What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-14 compared with 2020-05-15 · 170 added, 113 removed, 18 unchanged (94% of the section changed)

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TO ALL PERIODS

OF OPERATIONS

Company's primary business is the exploration and development of oil and natural gas interests.

The Company has incurred significant

losses from operations, and there is no assurance that it will achieve profitability or obtain the

necessary to finance its operations.

For all periods presented, the Company's effective tax rate is 0%.

The Company has generated

net operating losses since inception, which would normally reflect a tax benefit in the statement of operations and a deferred

asset on the balance sheet.

However, because of the current uncertainty as to the Company's ability to achieve profitability,

a valuation reserve has been established that offsets the amount of any tax benefit available for each period presented in the

statements of operations.

following table sets forth a summary of our production and operating data for the three months ended March 31, 2020.

normal production declines, increased or decreased drilling activities, fluctuations in commodity prices and the effects of acquisitions

or divestitures, the historical information presented below should not be interpreted as being indicative of future results.

Three months ended March 31, 2020

Three months ended March

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL TO ALL PERIODS

RESULTS OF OPERATIONS

The Company's primary business is the exploration

and development of oil and natural gas interests.

The Company has incurred significant losses from operations, and there is no

assurance that it will achieve profitability or obtain the funds necessary to finance its operations.

For all periods presented,

the Company's effective tax rate is 0%.

The Company has generated net operating losses since inception, which would normally reflect

a tax benefit in the statement of operations and a deferred asset on the balance sheet.

However, because of the current uncertainty

as to the Company's ability to achieve profitability, a valuation reserve has been established that offsets the amount of any tax

benefit available for each period presented in the statements of operations.

The following table sets forth a summary of

our production and operating data for the three and six month periods ended June 30, 2020.

Because of normal production declines,

increased or decreased drilling activities, fluctuations in commodity prices and the effects of acquisitions or divestitures,

the historical information presented below should not be interpreted as being indicative of future results.

Three months ended June 30,

months ended June 30,

Production and operating data:

7 unchanged sentences

Total (Boe) (c)

- One stock tank barrel, of 42 U.S.

gallons liquid volume, used herein in reference to oil, condensate or natural gas

(a) Bbl - One stock tank barrel, of 42 U.S.

liquid volume, used herein in reference to oil, condensate or natural gas liquids.

(b) Mcf –

One thousand cubic feet of natural gas.

- One barrel of oil equivalent, a standard convention used to express oil and natural gas volumes on a comparable oil equivalent

Natural gas equivalents are determined under the relative energy content method by using the ratio of 6.0 Mcf of natural

gas to 1.0 Bbl of oil or condensate.

convention used to express oil and natural gas volumes on a comparable oil equivalent basis.

Natural gas equivalents are determined

under the relative energy content method by using the ratio of 6.0 Mcf of natural gas to 1.0 Bbl of oil or condensate.

Three months ended June 30,

Six months ended June 30,

Operating costs and expenses per Boe:

4 unchanged sentences

General and administrative

PERIOD ENDED MARCH 31, 2020 COMPARED TO THREE-MONTH PERIOD ENDED MARCH 31, 2019.

the three months ended March 31, 2020 and 2019, revenues from oil and natural gas sales were $ 1,314,399 and $343,965 respectively.

The Company purchased significant oil and natural gas properties in the second quarter of 2019 which were not included in the

March, 2019 revenues.

expenses, production taxes, depreciation and depletion and amortization and accretion increased to $1,916,885 cumulatively for

the three months ended March 31, 2020 from $196,821 for the same period in 2019.

The increase was due costs associated with oil

and natural gas properties purchased in the second quarter of 2019.

of oil and natural gas properties expense increased to $800,452 for the three months ended March 31, 2020 from $0 for the same

period in 2019.

The increase was due to the change in market prices for oil and natural gas in 2020.

(loss) on derivatives, net increased to $2,509,045 for the three months ended March 31, 2020, from ($88,114) in the same period

2019 due to decrease in oil prices since the agreements were entered into or since December 31, 2020 and 2019 respectively, for

those contracts in existence at that date.

and administrative expenses decreased by $83,606 to $528,983 for the three months ended March 31, 2020, from $612,589 for the

same period in 2019.

The decrease was primarily due to professional fees and travel related to the acquisition of oil and natural

THREE-MONTH PERIOD ENDED JUNE 30, 2020 COMPARED

TO THREE-MONTH PERIOD ENDED JUNE 30, 2019.

For the three months ended June 30, 2020 and

2019, revenues from oil and natural gas sales were $ 994,529 and $1,996,758 respectively.

In 2020, due to COVID and other

economic factors, prices of oil and natural gas declined, resulting in the Company reducing volumes produced.

Operating expenses, production taxes, depreciation

and depletion and amortization and accretion decreased to $1,527,715 cumulatively for the three months ended June 30, 2020 from

$2,296,556 for the same period in 2019.

The decrease was due to a decrease in costs associated with oil and natural gas production,

which was constrained during the period due to management’s reduction of production in response to lower prices.

Net realized and unrealized gain (loss) on

derivatives decreased to $(402,374) for the three months ended June 30, 2020, from $500,728 in the same period 2019 due primarily

to increases in oil prices since March 31,2020 and increases in oil prices during the same period in 2019, respectively, for those

contracts in existence at that date.

General and administrative expenses decreased

by $129,616 to $1,914,406 for the three months ended June 30, 2020, from $2,044,022 for the same period in 2019.

The decrease was

primarily due to options and warrants granted in 2019 as well as professional fees and travel related to the acquisition of oil

and natural gas properties in 2019.

In 2020, expenses included the $725,000 allowance for the acquisition deposit on the Ovintiv

Interest expense was $123,219 and $162,968

for the three months ended June 30, 2020 and 2019, respectively.

The decrease in interest expense of $39,749 resulted primarily

from lower interest rates in 2020.

For the reasons discussed above, the previous

period net loss increased by $967,125 from $(2,006,060) for the three months ended June 30, 2019 to net loss of $(2,973,185) for

the three months ended June 30, 2020.

SIX-MONTH PERIOD ENDED JUNE 30, 2020 COMPARED

TO SIX-MONTH PERIOD ENDED JUNE 30, 2019

For the six months ended June 30, 2020 and

2019, revenues from oil and natural gas sales were $ 2,308,929 and $2,320,968 respectively.

The Company purchased significant

oil and natural gas properties in the second quarter of 2019 which were not included in 2019 revenues.

In the second quarter of

2020, due to COVID and other economic factors, prices of oil and natural gas declined, resulting in the Company reducing volumes

Operating expenses, production taxes, depreciation

and depletion and amortization and accretion increased to $3,444,600 cumulatively for the six months ended June 30, 2020 from $2,493,377

for the same period in 2019.

The increase was due primarily to only a partial period of production in 2019 because of the EnergyQuest

acquisition March 2019.

Impairment of oil and natural gas properties

expense increased to $800,452 for the six months ended June 30, 2020 from $0 for the same period in 2019.

The increase was due

to the change in market prices for oil and natural gas in 2020.

Gain on derivatives, net increased to $2,106,671

for the six months ended June 30, 2020, from $432,369 in the same period 2019 due to decrease in oil prices since the agreements

were entered into or since December 31, 2020 and 2019 respectively, for those contracts in existence at that date, to the date

of maturity or the balance sheet date.

General and administrative expenses decreased

by $213,221 to $2,443,390 for the six months ended June 30, 2020, from $2,656,611 for the same period in 2019.

The decrease was

primarily due to options and warrants issued in 2019 and professional fees and travel related to the acquisition of oil and natural

gas properties in 2019.

expense was $132,869 and $33,943 for the three months ended March 31, 2020 and 2019, respectively.

The increase in interest expense

of $98,926 resulted primarily from the debt issued to acquire oil and natural gas properties in the second quarter of 2019.

the reasons discussed above, the previous period net loss decreased by $2,175,517 from $(587,502) for the three months ended March

31, 2019 to net income of $1,588,015 for the three months ended March 31, 2020.

AND CAPITAL RESOURCES

of March 31, 2020, the Company had $590,183 of cash.

The Company expects to incur costs related to future oil and natural gas

acquisitions for the foreseeable future.

It is expected that management will attempt to raise additional capital for future investment

and working capital opportunities.

Notes 3 through 6 to the financial statements for information regarding the purchase agreements the Company entered into in 2019

and 2020 to purchase existing oil and natural gas properties and mineral interests.

The Company is also actively pursuing the

acquisition of other operated and non-operated oil and natural gas properties.

It is anticipated that such acquisitions will be

financed through equity or debt transactions.

oil and natural gas prices present challenges to our industry and our Company.

During the first quarter of 2020, the economic

impact of the COVID-19 pandemic, along with the disagreements between OPEC and Russia on production levels, have caused oil prices

to decrease substantially since the beginning of 2020.

In the first quarter of 2020, gains on settled derivatives offset a large

portion of the impact of the recent decline in prices, and we currently have derivative positions in place for a substantial amount

of our expected remaining 2020 production.

There can be no assurance that we will be able to add derivative positions to cover

the remainder of our expected production at favorable prices.

Impact of COVID-19 on Our Business

the first quarter of 2020, we did not experience any material impact to our ability to operate or market our production due to

the direct or indirect impacts of the COVID-19 pandemic.

In 2020, expenses included the $725,000 allowance for the acquisition deposit on the Ovintiv properties.

Interest expense was $256,088 and $196,911

for the six months ended June 30, 2020 and 2019, respectively.

The increase in interest expense of $59,177 resulted primarily from

the debt issued to acquire oil and natural gas properties in the second quarter of 2019.

For the reasons discussed above, the previous

period net loss decreased by $1,208,392 from $(2,593,562) for the six months ended June 30, 2019 to net loss of $(1,385,170) for

the six months ended June 30, 2020

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2020, the Company had $285,813

The Company expects to incur costs related to future oil and natural gas acquisitions for the foreseeable future.

expected that management will attempt to raise additional capital for future investment and working capital opportunities.

See Notes 3 through 7 to the financial statements

for information regarding the purchase agreements the Company entered into in 2019 and 2020 to purchase existing oil and natural

gas properties and mineral interests.

The Company is also actively pursuing the acquisition of other operated and non-operated

oil and natural gas properties.

It is anticipated that such acquisitions will be financed through equity or debt transactions.

Lower oil and natural gas prices present challenges

to our industry and our Company.

During the first and second quarters of 2020, the economic impact of the COVID-19 pandemic have

caused oil price volatility in 2020.

In the first two quarters of 2020, gains on settled derivatives offset a large portion of

the impact of the recent decline in prices and slower production, and we currently have derivative positions in place for a substantial

amount of our expected remaining 2020 production.

There can be no assurance that we will be able to add derivative positions to

cover the remainder of our expected production at favorable prices.

The Impact of COVID-19 on Our Business

During the first two quarters of 2020, we did

not experience any material impact to our ability to operate or market our production due to the direct or indirect impacts of

the COVID-19 pandemic.

The Cybersecurity and Infrastructure Security Agency in the U.S.

of Homeland Security classifies individuals engaged in and supporting exploration for and production of natural gas, oil and NGLs

as “essential critical infrastructure workforce,”

and to date, state and local governments where our wells are located

have followed this guidance and exempted these activities from business closures.

Should this situation change, our access to

supplies or workers to drill, complete and operate wells could be materially and adversely affected.

as decreased transportation, manufacturing and general economic activity levels prompted by COVID-19 and related governmental

and societal actions have reduced the demand for oil-based products such as gasoline, jet fuel and other refined products, space

to store oil and condensate production is reaching or may reach capacity in some areas, which is prompting purchasers of oil and

condensate to reduce future purchase levels and, in some cases, to claim force majeure for purchases already contracted.

situations may lead to production greater than storage capacity later in the year, depending on weather and other seasonal factors.

In addition, commodity pricing challenges may cause our production costs to exceed the revenues associated with such production.

To the extent that this decreased demand for our commodities continues and our margins are not at acceptable levels or storage

for our production is not available, we may have to reduce production from or completely shut in portions of our currently producing

The inability to sell our production or the decision to potentially reduce or shut in our production could materially and

adversely affect our operating results and our ability to comply with the financial covenants under our credit facility.

is uncertainty around the extent and duration of the disruption.

The degree to which the COVID-19 pandemic or any other

public health crisis adversely impacts our results will depend on future developments, which are highly uncertain and cannot

be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain

the virus or treat its impact, its impact on the economy and market conditions, and how quickly and to what extent normal

economic and operating conditions can resume.

Therefore, while we expect this matter will likely disrupt our operations, the

degree of the adverse financial impact cannot be reasonably estimated at this time.

FORWARD-LOOKING

Quarterly Report on Form 10-Q, including this section, includes certain statements that may be deemed "forward-looking statements"

within the meaning of federal securities laws.

All statements, other than statements of historical facts, that address activities,

events or developments that the Company expects, believes or anticipates will or may occur in the future, including future sources

of financing and other possible business developments, are forward-looking statements.

Such statements are subject to a number

of assumptions, risks and uncertainties and could be affected by a number of different factors, including the Company's failure

to secure short and long-term financing necessary to sustain and grow its operations, increased competition, changes in the markets

in which the Company participates and the technology utilized by the Company and new legislation regarding environmental matters.

These risks and other risks that could affect the Company's business are more fully described in reports the Company files with

the SEC, including its Form 10-K for the year ended December 31, 2019.

Actual results may vary materially from the forward-looking

Company undertakes no duty to update any of the forward-looking statements in this Form 10-Q.

Company has incurred significant losses from operations and there is no assurance that it will achieve profitability or obtain

the funds necessary to finance continued operations.

For other material risks, see the Company's Form 10-K for the year ended

December 31, 2019, which was filed on March 30, 2020.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Department of Homeland Security classifies

individuals engaged in and supporting exploration for and production of natural gas, oil and NGLs as “essential critical

infrastructure workforce,”

and to date, state and local governments where our wells are located have followed this guidance

and exempted these activities from business closures.

Should this situation change, our access to supplies or workers to drill,

complete and operate wells could be materially and adversely affected.

However, as decreased transportation, manufacturing

and general economic activity levels prompted by COVID-19 and related governmental and societal actions have reduced the demand

for oil-based products such as gasoline, jet fuel and other refined products, space to store oil and condensate production is reaching

or may reach capacity in some areas, which is prompting purchasers of oil and condensate to reduce future purchase levels and,

in some cases, to claim force majeure for purchases already contracted.

These situations may lead to production greater than storage

capacity later in the year, depending on weather and other seasonal factors.

In addition, commodity pricing challenges may cause

our production costs to exceed the revenues associated with such production.

To the extent that this decreased demand for our commodities

continues and our margins are not at acceptable levels or storage for our production is not available, we may have to reduce production

from or completely shut in portions of our currently producing wells.

The inability to sell our production or the decision to potentially

reduce or shut in our production could materially and adversely affect our operating results and our ability to comply with the

financial covenants under our credit facility.

There is uncertainty around the extent and

duration of the disruption.

The degree to which the COVID-19 pandemic or any other public health crisis adversely impacts our results

will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration

and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, its impact on the economy and market

conditions, and how quickly and to what extent normal economic and operating conditions can resume.

Therefore, while we expect

this matter will likely disrupt our operations, the degree of the adverse financial impact cannot be reasonably estimated at this

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q, including

this section, includes certain statements that may be deemed "forward-looking statements"

within the meaning of federal

securities laws.

All statements, other than statements of historical facts, that address activities, events or developments that

the Company expects, believes or anticipates will or may occur in the future, including future sources of financing and other possible

business developments, are forward-looking statements.

Such statements are subject to a number of assumptions, risks and uncertainties

and could be affected by a number of different factors, including the Company's failure to secure short and long-term financing

necessary to sustain and grow its operations, increased competition, changes in the markets in which the Company participates and

the technology utilized by the Company and new legislation regarding environmental matters.

These risks and other risks that could

affect the Company's business are more fully described in reports the Company files with the SEC, including its Form 10-K for the

year ended December 31, 2019.

Actual results may vary materially from the forward-looking statements.

The Company undertakes no duty to update any

of the forward-looking statements in this Form 10-Q.

MATERIAL RISKS

The Company has incurred significant losses

from operations and there is no assurance that it will achieve profitability or obtain the funds necessary to finance continued

For other material risks, see the Company's Form 10-K for the year ended December 31, 2019, which was filed on March

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis