $293,333, with a net profit of $80,196. We did not have any property sales in the three months ending September 30, 2015. Other operating revenue from the sale of oil and gas properties fluctuates due to market demand and preparation of the land. We buy and sell parcels of land when the opportunity to generate significant profit presents itself.
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Lease Operating Expense. Lease operating expenses decreased from $335,720 in the three months ended September 30, 2014 to $52,072 in the three months ended September 30, 2015. This decrease is the result of reduced operations due to low oil prices. Lease operating expenses can vary based upon conditions at the well site and well productivity.
Ad Valorem and Production Tax Expense. Ad valorem and production taxes as a percentage of oil and natural gas revenues increased for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014. There was an overall decrease in taxes due to the revenue decrease discussed above. Ad valorem and production taxes are primarily based on the market value of our production at the wellhead and may vary across the different counties in which we operate.
Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense decreased from $383,556 in the three months ended September 30, 2014 to $103,593 in the three months ended September 30, 2015. The decrease is related to decreased production from our wells discussed under Oil and Natural Gas Revenues, above.
General and Administrative. General and administrative expenses decreased from $1,718,151 in the three months ended September 30, 2014 to $800,847 in the three months ended September 30, 2015. These expenses relate primarily to salaries and wages, investor relations costs and professional and consulting fees. The decrease is related to cost cutting efforts in response to the significantly lower price of oil in the period ended September 30, 2015.
Net Interest Expense. Net interest expense was $1,640,438 during the three months ended September 30, 2015 as compared to $744,868 during the three months ended September 30, 2014. In both periods, the interest expense represented the costs of our Senior Secured Notes (see “Senior Secured Notes” below). In the 2014 period, the interest expense also included the costs of our Directors’ Loans.
Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014
Oil and Natural Gas Revenues. Our oil and natural gas revenues decreased by $1,704,584, or 63%, to $1,011,509 for the nine months ended September 30, 2015, as compared to $2,716,093 for the nine months ended September 30, 2014. Our revenues are a function of oil and natural gas production volumes sold and average sales prices received for those volumes. The decrease in revenues is due to the substantially lower price of oil realized in the period ended September 30, 2015 ($46.55 per barrel in the quarter ended September 2015 as compared to $90.69 in the prior year period) and to the decreased volumes of production.
Other Revenue. Other revenue relates to administrative overhead fees paid to Arabella Operating by other working interest owners to operate our wells. Arabella Operating was paid $24,000 for the nine months ended September 30, 2015 and did not operate our wells for the nine months ended September 30, 2014.
Other Operating Revenue. Other operating revenue in the nine months ended September 30, 2014 relates to oil and gas property sales. In the nine months ended September 30, 2014, we sold five non-producing properties for $5,337,387 with a net profit of $3,038,519 and one non-operated, producing property for $327,734 with a net profit of $46,398. Contingent conditions on the sale of the Weatherby acreage may result in an additional $78,300 of revenue. We did not have any property sales in the nine months ending September 30, 2015. Other operating revenue from the sale of oil and gas properties fluctuates due to market demand and preparation of the land. We buy and sell parcels of land when the opportunity to generate significant profit presents itself.
Lease Operating Expense. Lease operating expenses decreased from $888,072 in the nine months ended September 30, 2014 to $316,132 in the nine months ended September 30, 2015. This decrease is the result of reduced operations due to low oil prices. Lease operating expenses can vary based upon conditions at the well site and well productivity.
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Ad Valorem and Production Tax Expense. Ad valorem and production taxes as a percentage of oil and natural gas revenues increased for the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014. There was an overall decrease in taxes due to the revenue decrease discussed above. Ad valorem and production taxes are primarily based on the market value of our production at the wellhead and may vary across the different counties in which we operate.
Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense decreased from $954,930 in the nine months ended September 30, 2014 to $415,315 in the nine months ended September 30, 2015. The decrease is related to decreased production from our wells discussed under Oil & Natural Gas Revenues, above.
General and Administrative. General and administrative expenses decreased from $4,319,236 in the nine months ended September 30, 2014 to $2,616,695 in the nine months ended September 30, 2015. These expenses relate primarily to salaries and wages, investor relations costs and professional and consulting fees. The decrease is related to cost cutting efforts in response to the significantly lower price of oil in the period ended September 30, 2015.
Net Interest Expense. Net interest expense was $5,961,917 during the nine months ended September 30, 2015 as compared to $760,941 during the nine months ended September 30, 2014. In both periods, the interest expense represented the costs of our Senior Secured Notes (see “Senior Secured Notes” below). In the 2014 period, the interest expense also included the costs of our Directors’ Loans.
Liquidity and Capital Resources
Our primary source of liquidity has been oil and gas sales revenue and the sales of certain properties. A major source of our liquidity is the Senior Secured Note Facility entered into on September 2, 2014 (the “Notes”). Our primary uses of capital have been the acquisition, development and exploration of oil and natural gas properties. As we pursue reserves and production growth, we regularly consider which capital resources, including equity and debt financings, are available to meet our future financial obligations, planned capital expenditure activities and liquidity requirements. Our future ability to grow proved reserves and production will be highly dependent on the price of oil and the capital resources available to us.
The Notes became due on September 2, 2015 and the Company was unable to repay them and is continuing to work with its Senior Lender to find the best alternative solution for the Notes.
The rapid and substantial decline in oil prices in the later part of 2014 significantly reduced the amount of revenue we receive per barrel of oil. Approximately 97% of our oil and gas revenue comes from oil sales. This decline has reduced our revenue and, as a result, our cash flow, which limits our operations and could limit our future growth. Our current cash position, availability of financing from our Notes and current level of operating cash flows may not, in aggregate, be adequate to support our current working capital requirements, interest costs and, at the same time, support additional drilling activity. The current oil pricing environment and related conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management is exploring various opportunities to remedy the Company’s liquidity concerns.
Liquidity and cash flow
We commenced oil and gas exploration activities in 2011 and had a working capital deficit of $22,755,503 as of September 30, 2015 largely consisting of notes payable in less than twelve months and advances from affiliates. Our net cash flow for the nine months ended September 30, 2015 was an increase of $9,081, the components of which are described below. Our net cash flow for the nine months ended September 30, 2014 was a decrease of $2,023,158. We are not currently drilling any new wells; if we were to resume drilling we might need approximately $40 million to fund our operations during the next twelve months, which will include minimum annual property lease payments, well expenditures and operating costs and expenses, however, if oil prices do not rebound significantly in a short time it is highly unlikely that we will resume drilling or drill at such a high pace. In the event that we begin new drilling operations we may require additional funding in 2016. There can be no assurance that financing will be available on acceptable terms if at all.
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On September 2, 2014 we sold the first $16,000,000 of Notes under our $45,000,000 Senior Secured Note Facility, with further sales during the term of the facility to be based upon reserve based performance hurdles. The Notes became due on September 2, 2015; we were unable to repay them and are continuing to work with our Senior Lender to find the best alternative solution for the Notes.
Additionally, in the event we are able to redeem our offering warrants, they would likely be exercised resulting in the receipt of proceeds up to $20,532,500. There can be no assurance we will redeem the offering warrants.
Operating Activities
Net cash used in operating activities was $1,508,713 for the nine months ended September 30, 2015, as compared to net cash used in operating activities of $4,665,583 for the nine months ended September 30, 2014. The change in operating cash flows is largely a result of the impact of the operating losses during the 2015 period and operating losses, the reduction of joint interest billings payable and the sale of oil & gas properties in the 2014 period.
Investing Activities
The purchase and development of oil and natural gas properties generally accounts for the majority of our cash outlays for investing activities, however, we did not have any drilling activity in the first nine months of 2015. We used net cash for investing activities of $392,953 and $12,370,584 for the nine months ended September 30, 2015 and 2014, respectively. During the nine months ended September 30, 2014 we received proceeds of $5,665,121 from sales of oil and gas properties. We used cash for investing in oil and natural gas properties in the amounts of $392,954 and $17,538,736 for the nine months ended September 30, 2015 and 2014, respectively. We used cash for investing in property and equipment in the amounts of $0 and $496,969 for the nine months ended September 30, 2015 and 2014, respectively.
Financing Activities
During the nine months ended September 30, 2015 we received an aggregate of $1,910,748 in advances from affiliates and shareholders, which are repayable on demand without interest. During the nine months ended September 30, 2014 we received a loan from Hauser Holdings, LLC an affiliate of Richard Hauser, one of our directors. The $800,000 loan was due August 31, 2014 and bore an interest rate of 10% per annum. We also received a loan from BBS Capital Fund, LP an affiliate of Berke Bakay, one of our directors. The $500,000 loan was due August 31, 2014 and bore an interest rate of 10% per annum. On September 4, 2014 we repaid the loans from BBS Capital Fund, LP and Hauser Holdings, LLC with accrued interest for total repayment of $512,500 and $828,222, respectively.
On June 26, 2014 our Chief Executive Officer Jason Hoisager purchased 190,477 of our ordinary shares for $10.50 a share in a private transaction from us.
Senior Secured Note Facility
On September 2, 2014 we entered into a $45,000,000 Senior Secured Note Facility (the “Notes”) with a New York based investor (the “Investor”). The initial sale of $16,000,000 in Notes occurred on September 2, 2014 with further sales during the term of the facility to be based upon reserve based performance hurdles. The Notes bear interest at an annual rate of 15%, of which six months was prepaid at close. We paid a 3% origination fee to the Investor and a 5% cash commission to our financial advisors on the transaction. In conjunction with the sale of the Notes, we issued warrants to purchase 1,300,000 of our ordinary shares at a price of $5.00 per share. The warrants expire on September 2, 2019. The Notes became due on September 2, 2015; we were unable to repay them and are continuing to work with our Senior Lender to find the best alternative solution for the Notes.
The Notes are the senior secured obligations of the Company and, with certain exceptions, are secured by first lien positions on all of the Company’s assets and property.
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Capital Requirements, Sources of Liquidity and Ability to Continue as a Going Concern
Currently, we are not engaged in any drilling activity due to the reduced price of oil. A return to our drill schedule will be dependent on future oil prices and planning. Depending on the pace of drilling and the oil and gas pricing environment, we could need approximately $40 million to fund our operations during the first twelve months of drilling, which will include minimum annual property lease payments, well expenditures and operating costs and expenses. We do not have a specific acquisition budget since the timing and size of acquisitions cannot be accurately forecasted. We anticipate that while some of these expenditures will be funded by operations, the majority will come from outside funding sources.
The amount and timing of these capital expenditures is largely discretionary and within our control. The timing of these capital expenditures depends on a variety of factors, including but not limited to raising of outside capital, the success of our drilling activities, prevailing and anticipated prices for oil and natural gas, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners.
Additionally, while some of our capital expenditures will be financed through operations, the majority of these costs will require outside financing.
The current oil pricing environment, the amounts due on the Senior Secured Note Facility and related conditions raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to generate revenue from oil and gas operations or asset sales and achieve profitable operations and to generate sufficient cash flow from financing and operations to meet our obligations, as they become payable. We have plans to explore additional alternatives to our existing oil and gas activities to generate revenue in the current oil pricing environment. Although there are no assurances that our plans will be realized we believe that we will be able to continue operations in the future.
Critical Accounting Policies
There have been no changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.
OFF-BALANCE SHEET ARRANGEMENTS:
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, operating results, liquidity or capital expenditures.
| Item 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a smaller reporting company we are not required to provide information required by this Item.
| Item 4 | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2015 was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in internal controls
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(d) of the Exchange Act) that occurred during the nine months ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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Part
II
OTHER INFORMATION
| ITEM 1 | LEGAL PROCEEDINGS |
We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. We expect to resolve these and any similar suits within the ordinary course of business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
| ITEM 1A. | RISK FACTORS |
There have been no material changes from the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
| ITEM 2 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
There were no unregistered sales of equity securities that were not reported on a Current Report on Form 8-K.
| ITEM 3 | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4 | mine safety disclosures |
Not Applicable.
| ITEM 5 | OTHER INFORMATION |
None.
| ITEM 6 | EXHIBITS |
The
exhibits listed on the Exhibit Index are filed as part of this report.
| No. | Description | |
| 31.1 | Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. | |
| 31.2 | Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. | |
| 32.1 | Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. | |
| 32.2 | Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. | |
| 101.1 | Interactive Data Files |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: November 23, 2015 | ARABELLA EXPLORATION, INC. | |
| By: | /s/ Jason Hoisager | |
| Jason Hoisager | ||
| Chief Executive Officer (Principal Executive Officer) | ||
| Dated: November 23, 2015 | ARABELLA EXPLORATION, INC. | |
| By: | /s/ Terry E. Sanford | |
| Terry E. Sanford | ||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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