10-Q 1 star_10q.htm QUARTERLY REPORT star_10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q
 
 

 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2014
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                     to                    
 
Commission file number 000-54967  
 

STARBOARD RESOURCES, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware
 
45-5634053
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
300 E. Sonterra Blvd, Suite 1220
San Antonio, Texas
 
78258
(Address of principal executive offices)
 
(Zip Code)
 
(210) 999-5400
(Registrant’s telephone number, including area code)
 
 
 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     þ   Yes     o   No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      þ   Yes      o   No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
                     
Large accelerated filer
 
o
         
Accelerated filer
 
¨
           
Non-accelerated filer
 
o
     
(Do not check if a smaller reporting company)
 
Smaller reporting company
 
þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    þ  No
 
As of March 31, 2014, there were 12,362,336 shares of the registrant’s common stock, par value $0.001 per share, outstanding. 
 


 
 
 
 
 
 

STARBOARD RESOURCES, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2014
 
INDEX
 
 
Page
 
PART I — FINANCIAL INFORMATION
 
1
  
Item 1. — Financial Statements
 
1
  
Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013
 
1
  
Condensed Consolidated Statements of Operations for the Three Months Ended  March 31, 2014 and 2013
 
3
  
Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Three Months Ended March  31, 2014
 
4
  
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013
 
5
  
Notes to the Condensed Consolidated Financial Statements
 
7
  
Item  2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
17
  
Item 3. — Quantitative and Qualitative Disclosures About Market Risk
 
26
  
Item 4. — Controls and Procedures
 
26
  
PART II — OTHER INFORMATION
 
27
  
Item 1. — Legal Proceedings
 
27
  
Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds
 
27
  
Item 3. — Defaults Upon Senior Securities
 
27
  
Item 4. — Mine Safety Disclosures
 
27
  
Item 5. — Other Information
 
27
  
Item 6. — Exhibits
 
27
  
SIGNATURES
 
28
  


 
 

 
 
Part I – Financial Information
 
Item 1.   Financial Statements

STARBOARD RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share data)
 
     
March 31,
 
December 31,
   
2014
 
2013
     
(Unaudited)
   
 
ASSETS
             
                 
 
Current assets
             
 
Cash
 
$
3,313  
    $
5,794  
 
Trade receivable
   
1,614  
     
1,778  
 
Joint interest receivable
 
951  
     
60  
 
Deferred tax assets
   
39  
     
39  
 
Prepaid expenses
   
137  
     
154  
                 
 
Total current assets
 
6,054  
     
7,825  
                 
 
Oil and natural gas properties and other equipment
           
 
Oil and natural gas properties, successful efforts method, net of
 
96,757
     
74,166  
 
accumulated depletion
           
 
Other property and equipment, net of depreciation
 
155  
     
168  
                 
 
Total oil and natural gas properties and other equipment, net
 
96,912  
     
74,334  
                 
 
Other assets
             
 
Prepaid drilling costs
   
351  
       
 
Goodwill
   
960  
     
960  
 
Other
   
1,249  
     
1,112  
                 
 
Total other assets
 
2,560  
     
2,072  
                 
 
Total assets
 
$
105,526  
    $
84,231  

 

 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
1

 
 

STARBOARD RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share data)


   
March 31,
   
December 31,
 
   
2014
   
2013
 
   
(Unaudited)
       
LIABILITIES AND STOCKHOLDERS’ EQUITY
           
             
Current liabilities
           
Accounts payable and accrued liabilities
  $ 9,938     $ 9,485  
Joint interest revenues payable
    816       968  
Current derivative liabilities
    58       63  
Current maturities of notes payable
    1,359       25  
Current asset retirement obligations
    366       366  
                 
Total current liabilities
    12,537       10,907  
                 
Long-term liabilities
               
Derivative liabilities
    39       51  
Notes payable
    21,525       12,532  
Related party note payable
    10,000          
Deferred tax liabilities
    15,689       15,914  
Asset retirement obligations
    2,936       2,070  
                 
Total long-term liabilities
    50,189       30,567  
                 
Commitments and contingencies
               
                 
Stockholders’ equity
               
Preferred stock, $.001 par value, authorized 10,000,000 shares;
               
none issued and outstanding
               
Common stock, $.001 par value, authorized 150,000,000 shares;
               
12,362,336 shares issued at
               
March 31, 2014 and December 31, 2013
    12       12  
Paid-in capital in excess of par
    54,746       54,446  
Accumulated deficit
    (11,958 )     (11,701 )
                 
Total stockholders’ equity
    42,800       42,757  
                 
Total liabilities and stockholders’ equity
  $ 105,526     $ 84,231  

 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
2

 

STARBOARD RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
   
Three Months Ended March 31,
   
   
2014
   
2013
   
   
(Unaudited)
   
(Unaudited)
   
               
Oil, natural gas, and related product sales
  $ 3,807     $ 2,950    
                   
Expenses
                 
Depreciation and depletion
    1,704       1,231    
Lease operating
    919       888    
General and administrative
    794       843    
Professional fees
    277       165    
Production taxes
    110       71    
Exploration
    14       23    
                   
Total expenses
    3,818       3,221    
                   
Operating loss
    (11 )     (271 )  
                   
Other expense
                 
Interest expense
    (288 )     (113 )  
Going public delay expense
            (182 )  
Gain (loss) from derivative contracts
    (2 )     38    
                   
Total other expense
    (290 )     (257 )  
                   
Loss before income taxes
    (301 )     (528 )  
                   
Income tax expense:
                 
Current income taxes
    181            
Deferred income taxes
    (225 )     (23 )  
                   
Total income tax expense
    (44 )     (23 )  
                   
Net loss
  $ (257 )   $ (505 )  
                   
Net loss per basic and diluted
                 
common share
  $ (0.02 )   $ (0.04 )  
                   
Weighted average basic and diluted
                 
common shares outstanding
    12,362,336       12,362,336    
                   

 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
3

 


STARBOARD RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY – UNAUDITED
(In thousands)
 
For the three months ended March 31, 2014
 

 
Common Stock
 
Paid-In
           
 
($.001 Par Value)
 
Capital in
 
Accumulated
       
 
Shares
 
Amount
 
Excess of Par
 
Deficit
 
Total
 
                               
Balances, December 31, 2013
    12,362     12     54,446     (11,701 )   42,757  
Stock-based compensation
                    300               300  
Net loss
                            (257 )     (257 )
Balances, March 31, 2014
    12,362     12     54,746     (11,958 )   42,800  
 

 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
4

 
 

STARBOARD RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share amounts)
 
   
Three Months Ended
March 31,
 
   
2014
   
2013
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities
           
Net loss
  $ (257 )   $ (505 )
Adjustments to reconcile net loss to net cash
               
 provided by operating activities:
               
Depreciation and depletion
    1,704       1,231  
Deferred income taxes
    (225     (23 )
Stock-based compensation
    300       300  
Accretion of asset retirement obligation
    37       46  
Going public delay expense
            182  
Unrealized income (loss) from derivative contracts
    (17     (38 )
Accretion of debt issuance costs
    38       12  
Increase (decrease) in cash attributable to
               
 changes in operating assets and liabilities:
               
Trade receivable
    164       164  
Joint interest receivable
    (890     53  
Prepaid expenses and other assets
    16       (33 )
Accounts payable and accrued liabilities
    (1,247     (1,207 )
Joint interest revenues payable
    (151     57  
Net cash provided by (used in) operating activities
    (528     239  
                 
Cash flows from investing activities
               
Development of oil and natural gas properties
    (4,052     (1,786 )
            Acquisition of White Oak Resources VI, LLC and Permian Atlantis LLC oil and natural gas properties      (17,383        
Acquisition of other oil and natural gas properties
    (318        
Prepaid drilling costs
    (315     (785 )
Net cash used in investing activities
    (22,104     (2,571 )
                 
Cash flows from financing activities
               
Proceeds from notes payable, net of debt issuance costs
    20,172       2,665  
Deferred offering costs
    (15        
Repayments of notes payable
    (6     (4 )
Net cash provided by financing activities
    20,151       2,661  
                 
Net increase (decrease) in cash
    (2,481     329  
Cash, beginning of period
    5,794       1,037  
Cash, end of period
  $ 3,313     $ 1,366  

 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
5

 
 
 
STARBOARD RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
   
Three Months Ended March 31,
 
   
2014
   
2013
 
   
(Unaudited)
   
(Unaudited)
 
Supplemental disclosure of cash flow information
           
Cash paid during the period for interest
  $ 250     $ 54  
                 
Supplemental disclosure of non-cash investing transactions
               
Payables related to oil and natural gas capitalized expenditures
  $ 1,699     $ 696  
Capitalized asset retirement cost
  $ 829     $    
                 


 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
6

 

STARBOARD RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - NATURE OF OPERATIONS

Starboard Resources LLC was formed in Delaware on June 2, 2011 as a limited liability company to acquire, own, operate, produce, and develop oil and natural gas properties primarily in Texas and Oklahoma. On June 28, 2012, Starboard converted from a Delaware limited liability company to a Delaware C-Corporation and is now known as Starboard Resources, Inc. (“Starboard”). The membership units of Starboard Resources LLC were exchanged on a 1:1 basis for common shares of Starboard.
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Additionally, the accompanying condensed consolidated financial statements as of March 31, 2014 and for the three months ended March 31, 2014 and 2013 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q, and reflect, in the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods.  Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
 
Principles of Consolidation

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

The Company has adopted and follows Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and Disclosures, for measurement and disclosures about fair value of its financial instruments.  ASC 820 establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.  The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The three (3) levels of fair value hierarchy defined by ASC 820 are:

Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 — Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Valuation of instruments includes unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

As defined by ASC 820, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale, which was further clarified as the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in an orderly transaction between market participants at the measurement date.  The carrying amounts of the Company’s financial assets and liabilities, such as cash, trade receivable, joint interest receivable, joint interest revenues payable, accounts payable and accrued liabilities and related party payable, approximate their fair values because of the short maturity of these instruments.  
 
 
 
7

 
 
STARBOARD RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 Oil and Gas Natural Gas Properties

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

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

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

Additionally, the Company assesses the impairment of capitalized costs of its proved oil and natural gas properties and other equipment when circumstances indicate that the carrying value may not be recoverable.  The Company determines if impairment has occurred through either adverse changes or as a result of their annual petroleum engineering review.  When it is determined that the estimated future net cash flows of an asset will not be sufficient to recover its carrying amount, an impairment loss must be recorded to reduce the carrying amount to its estimated fair value.  For the three months ended March 31, 2014 and 2013, the Company did not have an impairment charge.

Revenue Recognition and Natural Gas Imbalances

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

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

Income Taxes

The Company complies with GAAP which requires an asset and liability approach to financial reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred income tax assets to the amount expected to be realized.
 
 
 
8

 

 
STARBOARD RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Income Taxes (continued)

The Company is required to determine whether its tax positions are more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. De-recognition of a tax benefit previously recognized results in the Company recording a tax liability that reduces ending retained earnings. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of March 31, 2014 and December 31, 2013. The Company’s conclusions may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof.

The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense and other expenses, respectively. No interest expense or penalties have been recognized as of March 31, 2014 and 2013 and for the three month periods then ended (unaudited).

The Company files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states and foreign jurisdictions. Generally, the Company is subject to income tax examinations by major taxing authorities since the commencement of operations.

The Company may be subject to potential examination by U.S. federal, U.S. states or foreign jurisdiction authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal, U.S. state and foreign tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.

Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to stockholders by the weighted average number of common shares outstanding during the period.  Diluted net income (loss) per common share is calculated in the same manner, but also considers the impact to common shares for the potential dilution from stock options, non-vested share appreciation rights and non-vested restricted shares. For the three month periods ended March 31, 2014 and 2013, there were 349,650 (unaudited) potentially dilutive non-vested restricted shares. The potentially dilutive shares at March 31, 2014 and 2013 are considered antidilutive and thus result in the basic net income (loss) per common share equaling the diluted net income (loss) per common share.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
 
 
9

 


 
STARBOARD RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Use of Estimates (continued)

The Company’s estimates of oil and natural gas reserves are, by necessity, projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of natural gas and oil that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable natural gas and oil reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effect of regulations by governmental agencies, and assumptions governing future natural gas and oil prices, future operating costs, severance taxes, development costs and workover costs, all of which may in fact vary considerably from actual results. The future drilling costs associated with reserves assigned to proved undeveloped locations may ultimately increase to the extent that these reserves are later determined to be uneconomic. For these reasons, estimates of the economically recoverable quantities of expected natural gas and oil attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity of the reserves, which could affect the carrying value of the Company’s oil and natural gas properties and/or the rate of depletion related to the oil and natural gas properties.
 
NOTE 3 – FAIR VALUE MEASUREMENTS

As of March 31, 2014 and December 31, 2013, the Company had no assets which were measured at fair value.

The following tables present information about the Company’s liabilities measured at fair value as of March 31, 2014 and December 31, 2013:
 
                     
Balance as of
 
                     
March 31,
 
($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
2014
 
Liabilities (at fair value):
   (Unaudited)    
(Unaudited)
            (Unaudited)    
(Unaudited)
 
                         
                         
Asset retirement obligations
  $       $       $ 3,302     $ 3,302  
Derivative liabilities (oil collar and put options)
            97               97  
Total liabilities (at fair value)
  $       $ 97     $ 3,302     $ 3,399  

                     
Balance as of
 
                     
December 31,
 
($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
2013
 
Liabilities (at fair value):
                       
                         
Asset retirement obligations
  $       $       $ 2,437     $ 2,437  
Derivative liabilities (oil collar and put options)
            114               114  
Total liabilities (at fair value)
  $       $ 114     $ 2,437     $ 2,551  

 
 
10

 

 
STARBOARD RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE 4 – PROPERTY ACQUISITION

On March 26, 2014 (the “Acquisition Date”), the Company completed the purchase of oil and natural gas leases and leasehold interests (the “Oil and Natural Gas Properties”) with White Oak Resources VI, LLC and Permian Atlantis LLC (collectively the “Seller”) for the purpose of increasing the Company’s oil and natural gas operations in the Permian Basin.  The assets acquired are: (a) oil and natural gas leases and leasehold interests in Winkler and Loving Counties in Texas and Lea County, New Mexico; (b) twenty-nine wellbores; and (c) any contracts or agreements related to the foregoing lands, leases and wells.  The Oil and Natural Gas Properties include total acreage held by production of 5,160 gross developed acres (1,983.61 net developed acres). Additionally, producing wells and surrounding acreage have been unitized under Texas Railroad Commission regulations. Under the terms of the agreement, the Company purchased the Oil and Natural Gas Properties for $17,383,000 in cash.

Unaudited Pro Forma Condensed Combined Financial Statements

The following unaudited pro forma financial statements and related footnotes give effect to the acquisition of the Oil and Natural Gas Properties. The unaudited pro forma condensed statement of operations for the year ended December 31, 2013 reflects the acquisition of the Oil and Natural Gas Properties as if it had occurred on January 1, 2013.
 
The unaudited pro forma adjustments are based upon currently available information and certain assumptions that the Company believes to be reasonable under the circumstances. Pursuant to Regulation S-X, Article 11, of the Securities and Exchange Commission, pro forma adjustments include the effects of events that are directly attributable to the acquisition and are factually supportable. As actual adjustments may differ from pro forma adjustments, the unaudited pro forma combined financial information has been prepared for informational purposes only. It is not intended to be indicative of the Company's results of operations or financial position that might have been achieved had the acquisition been completed as of the dates presented, or the Company's future results of operations or financial position.
 
These unaudited pro forma condensed combined financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2013, as filed on March 31, 2014.
 
 
 
11

 


STARBOARD RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE 4 – PROPERTY ACQUISITION - CONTINUED

Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 2013

   
Starboard Resources, Inc. Historical
(unaudited)
   
Oil and Natural Gas Properties Acquired Historical
(unaudited)
   
 
Pro Forma Adjustments
(unaudited)
 
Pro Forma
Combined
(unaudited)
 
 
Oil, natural gas, and related product sales
  $  14,965,153     $  2,828,867     $   $  17,794,020  
Expenses
                           
  Depreciation and depletion
    6,436,367               674,651 (1)    7,111,018  
  Lease operating
    4,237,207       1,044,302             5,281,509  
  General and administrative
    3,087,035                     3,087,035  
  Professional fees
    777,655                     777,655  
  Production taxes
    434,623       146,334             580,957  
  Exploration
    43,794                     43,794  
                               
     Total expenses
    15,016,681       1,190,636       674,651     16,881,968  
                               
Operating income (loss)
    (51,528 )     1,638,231       (674,651   912,052  
                               
Other income (expense)
                             
  Interest income
    1,434                     1,434  
  Interest expense
    (747,659 )             (2,036,290 ) (2)   (2,783,949 )
  Going public delay expense
    (425,005 )                   (425,005 )
  Loss from derivative contracts
    (23,153 )                   (23,153 )
                               
     Total other expense
    (1,194,383 )             (2,036,290   (3,230,673 )
                               
Income (loss) before income taxes
    (1,245,911 )     1,638,231       (2,710,941   (2,318,621 )
                               
Income tax expense
                             
  Current income taxes
    26,502               (364,721 ) (3)   (338,219 )
  Deferred income taxes
    602,747                     602,747  
                               
     Total income tax expense
    629,249               (364,721 )    264,528  
                               
Net loss
  $ (1,875,160 )   $ 1,638,231     $ (2,346,220 $ (2,583,149 )
                               
Net loss per basic and diluted common share
  $ (0.15 )   $       $     $ (0.21 )
                               
Weighted average basic and diluted common shares outstanding
    12,362,336                     12,362,336  


 
12

 

 
STARBOARD RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE 4 – PROPERTY ACQUISITION - CONTINUED

Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 2013

(1)
Reflects additional depletion expense attributable to the Oil and Natural Gas Properties acquired based on the preliminary purchase price allocations.
(2) 
Reflects additional interest expense attributable to notes payable obtained to finance the Oil and Natural Gas Properties acquisition and accretion of the asset retirement obligations assumed as part of the Oil and Natural Gas Properties acquisition.
(3)
Reflects adjustment to the income tax provision for the estimated impact of the Oil and Natural Gas Properties' revenue and direct operating expenses, depletion, and interest expenses.  Income taxes were adjusted using a combined federal and state tax rate of 34%.
 
Financial Statement Presentation and Preliminary Purchase Price Allocation

The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2013 was derived from the statements of revenues and direct operating expenses of the Oil and Natural Gas Properties for the years ended December 31, 2013 and 2012, together with pro forma adjustments to give effect to the acquisition as if it occurred on January 1, 2013.
 
These unaudited pro forma condensed combined financial statements are provided for illustrative purposes and do not purport to represent what the Company's results of operations or financial position would have been if such transactions had occurred on the above mentioned date. This statement was prepared based on accounting principles generally accepted in the United States. The use of estimates is required and actual results could differ from the estimates used. The Company believes the assumptions used provide a reasonable basis for presenting the significant effects directly attributable to the acquisition.

The following purchase price allocation for the Oil and Natural Gas Properties is preliminary and includes significant use of estimates.  The fair values of the assets acquired and liabilities assumed are preliminary and are subject to revision as the Company continues to evaluate the fair value of these acquisitions.  Accordingly, the allocation will change as additional information becomes available and is assessed by management, and the impact of such changes may be material.  The following table summarizes the preliminary purchase price and preliminary estimated values of assets acquired and liabilities assumed:

Fair value of assets acquired and liabilities assumed
     
   Proved oil and natural gas properties (4)
  $ 18,225,736  
   Asset retirement obligations
    (842,736 )
 
     Total fair value of assets acquired and liabilities assumed, net
  $ 17,383,000  
         
Cash consideration transferred
  $ 17,383,000  

(4) Amount includes asset retirement costs of approximately $842,736.
 

 
 
13

 

 

STARBOARD RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE 5 – OIL AND NATURAL GAS PROPERTIES

The following table presents a summary of the Company’s oil and natural gas properties at March 31, 2014 and December 31, 2013:
 
 
($ in thousands)
 
March 31,
2014
   
December 31, 2013
 
Oil and natural gas properties
 
(Unaudited)
       
   Proved-developed producing properties
  $ 94,143     $ 72,208  
   Proved-developed non producing properties
    1,379       1,384  
   Proved-undeveloped properties
    10,755       9,410  
   Unproved properties
    5,214       4,208  
   Less: Accumulated depletion
    (14,734 )     (13,044 )
Total oil and natural gas properties, net of  accumulated depletion
  $ 96,757     $ 74,166  
 
NOTE 6 – ASSET RETIREMENT OBLIGATIONS
 
The Company has recognized the fair value of its asset retirement obligations related to the future costs of plugging, abandonment, and remediation of oil and natural gas producing properties.  The present value of the estimated asset retirement obligations has been capitalized as part of the carrying amount of the related oil and natural gas properties.  The liability has been accreted to its present value as of the end of each period.  At March 31, 2014 and December 31, 2013, the Company evaluated 155 (unaudited) and 125 wells, respectively, and has determined a range of abandonment dates between January 2014 and March 2061.  The following table represents a reconciliation of the asset retirement obligations for the three months ended March 31, 2014 and for the year ended December 31, 2013:

   
Three Month Period Ended March 31, 2014
   
Year Ended December 31, 2013
 
($ in thousands)
 
(Unaudited)
       
Asset retirement obligations, beginning of period
  $ 2,437     $ 2,272  
 
    Additions to asset retirement obligation
     871       43  
    Liabilities settled during the period
            (48 )
    Accretion of discount
    37       160  
    Revision of estimate
    (43 )     10  
Asset retirement obligations, end of period
  $ 3,302     $ 2,437  

NOTE 7 – GOING PUBLIC DELAY FEE

If the Company, for any reason, does not go public on or before that date that is one hundred fifty days after the Roll-up Date (the “Going Public Delay Date”), the Company shall pay to each applicable stockholder an aggregate amount equal to the product of (i) such stockholder’s allocation percentage multiplied by (ii) $60,715 (the “Going Public Delay Fee”) on the last business day of each calendar month, for each such calendar month following the Going Public Delay Date through and including the date of going public (the “Going Public Delay Period”). For any partial calendar months during the Going Public Delay Period, the Going Public Delay Fee shall be pro-rated appropriately. For the three months ended March 31, 2013, the Company has incurred a delay fee of approximately $182,000 (unaudited) , which is currently included in accrued liabilities on the accompanying condensed consolidated balance sheets.

Effective August 6, 2013, the Company ceased to incur Going Public Delay Fees.
 
 
 
14

 

 
STARBOARD RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE 8 – NOTES PAYABLE

On June 27, 2013, the Company entered into a credit agreement (“Credit Agreement”) with Independent Bank for an initial borrowing base of $13,000,000, bearing interest at the greater of: (1) the prime rate, the annual rate of interest announced by the Wall Street Journal as its “prime rate” (3.25% at March 31, 2013 (unaudited)) or (2) the floor rate of 4.00%. This borrowing base is subject to re-determinations semi-annually and upon requested special redetermination, with the aggregate indebtedness not to exceed $100,000,000. Additionally, the borrowing base may be adjusted at the financial institution’s discretion which is based on part upon external factors over which the Company has no control. If the re-determined borrowing base were to be less than outstanding borrowing under the Credit Agreement, the Company would be required to repay the deficit. The Company incurs a commitment fee of 0.5% on the unused portion of the credit facility or if less, the borrowing base. The Credit Agreement matures at June 1, 2016.

At March 31, 2014 and December 31, 2013, the Company had approximately $18,768,000 (unaudited) and $12, 436,000, respectively, in borrowings outstanding under the Credit Agreement, subject to borrowing base limitations at March 31, 2014 and December 31, 2013 of $21,000,000 (unaudited) and $17,000,000, respectively.
 
The Credit Agreement is collateralized by the oil and natural gas properties and contains several restrictive covenants including, among others:  (1) a requirement to maintain a current ratio, of not less than 1.0 to 1.0; (2) a maximum permitted ratio of debt to adjusted EBITDAX of not more than 3.5 to 1.0; (3) a maximum permitted ratio of adjusted EBITDAX to interest expense of not more than 3.0 to 1.0; and (4) a prohibition against incurring debt, subject to permitted exceptions.

On March 26, 2014, the Company entered into a term loan agreement with Independent Bank totaling $4,000,000 at a current rate of 6.75% annum.  The agreement was obtained to fund the development of the Company’s acquisition of oil and natural gas properties (see note 4).  The loan requires 18 equal monthly payments of approximately $222,000 starting on October 1, 2014 and maturing on March 1, 2016 and is subject to the same covenants as the Credit Agreement.

The loan under the term agreement bears interest at the greater of: (1) the prime rate, the annual rate of interest announced by the Wall Street Journal as its “prime rate” (3.25% at  March 31, 2014 (unaudited)), plus the applicable margin of 3.00% or (2) the floor rate of 6.75%.
 
NOTE 9 – STOCK BASED COMPENSATION AND CONDITIONAL PERFORMANCE AWARDS

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

The restricted stock grant of 349,650 shares had a grant date fair value of $10.00 per share and vests in full upon the earlier of an initial public offering (“IPO”) which includes the sale of shares to the public, a business combination whereas 50% or more of the voting power is transferred to the new owners, or March 1, 2015.   During the three months ended March 31, 2013 and 2012, the Company incurred a stock-based compensation expense of approximately $300,000 (unaudited) and $300,000 (unaudited), respectively, related to the restricted stock grant, which is included in the accompanying condensed consolidated statements of operations in general and administrative expenses.  As of March 31, 2014 and December 31, 2013, there was approximately $1,098,000 (unaudited) and $1,398,000, respectively, of unrecognized stock-based compensation expense related to the non-vested restricted stock grant. At March 31, 2014 and December 31, 2013, this unrecognized stock-based compensation is expected to be expensed on a straight-line basis over 11 (unaudited) and 14 months. As of March 31, 2014 and as of December 31, 2013, there have been no forfeitures associated with the restricted stock grant.
 
 
 
15

 

 
STARBOARD RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE 9 – STOCK BASED COMPENSATION AND CONDITIONAL PERFORMANCE AWARDS - CONTINUED

Additionally, the Employment Agreement provides for a conditional performance award where if an IPO occurs, the employee will receive: (1) a cash payment of 1% of the difference between the Company market capital and the book value at the time of the IPO, (2) common stock options to purchase 1.0% of the fully-diluted capital stock as of the IPO date and IPO price which will vest over a four year period and contain a cashless exercise, (3) common stock options to purchase 1.0% of the fully-diluted capital stock as of the 2nd anniversary of the IPO date at the closing price of the common stock on the 2nd anniversary date of the IPO and will vest six years after the grant and contain a cashless exercise.
 
NOTE 10 – RELATED PARTY TRANSACTIONS
 
Related Party Credit Agreement

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

On July 25, 2013, the Company amended its credit agreement with SOSventures, LLC providing for a term loan through February 1, 2016 in an amount up to $10,000,000 at a 17.00% interest rate through May 29, 2014 and 22.00% interest rate thereafter.  As of March 31, 2014, the Company has borrowed $10,000,000 under this agreement.

The term loan is collateralized by the oil and natural gas properties and contains several restrictive covenants including, among others:  (1) a requirement to maintain a current ratio, of not less than 1.0 to 1.0; (2) a maximum permitted ratio of debt to adjusted EBITDAX of not more than 4.0 to 1.0; (3) a maximum permitted ratio of adjusted EBITDAX to interest expense of not more than 3.0 to 1.0; and (4) a prohibition against incurring debt, subject to permitted exceptions.
 
NOTE 11 – LEGAL PROCEEDINGS
 
From time-to-time, the Company may become subject to proceedings, lawsuits and other claims in the ordinary course of business including proceedings related to environmental and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance.

The Company is subject to various possible contingencies that arise primarily from interpretation of federal and state laws and regulations affecting the oil and natural gas industry. Such contingencies include differing interpretations as to the prices at which oil and natural gas sales may be made, the prices at which royalty owners may be paid for production from their leases, environmental issues and other matters. Although management believes that it has complied with the various laws and regulations, administrative rulings and interpretations thereof, adjustments could be required as new interpretations and regulations are issued. In addition, environmental matters are subject to regulation by various federal and state agencies. 
 
 
 
16

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our 10k filed under the Securities Act of 1934, as amended, with the Securities and Exchange Commission on March 31, 2014.  Our discussion and analysis includes forward-looking information that involves risks and uncertainties, and should be read in conjunction with the below section entitled “Forward-Looking Statements.”  For a discussion about the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements, see Part II. Item 1A. “Risk Factors.”
 
In this Quarterly Report on Form 10-Q, references to “we,” “our” or “the Company” refer to Starboard Resources Inc. and its subsidiaries.

Forward-Looking Statements

This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements other than historical fact and give our current expectations or forecasts of future events. They may include estimates of natural gas and oil reserves, expected natural gas and oil production and future expenses, assumptions regarding future natural gas and oil prices, planned capital expenditures, and anticipated asset acquisitions and sales, as well as statements concerning anticipated cash flow and liquidity, business strategy and other plans and objectives for future operations.
 
Although we believe the expectations and forecasts reflected in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that could cause actual results to differ materially from expected results include:

  
the volatility of natural gas and oil prices;
  
the limitations our level of cash flow or ability to raise capital may have on our operational and financial flexibility;
  
declines in the values of our natural gas and oil properties resulting in ceiling test write-downs;
  
the availability of capital on an economic basis to fund reserve replacement costs;
  
our ability to replace reserves and sustain production;
  
uncertainties inherent in estimating quantities of natural gas and oil reserves and projecting future rates of production and the timing of development expenditures;
  
inability to generate profits or achieve targeted results in our drilling and well operations;
  
leasehold terms expiring before production can be established;
  
drilling and operating risks, including potential environmental liabilities associated with hydraulic fracturing;
  
changes in legislation and regulation adversely affecting our industry and our business;
  
general economic conditions negatively impacting us and our business counterparties; and
  
transportation capacity constraints and interruptions that could adversely affect our cash flow.


We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report, and we undertake no obligation to update this information. We urge you to carefully review and consider the disclosures made in this Quarterly Report and our other filings with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.

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

As of March 31, 2014, we owned interests in 154 producing oil and natural gas wells.  Our oil and natural gas production for the three months ended March 31, 2014 consisted of 31,076 bbls of oil and 117,501 Mcf of gas compared to 25,185 bbls of oil and 115,575 Mcf of gas for the three months ending March 31, 2013.  
 
 
 
17

 

 Strategy

Starboard produces from operated oil and natural gas wells in the liquids rich, oil bearing window of the Eagle Ford trend of South Texas and the nearby oil-prone Giddings field where in combination we control approximately 16,000 gross acres.  The Company also has material non-operated working interests in producing properties and conventional prospects located throughout Logan and McClain counties in Oklahoma which account for 23,000 gross acres.  The Company’s operated Permian Basin interest consists of approximately 5,280 gross acres in Winkler County, Texas.  The combined reserve base and net production are each over 70% oil-weighted.
 
At January 1, 2014, based on the reserves estimate by our independent reservoir engineers, we had 5,091 MBOE of estimated proved reserves with a PV-10 of $131.6 million. At January 1, 2014, 17% of our estimated proved reserves were proved developed reserves and 72% of our estimated proved reserves were oil and condensate. We grew our average daily production by 12% from 518 BOE per day for the year ending December 31, 2012 to 579 BOE per day for the year ended December 31, 2013.
 
As part of this strategy, we focus on the following areas:
 
Bigfoot - Texas

We control about 3,000 gross acres across Frio and Atascosa counties in southern Texas, comprising 7% of our total proved reserves.
 
 Giddings – Bastrop - Texas

Giddings is our largest acreage position with just over 13,000 gross acres located within the Eagle Ford trend.  Our acreage is spread across Bastrop, Burleson, Brazos, Fayette, Lee, Gonzales, and Robertson counties.  From a reserve perspective, Giddings comprises the largest portion of our total proved reserves at 64%. 
 
Logan County - Oklahoma

Our non-operated working interests are located in Oklahoma, spread across Logan, Kingfisher, and McClain counties. Our position consists of just over 23,360 gross acres and comprises 12% of our total proved reserves.
 
Winkler County - Texas

In Winkler County, Texas we control about 5,280 gross acres. Our position comprises 17% of our total proved reserves.
 
Key Performance Indicators
 
Our management team has defined and tracks performance against several key production, sales and operational performance indicators, including, without limitation, the following:
 
  
average daily natural gas and oil production;
  
weighted average sales price received for natural gas and oil; and
  
lifting costs.

We believe that tracking these performance indicators on a regular basis enables us to better understand whether we are on target to achieve our internal production, sales and other plans and projections and forecast working capital, cash flow and liquidity items and allows us to determine whether we are successfully implementing our strategies.

The following table sets forth information regarding production volumes, average sales prices received and lifting costs for the periods indicated:
 
 
 
18

 
 
Production Volumes, Sales Prices and Lifting Costs
 
   
Years Ended December 31,
 
 ($ actual)
 
2013
   
2012
 
Production:
           
Natural gas-Mcf (1)
   
507,321
     
442,004
 
Crude oil-bbl (2)
   
126,845
     
115,398
 
                 
Average Sales Prices:
               
Natural gas (1)
 
$
5.31
   
$
5.19
 
Crude oil (2)
   
96.20
     
92.37
 
                 
Lifting cost per equivalent BOE (3)
 
$
22.10
   
$
16.80
 

(1)
Natural gas production is located in Texas and Oklahoma.

(2)
Crude oil production is located in Texas and Oklahoma.

(3)
Lifting cost represents lease operating expenses divided by the net volumes of production, and is measured in BOE based on an energy content factor of six-to-one (i.e., six Mcf of natural gas to one barrel of oil).  Lease operating expenses include normal operating costs such as pumper fees, operator overhead, salt water disposal, repairs and maintenance, chemicals, equipment rentals, production taxes and ad valorem taxes.
 
Lease operating expense and production taxes

The following table presents the major components of Starboard’s lease operating expense for the last two years on a BOE basis:
 
 
  
Years Ending December 31,
 
 ($ actual)
  
2013
   
2012
 
   
Total
   
Per BOE
   
Total
   
Per BOE
 
Lease operating costs
  
$
4,237,207
  
 
$
20.04
   
$
2,897,214
   
$
15.32
 
Production taxes
  
$
434,623
  
  
$
2.06
   
$
279,037
   
$
1.48
 
                                 
 Total
  
$
4,671,830
  
  
$
22.10
   
$
3,176,251
   
$
16.80
 

 
Lease operating expense and production taxes from continuing operations for the year ended December 31, 2013 totaled $4,671,830 versus $3,176,251 for the year ended December 31, 2012. This translated to an increase of $5.30/BOE on a volume basis. This increase reflects Starboard’s increased drilling and development efforts.

Results of Operations

Comparison of Three Months Ended March 31, 2014 to the Three Months Ended March 31, 2013
 
Total Revenues. Total revenues increased $857 thousand to $3,807 thousand for the three months ended March 31, 2014 from $2,950 thousand for the three months ended March 31, 2013, driven primarily by increased oil and natural gas production from existing reserves.
 
 Investment Income. Total natural gas and oil production for the three months ending March 31, 2014 consisted of 117,501 Mcf of natural gas and 31,076 bbls of oil, as compared to total natural gas and oil production for three months ending March 31, 2013, which consisted of 115,576 Mcf of natural gas and 25,185 bbls of oil.
 
Our average sales price received for natural gas increased to $6.27 per Mcf for the three months ending March 31, 2014 from $5.42 per Mcf for the same period in 2013. Our average sales price received for oil increased to $98.82 per bbl for the three months ending March 31, 2014 from $92.24 per bbl for the same period in 2013.
 
Changes in natural gas and oil prices can significantly impact our natural gas and oil sales and related cash flows. Natural gas prices have declined slightly over the past two to three years. Although we are hopeful that natural gas prices will begin to increase within the next 12 months, continued lower prices may materially adversely affect the sales prices we receive and our revenues and cash flow.
 
 
 
19

 
 
 
Costs and Expenses. Total costs and expenses (excluding depreciation and depletion) increased $126 thousand to $2,115 thousand for the three months ending March 31, 2014 from $1,989 thousand for the same period in 2013, due generally to increased drilling and production expenses.  Lease operating expenses increased $32 thousand to $919 thousand for the three months ending March 31, 2014 from $887 thousand for the same period in 2013, due primarily to increased production activity.  General and administrative expenses and professional fees increased $64 thousand to $1,072 thousand for the three month period ending March 31, 2014 from $1,008 thousand for the same period in 2013, due primarily to fees charged in connection with increased staffing, legal and administrative due to greater drilling activity. Depletion, depreciation and amortization expense increased to $1,704 thousand for the three month period ending March 31, 2014 from $1,231 thousand for the same period in 2013, due primarily to increased depletion expenses associated with new property acquisitions.
 
Net Income. Net income was $(257) thousand, or $(0.02) per diluted common share, for the three month period ending March 31, 2014 as compared to $(505) thousand, or $(0.04) per diluted common share, for the same period in 2013. The increase in net income was attributable primarily to additional production from new and existing wells.
   
Liquidity and Capital Resources
 
During the three months ended March 31, 2014 compared to the same period in 2013, net cash flow provided by operating activities decreased by $767 thousand to $528 thousand. This decrease was primarily attributable to increased oil and gas  related payables.
 
Our current assets were $6,054 thousand on March 31, 2014. Cash on hand comprised approximately $3,313 thousand, of which there is nothing in restricted cash accounts. This compared to cash of $5,794 thousand at December 31, 2013. Accounts payable increased from $9,485 thousand at December 31, 2013 to $9,938 thousand at March 31, 2014.
 
The consolidated financial statements continue to reflect a much increased but ongoing drilling program which amounted to $16 million during 2013. Our capital program is designed to increase production through exploration and workovers within our fields and through joint venture programs. This strategy will involve industry partners in these efforts so as to reduce our upfront cash requirements and reduce risk dollars expended. This represents an increase of $5.2 million from our capital investment in 2012.
 
Our primary sources of liquidity are cash provided by operating activities, our revolving bank facility, a subordinated credit facility, sales of non-core properties and access to capital markets.
 
 The following table summarizes our contractual obligations and commercial commitments as of December 31, 2013:
 
 
  
Payments Due By Period
 
  
Total
 
  
Less 
than
 1 year
1 - 3 years
4 - 5 years
After 5
 years
 
  
(in thousands)
Contractual obligations:
  
                     
    Principal debt payments
  
$
12,577
 
$
25
$
12,518
$
14  
$
Office lease
  
 
868
 
 
153
  
  520
 
 195  
 
 —
 
  
         
  
         
Total
  
$
 13,425
 
$
178
  $
 13,038
$
209  
$

Bank Credit Facility

On June 27, 2013 we entered into a senior secured credit facility from Independent Bank, providing for a $100.0 million revolving credit facility, subject to scheduled or elective collateral borrowing base redeterminations based on our oil and natural gas reserves. The credit facility matures on June 1, 2016.  As of March 31, 2014, our borrowing base was $21.0 million.  The outstanding borrowings bear interest at a rate that is currently based on the prime plus 0.0% with a 4.00% floor.  We also must pay an unused commitment fee of 0.5% per year on the undrawn amount of the borrowing base.  As of March 31, 2014 we have currently borrowed approximately $18.8 million on the credit facility.
 
 
 
20

 

 The credit facility is secured by our assets, including the oil and gas assets, and is guaranteed by our subsidiaries.  We are also required to limit our commodity hedges to collars with no more than 75% of our projected monthly oil and gas production from our proved developed producing reserves. Finally, we may not pay dividends to stockholders without the consent of Independent Bank.

The credit facility requires us to maintain certain financial ratios.  First, each quarter we must maintain an interest coverage ratio of 3:1 so that our consolidated net income, adjusted for interest expense, depreciation, depletion and amortization expenses less tax expenses and dividends/stock buybacks(“EBITDAX”) is greater than 3 times our interest expense under the credit facility.  Second, we must maintain a debt to EBITDAX ratio of less than 3.5:1 at the end of each fiscal quarter. Third, we must maintain a current ratio of at greater than 1:1 at the end of each fiscal quarter, meaning that our consolidated current assets (including the unused amount of the credit facility and excluding non-cash assets under ASC 410 and 815) must be greater than our consolidated current liabilities (excluding non-cash obligations under ASC 410 and 815 and current portion of the note under the credit facility.)

Further, the credit facility prohibits our incurring most debt outside the ordinary course of business except for the subordinated credit facility.

We may not merge or have a subsidiary merger with another company without the consent of Independent Bank.  We also must obtain Independent Bank’s consent to sell oil and gas assets.

The credit facility has no required amortizations unless there is a borrowing base deficiency.  There are no mandatory prepayments unless there is a borrowing base deficiency.

We also have additional affirmative and restrictive covenants.

The bank credit facility provides us with financial flexibility and liquidity.  It also exposes us to interest rate risk, requires that we make business decisions with a focus on the credit facility’s financial ratios and other terms and presents a risk of loss of assets if we have an event of default.  Further, our liquidity may also be affected by material changes to our borrowing base that result from changes in hydrocarbon prices or other market conditions.

Bank Term Loan

On March 26, 2014, the Company entered into a term loan agreement with Independent Bank totaling $4,000,000 at a current rate of 6.75% annum.  The agreement was obtained to fund the development of the Company’s acquisition of oil and natural gas properties (see note 4).  The loan requires 18 equal monthly payments of approximately $222,000 starting on October 1, 2014 and maturing on March 1, 2016 and is subject to the same covenants as the Credit Agreement.

The loan under the term agreement bears interest at the greater of: (1) the prime rate, the annual rate of interest announced by the Wall Street Journal as its “prime rate” (3.25% at  March 31, 2014 (unaudited)), plus the applicable margin of 3.00% or (2) the floor rate of 6.75%.
 
SOSventures, LLC Credit Agreement
 
On July 25, 2013 we entered into an amended credit agreement with SOSventures, LLC providing for a term loan through February 16, 2016 in an amount up to $10,000,000 at a 17.00% interest rate through May 29, 2014 and 22.00% interest rate thereafter.  The loan under this Agreement will be secured by a second lien on the Company’s assets.

The SOSventures, LLC credit agreement requires us to maintain certain financial ratios.  First, we must maintain an interest coverage ratio of 3:1 at the end of each quarter so that our consolidated net income less our fees under the credit facility, lender expenses, non-cash charges relating to the hedge agreements, interest, income taxes, depreciation, depletion, amortization, exploration expenditures and costs and other non-cash charges (netted for noncash income) (“EBITDAX”) is greater than 3 times our interest expense under the credit facility.  Second, we must maintain a debt to EBITDAX ratio of less than 3.5:1 at the end of each quarter. Third, we must maintain a current ratio of at greater than 1:1 at the end of each quarter, meaning that our consolidated current assets (including the unused amount of the credit facility by excluding non-cash assets under ASC 410 and 815) must be greater than our consolidated current liabilities (excluding non-cash obligations under ASC 410 and 815 and current maturities under the credit facility.)
 
 
 
21

 

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

As of March 31, 2014, we have $10 million drawn against the SOSventures, LLC credit facility.

Hedging Activities

Our current hedge position consists of a mix of costless collars and put options.  Up to July 31, 2014, we have hedged 7,540 bbls of crude oil per moth using a combination of a 2,040 bbl / month $73 - $99 WTI costless collar, a 1,500 bbl / month $82 WTI put option, and a 4,000 bbl / month $90 – 105 WTI costless collar.  For August 1, 2014 to December 31, 2014, we hedged 7,550 bbls of crude oil per month using a 4,000 bbl / month $90 - $105 WTI costless collar and a 3,550 bbl / month $82 WTI put option.  For January 1, 2015 to October 31, 2015, we hedged 5,000 bbl of crude oil per month using a 2,200 bbl / month $77 WTI put option and a 2,800 bbl / month $80 WTI put option.  For November 1, 2015 to December 31, 2015 we hedged 2,800 bbl / month using a $80 WTI put option.  For January 1, 2016 to March 31, 2016 we hedged 1,500 bbl / month with a $75 WTI put option.  These contracts and any future hedging arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or oil prices increase.  In addition, these arrangements may limit the benefit to us of increases in the price of oil.  Accordingly, our earnings may fluctuate significantly as a result of changes in the fair value of our derivative instruments.
 
Liquidity and Capital Resources
 
 Sources and Uses of Funds

Cash flow from operations is a significant source of liquidity. We generate our operating cash flow from oil and natural gas, which are generally attributable to working interests owned and held directly by us in wells on producing oil and gas properties (which generate monthly revenue and cash flow to the extent such wells produce natural gas and oil) and carried working interests in such wells (which also generate monthly revenue and cash flow to the extent such wells produce natural gas and oil), as well as overriding royalty interests and reversionary interests (which may generate additional monthly revenue and cash flow to the extent such wells produce natural gas and oil).

Cash and cash equivalents totaled $3,313 thousand at March 31, 2014, compared to $5,794 thousand at December 31, 2013.  Cash provided by (used in) operating activities was $528 thousand for the three month period ending March 31, 2014, compared to $239 thousand for the same period in 2013.
 
Changes in cash flows from operations are largely due to the same factors that affect our net income, excluding various non-cash items such as impairments of assets, depreciation, depletion and amortization and deferred income taxes. For example, changes in turnkey drilling revenues, production volumes and market prices for natural gas and oil directly impact the level of our cash flow from operations. See the discussion under “Results of Operations.”
 
We use cash flows from operations to fund expenditures related to our exploration, development and acquisition of natural gas and oil properties. We use cash provided by our oil and natural gas sales. We have historically obtained most of the capital to fund expenditures related to oil and natural gas production from a combination of free cash flow and borrowing on our bank facility.

Net cash provided by financing activities was $20,151 thousand for the three month period ending March 31, 2014, compared to $2,661 thousand for the same period in 2013. These financing activities primarily reflect borrowing on our bank facility.
 
Although we typically retain a significant degree of control over the timing of our capital expenditures, we may not always be able to defer or accelerate certain capital expenditures to address any potential liquidity issues. In addition, changes in drilling and field operating costs, drilling results that alter planned development schedules, acquisitions or other factors could cause us to revise our drilling program, which is largely discretionary.
 
 
 
22

 

As of March 31, 2014, we had a working capital deficit of $6,483 thousand, which consisted of $6,054 thousand of current assets offset by $12,537 thousand of current liabilities. Current assets as of March 31, 2014 included cash of $3,313 thousand and accounts receivable of $2,565 thousand. Current liabilities as of March 31, 2014 included accounts payable and accrued liabilities of $9,938 thousand and revenue payable of $816 thousand.
 
 Our current credit facility is with Independent Bank (See Exhibits 10.5.1 through 10.5.14).  The $100 million secured facility has a current borrowing base of $21 million as of March 31, 2014, matures in 2016, and has a prime plus 0.0% interest rate with a 4.0% floor.  We currently have approximately $19.0 million drawn on the facility.

On July 25, 2013 we entered an amended credit agreement with SOSventures, LLC providing for a term loan through February 1, 2016 in an amount up to $10,000,000 at a 17.00% interest rate through May 29, 2014 and 22.00% interest rate thereafter.  The loan under this Agreement will be secured by a second lien on the Company’s assets.  The credit agreement and the related intercreditor agreement are attached as Exhibits 10.6.1 and 10.6.2.  We have $10 million draw on this credit facility.

On March 26, 2014, the Company entered into a term loan agreement with Independent Bank totaling $4,000,000 at a current rate of 6.75% annum.  The agreement was obtained to fund the development of the Company’s acquisition of oil and natural gas properties (see note 4).  The loan requires 18 equal monthly payments of approximately $222,000 starting on October 1, 2014 and maturing on March 1, 2016 and is subject to the same covenants as the Credit Agreement.

The loan under the term agreement bears interest at the greater of: (1) the prime rate, the annual rate of interest announced by the Wall Street Journal as its “prime rate” (3.25% at  March 31, 2014 (unaudited)), plus the applicable margin of 3.00% or (2) the floor rate of 6.75%.

Critical Accounting Policies and Estimates
 
The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used.  We evaluate such estimates and assumptions on a regular basis.  We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements.  Below, we have provided expanded discussion of the more significant accounting policies, estimates and judgments.  We believe these accounting policies reflect the more significant estimates and assumptions used in preparation of our consolidated financial statements.  Please read the notes to our audited consolidated financial statements included in this registration statement for a discussion of additional accounting policies and estimates made by management.
 
Oil and Gas Producing Activities
 
 Our oil and gas producing activities were accounted for using the successful efforts method of accounting as further defined under FASB ASC 932, Extractive Activities – Oil and Natural Gas. Costs to acquire leasehold rights in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized.  Costs to drill exploratory wells that do not find proved reserves, delay rentals and geological and geophysical costs are expensed.
 
Depletion and Depreciation
 
Estimates of natural gas and oil reserves utilized in the calculation of depletion are prepared using certain assumptions. Reserve estimates are based upon existing economic and operating conditions with no provision for price and cost escalations except by contractual arrangements.  Natural gas and oil reserve estimates are inherently imprecise and are subject to change as more current information becomes available. Capitalized costs are depleted and amortized using the units of production method, based upon reserve estimates. 

 Impairments

 The carrying value of oil and gas properties is assessed for possible impairment on a field by field basis and on at least an annual basis, or as circumstances warrant, based on geological analysis or changes in proved reserve estimates. When impairment occurs, an adjustment is recorded as a reduction of the asset carrying value.  For the years ended December 31, 2013 and 2012, the Company did not have any impairment charges.
 
 
 
23

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

Goodwill
 
            At March 31, 2014 and December 31, 2013 the Company had goodwill of $960 thousand.
 
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired.  The Company follows FASB ASC Topic 350 Goodwill and Intangible Asset Impairment Testing. Our analysis consists of two steps. Step 1 tests the company for impairment by comparing the fair value of equity to the book value of equity. If the fair value is less than the book value, then Step 2 analysis must be performed. If the fair value of goodwill is less than its carrying amount, impairment is recorded based on the difference. The Company annually assesses the carrying value of goodwill for impairment.  

Pricing mechanism for oil and gas reserves estimation
 
The SEC’s rules require reserve estimates to be calculated using a 12-month average price. Price changes can still be incorporated to the extent defined by contractual arrangements. The use of a 12-month average price rather than a single-day price is expected to reduce the impact on reserve estimates.
 
The SEC rules also amend the definition of proved oil and gas reserves to include reserves located beyond development spacing areas that are immediately adjacent to developed spacing areas if economic recoverability can be established with reasonable certainty. These revisions are designed to permit the use of alternative technologies to establish proved reserves in lieu of requiring companies to use specific tests. In addition, they establish a uniform standard of reasonable certainty that applies to all proved reserves, regardless of location or distance from producing wells. Because the revised rules generally expand the definition of proved reserves, proved reserve estimates could increase in the future based upon adoption of the revised rules.
 
Estimated proved oil and gas reserves
 
The evaluation of our oil and gas reserves is critical to management of our operations and ultimately our economic success. Decisions such as whether development of a property should proceed and what technical methods are available for development are based on an evaluation of reserves. These oil and gas reserve quantities are also used as the basis of calculating the unit-of-production rates for depreciation, evaluating impairment and estimating the life of our producing oil and gas properties in our asset retirement obligations. Our total reserves are classified as proved, possible and probable. Proved reserves are classified as either proved developed or proved undeveloped. Proved developed reserves are those reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Estimated proved undeveloped reserves include reserves expected to be recovered from new wells from undrilled proven reservoirs or from existing wells where a significant major expenditure is required for completion and production. Probable reserves are those additional reserves that are less certain to be recovered than proved reserves and when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the proved plus probable estimates. Possible reserves are those additional reserves that are less certain to be recovered than probable reserves and when probabilistic methods are used, there should be at least a 10% probability that the total quantities ultimately recovered will equal or exceed proved plus probable plus possible reserve estimates.

Independent reserve engineers prepare the estimates of our oil and gas reserves presented in this prospectus based on guidelines promulgated under GAAP and in accordance with the rules and regulations of the Securities and Exchange Commission. The evaluation of our reserves by the independent reserve engineers involves their rigorous examination of our technical evaluation and extrapolations of well information such as flow rates and reservoir pressure declines as well as other technical information and measurements. Reservoir engineers interpret these data to determine the nature of the reservoir and ultimately the quantity of total oil and gas reserves attributable to a specific property. Our total reserves in this prospectus include only quantities that we expect to recover commercially using current prices, costs, existing regulatory practices and technology. While we are reasonably certain that the total reserves will be produced, the timing and ultimate recovery can be affected by a number of factors including completion of development projects, reservoir performance, regulatory approvals and changes in projections of long-term oil and gas prices. Revisions can include upward or downward changes in the previously estimated volumes or proved reserves for existing fields due to evaluation of (1) already available geologic, reservoir or production data or (2) new geologic or reservoir data obtained from wells. Revisions can also include changes associated with significant changes in development strategy, oil and gas prices or production equipment/facility capacity.
 
 
 
24

 
 
Standardized measure of discounted future net cash flows

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

Unproved reserves

The SEC’s rules permit disclosure of probable and possible reserves and provide definitions of probable reserves and possible reserves. Disclosure of probable and possible reserves is optional.
 
In January 2010, the FASB issued an Accounting Standards Update (ASU) 2010-03, Extractive Industries-Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosure. This ASU amends the FASB accounting standards to align the reserve calculation and disclosure requirements with the requirements in the new SEC Rule, Modernization of Oil and Gas Reporting Requirements. The ASU is effective for reporting periods ending on or after December 31, 2009.

 Consent requirements for material Company actions before we obtain an exchange listing
 
We have yet to apply for a listing on a national securities exchange.  Under Section 6 of the put option waiver agreement attached as Exhibit 4.3, until such time as we obtain a listing on a national securities exchange, we are required to obtain the consent of the Longview Marquis Master Fund, L.P., LMIF Investments, LLC and SMF Investments, LLC to take any of the following actions:
 
a. consummate a sale of the equity securities of the Company to the extent that the valuation of all equity securities of the Company at the time of such sale is more than thirty percent (30%) below the then present value of the Company’s estimated proved future oil and gas net revenues calculated at an annual discount rate of ten percent (10%);
 
b. issue, or authorize the issuance of, any class of equity security that is not identical to the class of equity securities held by the Summerline Parties;
 
c. issue any equity securities without providing preemptive rights to Longview Marquis Master Fund, L.P., LMIF Investments, LLC, SMF Investments, LLC and Summerline Capital Partners, LLC as will enable them to maintain, post-issuance, their percentage equity ownership of the Company owned pre-issuance;
 
d. amend, modify or waive any provision of the Company’s certificate of incorporation or bylaws; or
 
e. sell all or substantially all of the assets of the Company or its subsidiaries
 
 
 
25

 

 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
The Company is a Smaller Reporting Company as defined by SEC Rules 405 and 12b-2 and is not required to disclose the information required by Regulation S-K, Item 305 pursuant to the Smaller Reporting Company exemption in Regulation S-K, Item 305(e).
 
Item 4.  Controls and Procedures
 
Disclosure Controls and Procedures

As of March 31, 2014, the Company was obligated to be a reporting company pursuant to Section 12(g) of the Securities and Exchange Act of 1934 required to file periodic or current reports with the Securities and Exchange Commission pursuant to the provisions of the Securities Exchange Act of 1934.  Thus, the Company must assess its disclosure controls and procedures in connection with its presentation of its information for the three months ending March 31, 2014 as presented in this Form 10-Q.  The Company maintains controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC.  The Company’s Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining these procedures and, as required by the rules of the SEC, evaluating their effectiveness.  Based on their evaluation the Company’s disclosure controls and procedures which took place as of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer have concluded that these procedures were effective as of March 31, 2014, to ensure that the Company is able to collect, process, and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods.

Management’s Evaluation of Internal Control over Financial Reporting

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

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

Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2014.  In making this assessment, management was guided by the releases issued by the SEC and to the extent applicable was based upon the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission. The Company has had no change during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.  Subject to the above, the Company’s internal control over financial reporting are effective as of the end of the reporting period ended March 31, 2014.
 
 
 
26

 

 
Part II—Other Information
 
Item 1. Legal Proceedings
 
See Part I, Item 1 – “Financial Statements,” “Note 10 – Commitments and Contingencies” of this Quarterly Report on Form 10-Q which is incorporated by reference into this Part II, Item 1 – “Legal Proceedings.”

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.

Item 6.  Exhibits and Reports on Form 8-K

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

1.  Financial Statements.  See Item 1.

2.  Financial Statement Schedules.  Not applicable.

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

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

(b)           Reports on Form 8-K.

None
 
 
 
27

 

SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
Starboard Resources, Inc.
   
(Registrant)
     
Date: May 14, 2014
By:
/s/ Michael J. Pawelek
   
Chief Executive Officer
   
(Principal Executive Officer)
     
Date: May 14, 2014
By:
/s/ Eric J. Alfuth
   
Chief Financial Officer
     
Date: May 14, 2014
By:
/s/ N. Kim Vo
   
Controller
   
(Chief Accounting Officer)
 

 
 
28

 
 
EXHIBITS
 
 Exhibit No.
 
Description
     
3.1.1
**
Certificate of Incorporation
     
3.1.2
**
Certificate of Conversion
     
3.2.1
**
Post-Effective Bylaws
     
3.2.2
**
Pre-Effective Bylaws
     
3.2.3
**
Starboard Resources Amended and Restated Operating Agreement dated January 20, 2012
     
4.1
**
Securities Purchase and Exchange Agreement between Starboard Resources, LLC, Longview Marquis Master Marquis Fund, L.P., Summerview Marquis Fund, L.P., Longview Marquis Fund, L.P., LMIF Investments, LLC, SMF Investments, LLC, and Summerline Capital Partners, LLC dated June 10, 2011.
     
4.2
**
Agreement between ASYM Capital III, LLC, Giddings Genpar LLC, Hunton Oil Genpar LLC and SOSventures, LLC regarding Starboard Resources, LLC dated January 20, 2012
     
4.3
**
Agreement between Starboard Resources, LLC, Longview Marquis Master Marquis Fund, L.P., Summerview Marquis Fund, L.P., Longview Marquis Fund, L.P., LMIF Investments, LLC, SMF Investments, LLC, and Summerline Capital Partners, LLC dated July 20, 2012 (Relating to Waiver of Put Option)
     
10.1
**
Employment Agreement, dated as of April 1, 2012, between Starboard Resources, Inc. and Michael Pawelek.
     
10.2
**
Employment Agreement, dated as of April 1, 2012, between Starboard Resources, Inc. and Edward Shaw.
     
10.3
**
Employment Agreement, dated as of April 1, 2012, between Starboard Resources, Inc. and N. Kim Vo.
     
10.4
**
Participation Agreement with Husky Ventures, LLC.
     
10.5.01
*
Credit Agreement dated as of June 27, 2013 between Starboard Resources, Inc. as borrower and Independent Bank as lender.
     
10.5.02
*
Security Agreement dated as of June 27, 2013 between Starboard Resources, Inc. as debtor and Independent Bank as secured party.
     
10.5.03
*
Mortgage, Deed of Trust, Security Agreement, Fixture Filing and Financing Statement for Texas oil and gas properties from Starboard Resources, Inc., Mortgagor, to John E. Davis, Trustee, and Independent Bank, mortgagee.
     
10.5.04
*
Note from Starboard Resources, Inc. to Independent Bank dated July 27, 2012.
     
10.5.05
*
Certificate of Ownership Interests – Starboard Resources, Inc. dated June 27, 2013.
  
10.5.06
*
Omnibus Certificate – Starboard Resources, Inc. dated June 27, 2013.
     
10.5.07
*
Guaranty dated June 27, 2013 from Impetro Operating, LLC
     
 
 
 
29

 
 
 
 Exhibit No.
 
Description
     
10.5.08
*
Security Agreement dated June 27, 2013 between Impetro Operating, LLC and Independent Bank
     
10.5.09
*
Omnibus Certificate – Impetro Operating, LLC dated June 27, 2013.
     
10.5.10
*
Waiver of Operator’s Lien – Impetro Operating, LLC dated June 27, 2013
     
10.5.11
*
Guaranty dated June 27, 2013 from Impetro Resources, LLC
     
10.5.12
*
Security Agreement dated June 27, 2013 between Impetro Resources, LLC and Independent Bank
     
10.5.13
*
Omnibus Certificate – Impetro Resources, LLC dated June 27, 2013.
     
10.5.14
*
Note dated June 27, 2013 – Starboard Resources, Inc.
     
10.6.1
*
Credit Agreement dated July 24, 2013 between Starboard Resources, Inc. and SOSventures, LLC.
     
10.6.2
*
Intercreditor Agreement dated July 24, 2013 between Independent Bank, and SOSventures LLC.
     
10.6.3
***
Second Amendment to Credit Agreement between Independent Bank and Starboard Resources, Inc. dated March 26, 2014
     
10.7.1
*
Sunoco – Texon LP Crude Purchase Agreement
     
10.7.2
*
Sunoco – Texon LP Crude Purchase Agreement Amendment
     
10.8
*
DCP Midstream, LP Gas Purchase Agreement
     
21
**
List of subsidiaries.
     
23.1
***
Consent of Rothstein Kass
     
23.2
***
Consent of Forrest A. Garb & Associates, Inc., independent petroleum engineers.
     
31.1
***
Certification of Chief Executive Officer
     
31.2
***
Certification of Chief Financial Officer
     
32.1
***
Section 1350 Certification
     
99.1.1
**
Third Amended Complaint dated June 6, 2013 in Cause Nos. FST-CV-12-5013927-S and FST-CV-12-6014987-S, styled Charles Henry III, Ahmed Ammar, John P. Vaile as Trustee of John P. Vaile Living Trust, John Paul Otieno, SOSventures, LLC, Bradford Higgins, William Mahoney, Robert J. Conrads, Edward M. Conrads, William F. Pettinati, Jr. individually and derivatively on behalf of Giddings Oil & Gas LP, Hunton Oil Partners LP and Asym Energy Fund LP v. Gregory Imbruce, Giddings Investments LLC, Giddings Genpar LLC, Hunton Oil Genpar LLC, Asym Capital III LLC, Starboard Resources, Inc., Glenrose Holdings LLC and Asym Energy Investments LLC (hereinafter ”Henry et al v. Imbruce et al.”).
 
99.1.2
**
Answer of Starboard Resources, Inc. dated August 14, 2012 in Henry et al v. Imbruce et al.
     
99.1.3
**
Starboard Resources, Inc. Bill of Interpleader dated August 8, 2012
     
 
 
 
30

 
 
 Exhibit No.
 
Description
     
99.1.5
*****
Starboard Resources, Inc. Amended Bill of Interpleader dated March 14, 2014
     
99.2
**
Reserve Report as of January 1, 2013 from Forrest Garb & Associates, Inc.
     
99.3
**
Reserve Report as of January 1, 2014 from Forrest Garb & Associates, Inc.
     
99.4
*
Supplement to Reserve Report as of January 1, 2013 from Forrest Garb & Associates, Inc.
     
 
*
Filed as corresponding numbered exhibit with Starboard Resources, Inc. Form 10/A filed July 26, 2013.
**
Filed as corresponding numbered exhibit with Starboard Resources, Inc. Form 10 filed June 7, 2013.
***
Filed herewith.
****
Filed as a corresponding numbered exhibit with Starboard Resources, Inc. Form S-1/A filed October 25, 2013.
*****
Filed as a corresponding numbered exhibit to Starboard Resources, Inc.’s Form 10-K filed March 31, 2014

Exhibit No.
 
Description
     
101
 
XBRL Filings
EX-101.INS
 
XBRL Instance Document
EX-101.SCH
 
XBRL Taxonomy Extension Schema
EX-101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
EX-101.LAB
 
XBRL Taxonomy Extension Label Linkbase
EX-101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
EX-101.DEF
 
XBRL Taxonomy Extension Definition Document