10-Q 1 xtreme_10q-15357.htm XTREME OIL & GAS, INC. 09/30/2012 10-Q xtreme_10q-15357.htm

   
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarter ended September 30, 2012
 
OR
 
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
Commission file number 0-53892
 
Xtreme Oil & Gas, Inc.

(Name of small business issuer in its charter)
                                                                                    
 
 Nevada
 
 20-8295316
 (State or other jurisdiction 
of incorporation or organization)  
 
   (I.R.S Employer
Identification No.)
 
 5700 W. Plano Parkway, Suite 3600
 75093
 (Address of principal executive offices)
  (Zip Code)
   
(214) 432-8002
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
  
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 x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
 Large accelerated filer
 o
 
 Accelerated filer
 o
         
 Non-accelerated filer
 o
 
 Smaller reporting company
 x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x
 
State the number of shares outstanding of each of the issuer's classes of common equity as of November 14, 2012: 45,680,814.

 

 
1

 
 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
XTREME OIL & GAS , INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of September 30, 2012 and December 31, 2011
             
   
2012
   
2011
 
   
(Unaudited)
       
ASSETS
CURRENT ASSETS:
           
Cash
  $ 1,347     $ 484,970  
Cash - restricted
    75,313       75,322  
Accounts receivable - trade, net
    38,550       192,296  
Work in process
    -       505,038  
Prepaid expenses
    325,000       -  
Deferred financing costs
    -       164,831  
Inventory
    -       62,028  
Total Current Assets
    440,210       1,484,485  
                 
PROPERTY AND EQUIPMENT:
               
Furniture and fixtures
    53,044       53,044  
Oil and natural gas properties (successful efforts method)
    8,522,935       7,547,166  
       
    8,575,979       7,600,210  
Less-Accumulated depreciation, depletion and amortization
    110,946       103,499  
Net property and equipment
    8,465,033       7,496,711  
                 
OTHER ASSETS
               
Deposits
    7,887       7,537  
Total Other Assets
    7,887       7,537  
TOTAL ASSETS
  $ 8,913,130     $ 8,988,733  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
               
Accounts payable and accrued expenses
  $ 1,580,583     $ 1,789,482  
Deposits payable
    335,000       1,514,244  
Advances, related parties
    115,000       -  
Accounts payable – related parties
    1,126,320       -  
Short-term notes payable – related parties
    250,000       -  
Convertible notes payable, net of debt discount
    902,267       261,799  
Derivative liability
    541,573       2,737,824  
Total Current Liabilities
    4,850,743       6,303,349  
                 
LONG-TERM LIABILITIES
               
Asset retirement obligation
    300,000       300,000  
Total-long term liabilities
    300,000       300,000  
TOTAL LIABILITIES
    5,150,743       6,603,349  
Commitments and contingencies
               
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock, $.001 par value, 49,999,000 shares authorized;
none issued and outstanding
    -       -  
Non-transferable preferred stock, $.001 par value, 1,000 shares
authorized,  1,000 shares issued and outstanding
    1       1  
Common stock, $.001 par value; 200,000,000 shares authorized;
45,516,777 and 45,364,390 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
    45,516       45,364  
Additional paid-in capital
    36,131,913       36,063,970  
Accumulated deficit
    (32,415,043 )     (33,723,951 )
Total Stockholders' Equity
    3,762,387       2,385,384  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 8,913,130     $ 8,988,733  
 
See accompanying notes to consolidated financial statements. 

 
2

 
 
 
XTREME OIL & GAS, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
                         
   
Three months
   
Three months
   
Nine Months
   
Nine Months
 
   
Ended
   
Ended
   
Ended
   
Ended
 
   
September 30, 2012
   
September 30, 2011
   
September 30, 2012
   
September 30, 2011
 
Revenues:
                       
     Income from sales of working interest, net
  $ 238,454     $ 115,000     $ 1,270,934     $ 2,336,078  
     Oil and gas sales
    9,489       7,766       56,324       57,911  
TOTAL REVENUES
    247,943       122,766       1,327,258       2,393,989  
                                 
EXPENSES:
                               
   Production costs
    66,942       50,389       102,828       144,221  
   Workover costs
    6,338       -       28,874       -  
   Depreciation, depletion and amortization expense
    101,353       3,282       172,278       10,280  
   General and administrative expenses
    465,819       590,237       1,212,927       1,518,399  
   Loss on disposal of properties
    204,649       21,603       233,266       37,461  
TOTAL OPERATING EXPENSES
    845,101       665,511       1,750,173       1,710,361  
INCOME (LOSS) FROM OPERATIONS
    (597,158 )     (542,745 )     (422,915 )     683,628  
                                 
OTHER INCOME/(EXPENSE)
                               
Gain on settlement
    3,201       16,223       930,972       16,223  
Amortization of debt discount
    (640,478 )     (234,059 )     (1,179,364 )     (270,228 )
 Interest expense, net
    (81,090 )     (80,580 )     (216,036 )     (89,652 )
 Derivative income (loss)
    851,549       (3,388,778 )     2,276,758       (3,420,865 )
 Gain (loss) on extinguishment of debt
    -       147,066       (80,507 )     147,066  
      Total other income (expense)
    133,182       (3,540,128 )     1,731,823       (3,617,456 )
NET INCOME (LOSS)
  $ (463,976 )   $ (4,082,873 )   $ 1,308,908     $ (2,933,828 )
                                 
EARNINGS (LOSS) PER COMMON SHARE-BASIC
  $ (0.01 )   $ (0.09 )   $ 0.03     $ (0.07 )
EARNINGS (LOSS) PER COMMON SHARE-DILUTED
  $ (0.01 )   $ (0.09 )   $ 0.03     $ (0.07 )
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC
    45,403,966       45,700,493       45,390,507       45,120,687  
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – DILUTED
    45,403,966       45,700,493       45,390,507       45,120,687  
 
See accompanying notes to consolidated financial statements.

 
3

 
 
 
XTREME OIL & GAS, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
     Net income (loss)
 
$
1,308,908
   
$
(2,933,828)
 
     Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
             Depreciation, depletion and amortization
   
172,278
     
10,280
 
             Bad debt expense
   
182,018
     
-
 
             Loss on debt extinguishment
   
80,507
     
(147,066)
 
             Common stock issued for services
   
63,095
     
234,568
 
             Gain on settlement
   
(930,972)
     
(16,223)
 
             Income from sales of working interest
   
(1,270,934)
     
(2,336,079)
 
             Loss on disposal of properties
   
233,266
     
37,461
 
             Amortization of debt discount
   
1,179,364
     
270,228
 
             Derivative (income) loss
   
(2,276,758)
     
3,420,865
 
        Changes in operating assets and liabilities:
               
             Accounts receivable - trade
   
(28,272)
     
26,588
 
             Development work in process
   
-
     
(210,471)
 
             Prepaid expenses
   
(325,000)
     
-
 
             Inventory
   
-
     
(61,009)
 
             Other assets
   
(350)
     
(1,000)
 
             Accounts payable and accrued expenses
   
727,082
     
120,464
 
             Accounts payable – related parties
   
151,200
     
-
 
             Deposits payable
   
1,520,475
     
70,000
 
                 Net cash provided by (used in) operating activities
   
785,907
     
(1,515,222)
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
             Proceeds from sale of assets
   
150,000
     
220,000
 
             Capital expenditures
   
(1,245,634)
     
(818,556)
 
                 Net cash used in investing activities
   
(1,095,634)
     
(598,556)
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
             Payments on convertible notes payable
   
(538,896)
     
(160,000)
 
             Proceeds from convertible notes payable
   
-
     
2,520,000
 
             Proceeds from notes payable
   
-
     
50,000
 
             Proceeds from advances – related parties
   
115,000
     
-
 
             Proceeds from notes payable – related parties
   
250,000
     
-
 
             Proceeds from sale of common stock
   
-
     
305,000
 
             Proceeds from sale of treasury stock
   
-
     
120,000
 
                 Net cash provided by (used in) financing activities
   
(173,896)
     
2,835,000
 
                 
Net change in cash
   
(483,623)
     
721,222
 
CASH AT BEGINNING PERIOD
   
484,970
     
657,475
 
CASH AT END OF PERIOD
 
$
1,347
   
$
1,378,697
 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
     Cash paid for interest expense
 
$
138,946
   
$
-
 
     Deposits applied to sale of assets
 
$
2,849,719
   
$
2,985,481
 
     Development work in process reclassified to oil and gas properties
 
$
505,038
   
$
303,129
 
     Accounts payable – related party issued for oil and gas properties
 
$
75,600
   
$
-
 
     Accounts payable – related party issued for oil and gas properties applied to sale of assets
 
$
1,050,720
   
$
-
 
     Inventory reclassified to oil and gas properties
 
$
62,028
   
$
-
 
     Common stock issued for leasehold interests and equipment
 
$
-
   
$
15,000
 
     Common stock issued for accrued interest
 
$
5,000
   
$
-
 

See accompanying notes to consolidated financial statements.


 
4

XTREME OIL & GAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
 
1. BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Regulation S-K. They do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements for the year ended December 31, 2011 included in the Company’s Form 10-K. The interim unaudited consolidated financial statements should be read in conjunction with those consolidated financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
 
Accounting Estimates
 
The preparation of the accompanying unaudited consolidated financial statements requires the use of estimates that affect the reported amounts of assets, liabilities, revenues, expenses and contingencies. These estimates include, but are not limited to, estimates related to revenue recognition, allowance for doubtful accounts, inventory valuation, tangible and intangible long-term asset valuation, obligations and commitments. Estimates are updated on an ongoing basis and are evaluated based on historical experience and current circumstances. Changes in facts and circumstances in the future may give rise to changes in these estimates which may cause actual results to differ from current estimates.
 
Reclassifications
 
Certain amounts in the prior period consolidated financial statements may have been reclassified to conform to the current period presentation.
 
Recent Accounting Pronouncements
 
Management does not expect the impact of any other recently issued accounting pronouncements to have a material impact on its financial condition or results of operations. 
 
2. HISTORY AND NATURE OF BUSINESS
 
Xtreme Oil & Gas, Inc. (the “Company” formerly Xtreme Technologies, Inc.), a Nevada corporation formed on October 3, 2006 is organized to engage in the acquisition, operation and development of oil and natural gas properties located in Texas and the southeast region of the United States. Effective December 29, 2006, Xtreme Technologies, Inc., a then Washington corporation, acquired Emerald Energy Partners, Inc., (“Emerald”) a Nevada corporation, in exchange for the issuance of 7,960,000 shares of the Company’s common stock and changed the Company’s name to Xtreme Oil & Gas, Inc. (“Xtreme”).
 
For accounting purposes this transaction was treated as an acquisition of Xtreme Technologies, Inc. and a re-capitalization of Emerald.  Emerald is the accounting acquirer and the results of its operations carry over.  Accordingly, the operations of Xtreme Technologies, Inc. were not carried over and were adjusted to $0 at the date of the merger.
 
Nature of Business
 
Since its formation, the Company has been involved in the acquisition and management of fee mineral acreage and the exploration for and development of oil and natural gas properties, principally involving drilling wells located on the company’s mineral acreage.  The Company’s mineral properties and other oil and natural gas interests are all located in the United States, primarily in Oklahoma, Kansas, and Texas. The majority of the Company’s oil and natural gas production is from its Texas wells for 2012 and 2011.  Substantially all the Company’s oil and natural gas production is sold by the Company directly to independent purchasers.
 
 
 


 
5

XTREME OIL & GAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
 
2. HISTORY AND NATURE OF BUSINESS - CONTINUED
 
The Company from time to time sells or otherwise disposes of its interest in oil and natural gas properties as part of the normal course of business.
  
 Oil and Natural Gas Properties
 
The Company has the following oil and natural gas properties:
 
Oil and gas property:
 
December 31, 2011
   
Additions
   
Dispositions
   
September 30, 2012
 
  West Thrifty / Quita Field
 
$
4,984,040
   
$
141,921
   
$
25,546
   
$
5,100,415
 
  Texas 5 Star
   
528,089
     
-
     
-
     
528,089
 
  Smoky Hill
   
577,951
     
713,049
     
60,179
     
1,230,821
 
  Hancock/Robinson
   
62,323
     
-
     
-
     
62,323
 
  Lionheart
   
1,198,326
     
76,800
     
-
     
1,275,126
 
  Gotcheye SWD
   
-
     
1,021,418
     
695,257
     
326,161
 
  Flint Creek / Oil Creek
   
196,437
     
-
     
196,437
     
-
 
Total
 
$
7,547,166
   
$
1,953,188
   
$
977,419
   
$
8,522,935
 

Saltwater Disposal Property
 
During the second quarter 2012, the Company began full time operations taking saltwater from multiple water hauling companies in the area. We acquired a 10% working interest from the ADA Energy Services and took over operations on May 29, 2012 in exchange for a 5 cent per barrel of water disposed fee payable upon collecting revenue from disposal customers.

The Flint Creek/Oil Creek property was written off at September 30, 2012 as unrecoverable.
 
3. RELATED PARTY TRANSACTIONS
 
During the nine months ended September 30, 2012, a director advanced $115,000 to the Company. Interest is accrued on these advances at the rate of 10% per annum. The advances and accrued interest are payable on demand and unsecured.
 
On June 8, 2012, the Company owed an officer $464,000 for the acquisition of their working interest in the Saltwater Disposal Well (Gotcheye SWD) and $36,000 for the acquisition of their working interests in the Lionheart. See Note 7 for more details. These amounts are included in accounts payable – related parties on the consolidated balance sheet as of September 30, 2012.
 
On June 8, 2012, the Company owed an officer $464,000 for the acquisition of their working interest in the Saltwater Disposal Well (Gotcheye SWD) and $36,000 for the acquisition of their working interests in the Lionheart. See Note 7 for more details. These amounts are included in accounts payable – related parties on the consolidated balance sheet as of September 30, 2012.
 
On June 8, 2012, the Company owed an employee $80,000 for the acquisition of their working interest in the Saltwater Disposal Well (Gotcheye SWD) and $3,600 for the acquisition of their working interests in the Lionheart. See Note 7 for more details. These amounts are included in accounts payable – related parties on the consolidated balance sheet as of September 30, 2012.
 
On June 8, 2012, the Company owed a director $42,720 for the acquisition of their working interest in the Saltwater Disposal Well (Gotcheye SWD). See Note 7 for more details. These amounts are included in accounts payable – related parties on the consolidated balance sheet as of September 30, 2012.
 
On June 11, 2012 a director loaned $50,000 to the Company. The loan is non-interest bearing and due on September 30, 2012. The Company shall pay the director $5,000 for underwriting fees, charges and other payments on the maturity date if the Company’s financing is completed.
 
On June 11, 2012 an officer loaned $200,000 to the Company. The loan is non-interest bearing and due on September 30, 2012. The Company shall pay the officer $20,000 for underwriting fees, charges and other payments on the maturity date if the Company’s financing is completed.
 

 
6

XTREME OIL & GAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
 
4. CONVERTIBLE NOTES PAYABLE
 
On September 12, 2011, the Company raised $2,360,000 in convertible notes.  The notes bear an interest rate of 12% per annum and mature on September 12, 2013.  Under the convertible note agreements, the lender has the right to convert all or any part of the outstanding and unpaid principal and interest into shares of the Company’s common stock; provided however, that in no event shall the lender be entitled to convert any portion of the notes that would result in the beneficial ownership by it and its affiliates to be more than 9.99% of the outstanding shares of the Company's common stock. The notes are convertible at a fixed conversion price of $0.28 per share.  In addition, the Company issued warrants to acquire 6,810,269 shares of the Company’s common stock at a strike price of $0.28 per share.  The warrants expire on September 12, 2016. The conversion price of the notes and warrants will be reduced in the event the Company issues or sells any shares of common stock less than the conversion price.
 
The Company delayed scheduled payments on the convertible notes for the months of June, July, August, September, October and November 2012. This resulted in a default on the note agreement. Interest is being accrued at a rate of 18% as a result of the default.
 
5. DERIVATIVE INSTRUMENTS
 
The Company’s debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.
 
The identification of, and accounting for, derivative instruments is complex.  Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur.  For bifurcated conversion options that are accounted for as derivative instrument liabilities, we determine the fair value of these instruments using binomial option pricing model.  That model requires assumptions related to the remaining term of the instrument and risk-free rates of return, our current Common Stock price and expected dividend yield, and the expected volatility of our Common Stock price over the life of the option.
 
In connection with the issuance of the notes and warrants, the conversion features are accounted for as derivative liabilities at the date of issuance and adjusted to fair value through earnings at each reporting date, due to reset and conversion features. The conversion price will be reduced in the event the Company issues or sells any shares of common stock less than the conversion price. The fair value was estimated on the date of grant using a binomial option-pricing model using the following weighted-average assumptions: expected dividend yield of 0%; expected volatility of 290%; risk-free interest rate of 0.05% and an expected holding period of 24 months for the notes and 60 months for the warrants. The resulting values, at the date of issuance, were allocated to the proceeds received and applied as a discount to the face value of the notes and warrants.  The Company recorded a derivative expense on the notes of $649,212 at inception and a further derivative expense on the warrants of $2,431,437 at inception.
 
In regards to the September 12, 2011 notes, the Company recognized a derivative liability of $1,484,806 on December 31, 2011 and a change in fair value of $(688,947) for the nine months ended September 30, 2012, and redemptions of $538,896 for the nine months ended September 30, 2012 resulting in a derivative liability of $256,963 at September 30, 2012.
 
In regards to the September 12, 2011 warrants, the Company recognized a derivative liability of $1,253,018 on December 31, 2011 and a change in fair value of $(968,408) for the nine months ended September 30, 2012, resulting in a derivative liability of $284,610 at September 30, 2012.
 
The following tables illustrate the fair value adjustments that were recorded related to the derivative financial instruments associated with the convertible debenture financings:
 
   
Nine months ended September 30, 2012
 
Derivative liability
 
December 31, 2011
   
Fair Value Adjustments
   
Redemptions
   
September 30, 2012
 
Notes
 
$
1,484,806
   
$
(688,947
 
$
(538,896
)  
256,963
 
Warrants
   
1,253,018
     
   (968,408
)
   
-
     
284,610
 
   
$
2,737,824
   
$
(1,657,355
)
 
$
(538,896
)  
$
541,573
 
 
 

 
7

XTREME OIL & GAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
 
6. STOCKHOLDERS’ EQUITY
 
Capital Structure
 
The Company is authorized to issue up to 200,000,000 shares of common stock, $0.001 par value per share. The holders of the common stock do not have any preemptive right to subscribe for, or purchase, any shares of any class of stock.
 
The Company is authorized to issue up to 49,999,000 shares of preferred stock, $0.001 par value per share of which none were issued and outstanding as of September 30, 2012.
 
The Company has one class of Preferred Stock and Nontransferable Preferred Stock.  The Nontransferable Preferred Stock, consisting of 1,000 shares, is all owned by Mr. McAndrew, the Company’s chief executive officer.
 
 Common Stock
 
In the nine months ended September 30, 2012, we issued 75,464 restricted shares of our common stock to consultants valued at $63,095.

During the nine months ended September 30, 2012, the Company cancelled 67,500 shares of common stock previously issued to a consultant pursuant to a consulting agreement entered into on October 18, 2011.  The cancelled shares are being included in the issued and outstanding shares of common stock as of September 30, 2012.

In the nine months ended September 30, 2012, we issued 76,923 shares of our common stock to a convertible note holder as conversion of $5,000 of accrued interest.

7. CONTINGENCIES
 
On December 1, 2009, we began legal proceedings in McLain County District Court in Purcell, Oklahoma against D. Deerman, L.P. alleging breach of contract and demanding payment for fees owed, oil and gas production revenue and other expenses on the Oil Creek property in excess of $75,000 based on our contracted ownership percentage.  The suit also demands an accounting discovery for all items in dispute. On December 31, 2009, Deerman filed a counterclaim in the same court claiming breach of contract for drilling the Oil Creek property and demanding payment of $235,000 for expenses incurred.   A remaining accounts receivable balance of $173,842 was written off at September 30, 2012. The Flint Creek/Oil Creek property was written off at September 30, 2012 as unrecoverable.

On March 30, 2010, each of Baker Hughes, Pan American Drilling, Native American Drilling and other service providers began legal proceedings against us in Logan County District Court in Oklahoma demanding judgment for past due invoices in excess of $75,000. We have settled with all service providers in this suit except for Baker Hughes whose bills we continue to dispute.
 
On June 8, 2012, the Company agreed to acquire a 9.255321%, before payout, working interest in the Saltwater Disposal well (Gotcheye SWD) from the KD Family, LLC for $464,000 and a 6.382980%, before payout, working interest in the Lionheart well for $36,000 from the NCAL, LLC.  The KD Family, LLC and the NCAL, LLC are both owned by Mr. Nicholas DeVito, the Company’s chief operation officer.  The saltwater disposal working interest was resold in June 2012 by the Company for $535,480.  
 
On June 8, 2012, the Company agreed to acquire a 9.255321%, before payout, working interest in the Saltwater Disposal well (Gotcheye SWD) from the WMDM Family Partnership for $464,000 and a 6.382980%, before payout, working interest in the Lionheart well for $36,000 from the WMDM Family Limited Partnership.  The WMDM Family Limited Partnership is owned by wife of Mr. McAndrew’s, the Company’s chief executive officer.  The saltwater disposal working interest was resold in June 2012 by the Company for $535,480.  
 
 

 
8

XTREME OIL & GAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
 
7. CONTINGENCIES – Continued
 
On June 8, 2012, the Company agreed to acquire a 1.595745%, before payout, working interest in the Saltwater Disposal well (Gotcheye SWD) from Ms. Phyllis Wingate for $80,000 and a 0.638298% working interest in the Lionheart well for $3,600 from Ms. Phyllis Wingate, our Corporate Secretary. The saltwater disposal working interest was resold in June 2012 by the Company for $92,300.  
 
8. EARNINGS PER SHARE
 
For the three and nine months ended September 30, 2012, dilutive securities existed. Diluted earnings per share reflect the potential dilution of security that could share in the earnings of an entity, such as convertible preferred stock, stock options, warrants or convertible securities.
 
The calculation of diluted earnings per share for the three and nine months ended September 30, 2012 does not include 6,810,269 shares of common stock assuming the warrants issued with the convertible notes payable, as discussed above, were exercised due to their anti-dilutive effect.

The calculation of diluted earnings per share for the three and nine months ended September 30, 2012 does not include 6,130,375 shares of common stock assuming the convertible notes payable, as discussed above, were converted due to their anti-dilutive effect.

9. INCOME TAXES

At September 30, 2012, the Company had an unused net operating loss carryover of approximately $6,299,000 that is available to offset future taxable income which expires beginning in 2028 and ending in 2031.
 
The ability of the Company to utilize NOL carryforwards to reduce future federal taxable income and federal income tax is subject to various limitations under the Internal Revenue Code of 1986, as amended. The utilization of such carryforwards may be limited upon the occurrence of certain ownership changes, including the issuance or exercise of rights to acquire stock, the purchase or sale of stock by 5% stockholders, as defined in the Treasury regulations, and the offering of stock during any three-year period resulting in an aggregate change of more than 50% in the beneficial ownership of the Company.
 
In the event of an ownership change (as defined for income tax purposes), Section 382 of the Code imposes an annual limitation on the amount of a corporation's taxable income that can be offset by these carryforwards. The limitation is generally equal to the product of (i) the fair market value of the equity of the company multiplied by (ii) a percentage approximately equivalent to the yield on long-term tax exempt bonds during the month in which an ownership change occurs. In addition, the limitation is increased if there are recognized built-in gains during any post-change year, but only to the extent of any net unrealized built-in gains (as defined in the Code) inherent in the assets sold. Certain NOLs acquired through various acquisitions are also subject to limitations.
 
There are no significant differences between the Company’s operating results for financial reporting purposes and for income tax purposes.
 
10. SUBSEQUENT EVENTS
 
The Company failed to make its October 12, 2012 and November 12, 2012 payments on the convertible debt instrument on time. This resulted in a default on the note agreement. Interest is being accrued at a rate of 18% as a result of the default.

In October 2012, we issued 164,037 shares of our common stock to certain convertible note holders as conversion of $26,039 of accrued interest and principal.
 
 
 
 
 

 
9

 
 
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
SAFE HARBOR STATEMENT
 
This Quarterly Report on Form 10-Q (the “Report”) 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. Discussions containing such forward-looking statements may be found in Part I. Items 2 and 3 hereof, as well as within this Report generally. All statements, other than statements of historical facts, concerning, among other things, planned capital expenditures, potential increases in oil and natural gas production, the number and location of wells to be drilled in the future, future cash flows and borrowings, pursuit of potential acquisition opportunities, our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. One should consider carefully the statements under the “Risk Factors” section of our Annual Report on Form 10-K filed with the SEC (the “Form-10K”), which describe factors that could cause our actual results to differ from those anticipated in the forward-looking statements, including, but not limited to, the following factors:
 
 
·
our ability to successfully develop our undeveloped acreage primarily held in Texas;
 
·
volatility in commodity prices for oil and natural gas;
 
·
the possibility that the industry may be subject to future regulatory or legislative actions (including any additional taxes and changes in environmental regulation);
 
·
the presence or recoverability of estimated oil and natural gas reserves and the actual future production rates and associated costs;
 
·
the potential for production decline rates for our wells to be greater than we expect;
 
·
our ability to generate sufficient cash flow from operations, borrowings or other sources to enable us to fully develop our undeveloped acreage positions;
 
·
our ability to replace oil and natural gas reserves;
 
·
environmental risks;
 
·
drilling and operating risks;
 
·
exploration and development risks;
 
·
competition, including competition for acreage in resource-style areas;
 
·
management’s ability to execute our plans to meet our goals;
 
·
our ability to retain key members of senior management and key technical employees;
 
·
our ability to obtain goods and services, such as drilling rigs and tubulars, and access to adequate gathering systems and pipeline take-away capacity, necessary to execute our drilling program;
 
·
our ability to secure firm transportation for natural gas we produce and to sell natural gas at market prices;
 
·
general economic conditions, whether internationally, nationally or in the regional and local market areas in which we do business, may be less favorable than expected, including the possibility that the economic recession and credit crisis in the United States will be prolonged, which could adversely affect demand for oil and natural gas and make it difficult to access financial markets;
 
·
continued hostilities in the Middle East and other sustained military campaigns or acts of terrorism or sabotage; and
 
·
other economic, competitive, governmental, legislative, regulatory, geopolitical and technological factors that may negatively impact our business, operations or pricing.
 
Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in the section entitled “Risk Factors” included in the Form 10-Q. All forward-looking statements are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this document. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.
 
 
 
 
 

 
10

 
 
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. - continued
 
Overview
 
Xtreme Oil & Gas, Inc. is a growing independent energy company focused on the acquisition, development, ownership, operation and investment in energy-related businesses and assets, including, without limitation, the acquisition, exploration and development of natural gas and crude oil, and other related businesses which management believes have potential for improved production rates and resulting income by application of both conventional and non-conventional improvement and enhancement techniques. As of September 30, 2012 we own working interests in over 10,000 acres of oil and gas leases in Kansas, Texas and Oklahoma that now include 10 gross producing wells and 55 gross non-producing wells. Xtreme plans to pursue an ongoing reworking and drilling program to increase production from its properties.
 
During the second quarter 2012, the Saltwater Disposal well project was placed into full time operations.  We acquired a 10% working interest from the ADA Energy Services and took over operations on May 29, 2012 in exchange for a 5 cent per barrel of water disposed fee payable upon collecting revenue from disposal customers.
 
Our revenues are derived from the sale of oil and gas products and sale of interests, principally in drilling programs. In 2008 we derived a small amount of revenue from contract drilling on one project, the Oil Creek, but have no plans to engage in contract drilling in the future.
 
          When we sell working interests in our leases, we maintain a deposits payable liability and recognize revenue as the development related to the working interest is completed. After completion, costs incurred to maintain wells and related equipment and lease and well operating costs are charged to expense as incurred.
 
We have been an operating company since 2006 with the acquisition of Emerald Energy and have had revenues from operations for more than four years.
 
Results of Operations.
 
 For the Nine Months Ended September 30, 2012 compared to 2011
 
Revenues
 
For the nine months ended September 30, 2012, revenue was $1,327,258 a decrease of approximately $1,067,000 from $2,393,989 for the nine months ended September 30, 2011. Decrease in revenue was due primarily to the difference in the gain from sale of working interest for the nine months ended September 30, 2012. Oil and gas revenues are principally from the Texas Five Star project. Oil and gas revenues were essentially flat due to several equipment failures that required repair.
 
Expenses
 
Oil production costs for the nine months ended September 30, 2012 totaled $102,828, a decrease of approximately $41,000 from $144,221 for the nine months ended September 30, 2011. The decrease is due to reduced production costs on all of our properties. Production costs exceeded oil and gas revenues in 2012 and 2011 because of higher costs of maintenance and continued additional operations to increase future production on certain wells in Texas. Oil and gas production costs are principally from the Texas Five Star project.
 
General and administrative expenses totaled $1,212,927 for the nine months ended September 30, 2012, a decrease of approximately $305,000, from $1,518,399 for the nine months ended September 30, 2011. These general and administrative expense differences are largely driven by costs of professional services.

Loss on disposal of properties totaled $233,266 for the nine months ended September 30, 2012, an increase of approximately $195,805, from $37,461 for the nine months ended September 30, 2011 due to the write off of the Oil Creek property.
 
Other Income/(Expenses)
 
Gain on Settlement relates to the net cost recovery after expenses for litigation and repairs incurred by the Company from the damages to the Lionheart well totaled $930,972 for the nine months ended September 30, 2012, an increase of $914,749 from the nine months ended September 30, 2011. We expect to use the remaining proceeds of these settlements to redevelop the property and attempt to produce oil from other depths in an undamaged part of the wellbore.

 
11

 
 
 
 ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. - continued
 
Other income and expense are largely driven by our debt offering in September 2011. Amortization of debt discount and interest expense totaled $1,395,400 for the nine months ended September 30, 2012. Derivative income related to the convertible debt and warrants issued in the offering was $2,276,758 for the period ended September 30, 2012. This income, a non-cash charge, is particularly volatile as we incurred, for example, derivative expense of $3,420,865 in the period ended September 30, 2011 related to another debt offering during that period.
 
Net Income
 
For the nine months ended September 30, 2012, we had a net income of $1,308,908 compared with a net loss of $2,933,828 for nine months ended September 30, 2011. This increase in net income was due primarily to gain on settlement of litigation and non-cash derivative income related of convertible debt instruments during the period ended September 30, 2012.
 
For the nine months ended September 30, 2012 and 2011, our earnings per share, on a basic and diluted basis, was and $0.03 and $(0.07), respectively.
 
For the Three Months Ended September 30, 2012 compared to 2011

Revenues
 
For the three months ended September 30, 2012, revenue was $247,943, an increase of approximately $125,000 from $122,766 for the three months ended September 30, 2011. The increase was principally due to an increase in the gain from working interest sales.   Revenue for oil sales for the three months ended September 30, 2012 was $9,489.
 
Currently, most of our revenues have come from the gains on sales of working interest in our oil and gas properties, such sales reflecting approximately 96% of our revenues in the third quarter of 2012 and approximately 94% of our revenues in the third quarter of 2011. 
 
Expenses
 
Oil production costs for the three months ended September 30, 2012 totaled $66,942, an increase of approximately $16,000 from $50,389 for the three months ended September 30, 2011. The increase is due to maintenance activities on all of our properties.
 
General and administrative expenses totaled $465,819, for the three months ended September 30, 2012, a decrease of approximately $124,000, from $590,237 for the three months ended September 30, 2011. This decrease in general and administrative expense is largely driven by decrease in expenses for professional services delivered.   These expenses, incurred in 2012, included salaries, utilities and rent, consulting fees, and presentation fees.
 
Loss on disposal of properties totaled $204,649 for the three months ended September 30, 2012, an increase of approximately $183,406, from $21,603 for the three months ended September 30, 2011 due to the write off of the Oil Creek property.

 Other Income/(Expenses)
 
Other income and expense are largely driven by our debt offering in September 2011. Amortization of debt discount and interest expense totaled $721,568 for the three months ended September 30, 2012.  Derivative income related to the convertible debt and warrants issued in the offering was $851,549 for the quarter. This income, a non-cash charge, is particularly volatile as we incurred, for example, derivative expense of $3,388,778 in the three months ended September 30, 2011 related to another debt offering during that period.
 
 Net Income
 
For the three months ended September 30, 2012, we had a net loss of $463,976 compared to a loss of $4,082,873 for the three months ended September 30, 2011. This change in net loss was primarily due to accounting charges taken for derivative instruments during the period ended September 30, 2012. Our losses from operations increased in the third quarter of 2012 to a loss of $597,158 from a loss of $542,745 in the third quarter of 2011. The increased operating loss essentially reflects the increase in loss on disposal of properties, depreciation, depletion and amortization expenses, and production costs, partially offset by the increase in working interest revenue and lower general and administrative expenses.
 
For the three months ended September 30, 2012 and 2011, our loss per share on a basic and diluted basis was $0.01 and $0.09, respectively.

 
12

 
 
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. - continued
 
Liquidity and Capital Resources
 
Our first audited financial statements were for fiscal years 2008 and 2009 and had a going concern qualification. The audit for fiscal 2010 and 2011 had the same qualification.
 
Our plan has been for our field operations to provide sufficient liquidity for daily operating capital and further development. We have also sold working interests in our properties and incurred debt to also provide capital to acquire properties and develop them when the cash flow from those operations would sustain our operations and provide for growth. Though each of our properties indicate significant reserves or potential, currently all of our properties need additional capital to develop, and we have failed to make payments on indebtedness incurred in September 2011, indebtedness in which we are in default.
 
In need of capital to develop properties and expand, in June 2012 we pursued several funding opportunities based on the belief that the assets owned, if developed, would satisfy our current operating and development needs and provide for our growth. With a $325,000 deposit advanced by affiliates of the company, we obtained a commitment for a $20,000,000 debt instrument with a close indicated in the early summer 2012 from the RO Financial Group. Two other discussions we chose not to pursue would have resulted in significant dilution or debt and warrants that would not be beneficial.
 
Although we have been assured both verbally and in writing that the funding by the RO Financial Group engaged in June of this year remains imminent, we began to pursue various alternatives to that financing. Our plan is to bring to fruition one or more of these plans as soon as possible to continue to develop our existing properties, and expand our business, probably in the development of the salt water disposal business.
 
Financing Plans
 
On June 8 2012, three of our executives and one Director sold back working interest in the Saltwater Disposal Well to the Company for $1,050,720 and the Company subsequently resold that interest for $1,212,475.   See Note 7 to the consolidated financial statements for further detail.
 
As discussed above, in June 2012, we signed an agreement with the RO Financial Group that will give us access to a $20,000,000 line of credit facility.  One director and an officer advanced the company $250,000 of the $325,000 placement fee required to commence the loan process. See Note 3 to the consolidated financial statements. This financing has not yet closed as of the date of this filing.
 
Cash flow provided by operations was $785,907 for the nine months ending September 30, 2012. Cash flow used in investing activities was $1,095,634 for the nine months ended September 30, 2012. Cash flow used by financing activities was $173,896 for the nine months ended September 30, 2012.
 
Deposits payable at September 30, 2012 include $335,000 for the Smoky Hill Two well Project in process at September 30, 2012.
 
The Saltwater Disposal project, completed in the second quarter of 2012, was accepting water from customers for the entire quarter and is now shut in awaiting a larger pump to be installed. Gross charges to customers for the third quarter were approximately $16,500.
 
Development is continuing on the first well on the Smoky Hill Project. During second quarter of 2012 frac fluid continued to be pumped off and the well encountered operational problems when a casing pipe developed a leak and contaminated the hole.  The wellbore has been cleaned but residual problems continue, problems that we anticipate will abate as we gain production during the fourth quarter.
 
Convertible notes payable are presented net of debt discount. Principal balance at September 30, 2012 was $1,787,305. Unamortized debt discount at September 30, 2012 was $885,038. The Company delayed scheduled payments on the convertible notes for the months of June, July, August, September, October, and November 2012. This resulted in a default on the note agreement. Interest is being accrued at a rate of 18% as a result of the default.
 
As of September 30, 2012, we are unable to determine whether we will generate sufficient cash from our oil and gas operations to fund our operations for the next twelve months. Although we expect cash flow from operations to rise as our operations improve and the number of projects we successfully develop grows, we believe that we will raise, probably through the private placement of equity securities, additional capital to assure we have the necessary liquidity for 2012.
 
 
13

 
 
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. – continued
 
Our cash requirements, mostly for corporate expenses, are projected to be approximately $80,000 per month or $960,000 for the next 12 months, and our drilling activity has been funded from drilling programs. Revenue from existing oil production is not yet consistent on a monthly basis, and we cannot predict whether our cash flows from the future completion of our current drilling operations and Saltwater Disposal Well will be sufficient to meet our monthly cash requirements.
 
To continue with our business plan including the funding of operations, we may require additional capital to develop properties and believe that we will continue to raise capital and generate revenue by selling interest in prospects to investors through drilling programs and through future offerings of equities.
 
If required, our ability to obtain additional financing from other sources also depends on many factors beyond our control, including the state of the capital markets and the prospects for business growth. The necessary additional financing may not be available or may be available only on terms that would result in excessive further dilution to the current owners of our common stock or at unreasonable costs of capital.
 
 ITEM 4. Controls and Procedures
 
As of the end of the quarter ended September 30, 2012, our Chief Executive Officer, Willard G. McAndrew, and Chief Financial Officer, Roger Wurtele, with the participation of our Chief Operating Officer, reviewed our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon our evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the end of the period covered by this report our disclosure controls and procedures are effective at the reasonable assurance level to ensure that information required to be included in this report is (i) accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
 
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.
 
Changes in Internal Control over Financial Reporting
 
There have been no significant changes in our internal controls or other factors during the fiscal quarter ended September 30, 2012 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 

 
14

 
 
 
PART II – OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
On December 1, 2009, we began legal proceedings in McLain County District Court in Purcell, Oklahoma against D. Deerman, L.P. alleging breach of contract and demanding payment for fees owed, oil and gas production revenue and other expenses on the Oil Creek property in excess of $75,000 based on our contracted ownership percentage.  The suit also demands an accounting discovery for all items in dispute. On December 31, 2009, Deerman filed a counterclaim in the same court claiming breach of contract for drilling the Oil Creek property and demanding payment of $235,000 for expenses incurred.   A remaining accounts receivable balance of $173,842 was written off at September 30, 2012. The Flint Creek/Oil Creek property was written off at September 30, 2012 as unrecoverable.
 
On March 30, 2010, each of Baker Hughes, Pan American Drilling, Native American Drilling and other service providers began legal proceeding against us in Logan County District Court in Oklahoma demanding judgment for past due invoices in excess of $75,000. We have settled with all service providers in this suit except for Baker Hughes whose bills we continue to dispute.
 
On April 27, 2010, we filed suit against Genie Well Services in U.S. District Court for the Western District of Oklahoma demanding restitution for damaging our Lionheart well for damages in excess of $75,000 based on their negligence that resulted in damaging the wellbore and added Crescent Services and Onsite Oiltools as additional defendants. Genie filed a counterclaim for $53,110 for their services rendered after causing the damage. We settled all claims between all parties in confidential settlements dated March 5, 2012 which included debt forgiveness income from cancellation of vendor balances. 
 
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
 
We sold and issued the unregistered securities described below. We believe that each of the securities transactions described below was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) as a transaction not involving any public offering and Regulation D promulgated under the Securities Act of 1933. In each case, the number of investors was limited, the investors were either all accredited and/or otherwise qualified, had access to material information about the issuer, and restrictions were placed on the resale of the securities sold.
 
Shares issued for Cash
 
In the nine months ended September 30, 2012, we did not sell any shares to investors.
 
Shares issued for Services
 
In the nine months ended September 30, 2012, we issued 75,464 restricted shares of our common stock to consultants valued at $63,095.

During the period ended September 30, 2012, the Company cancelled 67,500 shares of common stock previously issued to a consultant pursuant to a consulting agreement entered into on October 18, 2011.  The cancelled shares are being included in the issued and outstanding shares of common stock as of September 30, 2012.

In the nine months ended September 30, 2012, we issued 76,923 shares of our common stock to a convertible note holder as conversion of $5,000 of accrued interest.
 
We believe that each of the securities transactions described below was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) as a transaction not involving any public offering and Regulation D promulgated under the Securities Act of 1933. In each case, the number of investors was limited, the investors were either all accredited and/or otherwise qualified, had access to material information about the issuer, and restrictions were placed on the resale of the securities sold.
 
Securities issued for Working Interests
 
           In the nine months ended September 30, 2012, we issued working interests in the Saltwater Disposal Project valued at $2,585,719.
 

 
15

 

ITEM 6. EXHIBITS
 
 
 
 
 
 
 

 
SIGNATURES
 
In accordance with the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Plano, State of Texas. 
 
                                                                                           
 
Xtreme Oil & Gas, Inc.:
 
       
Date: November 14, 2012
By:
/s/ Willard G. McAndrew III
 
   
Name: Willard G. McAndrew III
 
   
Title: Chief Executive Officer
 
       
 
       
Date: November 14, 2012
By:
/s/ Roger Wurtele
 
   
Name: Roger Wurtele
 
   
Title: CFO, Principal Accounting Officer
 
       
 
In accordance with the Securities and Exchange Act, this Form 10K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 
Xtreme Oil & Gas, Inc.:
 
       
Date: November 14, 2012
By:
/s/ Willard G. McAndrew III
 
   
Name: Willard G. McAndrew III
 
   
Title: Director
 
       
 
 
 
 
16