UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended March 31, 2015 |
|
|
OR
☐ |
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 000-52738
CROSS BORDER
RESOURCES, INC.
(Exact Name of Registrant as Specified in Its
Charter)
Nevada |
98-0555508 |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
|
|
2515 McKinney Avenue, Suite 900 |
|
Dallas, TX |
75201 |
(Address of Principal Executive Offices) |
(Zip Code) |
(210) 226-6700
(Registrant’s Telephone Number, Including
Area Code)
Securities registered pursuant to Section
12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, par value $.001
(Title of class)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
☐
Yes ☒ No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
☐
Yes ☒ No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer ☐ |
Accelerated filer ☐ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) |
Smaller reporting company ☒ |
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐
Yes ☒ No
Indicate the number of shares outstanding of
each of the issuer’s classes of common stock, as of the latest practicable date:
As of August 14, 2015, the Registrant had
17,336,226 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
Page
PART
I. FINANCIAL INFORMATION
Item 1. Financial
Statements
Cross Border Resources, Inc.
Balance Sheets
| |
March 31, 2015 | |
December 31, 2014 |
| |
(Unaudited) | |
|
ASSETS | |
| |
|
| |
| |
|
Current Assets | |
| |
|
Cash and Cash Equivalents | |
$ | 715,382 | | |
$ | 356,950 | |
Accounts Receivable – Oil and Natural Gas Sales | |
| 1,524,119 | | |
| 1,594,990 | |
Prepaid Expenses & Other Current Assets | |
| 68,113 | | |
| 71,598 | |
Assets Held for Sale | |
| 16,543,264 | | |
| 15,617,472 | |
Current Tax Asset | |
| 19,600 | | |
| 19,600 | |
Total Current Assets | |
| 18,870,478 | | |
| 17,660,610 | |
| |
| | | |
| | |
Oil and Gas Properties | |
| 28,194,837 | | |
| 27,243,106 | |
Less: Accumulated Depletion, Amortization, and Impairment | |
| (12,333,688 | ) | |
| (11,956,319 | ) |
Net Oil and Gas Properties | |
| 15,861,149 | | |
| 15,286,787 | |
| |
| | | |
| | |
Other Assets | |
| | | |
| | |
Other Property and Equipment, net of Accumulated
Depreciation of $104,211 and $104,211 as of March 31, 2015 and December 31, 2014, respectively | |
| 26,258 | | |
| 26,258 | |
Restricted Cash | |
| 214,751 | | |
| 214,751 | |
Deferred financing costs | |
| 36,580 | | |
| 47,512 | |
Other Assets | |
| 54,324 | | |
| 54,324 | |
Total Other Assets | |
| 331,913 | | |
| 342,845 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 35,063,540 | | |
$ | 33,290,242 | |
The accompanying notes are an integral part
of these financial statements.
Cross Border Resources, Inc.
Balance Sheets - Continued
| |
March 31, 2015 | |
December 31, 2014 |
| |
(Unaudited) | |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| |
|
| |
| |
|
Current Liabilities | |
| |
|
Accounts Payable - Trade | |
$ | 3,322,034 | | |
$ | 1,865,625 | |
Accounts Payable - Related Party | |
| 163,344 | | |
| — | |
Accrued Expenses & Other Payables | |
| 782,181 | | |
| 664,368 | |
Environmental Liability – Current Portion | |
| 2,057,175 | | |
| 2,057,175 | |
Line of Credit | |
| 8,200,000 | | |
| 8,200,000 | |
Liabilities Associated with Assets Held for Sale | |
| 1,624,787 | | |
| 1,594,711 | |
Deferred Tax Liability | |
| 19,600 | | |
| 19,600 | |
Total Current Liabilities | |
| 16,169,121 | | |
| 14,401,479 | |
| |
| | | |
| | |
Non-Current Liabilities | |
| | | |
| | |
Asset Retirement Obligations, Net of Current Portion | |
| 1,624,787 | | |
| 1,594,710 | |
Total Non-Current Liabilities | |
| 1,624,787 | | |
| 1,594,710 | |
Total Liabilities | |
| 17,793,908 | | |
| 15,996,189 | |
| |
| | | |
| | |
Commitments & Contingencies (Note 8) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ Equity | |
| | | |
| | |
Common Stock ($0.001 par value; 99,000,000 shares authorized and 17,336,226 issued and outstanding as of March 31, 2015 and as of December 31, 2014, respectively) | |
| 17,336 | | |
| 17,336 | |
Additional Paid in Capital | |
| 33,462,473 | | |
| 33,462,473 | |
Accumulated Deficit | |
| (16,210,177 | ) | |
| (16,185,756 | ) |
Total Stockholders’ Equity | |
| 17,269,632 | | |
| 17,294,053 | |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 35,063,540 | | |
$ | 33,290,242 | |
The accompanying notes are an integral part
of these financial statements.
Cross Border Resources, Inc.
Statements of
Operations
| |
Three Months Ended March 31, |
| |
2015 | |
2014 |
| |
(Unaudited) | |
(Unaudited) |
Revenues | |
| |
|
Oil and gas sales | |
$ | 1,453,419 | | |
$ | 3,496,782 | |
Expenses: | |
| | | |
| | |
Operating costs | |
| 749,266 | | |
| 473,192 | |
Natural gas marketing and transportation expenses | |
| 24,145 | | |
| 24,623 | |
Production taxes | |
| 133,109 | | |
| 263,811 | |
Depreciation, depletion, amortization, and Impairment | |
| 377,369 | | |
| 1,140,355 | |
Accretion expense | |
| 34,214 | | |
| 36,648 | |
General and administrative | |
| 55,783 | | |
| 209,960 | |
Total expense | |
| 1,373,886 | | |
| 2,148,589 | |
| |
| | | |
| | |
Income from operations | |
| 79,533 | | |
| 1,348,193 | |
| |
| | | |
| | |
Other income (expense): | |
| | | |
| | |
Gain (loss) on derivatives | |
| — | | |
| (50,653 | ) |
Interest expense | |
| (103,956 | ) | |
| (135,049 | ) |
Total other income (expense) | |
| (103,956 | ) | |
| (185,702 | ) |
| |
| | | |
| | |
Income before income taxes | |
| (24,423 | ) | |
| 1,162,491 | |
| |
| | | |
| | |
Current tax benefit | |
| — | | |
| — | |
Deferred tax expense | |
| — | | |
| — | |
Income tax expense | |
| — | | |
| — | |
Net income | |
$ | (24,423 | ) | |
$ | 1,162,491 | |
| |
| | | |
| | |
Net income per share: | |
| | | |
| | |
Basic | |
$ | 0.00 | | |
$ | 0.07 | |
Fully diluted | |
$ | 0.00 | | |
$ | 0.06 | |
Weighted average shares outstanding: | |
| | | |
| | |
Basic | |
| 17,336,226 | | |
| 17,336,226 | |
Fully diluted | |
| 21,023,726 | | |
| 21,023,726 | |
| |
| | | |
| | |
The accompanying notes are an integral part
of these financial statements.
Cross Border Resources, Inc.
Statements of Cash Flows
| |
Three Months Ended March 31, |
| |
2015 | |
2014 |
| |
(Unaudited) | |
(Unaudited) |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| |
|
Net income (loss) | |
$ | (24,423 | ) | |
$ | 1,162,491 | |
Adjustments to reconcile net income (loss) to cash used by operating activities: | |
| | | |
| | |
Depreciation, depletion, amortization, and impairment | |
| 377,369 | | |
| 1,135,696 | |
Settlement of environmental liability | |
| — | | |
| (10,667 | ) |
Accretion of asset retirement obligations | |
| 34,214 | | |
| 36,648 | |
Amortization of and deferred financing costs | |
| 10,933 | | |
| 10,933 | |
Change in derivative instruments | |
| — | | |
| 37,039 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (123,525 | ) | |
| 112,872 | |
Accounts receivable – related party | |
| 197,882 | | |
| (1,891,167 | ) |
Prepaid expenses and other current assets | |
| — | | |
| 1,724 | |
Accounts payable | |
| 1,875,191 | | |
| (848,946 | ) |
Accounts payable – related party | |
| 163,344 | | |
| — | |
Accrued expenses | |
| (300,969 | ) | |
| 19,693 | |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | |
| 2,210,016 | | |
| (233,685 | ) |
| |
| | | |
| | |
CASH FLOWS USED IN INVESTING ACTIVITIES | |
| | | |
| | |
Capital expenditures - oil and gas properties | |
| (1,851,584 | ) | |
| (465,255 | ) |
NET CASH USED IN INVESTING ACTIVITIES | |
| (1,851,584 | ) | |
| (465,255 | ) |
| |
| | | |
| | |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | |
| 358,432 | | |
| (698,940 | ) |
Cash and cash equivalents, beginning of period | |
| 356,950 | | |
| 726,239 | |
Cash and cash equivalents, end of period | |
$ | 715,382 | | |
$ | 27,299 | |
| |
| | | |
| | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Interest paid | |
$ | 93,023 | | |
$ | 124,116 | |
| |
| | | |
| | |
NON-CASH TRANSACTIONS | |
| | | |
| | |
Additions of ARO | |
$ | 25,939 | | |
$ | 36,648 | |
The accompanying notes are an integral part
of these financial statements.
Cross Border Resources, Inc.
Notes to Financial Statements
(Unaudited)
Nature of Operations
Cross Border Resources,
Inc. (the “Company”) is an independent natural gas and oil company engaged in the exploration, development, exploitation,
and acquisition of natural gas and oil reserves in North America. The Company’s area of focus is the State of New Mexico,
particularly southeastern New Mexico. The Company has two wholly-owned subsidiaries, which are inactive: Doral West Corporation
and Pure Energy Operating, Inc. and accordingly are not consolidated in these financial statements.
The interim financial statements
are condensed and should be read in conjunction with the company’s latest annual financial statements and interim disclosures
generally do not repeat those in the annual statements.
At March 31, 2015, the
Company had working capital of $2,701,357 (including Assets Held for Sale of $16,543,264) and outstanding debt of $8,200,000 (consisting
of a line of credit). The Company would have a working capital deficit of $12,214,120 (excluding Assets Held for Sale, Net of ARO
Liabilities associated with the Assets Held for Sale). The Company was not in compliance with the covenants of its line of credit
with Independent Bank and had no availability under this line of credit. The Company currently does not have sufficient funds to
repay these obligations. The Company is exploring available financing options, including the sale of debt, equity, or assets. If
the Company is unable to finance its operations on acceptable terms or at all, its business, financial condition and results of
operations may be materially and adversely affected. As a result of these conditions, there is substantial doubt regarding the
Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities
that may result from the possible inability of the Company to continue as a going concern.
3. |
Summary
of Significant Accounting Policies |
In the opinion of management,
the accompanying unaudited financial statements include all adjustments, consisting of only normal recurring accruals, necessary
for a fair statement of financial position, results of operations, and cash flows. The information included in this Quarterly Report
on Form 10-Q should be read in conjunction with the financial statements and the accompanying notes included in our Annual Report
on Form 10-K for the year ended December 31, 2014 filed with the SEC on May 19, 2015. The accounting policies are described in the
“Notes to Financial Statements” in the 2014 Annual Report on Form 10-K and updated, as necessary, in this Form 10-Q.
The year-end balance sheet data presented for comparative purposes was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in the United States (U.S. GAAP). The results of operations
for the three months ended March 31, 2015 are not necessarily indicative of the operating results for the full year or for any
other subsequent interim period.
Cash and cash equivalents
The Company considers all
highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. At times, the
amount of cash and cash equivalents on deposit in financial institutions exceeds federally insured limits. The Company monitors
the soundness of the financial institutions and believes the Company’s risk is negligible.
Financial instruments
The carrying amounts of
financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and long-term
debt, approximate fair value as of March 31, 2015 and December 31, 2014.
Oil and natural gas properties
The Company follows the
successful efforts method of accounting for its oil and natural gas producing activities. Costs to acquire mineral interests in
oil and natural gas properties and to drill and equip development wells and related asset retirement costs are capitalized. Costs
to drill exploratory wells are capitalized pending determination of whether the wells have proved reserves. If the Company determines
that the wells do not have proved reserves, the costs are charged to expense. There were no exploratory wells capitalized pending
determination of whether the wells have proved reserves at March 31, 2015 or December 31, 2014. Geological and geophysical costs,
including seismic studies and costs of carrying and retaining unproved properties, are charged to expense as incurred. The Company
capitalizes interest on expenditures for significant exploration and development projects that last more than six months while
activities are in progress to bring the assets to their intended use. Through March 31, 2015, the Company had capitalized no interest
costs because its exploration and development projects generally lasted less than six months. Costs incurred to maintain wells
and related equipment are charged to expense as incurred.
On the sale or retirement
of a complete unit of a proved property, the cost and related accumulated depreciation, depletion and amortization are eliminated
from the property accounts, and the resulting gain or loss is recognized. On the retirement or sale of a partial unit of proved
property, the cost is charged to accumulated depreciation, depletion and amortization, with a resulting gain or loss recognized
in income.
Capitalized amounts attributable
to proved oil and natural gas properties are depleted by the unit-of-production method over proved reserves using the unit conversion
ratio of six Mcf of gas to one barrel of oil equivalent (“Boe”). The ratio of six Mcf of natural gas to one Boe is
based upon energy equivalency, rather than price equivalency. Given current price differentials, the price for a Boe for natural
gas differs significantly from the price for a barrel of oil.
It is common for operators
of oil and natural gas properties to request that joint interest owners pay for large expenditures, typically for drilling new
wells, in advance of the work commencing. This right to call for cash advances is typically found in the operating agreement
that joint interest owners in a property adopt. The Company records these advance payments in prepaid and other current assets
and release this account when the actual expenditure is later billed to it by the operator.
On the sale of an entire
interest in an unproved property for cash or cash equivalents, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an unproved property
is sold, the amount received is treated as a reduction of the cost of the interest retained.
Impairment of long-lived assets
The Company evaluates its
long-lived assets for potential impairment in their carrying values whenever events or changes in circumstances indicate such impairment
may have occurred. Oil and natural gas properties are evaluated for potential impairment by field. Other properties are evaluated
for impairment on a specific asset basis or in groups of similar assets, as applicable. An impairment on proved properties is recognized
when the estimated undiscounted future net cash flows of an asset are less than its carrying value. If an impairment occurs, the
carrying value of the impaired asset is reduced to its estimated fair value, which is generally estimated using a discounted cash
flow approach. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added
to the capitalized costs to be amortized.
Unproved oil and
natural gas properties do not have producing properties. As reserves are proved through the successful completion of
exploratory wells, the cost is transferred to proved properties. The cost of the remaining unproved basis is periodically
evaluated by management to assess whether the value of a property has diminished. To do this assessment, management considers
estimated potential reserves and future net revenues from an independent expert, the Company’s history in exploring the
area, the Company’s future drilling plans per its capital drilling program prepared by the Company’s reservoir
engineers and operations management and other factors associated with the area. Impairment is taken on the unproved property
cost if it is determined that the costs are not likely to be recoverable. The valuation is subjective and requires management
to make estimates and assumptions which, with the passage of time, may prove to be materially different from actual results.
There was no impairment expense recorded for the three months ended March 31, 2015.
Revenue and accounts receivable
The Company recognizes
revenue for its production when the quantities are delivered to, or collected by, the purchaser. Prices for such production are
generally defined in sales contracts and are readily determinable based on certain publicly available indices. All transportation
costs are included in lease operating expense.
Accounts receivable—oil
and natural gas sales consist of uncollateralized accrued revenues due under normal trade terms, generally requiring payment within
30 to 60 days of production. Accounts receivable—other consist of amounts owed from interest owners of the Company’s
operated wells. No interest is charged on past-due balances. Payments made on all accounts receivable are applied to the earliest
unpaid items. The Company reviews accounts receivable periodically and reduces the carrying amount by a valuation allowance that
reflects its best estimate of the amount that may not be collectible. There was no reserve for bad debts as of March 31, 2015 or
December 31, 2014.
Other property
Furniture, fixtures and
equipment are carried at cost. Depreciation of furniture, fixtures and equipment is provided using the straight-line method over
estimated useful lives ranging from three to ten years. Gain or loss on retirement or sale or other disposition of assets is included
in income in the period of disposition.
Income taxes
The Company is subject
to U.S. federal income taxes along with state income taxes in New Mexico. When tax returns are filed, it is highly certain that
some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about
the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position
is recognized in the financial statements in the period during which, based on all available evidence, management believes it is
more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes,
if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement
with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured
as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated
interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with
unrecognized tax benefits are classified as additional income taxes in the Company’s Statements of Operations. The Company
accrues interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.
Deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using the tax rate in effect for the year in which those temporary differences are expected to be recovered or settled. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in income in the year of the enacted tax rate change.
In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely
than not that some portion of the deferred tax asset will not be realized.
Asset retirement obligations
Asset retirement obligations
(“AROs”) associated with the retirement of tangible long-lived assets are recognized as liabilities with an increase
to the carrying amounts of the related long-lived assets in the period incurred. The cost of the tangible asset, including the
asset retirement cost, is depreciated over the useful life of the asset. AROs are recorded at estimated fair value, measured by
reference to the expected future cash outflows required to satisfy the retirement obligations discounted at the Company’s
credit-adjusted risk-free interest rate. Accretion expense is recognized over time as the discounted liabilities are accreted to
their expected settlement value. If estimated future costs of AROs change, an adjustment is recorded to both the ARO and the long-lived
asset. Revisions to estimated AROs can result from changes in retirement cost estimates, revisions to estimated inflation rates
and changes in the estimated timing of abandonment.
Earnings per common share
The Company reports basic
earnings per common share, which excludes the effect of potentially dilutive securities, and diluted earnings per common share,
which includes the effect of all potentially dilutive securities, unless their impact is anti-dilutive.
Recently issued accounting pronouncements
In April 2014, the FASB
issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Components
of an Entity(“ASU 2014-08”). ASU 2014-08 revises the definition of discontinued operations by limiting discontinued
operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major
effect on an entity’s operations and financial results, removing the lack of continuing involvement criteria and requiring
discontinued operations reporting for the disposal of an equity method investment that meets the definition of discontinued operations.
The update also requires expanded disclosures for discontinued operations, including disclosure of pretax profit or loss of an
individually significant component of an entity that does not qualify for discontinued operations reporting. The update is effective
prospectively to all periods beginning after December 15, 2014. Currently, the Company does not expect the adoption of ASU
2014-08 to have a material impact on our financial statements or results of operations.
Effective January 1, 2016,
the Company will be required to adopt the amended guidance of Accounting Standards Codification (ASC) Topic 718, Compensation -
Stock Compensation, which seeks to resolve the diversity in practice that exists when accounting for share-based payments. The
amended guidance requires a performance target that affects vesting and that could be achieved after the requisite service period
to be treated as a performance condition. The Company will be required to adopt the amended guidance either prospectively to all
awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding
as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter.
The Company does not expect the adoption of this amended guidance to impact financial results.
Effective January 1, 2016,
the Company will be required to adopt the amended guidance of ASC Topic 810, Consolidation (Topic 810), which seeks to improve
targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and
securitization structures. The amended guidance changes the analysis that a reporting entity must perform to determine whether
it should consolidate certain types of legal entities. The changes include, among others, modification of the evaluation whether
limited partnerships and similar legal entities are variable interest entities or voting interest entities and elimination of the
presumption that a general partner should consolidate a limited partnership. The Company will be required to adopt Topic 810 either
on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative
effect of initially applying the new guidance recognized at the date of initial application. The Company has not yet completed
its assessment of the impact of the amended guidance on its financial statements but does not expect the adoption of this amended
guidance to have a significant impact on financial results.
Effective January 1, 2017,
the Company will be required to adopt the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which
will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires the Company to 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. The new guidance requires the Company to apply the following
steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction
price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as,
the Company satisfies a performance obligation. The Company will be required to adopt Topic 606 either on a full retrospective
basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying
the new guidance recognized at the date of initial application. If the Company elects the modified retrospective approach, it will
be required to provide additional disclosures of the amount by which each financial statement line item is affected in the current
reporting period, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant
changes. The Company has not yet completed its assessment of the impact of the new guidance on its financial statements.
In August 2014, the FASB
issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU
2014-15”), an amendment to FASB Accounting Standards Codification (“ASC”) Topic 205, Presentation of Financial
Statements. This update provides guidance on management’s responsibility in evaluating whether there is substantial doubt
about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This ASU 2014-15 is
effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption
is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on our financial statements or
results of operations.
The Company has reviewed
other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on our results of
operations, financial position and cash flows. Based on that review, we believe that none of these recent pronouncements will have
a significant effect on our current or future earnings or operations.
4. |
Asset retirement obligations |
The following is a description
of the changes to the Company’s asset retirement obligations for the periods ended March 31, 2015 and December 31, 2014:
| |
| |
|
| |
March 31,
2015 | |
December 31, 2014 |
| |
| |
|
Asset retirement obligations at beginning of year | |
$ | 3,189,421 | | |
$ | 3,515,898 | |
Loss on settlement | |
| — | | |
| (1,096 | ) |
Settlement of liabilities | |
| — | | |
| (3,314 | ) |
Revision of previous estimates | |
| (— | ) | |
| (554,287 | ) |
Accretion expense | |
| 34,214 | | |
| 185,773 | |
Additions | |
| 25,939 | | |
| 46,447 | |
Asset retirement obligations at end of period | |
$ | 3,249,574 | | |
$ | 3,189,421 | |
Less:ARO classified as liabilities associated with assets held for sale | |
| 1,624,787 | | |
| 1,594,711 | |
Long-term portion | |
$ | 1,624,787 | | |
$ | 1,594,710 | |
5. |
Property
and equipment |
Oil and natural gas properties
The following table sets
forth the capitalized costs under the successful efforts method for oil and natural gas properties:
| |
| |
|
| |
March 31,
2015 | |
December 31, 2014 |
| |
| |
|
Oil and natural gas properties | |
$ | 28,194,837 | | |
$ | 27,243,106 | |
Less accumulated depletion and impairment | |
| (12,333,688 | ) | |
| (11,956,319 | ) |
Net oil and natural gas properties capitalized costs | |
$ | 15,861,149 | | |
$ | 15,286,787 | |
Capitalized costs related
to proved oil and natural gas properties, including wells and related equipment and facilities, are evaluated for impairment based
on the Company’s analysis of undiscounted future net cash flows. If undiscounted future net cash flows are insufficient to
recover the net capitalized costs related to proved properties, then the Company recognizes an impairment charge in income equal
to the difference between carrying value and the estimated fair value of the properties. Estimated fair values are determined using
discounted cash flow models. The discounted cash flow models include management’s estimates of future oil and natural gas
production, operating and development costs, and discount rates.
Uncertainties affect the
recoverability of these costs as the recovery of the costs outlined above are dependent upon the Company obtaining and maintaining
leases and achieving commercial production or sale.
During the year ended
December 31, 2014, the Company recorded a $6.5 million impairment charge against its oil and gas assets. Additionally, the
Company reclassified half of its oil and gas assets to assets held for sale. No impairment was recorded during the three
months ended March 31, 2015 and March 31, 2014.
Other property and equipment
The historical cost of
other property and equipment, presented on a gross basis with accumulated depreciation is summarized as follows:
| |
| |
|
| |
March 31, 2015 | |
December 31, 2014 |
| |
| |
|
Other property and equipment | |
$ | 136,535 | | |
$ | 136,535 | |
Less accumulated depreciation | |
| (110,277 | ) | |
| (110,277 | ) |
Net property and equipment | |
$ | 26,258 | | |
$ | 26,258 | |
6. |
Stockholders’
equity and earnings per share |
2011 Equity Financing
On May 26, 2011, the Company
closed a private offering exempt from registration under the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated
thereunder. In the offering, the Company issued an aggregate of 3,600,000 units. Each unit was sold at $1.50 and was comprised
of one share of common stock and one five-year warrant to purchase a share of common stock at an exercise price of $2.25 per share.
The warrants became exercisable on November 26, 2011. The Company agreed to use the net proceeds from the sale of the units for
general business and working capital purposes and not to use such proceeds for the redemption of any common stock or common stock
equivalents.
The investors in the offering
(“Selling Stockholders”) received registration rights. The Company agreed to file a registration statement covering
the resale of the common stock issued and the common stock underlying the warrants issued to the Selling Stockholders within sixty
days after the closing date. If the registration statement was not declared effective by the SEC within the time periods defined
within the agreement, then the Company would have made pro rata cash payments to each Selling Stockholder as liquidated
damages in an amount equal to 1.0% of the aggregate amount invested by such Selling Stockholder for each 30-day period or
pro rata for any portion thereof following the date by which such Registration Statement should have been effective. If at the
time of exercise of the warrants there is no effective registration statement covering the resale of the shares underlying the
warrant, then the Selling Stockholders have the right at such time to exercise warrants in full or in part on a cashless basis.
The Company filed an S-1 registration statement registering the shares on July 25, 2011, which was declared effective on August
5, 2011. In April 2015, the foregoing registration statement was terminated by the Company.
In addition to registration
rights, the Selling Stockholders were offered a right of first refusal to participate in future offerings of common stock if the
principal purpose of which was to raise capital. This right of first refusal terminated upon the one-year anniversary of the
closing date.
Warrants
In connection with the
equity offering closed on May 26, 2011, the Company issued warrants to purchase an aggregate of 3,600,000 shares of the Company’s
common stock at a per share price of $2.25 (the “$2.25 Warrants”). The Company also has outstanding warrants to purchase
3,125 shares of the Company’s common stock at a per share price of $5.00. The $2.25 Warrants became exercisable in November
2011 and expire in May 2016. On the date of issuance, the warrants were valued at $898,384. Management determined the
fair value of the warrants based upon the Black-Scholes option model with a volatility based on the historical closing price of
common stock of industry peers and the closing price of the Company’s common stock on the OTCBB on the date of issuance.
The volatility and remaining term was 50% and 2.92 years, respectively. The Company does not expect the immediate exercise of these
warrants as the exercise price exceeds the average closing market price for the Company’s common stock. Furthermore, no assurances
can be made that any of the warrants will ever be exercised for cash or at all.
Stock Options
In 2011, the Company issued
options to purchase 87,500 shares of its common stock at $4.80 to its directors. For the three months ended March 31, 2015, there
was no stock based compensation.
Stock option activity summary
is presented in the table below:
| |
Number of Shares | |
Weighted-average Exercise Price | |
Weighted-average Remaining Contractual Term (years) |
Outstanding and exercisable December 31, 2013 | |
| 87,500 | | |
$ | 4.80 | | |
| 3.08 | |
Granted | |
| — | | |
| — | | |
| — | |
Cancelled | |
| — | | |
| — | | |
| — | |
Exercised | |
| — | | |
| — | | |
| — | |
Forfeited | |
| — | | |
| — | | |
| — | |
Expired | |
| — | | |
| — | | |
| — | |
Outstanding and exercisable at December 31, 2014 | |
| 87,500 | | |
| 4.80 | | |
| 2.08 | |
Granted | |
| — | | |
| — | | |
| — | |
Cancelled | |
| — | | |
| — | | |
| — | |
Exercised | |
| — | | |
| — | | |
| — | |
Forfeited | |
| — | | |
| — | | |
| — | |
Expired | |
| — | | |
| — | | |
| — | |
Outstanding and exercisable at March 31, 2015 | |
| 87,500 | | |
$ | 4.80 | | |
| 1.83 | |
There is no intrinsic value
in the outstanding options since the option price is in excess of the market price of the Company’s common stock.
The fair value of the options
granted during 2011 was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Closing market price of stock on grant date | |
$ | 3.11 | |
Risk-free interest rate | |
| 2.43 | % |
Dividend yield | |
| 0.00 | % |
Volatility factor | |
| 50 | % |
Expected life | |
| 2.5 years | |
The Company elected to
use the “simplified” method to calculate the estimated life of options granted to employees. The use of the “simplified”
method has been extended until such time when the Company has sufficient information to make more refined estimates on the estimated
life of its options. The expected stock price volatility was calculated by averaging the historical volatility of the Company’s
common stock over a term equal to the expected life of the options.
7. |
Related party transactions |
The Company and Red Mountain
Resources, Inc. are party to a Technical Services Agreement under which RMR incurs costs on behalf of the Company, primarily related
to wells in the Company’s Tom Tom and Tomahawk fields. During the three months ended March 31, 2015, RMR incurred $223,344
on behalf of the Company, while the Company advanced RMR $50,000. During the year ended December 31, 2014, RMR incurred approximately
$1,880,000 on behalf of the Company. During the period ended December 31, 2014, the Company advanced RMR $5,880,000 to use for
its general and administrative and operating costs. Effective June 30, 2014 and December 31, 2014 RMR assumed $3,000,000 and $1,000,000,
respectively, of the Company’s obligation under the Credit Facility.
Operating Line of Credit
On February 5,
2013, the Company entered into a Senior First Lien Secured Credit Agreement with RMR, Black Rock Capital, Inc. (“Black
Rock”) and RMR Operating, LLC, (“RMR Operating”) as borrowers (the “Borrowers”) and
Independent Bank, as Lender, providing for an up to $100,000,000 credit facility (the “Credit Facility”). RMR
owns approximately 83% of the outstanding common stock of the Company, and Black Rock and RMR Operating are wholly
owned subsidiaries of RMR. On February 5, 2013, the Company drew $8,900,000 on the line of credit and used those funds to pay
off its prior line of credit and associated accrued interest. On February 29, 2013, the Company drew $2,000,000 and on May
24, 2013, the Company drew a further $1,300,000 on the line of credit and used those funds to pay accounts payable related to
the drilling program. Effective June 30, 2014, RMR assumed the Company’s obligations with respect to $3,000,000 of
the Company’s outstanding borrowings under the Credit Facility in exchange for the satisfaction and discharge of
a $2,900,000 intercompany payable from RMR to the Company. Effective December 31, 2014, RMR assumed the
Company’s obligation with respect to $1,000,000 of the Company’s outstanding borrowings under the Credit Facility
in exchange for the satisfaction and discharge of a $1,000,000 intercompany payable from RMR to the Company.
The borrowing base under
the Credit Facility is determined at the discretion of the Lender based on, among other things, the Lender’s estimated value
of the proved reserves attributable to the Borrowers’ oil and natural gas properties that have been mortgaged to the Lender,
and is subject to regular redeterminations on September 30 and March 31 of each year, and interim redeterminations described in
the Credit Agreement and potentially monthly commitment reductions, in each case which may reduce the amount of the borrowing base.
As of March 31, 2015
and December 31, 2014, the Company’s outstanding borrowings under the line of credit were $8,200,000 and the Company
was not in compliance with all debt covenants. The Company received waivers from the lenders for covenants that were not in
compliance.
On March 11, 2015, the Company entered into
an amendment and waiver (the “Third Amendment”) to the Senior First Lien Secured Credit Agreement, dated February 5,
2013, as amended (the “Credit Agreement”), with RMR, Black Rock and RMR Operating (together with the Company, the “Borrowers”)
and Independent Bank (“Lender”). Pursuant to the Third Amendment, (i) the Lender waived any default or right to exercise
any remedy as a result of the failure by the Borrowers to be in compliance with the requirements of Section 6.18 of the Credit
Agreement with respect to the permitted ratio of consolidated current assets to consolidated current liabilities of Borrowers for
the fiscal quarter ended September 30, 2014; and (ii) the borrowing base was decreased from $30 million to $27.8 million, effective
as of March 1, 2015, and the commitment amount was decreased to $27.8 million, subject to monthly commitment reductions of $350,000
beginning March 1, 2015.
On April 21, 2015, the
Company entered into an amendment (the “Fourth Amendment”) to the Credit Agreement, with the other Borrowers and the
Lender. Pursuant to the Fourth Amendment, the borrowing base was decreased from $27.8 million to $12.4 million, effective as of
April 21, 2015, and the commitment amount was decreased to $12.4 million. In addition, the monthly commitment reduction amount
was set to $0 as of April 1, 2015.
On June 30, 2015, the Company entered into an amendment and waiver (the "Fifth Amendment") to the Credit Agreement, with the
other Borrowers and the Lender. Pursuant to the Fifth Amendment, (i) the Lender waived any default or right to exercise any
remedy as a result of the failure by the Borrowers to be in compliance with the requirements of Section 6.18 of the Credit
Agreement with respect to the permitted ratio of consolidated current assets to consolidated current liabilities of Borrowers
for the fiscal quarter ended December 31, 2014 and the requirements of Section 6.21 of the Credit Agreement with respect to
the trade payables or other accounts payable of Borrowers that may be past due for more than 90 days for the fiscal quarter
ended December 31, 2014 and the fiscal quarter ended March 31, 2015; and (ii) the borrowing base was affirmed at $12.4 million,
effective as of June 30, 2015, and the commitment amount was affirmed at $12.4 million, subject to monthly commitment reductions
of $125,000 beginning July 1, 2015.
As of August 13,
2015, total borrowings under the line of credit were $12,150,000 of which $0 is allocated to the Company.
9. |
Commitments and contingencies |
Litigation
The Company, the Company’s former Chief
Executive Officer, and the Company’s former Chief Operating Officer are party to a lawsuit with a former employee. On May
4, 2011, Clifton M. (Marty) Bloodworth initially filed a lawsuit in the State District Court of Midland County, Texas, against
Doral West Corp. d/b/a Doral Energy Corp. (the predecessor entity of Cross Border) (“Doral Energy”) and Everett Willard
Gray II, the Company’s former Chief Executive Officer. Mr. Bloodworth later amended his lawsuit to name Horace Patrick Seale,
the Company’s former Chief Operating Officer, as an additional defendant. Mr. Bloodworth generally alleges that Mr. Gray
and Mr. Seale, as agents of the Company, made false representations which induced Mr. Bloodworth to enter into an employment contract
that was subsequently breached by the Company. The claims that Mr. Bloodworth has alleged are: breach of his employment agreement
with Doral Energy, fraud in the inducement and common law fraud, civil conspiracy, breach of fiduciary duty, and violation of the
Texas Deceptive Trade Practices Act. Mr. Bloodworth is seeking damages of approximately $280,000. Mr. Gray, Mr. Seale and the Company
deny that Mr. Bloodworth’s claims have any merit. The Company has not made any accruals related to this lawsuit.
The Company was previously party to an engagement
letter, dated February 7, 2012 (the “Engagement Letter”) with KeyBanc Capital Markets Inc. (“KeyBanc”)
pursuant to which KeyBanc was to act as exclusive financial advisor to the Company’s board of directors in connection with
a possible “Transaction” (as defined in the Engagement Letter). The Engagement Letter was formally terminated by the
Company on August 21, 2012. The Engagement Letter provided that KeyBanc would be entitled to a fee upon consummation of a Transaction
within a certain period of time following termination of the Engagement Letter. On May 16, 2013, KeyBanc delivered an invoice to
the Company representing a fee and out-of-pocket expenses purportedly owed by the Company to KeyBanc as a result of the consummation
of a purported Transaction that KeyBanc asserts had been consummated within the required time period. The Company disputed that
any Transaction was consummated and that KeyBanc was entitled to any fees or out-of-pocket expenses. The Company filed a complaint
seeking (i) a declaration that it was not liable to KeyBanc for any amounts in connection with the Engagement Letter, (ii) attorneys’
fees, and (iii) costs of suit. KeyBanc filed a counterclaim seeking (i) compensatory damages, (ii) interest, (iii) expenses and
court costs, and (iv) reasonable and necessary attorneys’ fees. The matter was originally filed in the 44th Judicial District
Court for the State of Texas, Dallas County but was subsequently removed to the United States District Court for the Northern District
of Texas, Dallas Division. On August 26, 2014, the Company entered into a settlement agreement with KeyBanc, settling a lawsuit
between the parties. In connection with the settlement, the Company agreed to pay KeyBanc $900,000 in three equal installments
of $300,000 each on or before August 28, 2014, October 31, 2014 and December 31, 2014, and the parties agreed to mutual releases
of liability related to the Engagement Letter. This balance was paid in full at December 31, 2014.
In addition to the foregoing, in the ordinary
course of business, the Company is periodically a party to various litigation matters that it does not believe will have a material
adverse effect on its results of operations or financial condition.
Environmental Contingencies
The Company is subject to federal and state
laws and regulations relating to the protection of the environment. Environmental risk is inherent in all oil and natural gas operations,
and the Company could be subject to environmental cleanup and enforcement actions. The Company manages this environmental risk
through appropriate environmental policies and practices to minimize the impact to the Company.
As of December 31, 2014 and March 31, 2015,
the Company had approximately $2.1 million in environmental remediation liabilities related to the Company’s operated Tom
Tom and Tomahawk fields located in Chaves and Roosevelt counties in New Mexico. In February 2013, the Bureau of Land Management
(“BLM”) accepted the Company’s remediation plan for the Tom Tom and Tomahawk fields. The Company is working in
conjunction with the BLM to initiate remediation on a site-by-site basis. This is management’s best estimate of the costs
of remediation and restoration with respect to these environmental matters, although the ultimate cost could differ materially.
Inherent uncertainties exist in these estimates due to unknown conditions, changing governmental regulation, and legal standards
regarding liability, and emerging remediation technologies for handling site remediation and restoration. Pursuant to the
PSA dated April 21, 2015 between the Companies and the Buyer, the Companies retained certain obligations and covenanted to bear
and pay all costs attributable to the Tom Tom and Tomahawk fields as further defined in the PSA. The Company expects to incur the
remaining costs during the next fiscal year.
10. |
Fair Value Measurements |
Fair
value measurements are based upon inputs that market participants use in pricing an asset or liability, which are classified into
two categories: observable inputs and unobservable inputs. Observable inputs represent market data obtained from independent sources,
whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably
available without undue cost and effort. These two types of inputs are further prioritized into the following fair value input
hierarchy:
|
Level 1 – |
quoted prices for identical assets or liabilities in active markets. |
|
|
|
|
Level 2 – |
quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means. |
|
|
|
|
Level 3 – |
unobservable inputs for the asset or liability. |
The fair value input hierarchy
level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant
to the measurement in its entirety.
The following tables summarize
the valuation of the Company’s financial assets and liabilities at March 31, 2015 and December 31, 2014:
| |
Fair Value Measurements at Reporting Date Using |
| |
Quoted
Prices in Active Markets for Identical Assets or Liabilities (Level 1) | |
Significant
or Other Observable Inputs (Level
2) | |
Significant Unobservable
Inputs (Level 3) | |
Fair Value at March 31, 2015 |
| |
| |
| |
| |
|
Liabilities | |
| |
| |
| |
|
Environmental liability | |
$ | — | | |
$ | — | | |
$ | (2,057,175 | ) | |
$ | (2,057,175 | ) |
Liabilities associated with assets held for sale | |
$ | — | | |
$ | — | | |
$ | (1,624,787 | ) | |
$ | (1,624,787 | ) |
Asset retirement obligations (non-recurring) | |
$ | — | | |
$ | — | | |
$ | (1,624,787 | ) | |
$ | (1,624,787 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | — | | |
$ | — | | |
$ | (5,306,749 | ) | |
$ | (5,306,749 | ) |
| |
Fair Value Measurements at Reporting Date Using |
| |
Quoted
Prices in Active Markets for Identical Assets or Liabilities (Level 1) | |
Significant
or Other Observable Inputs (Level
2) | |
Significant Unobservable
Inputs (Level 3) | |
Fair
Value at December 31, 2014 |
| |
| |
| |
| |
|
Liabilities | |
| |
| |
| |
|
Environmental liability | |
$ | — | | |
$ | — | | |
$ | (2,057,175 | ) | |
$ | (2,057,175 | ) |
Liabilities associated with assets held for sale | |
$ | — | | |
$ | — | | |
$ | (1,594,711 | ) | |
$ | (1,594,711 | ) |
Asset retirement obligations (non-recurring) | |
$ | — | | |
$ | — | | |
$ | (1,594,710 | ) | |
$ | (1,594,710 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | — | | |
$ | — | | |
$ | (5,246,596 | ) | |
$ | (5,246,596 | ) |
11. |
Assets and Liabilities Associated with
Assets Held for Sale |
On April 21, 2015, the
Company entered into a purchase and sale agreement (the “PSA”) with RMR Operating,
Black Rock, RMR KS Holdings, LLC (“RMR KS”) and Black Shale Minerals, LLC
(“Buyer”). Each of the Company, RMR Operating, Black Rock and RMR KS is an operating subsidiary (together, the “Operating
Subsidiaries”) of Red Mountain Resources, Inc. (“RMR,” and together with the Operating Subsidiaries, the “Companies”).
Pursuant to the PSA the
Operating Subsidiaries sold, assigned, transferred and conveyed to Buyer, effective as of April 1, 2015, fifty percent (50%) of
their right, title, and interest in and to certain oil and natural gas assets and properties (the “Assets”), including
their oil and natural gas leasehold interests, wells, contracts, and oil and natural gas produced after April 1, 2015 (the “Sale”).
The aggregate purchase price for the Assets under the PSA was $25.0 million, subject to certain adjustments, including post-closing
adjustments for any title or environmental benefits or title or environmental defects resulting from Buyer’s title and environmental
reviews.
As of December 31,
2014 and March 31, 2015, the carrying values of the Company’s ownership in half of its interest in its oil and gas
properties, mineral interests, and leaseholds were included in assets and liabilities held for sale in the accompanying
balance sheet and were comprised of the following:
| |
| |
|
| |
March 31, 2015 | |
December 31, 2014 |
| |
| |
|
Composition of assets included in assets held for sale: | |
| |
|
Oil and Gas Properties, Net | |
$ | 16,543,264 | | |
$ | 15,617,472 | |
Composition of liabilities included in liabilities associated with assets held for sale: | |
| | | |
| | |
Asset Retirement Obligations | |
$ | 1,624,787 | | |
$ | 1,594,711 | |
Non-current assets and
liabilities held for sale are presented in current assets and current liabilities, respectively, within the balance sheet. Assets
held for sale are not depreciated, depleted or amortized and they are measured at the lower of the fair value less costs to sell
and their carrying amount. Comparative period balance sheets are not restated.
Purchase and Sale Agreement
On April 21, 2015, the Company entered into
a purchase and sale agreement (the “PSA”) with RMR Operating, Black Rock, RMR KS and Buyer.
Each of the Company, RMR Operating, Black Rock and RMR KS is an operating subsidiary (together, the “Operating Subsidiaries”)
of RMR (RMR together with the Operating Subsidiaries, the “Companies”).
Pursuant to the PSA the Operating Subsidiaries
sold, assigned, transferred and conveyed to Buyer, effective as of April 1, 2015, fifty percent (50%) of their right, title, and
interest in and to certain oil and natural gas assets and properties (the “Assets”), including their oil and natural
gas leasehold interests, wells, contracts, and oil and natural gas produced after April 1, 2015 (the “Sale”). The aggregate
purchase price for the Assets under the PSA was $25.0 million, subject to certain adjustments, including post-closing adjustments
for any title or environmental benefits or title or environmental defects resulting from Buyer’s title and environmental
reviews.
The PSA contains customary representations,
warranties and covenants. Pursuant to the PSA, the Operating Subsidiaries and Buyer have agreed to indemnify each other, their
respective affiliates and their respective employees, officers, directors, managers, shareholders, members, partners, or representatives
from and against all losses that such indemnified parties incur arising from any breach of representations, warranties or covenants
in the PSA and certain other matters.
The Companies intend to use the cash
consideration from the Sale to repay a portion of the outstanding balance on the Credit Agreement (as defined below), pay accounts
receivable and for working capital.
Third Amendment and Waiver to the Credit Agreement
On March 11, 2015, the Company entered into
an amendment and waiver (the “Third Amendment”) to the Senior First Lien Secured Credit Agreement, dated February 5,
2013, as amended (the “Credit Agreement”), with RMR, Black Rock and RMR Operating (together with the Company, the “Borrowers”)
and Independent Bank (“Lender”). Pursuant to the Third Amendment, (i) the Lender waived any default or right to exercise
any remedy as a result of the failure by the Borrowers to be in compliance with the requirements of Section 6.18 of the Credit
Agreement with respect to the permitted ratio of consolidated current assets to consolidated current liabilities of Borrowers for
the fiscal quarter ended September 30, 2014; and (ii) the borrowing base was decreased from $30 million to $27.8 million, effective
as of March 1, 2015, and the commitment amount was decreased to $27.8 million, subject to monthly commitment reductions of $350,000
beginning March 1, 2015.
Fourth Amendment to the Credit Agreement
In conjunction with the PSA, on April 21, 2015,
the Company entered into an amendment (the “Fourth Amendment”) to the Credit Agreement, with the other Borrowers and
the Lender. Pursuant to the Fourth Amendment, the borrowing base was decreased from $27.8 million to $12.4 million, effective as
of April 21, 2015, and the commitment amount was decreased to $12.4 million. In addition, the monthly commitment reduction amount
was set to $0 as of April 1, 2015.
Fifth Amendment to the Credit Agreement
On June 30, 2015, the
Company entered into an amendment and waiver (the "Fifth Amendment") to the Credit Agreement, with the other Borrowers and the
Lender. Pursuant to the Fifth Amendment, (i) the Lender waived any default or right to exercise any remedy as a result of the
failure by the Borrowers to be in compliance with the requirements of Section 6.18 of the Credit Agreement with respect to the
permitted ratio of consolidated current assets to consolidated current liabilities of Borrowers for the fiscal quarter ended December
31, 2014 and the requirements of Section 6.21 of the Credit Agreement with respect to the trade payables or other accounts payable
of Borrowers that may be past due for more than 90 days for the fiscal quarter ended December 31, 2014 and the fiscal quarter
ended March 31, 2015; and (ii) the borrowing base was affirmed at $12.4 million, effective as of June 30, 2015, and the commitment
amount was affirmed at $12.4 million, subject to monthly commitment reductions of $125,000 beginning July 1, 2015.
The Company has evaluated its subsequent events
through the date of the financial statements that were available for filing with the SEC.
Item 2. |
Management’s Discussion
and Analysis of Financial Condition and Results of Operations |
Our Company
We are an oil and gas exploration
and development company. We currently own over 865,893 gross (approximately 146,922 net) mineral and lease acres in New Mexico.
Approximately 12,825 of these net acres exist within the Permian Basin. A significant majority of our acreage consists of either
owned mineral rights or leases held by production. The majority of our acreage interests consists of non-operated working interests
except for certain core San Andres properties which we operate.
Current development of
our acreage is focused on our prospective Bone Spring acreage located in the heart of the 1st and 2nd Bone Spring play. This play
encompasses approximately 4,390 square miles across both New Mexico and Texas. We currently own varying, non-operated working interests
in both Eddy and Lea Counties, New Mexico, along with our working interest partners that include Cimarex, Apache, Oxy Permian,
Occidental, Oxy USA and, Mewbourne; all having significant footprints within this play, and are adding to those footprints through
lease and corporate acquisitions.
History
We were originally formed
on October 25, 2005 under the name “Language Enterprises Corp.” We subsequently changed our name to Doral Energy Corp.
On July 29, 2008, we acquired a working interest in 66 producing oil fields and approximately 186 wells (the “Eddy County
Properties”) in and around Eddy County, New Mexico. As a result of our acquisition of the Eddy County Properties, we changed
our business focus to the acquisition, exploration, operation and development of oil and gas projects, and we ceased being a “shell
company.” On August 4, 2008, we filed our Form 8-K that included the information that would be required if we were filing
a general form for registration of securities on Form 10 as a smaller reporting company.
Effective January 3, 2011,
we completed the acquisition of Pure Energy Group, Inc. as contemplated pursuant to the Pure Merger Agreement among our company,
Doral Sub, Pure L.P. and Pure Sub, a wholly owned subsidiary of Pure L.P. Pursuant to the provisions of the Pure Merger Agreement,
all of Pure L.P.’s oil and gas assets and liabilities were transferred to Pure Sub. Pure Sub was then merged with and into
Doral Sub, with Doral Sub continuing as the surviving corporation. Upon completion of the Pure Merger, the outstanding shares of
Pure Sub were converted into an aggregate of 9,981,536 shares of our common stock. Since the Pure Merger, Pure L.P. has distributed
all of its shares of our common stock to the partners of Pure L.P. so that Pure L.P. is no longer a shareholder of our company.
Effective January
4, 2011, following closing of the Pure Merger, Doral Sub was merged with and into our company, with our company continuing as the
surviving corporation. Upon completing the merger of Doral Sub with and into our company, we changed our name to “Cross Border
Resources, Inc.”
On January 28, 2013, Red
Mountain Resources, Inc. closed the acquisition of 5,091,210 shares of our common, bringing its total ownership to approximately
78% of the outstanding common stock of the company. Prior to the acquisition, Red Mountain Resources, Inc. owned 47% of our outstanding
common stock. As of the date of this report, Red Mountain Resources, Inc. owns approximately 83% of our outstanding common stock.
As a result of that transaction, our results are consolidated in Red Mountain Resources, Inc.’s financial statements.
On April 21, 2015, we entered
into a purchase and sale agreement (the “PSA”) with RMR Operating, LLC (“RMR Operating”), Black Rock Capital,
Inc. (“Black Rock”), RMR KS Holdings, LLC (“RMR KS”) and Black Shale Minerals, LLC (“Buyer”).
Each of us, RMR Operating, Black Rock and RMR KS is an operating subsidiary (together, the “Operating Subsidiaries”)
of Red Mountain Resources, Inc. (“RMR,” and together with the Operating Subsidiaries, the “Companies”).
Pursuant to the PSA the
Operating Subsidiaries sold, assigned, transferred and conveyed to Buyer, effective as of April 1, 2015, fifty percent (50%) of
their right, title, and interest in and to certain oil and natural gas assets and properties (the “Assets”), including
their oil and natural gas leasehold interests, wells, contracts, and oil and natural gas produced after April 1, 2015 (the “Sale”).
The aggregate purchase price for the Assets under the PSA was $25.0 million, subject to certain adjustments, including post-closing
adjustments for any title or environmental benefits or title or environmental defects resulting from Buyer’s title and environmental
reviews.
First Quarter 2015 Operational Update
In the three months ended
March 31, 2015, Cross Border produced 506 Boe/d.
Planned Operations
In the second
and third quarters of 2015, we will drill and complete one well (0.02 net), targeting the 3rd Bone Spring in the Perla Verde
area. We also plan to continue work in the Tom Tom area, with a workover to an existing well in the Tom Tom area.
Critical Accounting Policies and Estimates
Our discussion and analysis
of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related
disclosures. Our significant accounting policies are described in “Note 3—Summary of Significant Accounting Policies”
to our financial statements included in our Annual Report on Form 10-K. We have identified below policies that are of particular
importance to the portrayal of our financial position and results of operations and which require the application of significant
judgment by management. These estimates are based on historical experience, information received from third parties, and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
We believe the following
critical accounting policies affect the significant judgments and estimates used in the preparation of our financial statements.
Oil and Gas Properties
We follow the successful
efforts method of accounting for our oil and natural gas producing activities. Costs to acquire mineral interests in oil and natural
gas properties and to drill and equip development wells and related asset retirement costs are capitalized. Costs to drill exploratory
wells are capitalized pending determination of whether the wells have proved reserves. If we determine that the wells do not have
proved reserves, the costs are charged to expense. There were no exploratory wells capitalized pending determination of whether
the wells have proved reserves at March 31, 2015 or December 31, 2014. Geological and geophysical costs, including seismic studies
and costs of carrying and retaining unproved properties, are charged to expense as incurred. We capitalize interest on expenditures
for significant exploration and development projects that last more than six months while activities are in progress to bring the
assets to their intended use. Through March 31, 2015, we had capitalized no interest costs because our exploration and development
projects generally lasted less than six months. Costs incurred to maintain wells and related equipment are charged to expense as
incurred.
On the sale or retirement
of a complete unit of a proved property, the cost and related accumulated depreciation, depletion and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proved
property, the cost is charged to accumulated depreciation, depletion and amortization, with a resulting gain or loss recognized
in income.
Capitalized amounts attributable
to proved oil and natural gas properties are depleted by the unit-of-production method over proved reserves using the unit conversion
ratio of six Mcf of natural gas to one Boe. The ratio of six Mcf of natural gas to one Boe is based on energy equivalency, rather
than price equivalency. Given current price differentials, the price for a Boe for natural gas differs significantly from the price
for a barrel of oil.
It is common for operators
of oil and natural gas properties to request that joint interest owners pay for large expenditures, typically for drilling new
wells, in advance of the work commencing. This right to call for cash advances is typically found in the operating agreement
that joint interest owners in a property adopt. We record these advance payments in prepaid and other current assets in its property
account and release this account when the actual expenditure is later billed to it by the operator.
On the sale of an entire
interest in an unproved property for cash or cash equivalents, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an unproved property
is sold, the amount received is treated as a reduction of the cost of the interest retained.
Impairment of Long-Lived Assets
We evaluate our long-lived
assets for potential impairment in their carrying values whenever events or changes in circumstances indicate such impairment may
have occurred. Oil and natural gas properties are evaluated for potential impairment by field. Other properties are evaluated for
impairment on a specific asset basis or in groups of similar assets, as applicable. An impairment on proved properties is recognized
when the estimated undiscounted future net cash flows of an asset are less than its carrying value. If an impairment occurs, the
carrying value of the impaired asset is reduced to its estimated fair value, which is generally estimated using a discounted cash
flow approach. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added
to the capitalized costs to be amortized.
Unproved oil and natural
gas properties do not have producing properties. As reserves are proved through the successful completion of exploratory wells,
the cost is transferred to proved properties. The cost of the remaining unproved basis is periodically evaluated by management
to assess whether the value of a property has diminished. To do this assessment, management considers estimated potential reserves
and future net revenues from an independent expert, our history in exploring the area, our future drilling plans per our capital
drilling program prepared by our reservoir engineers and operations management and other factors associated with the area. Impairment
is taken on the unproved property cost if it is determined that the costs are not likely to be recoverable. The valuation is subjective
and requires management to make estimates and assumptions which, with the passage of time, may prove to be materially different
from actual results.
Recent Accounting Pronouncements
In April 2014, the FASB
issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Components
of an Entity(“ASU 2014-08”). ASU 2014-08 revises the definition of discontinued operations by limiting discontinued
operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect
on an entity’s operations and financial results, removing the lack of continuing involvement criteria and requiring discontinued
operations reporting for the disposal of an equity method investment that meets the definition of discontinued operations. The
update also requires expanded disclosures for discontinued operations, including disclosure of pretax profit or loss of an individually
significant component of an entity that does not qualify for discontinued operations reporting. The update is effective prospectively
to all periods beginning after December 15, 2014. Currently, we do not expect the adoption of ASU 2014-08 to have a material
impact on our financial statements or results of operations.
In May 2014, the FASB issued
ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 amends the existing
accounting standards for revenue recognition and is based on the principle that revenue should be recognized to depict the transfer
of goods or services to a customer at an amount that reflects the consideration a company expects to receive in exchange for those
goods or services. The update is effective for periods beginning after December 15, 2017. We are currently assessing
the potential impact of ASU 2014-09 on our financial statements and results of operations.
In August 2014, the FASB
issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU
2014-15”), an amendment to FASB Accounting Standards Codification (“ASC”) Topic 205, Presentation of Financial
Statements. This update provides guidance on management’s responsibility in evaluating whether there is substantial doubt
about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This ASU 2014-15 is
effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption
is permitted. We do not expect the adoption of ASU 2014-15 to have a material impact on our financial statements or results of
operations.
We have reviewed recently
issued, but not yet adopted, accounting standards as noted in Footnote 3 of notes to the financial statements in order to determine
their effects, if any, on our results of operations, financial position and cash flows. Based on that review, we believe that none
of these recent pronouncements will have a significant effect on our current or future earnings or operations.
Results of Operations
Three Months Ended March 31, 2015 Compared to Three Months
Ended March 31, 2014
The following table sets
forth summary information regarding our oil and natural gas sales, net production sold, average sales prices and production costs
and expenses for the three months ended March 31, 2015 and 2014.
| |
Three Months Ended March 31, |
| |
2015 | |
2014 |
(dollars in thousands, except per unit prices) | |
|
Revenue | |
| |
|
Oil and Gas Sales | |
$ | 1,453,419 | | |
$ | 3,496,782 | |
| |
| | | |
| | |
Net Production sold | |
| | | |
| | |
Oil (Bbl) | |
| 32,290 | | |
| 33,420 | |
Natural gas (Mcf) | |
| 64,846 | | |
| 67,231 | |
Natural gas liquids (Bbl) | |
| 2,400 | | |
| 3,648 | |
Total (Boe) | |
| 45,498 | | |
| 48,273 | |
Total (Boe/d) (1) | |
| 506 | | |
| 536 | |
| |
| | | |
| | |
Average sales prices | |
| | | |
| | |
Oil ($/Bbl) | |
$ | 43.94 | | |
$ | 89.90 | |
Natural gas ($/Mcf) | |
| 2.85 | | |
| 5.65 | |
Natural gas liquids ($/Bbl) | |
| 17.69 | | |
| 30.82 | |
Total average price ($/Boe) | |
$ | 36.18 | | |
$ | 72.43 | |
| |
| | | |
| | |
Costs and expenses (per Boe) | |
| | | |
| | |
Operating costs and marketing | |
$ | 17.00 | | |
$ | 10.31 | |
Production taxes | |
| 2.93 | | |
| 5.46 | |
Depreciation, depletion, and amortization | |
| 8.29 | | |
| 23.53 | |
Accretion of discount on asset retirement obligation | |
| 0.75 | | |
| 0.76 | |
General and administrative expense | |
| 1.23 | | |
| 4.35 | |
___________
| (1) | Boe/d is calculated based on actual calendar days during the period. |
Three months Revenues and Sales Volumes
Oil and Natural
Gas Sales Volumes. During the three months ended March 31, 2015, we had total sales volumes of 45,498 Boe, compared to
total sales volumes of 48,273 Boe during the three months ended March 31, 2014. This decrease is primarily attributable to
the bringing online of new oil and gas wells in 2015, partially offset by natural production declines for existing
wells.
Oil and Natural Gas
Sales. During the three months ended March 31, 2015, we had oil and natural gas sales of $1.4 million, as compared to $3.5
million during the three months ended March 31, 2014. This decrease is primarily attributable to lower realized prices for crude
oil and natural gas.
Costs and Expenses
Operating Costs.
During the quarter ended March 31, 2015, we incurred operating costs of $0.7 million, as compared to $0.5 million during the quarter
ended March 31, 2014. The increased costs are related to the bringing online of new high cost wells in 2015.
Production Taxes.
Production taxes were $0.1 million for the quarter ended March 31, 2015, as compared to $0.3 million for the quarter ended March
31, 2014, primarily as a result of lower realized prices for crude oil and natural gas.
Depreciation, Depletion,
Amortization and Impairment. For the quarter ended March 31, 2015, depreciation, depletion, amortization, and impairment was
$.4 million, as compared to $1.1 million for the quarter ended March 31, 2014. This decrease is primarily related to the reclassification
of a portion of our oil and natural gas properties to assets held for sale, which are not subject to depletion.
General and Administrative
Expense. General and administrative expense was approximately $55,000 for the quarter ended March 31, 2015, as compared to
$.2 million for the quarter ended March 31, 2014. This decrease is attributable to a $150,000 decrease in professional fees.
Other Expense / Income.
Other expense was $0.1 million for the quarter ended March 31, 2015, as compared to other income of $0.2 million for the quarter
ended March 31, 2014, primarily attributable to lower interest expense during the period ending March 31, 2015.
Liquidity and Capital Resources
General
Our primary sources of liquidity are cash flow
from operations. Our ability to fund planned capital expenditures and to make acquisitions depends upon our future operating performance
and availability of equity and debt financing, which is affected by prevailing economic conditions in our industry and financial,
business and other factors, some of which are beyond our control. Our cash flow from operations is mainly influenced by the prices
we receive for our oil and natural gas production and the quantity of oil and natural gas we produce. Prices for oil and natural
gas are beyond our control and are affected by national and international economic and political conditions, national and global
supply and demand for hydrocarbons, seasonal weather influences and other factors beyond our control. The price we receive for
oil has fallen significantly since June 2014 and may remain at depressed levels for the foreseeable future.
Capital Expenditures
Most
of our capital expenditures are for the exploration, development, and production of oil and natural gas reserves. For
the three months ended March 31, 2015, we had capital expenditures of approximately $1.9 million for the development of oil
and natural gas properties. We anticipate capital expenditures between $0.2 million and $0.3 million for the second and third
quarters of 2015. See “Planned Operations” for more information about our planned capital expenditures.
Liquidity
At March 31 2015, we had
approximately $0.7 million in cash and cash equivalents and $8.2 million outstanding under our line of credit with Independent
Bank. At March 31, 2015, we had working capital of approximately $2.7 million (including assets held for sale of approximately
$16.2 million) and outstanding debt of $8.2 million (consisting of a line of credit). The Company would have a working capital
deficit of approximately $12.2 million (excluding Assets Held for Sale, Net of ARO Liabilities associated with the Assets Held
for Sale).
At March 31, 2015 we had
$0 of availability under the credit facility.
Cash Flows
Net cash provided by operating
activities was approximately $2.2 million for the three months ended March 31, 2015, compared to net cash used in operating activities
of approximately $0.2 million for the three months ended March 31, 2014.
Net cash used in investing
activities was approximately $1.9 million for the three months ended March 31, 2015 as compared to net cash used in investing activities
of approximately $0.5 million for the three months ended March 31, 2014 due to the drilling of higher cost wells in the three months
ended March 31, 2015.
During the three months
ended March 31, 2015 and March 31, 2014, there was no net cash used, nor provided, by financing activities.
Indebtedness
Line of Credit
On February 5, 2013, the
Company entered into a Senior First Lien Secured Credit Agreement with Red Mountain Resources, Inc., Black Rock Capital, Inc. and
RMR Operating, LLC and Independent Bank. Red Mountain owns approximately 83% of the outstanding common stock of Cross Border and
Black Rock and RMR Operating are wholly owned subsidiaries of Red Mountain. On February 5, 2013, the Company drew $8,900,000 on
the line of credit and used a portion of that draw to fully pay off the Texas Capital Bank line of credit. On February 28, 2013,
the Company drew $2,000,000 and on May 24, 2013, the Company drew a further $1,300,000 on the line of credit and used those funds
to pay outstanding accounts payable related to our drilling program.
The borrowing base under
the Credit Facility is determined at the discretion of the Lender based on, among other things, the Lender’s estimated value
of the proved reserves attributable to the Borrowers’ oil and natural gas properties that have been mortgaged to the Lender,
and is subject to regular redeterminations on September 30 and March 31 of each year, and interim redeterminations described in
the Credit Agreement and potentially monthly commitment reductions, in each case which may reduce the amount of the borrowing base.
On March 11, 2015, we entered
into an amendment and waiver (the “Third Amendment”) to the Senior First Lien Secured Credit Agreement, dated February
5, 2013, as amended (the “Credit Agreement”), with RMR, Black Rock and RMR Operating (together with the Company, the
“Borrowers”) and Independent Bank (“Lender”). Pursuant to the Third Amendment, (i) the Lender waived any
default or right to exercise any remedy as a result of the failure by the Borrowers to be in compliance with the requirements of
Section 6.18 of the Credit Agreement with respect to the permitted ratio of current assets to current liabilities of Borrowers
for the fiscal quarter ended September 30, 2014; and (ii) the borrowing base was decreased from $30 million to $27.8 million, effective
as of March 1, 2015, and the commitment amount was decreased to $27.8 million, subject to monthly commitment reductions of $350,000
beginning March 1, 2015.
On April 21, 2015, we entered
into an amendment (the “Fourth Amendment”) to the Credit Agreement, with the other Borrowers and the Lender. Pursuant
to the Fourth Amendment, the borrowing base was decreased from $27.8 million to $12.4 million, effective as of April 21, 2015,
and the commitment amount was decreased to $12.4 million. In addition, the monthly commitment reduction amount was set to $0 as
of April 1, 2015.
On June 30, 2015, the Company entered into an amendment and waiver (the "Fifth Amendment") to the Credit Agreement, with the
other Borrowers and the Lender. Pursuant to the Fifth Amendment, (i) the Lender waived any default or right to exercise any
remedy as a result of the failure by the Borrowers to be in compliance with the requirements of Section 6.18 of the Credit
Agreement with respect to the permitted ratio of consolidated current assets to consolidated current liabilities of Borrowers
for the fiscal quarter ended December 31, 2014 and the requirements of Section 6.21 of the Credit Agreement with respect to
the trade payables or other accounts payable of Borrowers that may be past due for more than 90 days for the fiscal quarter
ended December 31, 2014 and the fiscal quarter ended March 31, 2015; and (ii) the borrowing base was affirmed at $12.4 million,
effective as of June 30, 2015, and the commitment amount was affirmed at $12.4 million, subject to monthly commitment reductions
of $125,000 beginning July 1, 2015.
As of March 31, 2015, our indebtedness under
the Credit Agreement was $8.2 million. As of August 13,
2015, total borrowings under the line of credit were $12,150,000 of which $0 is allocated to the Company.
Off-Balance Sheet Arrangements
As of March 31, 2015, we
did not have any off-balance sheet arrangements as defined by Regulation S-K.
Forward-Looking Statements
This Quarterly Report on
Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are not historical
facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include
statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,”
believe,” “expect,” anticipate,” “plan,” “estimate,” “target,” “project,”
or “intend” or similar expressions and the negative of such words and expressions, although not all forward-looking
statements contain such words or expressions.
Forward-looking statements
are only predictions and are not guarantees of performance. These statements generally relate to our plans, objectives and expectations
for future operations and are based on management’s current beliefs and assumptions, which in turn are based on its experience
and its perception of historical trends, current conditions and expected future developments as well as other factors it believes
are appropriate under the circumstances. Although we believe that the plans, objectives and expectations reflected in or suggested
by the forward-looking statements are reasonable, there can be no assurance that actual results will not differ materially from
those expressed or implied in such forward-looking statements. Forward-looking statements also involve risks and uncertainties.
Many of these risks and uncertainties are beyond our ability to control or predict and could cause results to differ materially
from the results discussed in such forward-looking statements. Such risks and uncertainties include, but are not limited to, the
following:
| | our ability to raise additional capital to fund future capital expenditures; |
| | our ability to comply with debt covenants; |
| | our ability to generate sufficient cash flow from operations, borrowings or other sources to enable
us to fully develop and produce our oil and natural gas properties; |
| | declines or volatility in the prices we receive for our oil and natural gas; |
| | general economic conditions, whether internationally, nationally or in the regional and local market
areas in which we do business; |
| | risks associated with drilling, including completion risks, cost overruns and the drilling of non-economic
wells or dry holes; |
| | uncertainties associated with estimates of proved oil and natural gas reserves; |
| | the presence or recoverability of estimated oil and natural gas reserves and the actual future
production rates and associated costs; |
| | risks and liabilities associated with acquired companies and properties; |
| | risks related to integration of acquired companies and properties; |
| | potential defects in title to our properties; |
| | cost and availability of drilling rigs, equipment, supplies, personnel and oilfield services; |
| | geological concentration of our reserves; |
| | environmental or other governmental regulations, including legislation of hydraulic fracture stimulation; |
| | our ability to secure firm transportation for oil and natural gas we produce and to sell the oil
and natural gas at market prices; |
| | exploration and development risks; |
| | management’s ability to execute our plans to meet our goals; |
| | our ability to retain key members of our management team; |
| | actions or inactions of third-party operators of our properties; |
| | costs and liabilities associated with environmental, health and safety laws; |
| | our ability to find and retain highly skilled personnel; |
| | operating hazards attendant to the oil and natural gas business; |
| | competition in the oil and natural gas industry; and |
| | the other factors discussed under Item 1A. “Risk Factors” in our Annual Report on Form
10-K for the year ended December 31, 2014. |
Forward-looking statements
speak only as of the date hereof. All such forward-looking statements and any subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained
or referred to in this section and any other cautionary statements that may accompany such forward-looking statements. Except as
otherwise required by applicable law, we disclaim any duty to update any forward-looking statements.
Item 3. |
Quantitative
and Qualitative Disclosures About Market Risk |
Interest Rate Risk
On February 5, 2013, we
entered into the Credit Facility, which exposes us to interest rate risk associated with interest rate fluctuations on outstanding
borrowings. At March 31, 2015, we had $8.2 million in outstanding borrowings under the Credit Facility. We incur interest on borrowings
under the Credit Facility at a rate per annum equal to the greater of (x) the U.S. prime rate as published in The Wall Street Journal’s
“Money Rates” table in effect from time to time and (y) 4.0% (4.0 % at March 31, 2014). A hypothetical 10% change in
the interest rates we pay on our borrowings under the Credit Facility as of March 31, 2015 would result in an increase or decrease
in our interest costs of approximately $32,800 per year.
Item 4. |
Controls
and Procedures |
Evaluation of Disclosure Controls and Procedures
Disclosure controls and
procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under
the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent
limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls
and procedures can only provide reasonable assurance of achieving their control objectives.
Under the supervision and
with the participation of our management, including our principal executive officer and principal financial officer, we evaluated
the effectiveness of our disclosure controls and procedures as of March 31, 2015. Based on that evaluation, and as a result of
the material weaknesses described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, our principal
executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective
at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes
in our internal control over financial reporting that occurred during the three months ended March 31, 2015 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
Item 1. |
Legal
Proceedings |
Please see Note 9 to our
unaudited notes to financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
There have been no material
changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2014.
Item 2. |
Unregistered
Sales of Equity Securities and Use of Proceeds |
None.
Item 3. |
Defaults
Upon Senior Securities |
None.
Item 4. |
Mine
Safety Disclosures |
Not applicable.
Item 5. |
Other
Information |
None.
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: August 14, 2015 |
|
|
|
|
|
|
By: |
/s/ Earl M. Sebring |
|
|
Earl M. Sebring |
|
|
Interim President |
|
|
|
|
By: |
/s/ Kenneth S. Lamb |
|
|
Kenneth S. Lamb |
|
|
|
Chief Accounting Officer, Secretary, and Treasurer |
EXHIBIT INDEX
26
Exhibit 31.1
CERTIFICATIONS
I, Earl M. Sebring, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cross Border Resources, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August
14, 2015
|
|
|
|
|
/s/ Earl M. Sebring
|
|
|
Name:
|
Earl M. Sebring
|
|
|
Title:
|
Interim President
|
|
|
|
(Principal Executive Officer)
|
|
EXHIBIT 31.2
CERTIFICATIONS
I, Kenneth S. Lamb, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cross Border Resources, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:
August 14, 2015
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/s/ Kenneth S. Lamb
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Name:
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Kenneth S. Lamb
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Title:
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Chief Accounting Officer, Secretary, and Treasurer
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(Principal Financial and Accounting Officer)
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report on Form 10-Q of Cross Border Resources, Inc. (the “Company”) for the
three months ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), each of the undersigned officers does hereby certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to such officer’s knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
August 14, 2015
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/s/ Earl M. Sebring |
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Name:
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Earl M. Sebring
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Title:
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Interim President
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(Principal Executive Officer)
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The
foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section
906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and,
accordingly, is not being filed as part of the Report for purposes of Section 18 of the Securities Exchange Act of 1934, as amended,
and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless
of any general incorporation language in such filing.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report on Form 10-Q of Cross Border Resources, Inc. (the “Company”) for the three
months ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), each of the undersigned officers does hereby certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to such officer’s knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
August 14, 2015
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/s/ Kenneth S. Lamb |
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Name:
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Kenneth S. Lamb
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Title:
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Chief Accounting Officer, Secretary, and Treasurer
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|
|
|
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(Principal Financial and Accounting Officer)
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|
The
foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section
906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and,
accordingly, is not being filed as part of the Report for purposes of Section 18 of the Securities Exchange Act of 1934, as amended,
and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless
of any general incorporation language in such filing.
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