Item 1. Business
Sable Natural Resources Corporation (“Sable”) is an energy holding company with principal operations centralized in its wholly-owned subsidiary, Sable Operating Company, Inc. ("Sable Operating") Sable was formerly known as NYTEX Energy Holdings, Inc. and Sable Operating was formerly known as NYTEX Petroleum Inc. Sable Operating is a development stage exploration and production ("E&P") company engaged in the acquisition, development, and production of liquids rich natural gas and oil reserves from low-risk, high rate-of-return wells in the Fort Worth Basin of Texas. On December 31, 2014, our estimated proved reserves were 669.12 MBOE, of which 100% were proved developed. Our portfolio of proved developed natural gas and oil reserves is weighted in favor of liquids rich natural gas, with our proved reserves consisting of 15% oil, 38% natural gas liquids (“NGL”) and 47% natural gas. Also, on December 31, 2014 our probable reserves were 565 MBOE consisting of 17% oil, 2% NGL, and 81% natural gas, and our possible reserves were 1,231 MBOE consisting of 19% oil, 2% NGL, and 79% natural gas.
Sable and its subsidiaries, headquartered in Dallas, Texas, are collectively referred to herein as the “Company,” “we,” “us,” and “our.”
General Information
Our headquarters is located at 12222 Merit Drive, Suite 1850, Dallas, Texas, 75251, and our telephone number is 972-770-4700. Our internet address is www.snrcorp.com. Our trading symbol is SNRE.
General information about us, including our corporate governance policies can be found on our website. We make available on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) as soon as reasonably practicable after we electronically file or furnish them to the Securities and Exchange Commission (“SEC”). The public may read and copy any materials we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains our reports, proxy and information statements, and our other filings. The address of that site is www.sec.gov.
Our Strategy
The principal components of our strategy include:
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Growing reserves and production through acquisition, exploitation and development
We are focused on the acquisition, exploitation and development of unconventional liquids rich natural gas and oil reserves in the Fort Worth Basin. Our strategy is to increase production and expand our reserves through low cost unconventional recompletions and restimulations of existing wells and the drilling of low risk, high rate-of return natural gas and oil wells.
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Leveraging the skills of our experienced management and technical team
We believe our management and technical team is pivotal to the success of our business strategy averaging over 25 years of individual experience in conventional and unconventional E&P operations. We believe our team has the technical expertise and managerial track record to advance its development plan of recompletion and restimulation opportunities while orchestrating a development drilling program. Independently, the team has experience acquiring assets, running vertical and horizontal development programs within conventional and unconventional fields, and managing large an varied field operations. As a team, we have acquired a producing natural gas and oil property with exploitation and development opportunities and constructed a financial and operating plan to successfully grow and develop Sable.
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Identifying, acquiring and exploiting additional emerging liquids rich natural gas and oil assets
After acquiring, and now developing our platform acquisition, we have identified additional acquisition opportunities and plan to continue acquiring producing and leasehold properties in the Company's core area of the Fort Worth Basin. Utilizing our extensive network of industry professionals and operators within our core area, Sable is poised as an early entrant in the expansion of the Marble Falls play and other regional resource plays. With its platform acquisition in hand, larger acquisitions in play, and an aggressive development strategy, Sable's growth initiative is well underway.
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Upholding the ethical and business standards of the Company and maintaining the highest standards of health, safety, and environmental performance
We believe our success is grounded in our purpose, core values, and conduct demonstrated each day through ethical business practices, commitment to our employees, and our stakeholders.
Governmental Regulation
Our oil and natural gas exploration and production activities are subject to extensive laws, rules and regulations promulgated by federal and state agencies. In particular, oil and natural gas production and related operations are, or have been, subject to price controls, taxes and numerous other laws and regulations. The jurisdictions in which we own or operate properties for oil and natural gas production have statutory provisions regulation the exploration for and production of oil and natural gas, including provisions related to permits for the drilling of wells, bonding requirements to drill or operate wells, the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, sourcing and disposal of water used in the drilling and completion process and the abandonment of wells. Failure to comply with such laws, rules and regulations can result in substantial penalties, including the delay or stopping of our operations. The legislative and regulatory burden on the oil and natural gas industry increases our cost of doing business and affects our profitability.
Regulation of Production. Our exploration and drilling activities, including the construction and operation of pipelines and facilities for gathering, processing or storing oil, natural gas and other products, are subject to stringent federal, state, and local laws and regulations governing environmental quality, including those relating to oil spills, pipeline ruptures and pollution control, which are constantly changing. Although such laws and regulations can increase the cost of planning, designing, installing and operating such facilities, it is anticipated that, absent the occurrence of an extraordinary event, compliance with existing federal, state, and local laws, rules and regulations governing the release of materials in the environment or otherwise relating to the protection of the environment, will not have a material effect upon our business operations, capital expenditures, operating results or competitive position. See “Item 1A.
Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. In evaluating our business, you should carefully consider all of the risks described in this Annual Report on Form 10-K, together with the other information contained in this Annual Report. If any of the risks discussed in this Annual Report actually occur, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen the value of our common stock could decline significantly and you may lose all or a part of your investment. These risk factors are provided for investors as permitted by the Private Securities Litigation Reform Act of 1995. It is not possible to identify or predict all such factors and, therefore, you should not consider these risks to be a complete statement of all the uncertainties we face.
Our business model has changed.
Prior to its sale on May 4, 2012, our oil field services operation accounted for approximately 99 percent of our revenues and approximately 97 percent of our assets and the provision of drilling fluids and oil and natural gas well fracturing propellants had been our primary business strategy. Following the sale of this operating segment, we altered our business strategy to focus on the expansion and development of oil and natural gas reserves. In the future, we may explore additional and different opportunities, some of which may prove not to be viable or advisable and we will not develop every business we evaluate. Further, exploring and executing new business models and opportunities can be time consuming, result in significant expenses that may never be recouped and may divert management’s attention from our existing businesses. Even if we determine to further develop a business, the integration of any new business into our existing structure will likely be complex, time consuming and potentially expensive and could disrupt business operations if not completed in a timely and efficient manner. Any failure to identify new business opportunities, successfully integrate any new businesses with our current structure or receive the anticipated benefits of any new business could have a material adverse effect on our business, financial condition and operating results.
Our historical financial results are not indicative of future results.
Our historical financial results provide only a limited basis for you to assess our business and our historical financial results are not indicative of future financial results.
We will need additional capital to pursue future strategic plans, and the sale of additional shares or other equity securities would result in additional dilution to our stockholders.
We cannot be certain that our existing sources of cash will be adequate to meet our liquidity requirements. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain an additional credit facility. We cannot assure you that any additional equity sales or financing will be available in amounts or on terms acceptable to us, if at all. The sale of additional equity securities would result in additional dilution to our stockholders and, depending on the amount of securities sold, could result in a significant reduction of your percentage interest in us. The incurrence of additional indebtedness would result in increased debt service obligations and could result in additional operating and financing covenants that would further restrict our operations. If we are unable to secure sufficient sources of liquidity, we may be unable to continue our operations.
We intend to seek substantial sources of liquidity. In addition, management has implemented plans to improve liquidity through cash flows generated from development of new business initiatives within the oil & gas industry and
improvements to results from existing operations. There can be no assurance that we will be successful with our plans or that our results of operations will materially improve in either the short-term or long-term and accordingly, we may be unable to meet our obligations as they become due.
Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.
Our independent registered public accounting firm issued its report dated March 31, 2015 in connection with the audit of our consolidated financial statements as of December 31, 2014 and 2013, which included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern. Reports of independent auditors questioning a company’s ability to continue as a going concern are generally viewed unfavorably by analysts and investors. This report, along with our recent net losses and our accumulated deficit, may make it difficult for us to raise additional debt or equity financing necessary to conduct our operations. If we are not able to continue as a going concern, it is likely that holders of our common stock will lose all of their investment. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We cannot control activities on properties we do not operate and are unable to control their proper operation and profitability.
We do not operate all of the properties in which we own an ownership interest. As a result, we have limited ability to exercise influence over, and control the risks associated with, the operations of these properties. The failure of an operator on these properties to adequately perform operations, an operator’s breach of the applicable agreements or an operator’s failure to act in ways that are in our best interests could negatively impact our operations. The success and timing of drilling and development activities on properties operated by others therefore depend upon a number of factors outside of our control, including:
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the nature and timing of the operator’s drilling and other activities;
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the timing and amount of required capital expenditures;
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the operator’s geological and engineering expertise and financial resources;
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the approval of other participants in drilling wells; and
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the operator’s selection of suitable technology.
A substantial or extended decline in oil and natural gas prices may adversely affect our business, financial condition or results of operations and our ability to meet our financial commitments.
The price we receive for our oil and natural gas heavily influences our revenue, profitability, access to capital and future rate of growth. The prices for oil and natural gas are subject to wide fluctuations in response to relatively minor
changes in supply and demand. Historically, the markets for oil and natural gas have been very volatile and will likely continue to be volatile in the future. The prices we receive for our production, and the levels of our production, depend on numerous factors beyond our control. These factors include the following:
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worldwide and regional economic conditions impacting the global supply and demand for oil and natural gas;
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the actions of OPEC;
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the price and quantity of imports of foreign oil and natural gas;
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political conditions in or affecting other oil-producing and natural gas-producing countries, including the current conflicts in the Middle East and conditions in South America, China, India and Russia;
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the level of global oil and natural gas exploration and production;
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the level of global oil and natural gas inventories;
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localized supply and demand fundamentals and regional, domestic and international transportation availability;
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weather conditions and natural disasters;
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domestic and foreign governmental regulations;
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speculation as to the future price of oil and the speculative trading of oil and natural gas futures contracts;
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price and availability of competitors’ supplies of oil and natural gas;
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technological advances affecting energy consumption; and
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the price and availability of alternative fuels.
If oil and natural gas prices remain volatile, or decline, the demand for our land services could be adversely affected.
The demand for our land services is primarily determined by current and anticipated oil and natural gas prices and the related general production spending and level of drilling activity in the areas in which we have operations. Volatility or weakness in oil and natural gas prices (or the perception that oil and natural gas prices will decrease) affects the spending patterns of our customers and may result in the drilling of fewer new wells or lower production spending on existing wells. This, in turn, could result in lower demand for our services and may cause lower rates and lower utilization of our well service equipment. Continued volatility in oil and natural gas prices or a reduction in drilling activities could materially and adversely affect the demand for our services and our results of operations.
If oil and natural gas prices decline we may be required to take write-downs of the carrying values of our oil and natural gas properties.
Accounting rules require us to periodically review the carrying value of our producing oil and natural gas properties for possible impairment. Based on specific market factors and circumstances at the time of prospective impairment reviews, which may include depressed oil and natural gas prices, and the continuing evaluation of development plans, production data, economics and other factors, we may be required to write down the carrying value of our oil and natural gas properties.
Our results of operations depend on our ability to acquire properties with adequate reserves which produce results.
Our future operations depend on our ability to find, develop, or acquire oil and natural gas reserves that are economically producible. In general, properties produce oil and natural gas at a declining rate over time. In order to maintain production rates, we must locate and develop or acquire new oil and natural gas reserves to replace those being depleted by production. In addition, competition for oil and natural gas properties is intense and many of our competitors have financial, technical, human, and other resources needed to evaluate and integrate acquisitions that are substantially greater than ours. Without successful drilling or acquisition activities, our reserves and production will decline over time.
In the event we do complete an acquisition, its successful impact on our business will depend on a number of factors, many of which are beyond our control. These factors include the purchase price, future oil and natural gas prices, the ability to reasonably estimate or assess the recoverable volumes of reserves, rates of future production and future net revenues attainable from reserves, future operating and capital costs, results of future exploration, exploitation and development activities on the acquired properties, and future abandonment and possible future environmental or other liabilities. There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves, actual future production rates, and associated costs and potential liabilities with respect to prospective acquisition targets. Actual results may vary substantially from those assumed in the estimates. A customary review of subject properties will not necessarily reveal all existing or potential problems.
Additionally, significant acquisitions can change the nature of our operations and business depending upon the character of the acquired properties if they have substantially different operating and geological characteristics or are in different geographic locations than our existing properties. To the extent acquired properties are substantially different than our existing properties, our ability to efficiently realize the expected economic benefits of such transactions may be limited.
Our property acquisitions may not be worth what we paid due to uncertainties in evaluating recoverable reserves and other expected benefits, as well as potential liabilities.
Successful property acquisitions require an assessment of a number of factors sometimes beyond our control. These factors include exploration potential, future crude oil and natural gas prices, operating costs, and potential environmental and other liabilities. These assessments are not precise and their accuracy is inherently uncertain.
In connection with our acquisitions, we typically perform a customary review of the acquired properties that will not necessarily reveal all existing or potential problems and may not allow us to fully assess the potential deficiencies of a property.
In addition, significant acquisitions can change the nature of our operations and business if the acquired properties have substantially different operating and geological characteristics or are in different geographic locations than our existing
properties. To the extent acquired properties are substantially different than our existing properties, our ability to efficiently realize the expected economic benefits of such acquisitions may be limited.
Integrating acquired properties and businesses involves a number of other special risks, including the risk that management may be distracted from normal business concerns by the need to integrate operations and systems as well as retain and assimilate additional employees. Therefore, we may not be able to realize all of the anticipated benefits of any acquisitions.
Exploration and development drilling may not result in commercially producible reserves.
Crude oil and natural gas drilling and production activities are subject to numerous risks, including the risk that no commercially producible oil or natural gas will be found. The cost of drilling and completing wells is often uncertain, and oil and natural gas drilling and production activities may be shortened, delayed, or canceled as a result of a variety of factors, many of which are beyond our control. These factors include:
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unexpected drilling conditions;
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title problems;
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disputes with owners or holders of surface interests on or near areas where we operate;
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pressure or geologic irregularities in formations;
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engineering and construction delays;
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equipment failures or accidents;
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compliance with environmental and other governmental requirements; and
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shortages or delays in the availability of, or increases in the cost of, drilling rigs and crews, equipment, pipe, chemicals, water and other drilling supplies.
The prevailing prices for crude oil and natural gas affect the cost of and the demand for drilling rigs, completion and production equipment, and other related services. However, changes in costs may not occur simultaneously with corresponding changes in commodity prices. The availability of drilling rigs can vary significantly from region to region at any particular time. Although land drilling rigs can be moved from one region to another in response to changes in levels of demand, an undersupply of rigs in any region may result in drilling delays and higher drilling costs for the rigs that are available in that region. In addition, the recent economic and financial downturn has adversely affected the financial condition of some drilling contractors, which may constrain the availability of drilling services in some areas.
When we elect to conduct drilling operations, such operations may not be productive.
When we determine to drill wells, the wells we drill may not be productive and we may not recover all or any portion of our investment in such wells. The seismic data and other technologies we use do not allow us to know conclusively prior to drilling a well if oil or natural gas is present, or whether they can be produced economically. The cost of drilling, completing, and operating a well is often uncertain, and cost factors can adversely affect the economics of a project. Drilling activities can result in dry holes or wells that are productive but do not produce sufficient net revenues after operating and other costs to cover initial drilling and completion costs.
Any of our drilling activities may not be successful. Our overall drilling success rate or our drilling success rate within a particular area may decline. In addition, we may not be able to obtain any options or lease rights in potential drilling locations that we identify. Although we have identified numerous potential drilling locations, we may not be able to economically produce oil or natural gas from all of them.
Another significant risk inherent in any drilling plan is the need to obtain drilling permits from state, local, and other governmental authorities. Delays in obtaining regulatory approvals and drilling permits, including delays that jeopardize our ability to realize the potential benefits from leased properties within the applicable lease periods, the failure to obtain a drilling permit for a well, or the receipt of a permit with unreasonable conditions or costs could have a materially adverse effect on our ability to explore on or develop our properties.
Our success depends on key members of our management, the loss of any of whom could disrupt our business operations.
We depend to a large extent on the services of some of our executive officers. The loss of the services of Michael K. Galvis, our Chief Executive Officer; Cory Hall, our President and Chief Operating Officer; or other key personnel could disrupt our operations. Although we have entered into employment agreements with Mr. Galvis, Mr. Hall and certain other executive officers that contain, among other provisions, non-compete agreements, we may not be able to retain the executives past the terms of their employment agreements or enforce the non-compete provisions in the employment agreements.
Our operations are subject to inherent risks, some of which are beyond our control. These risks may be self-insured, or may not be fully covered under our insurance policies.
Our operations are subject to hazards inherent in the oil and gas industry, such as, but not limited to, accidents, blowouts, explosions, craterings, fires and oil spills. These conditions can cause:
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personal injury or loss of life;
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damage to or destruction of property and equipment (including the collateral securing our indebtedness) and the environment;
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suspension of our operations; and
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lost profits.
The occurrence of a significant event or adverse claim in excess of the insurance coverage we maintain or which is not covered by insurance could have a material adverse effect on our financial condition and results of operations. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in our being named as a defendant in lawsuits asserting large claims.
We maintain insurance coverage we believe to be customary in the industry against these hazards. However, we do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. As a result, not all of our property is insured.
The occurrence of an event not fully insured against, or the failure of an insurer to meet its insurance obligations, could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable. Insurance may not be available to cover any or all of the risks we are exposed to, or, even if available, it may be inadequate, or prohibitively expensive. It is likely that, in the future, our insurance renewals, our premiums and deductibles will be higher, and certain insurance coverage either will be unavailable or considerably more expensive than it has been in the recent past. In addition, our insurance is subject to coverage limits, and some policies exclude coverage for damages resulting from environmental contamination. Our insurance program is administered by an officer of the Company, is reviewed not less than annually with our insurance brokers and underwriters, and is reviewed by our Board of Directors on an annual basis.
We are subject to federal, state and local regulations regarding issues of health, safety and protection of the environment. Under these regulations, we may become liable for penalties, damages or costs of remediation. Any changes in these laws and government regulations could increase our costs of doing business.
Our operations are subject to federal, state and local laws and regulations relating to protection of natural resources and the environment, health and safety, waste management, and transportation of waste and other materials. Liability under these laws and regulations could result in cancellation of well operations, fines and penalties, expenditures for remediation, and liability for property damage and personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations also may include assessment of administrative, civil and criminal penalties, revocation of permits and issuance of corrective action orders.
Regulations related to global warming and climate change could have an adverse effect on our operations and the demand for oil and natural gas.
Recent scientific studies have suggested that emissions of certain gases, commonly referred to as “greenhouse gases,” may be contributing to the warming of the Earth’s atmosphere. Methane, a primary component of natural gas, and carbon dioxide, a byproduct of the burning of refined oil products and natural gas, are examples of greenhouse gases. From time to time the U.S. Congress has considered climate-related legislation to reduce emissions of greenhouse gases. In addition, many states have developed measures to regulate emissions of greenhouse gases, primarily through the planned development of greenhouse gas emissions inventories and/or regional greenhouse gas Cap and Trade programs. These regulations would likely increase our costs and adversely affect our operating results. The EPA has also adopted regulations imposing permitting and
best available control technology requirements on the largest greenhouse gas stationary sources, regulations requiring reporting of greenhouse gas emissions from certain facilities and is considering additional regulation of greenhouse gases as “air pollutants” under the existing federal Clean Air Act. Passage of climate change legislation or other regulatory initiatives by Congress or various states, or the adoption of regulations by the EPA or analogous state agencies, that regulate or restrict emissions of greenhouse gases (including methane or carbon dioxide) in areas in which we conduct business could have an adverse effect on our operations and the demand for oil and natural gas.
Legislation and regulatory initiatives relating to hydraulic fracturing could increase our cost of doing business and adversely affect our operations.
Our operations utilize the practice of hydraulic fracturing for new oil and natural gas wells. Hydraulic fracturing is also occasionally used to recomplete or restimulate an existing well that has declined in production performance. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into rock formation to stimulate oil and natural gas production. The use of hydraulic fracturing is necessary to produce commercial quantities of oil and natural gas from many reservoirs, especially shale formations. The process is typically regulated by state oil and natural gas commissions and agencies, and continues to receive significant regulatory and legislative attention at the federal, state, and local level. On May 11, 2012, the Bureau of Land Management (the “BLM”) proposed regulations that would require public disclosure of the chemicals used in hydraulic fracturing and impose certain permitting, testing and other requirements on such operations on federal lands, although the BLM announced on January 18, 2013 that it would revise and reissue these regulations at a later time. Various other federal agencies (including the EPA and the Department of Energy) continue to study hydraulic fracturing and may propose additional regulations. From time to time, legislation has been introduced in Congress to amend the federal SDWA to eliminate exemptions for most hydraulic fracturing activities. On August 16, 2012, the EPA published final rules that establish new air emission controls for natural gas and natural gas liquids production, processing and transportation activities, including New Source Performance Standards to address emissions of sulfur dioxide and volatile organic compounds, and a separate set of emission standards to address hazardous air pollutants frequently associated with production and processing activities. Similar efforts to review the practice of hydraulic fracturing and impose new regulatory conditions are taking place at the state and local level in Texas where we operate and states where we may operate in the future. California, Texas and Wyoming as well as other states, have adopted or are considering new regulations and statutes pertaining to hydraulic fracturing. These new requirements will (and future regulatory and legislative changes, if enacted, could) create new permitting and financial assurance requirements, require us to adhere to certain construction specifications, fulfill monitoring, reporting and recordkeeping obligations, and meet plugging and abandonment requirements. The imposition of stringent new regulatory and permitting requirements related to the practice of hydraulic fracturing could significantly increase our cost of doing business, create adverse effects on our operations including creating delays related to the issuance of permits, and depending on the specifics of any particular proposal that is enacted, could be material.
Furthermore, multiple lawsuits have been filed against regulatory agencies throughout the country by non-profit environmental organizations seeking to challenge various rules and regulations related to the practice of hydraulic fracturing and permitting of new wells completed with hydraulic fracturing. The resolution of these lawsuits could create new permitting or regulatory requirements, which could have an effect on our business.
The high cost or unavailability of drilling rigs, equipment, supplies and other oil field services could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget, which could have an adverse effect on our business, financial condition or results of operations.
Our industry is cyclical and, from time to time, there is a shortage of drilling rigs, equipment or supplies. During these periods, the costs of rigs, equipment and supplies are substantially greater and their availability may be limited. Additionally, these services may not be available on commercially reasonable terms. The high cost or unavailability of drilling rigs, equipment, supplies, personnel and other oil field services could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget, which could have an adverse effect on our business, financial condition or results of operations.
Risk factors relating to an investment in our securities
The issuance of shares of common stock upon conversion of the Series A Preferred Stock, as well as upon exercise of outstanding warrants may cause immediate and substantial dilution to our existing stockholders.
If the market price per share of our common stock at the time of conversion of our Series A Preferred Stock and exercise of any warrants, options, or any other convertible securities is in excess of the various conversion or exercise prices of these derivative securities, conversion or exercise of these derivative securities would have a dilutive effect on our common stock.
As of December 31, 2014, we had outstanding (i) 3,724,004 shares of Series A Preferred Stock which are convertible into an aggregate of 3,724,004 shares of our common stock at $.82 per share, and (ii) warrants to purchase 10,971,190 shares of our Common Stock at a weighted average exercise price of $0.80 per share.
Further, any additional financing we may secure could require the granting of rights, preferences or privileges senior to those of our common stock, which may result in additional dilution of the existing ownership interests of our common stockholders.
We are subject to the reporting requirements of federal securities laws, compliance with which is expensive.
We are a public reporting company in the U.S. and, accordingly, subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act of 2002. The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders will cause our expenses to be higher than they would be if we were a privately held company.
Our compliance with the Sarbanes Oxley Act and SEC rules concerning internal controls are time consuming, difficult, and costly.
As a reporting company, it is time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. In order to comply with our obligations, we hired additional financial reporting, internal control, and other finance staff in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the Sarbanes-Oxley Act’s requirements regarding internal controls, we may not be able to obtain the independent accountant certifications that the Sarbanes-Oxley Act requires publicly traded companies to obtain.
If we fail to maintain the adequacy of our internal controls, our ability to provide accurate financial statements and comply with the requirements of the Sarbanes-Oxley Act could be impaired, which could cause the market price of our common stock to decrease substantially.
We have committed limited personnel and resources to the development of the external reporting and compliance obligations that are required of a public company. We have taken measures to address and improve our financial reporting and compliance capabilities and we are in the process of instituting changes to satisfy our obligations in connection with being a public company, when and as such requirements become applicable to us. If our financial and managerial controls, reporting systems, or procedures fail, we may not be able to provide accurate financial statements on a timely basis or comply with the Sarbanes-Oxley Act as it applies to us. Any failure of our internal controls or our ability to provide accurate financial statements could cause the trading price of our common stock to decline substantially.
Our stock price may be volatile, which may result in losses to our stockholders.
Domestic and international stock markets often experience significant price and volume fluctuations especially in times of economic uncertainty. In particular, the market prices of companies quoted on the OTC QB market tier operated by OTC Markets Group, Inc., where our shares of common stock are quoted, generally have been very volatile and have experienced sharp share-price and trading-volume changes. The public trading price of our common stock is likely to be volatile and could fluctuate widely in response to the following factors, some of which are beyond our control:
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variations in our operating results;
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changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;
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changes in operating and stock price performance of other companies in our industry;
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additions or departures of key personnel;
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future sales of our common stock; and
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general economic and political conditions.
The market price for our common stock may be particularly volatile given our status as a smaller reporting company with a relatively small and thinly-traded “float.” You may be unable to sell your common stock at or above your purchase price, if at all, which may result in substantial losses to you.
The market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect our share price will be more volatile than a seasoned issuer for the indefinite future. The potential volatility in our share price is attributable to a number of factors. As noted above, our common stock may be sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impact on its share price.
Our common stock is thinly-traded. You may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate such shares.
We cannot predict the extent to which an active public trading market for our common stock will develop or be sustained due to a number of factors, including the fact that we are a smaller reporting company that is relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume. Even if we come to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our common stock is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained or that current trading levels will be sustained.
Our common stock may be subject to penny stock rules, which may make it more difficult for our stockholders to sell their common stock.
Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00 per share. The penny stock rules require a broker-dealer, prior to a purchase or sale of a penny stock not otherwise exempt from the rules, to deliver to the customer a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules.
We do not anticipate paying any dividends.
We presently do not anticipate we will pay any dividends on our common stock in the foreseeable future. The payment of dividends on our common stock, if any, would be contingent upon our revenues, earnings, capital requirements, and our general financial condition. We will pay dividends on our common stock only if and when declared by our board of directors. The ability of our board of directors to declare a dividend is subject to restrictions imposed by Delaware law. In determining whether to declare dividends, our board of directors will consider these restrictions as well as our financial condition, results of operations, working capital requirements, future prospects and other factors it considers relevant.
We have a substantial number of authorized common shares available for future issuance that could cause dilution of our stockholders’ interest and adversely impact the rights of holders of our common stock.
We have a total of 200,000,000 shares of common stock authorized for issuance. As of December 31, 2014, we had 164,842,499 shares of common stock available for issuance. We have reserved 3,724,004 shares for conversion of our Series A Preferred Stock, 10,971,190 shares for issuance upon the exercise of outstanding warrants held by various security holders, and 3,083,632 shares for issuance under the 2013 Equity Incentive Plan. We may seek financing that could result in the issuance of additional shares of our capital stock and/or rights to acquire additional shares of our capital stock. We may also make acquisitions that result in issuances of additional shares of our capital stock. Furthermore, the book value per share of our common stock may be reduced.
The introduction of a substantial number of shares of our common stock into the market or by the registration of any of our other securities under the Securities Act may significantly and negatively affect the prevailing market price for our common stock. The future sales of shares of our common stock issuable upon the exercise of outstanding warrants and options
may have a depressive effect on the market price of our common stock, as such warrants and options are likely to be exercised only at a time when the price of our common stock is greater than the exercise price.
Other risk factors
Reserve data of our oil and natural gas operations are estimates based on assumptions that may be inaccurate.
There are uncertainties inherent in estimating natural gas and oil reserves and their estimated value, including many factors beyond our control as producer. Reservoir engineering is a subjective and inexact process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact manner and is based on assumptions that may vary considerably from actual results.
Accordingly, reserve estimates and actual production, revenue and expenditures likely will vary, possibly materially, from estimates. Additionally, there recently has been increased debate and disagreement over the classification of reserves, with particular focus on proved undeveloped reserves. Changes in interpretations as to classification standards or disagreements with our interpretations could cause us to write down these reserves.
The extent to which we can benefit from successful acquisition and development activities or acquire profitable oil and natural gas producing properties with development potential is highly dependent on the level of success in finding or acquiring reserves.
Item 1B.
Item 1B. Unresolved Staff Comments
We do not have any unresolved comments from the SEC staff regarding our periodic or current reports under the Securities Exchange Act of 1934, as amended.
Item 2.
Item 2. Properties
Our corporate headquarters comprises 3,700 square feet of leased office space, located at 12222 Merit Drive, Suite 1850, Dallas, Texas 75251.
Our properties consist primarily of oil and gas wells and our ownership in leasehold acreage, both developed and undeveloped. At December 31, 2014 , we had interests in 135 gross (116.3 net) oil and gas wells and owned leasehold interests in approximately 7,752.3 gross (1,059.9 net) undeveloped acres.
Beginning in 2012, we re-focused our strategy on oil and natural gas production as well as early stage development of minor oil and natural gas resource plays. The following table summarizes our oil and natural gas production for the years ended December 31, 2014 and 2013:
During 2012, we began re-focusing on the acquisition, development, and production of oil and natural gas. However, nearly all of the wells in which we have interests were not completed nor in production until late in the fourth quarter of 2012. Further, due to negative financial and legal matters impacting the third-party operator's ability to effectively operate and manage the six wells completed in 2012, we recognized a $355,865 impairment charge in 2013 related to our non-operated interest in the six wells and accordingly, we do not present reserve data for these six wells for the years ended December 31, 2014 and 2013.
During 2014 we did not drill any new wells and during 2013, we drilled and completed two wells. On October 15, 2014 we purchased 19,881 leasehold acres with 123 existing wells, including 49 commercially producing wells at the time of acquisition, 69 shut-in wells that we plan to return to production through a combination of workovers including mechanical repairs, adding perforations, acidizing, fracture stimulations and recompletions in additional productive formations behind pipe, 4 injection wells and 1 salt water disposal well. The property contains sufficient leasehold acres upon which we intend to drill numerous infield wells. The acquired properties comprise most of our reserves at December 31, 2014.
Based on our 2014 year end reserve study we have recorded an impairment charge of $453,968 for the year ended December 31, 2014 against our Newman and Coley wells in Jack County, TX to align our cost basis in these wells with their estimated net present value.
Oil and Natural Gas Reserves
The following table sets forth our estimated net oil and natural gas reserves and the PV-10 value of such reserves as of December 31, 2014, all of which are located in Texas:
(a) Natural gas reserves have been converted to oil equivalents at the ratio of six Mcf of gas to one Bbl of oil.
(b) “Probable” or “possible” reserves are lower categories of reserves, commonly combined and referred to as “unproved reserves,” with decreasing levels of technical certainty. Probable reserves are volumes that are defined as “less likely to be recovered than proved, but more certain to be recovered than Possible Reserves”. Possible reserves are reserves which analysis of geological and engineering data suggests are less likely to be recoverable than probable reserves.
The PV-10 value as of December 31, 2014 is pre-tax and was determined utilizing the twelve-month un-weighted arithmetic average of the first day of the month price for the period January through December 2014. Natural gas prices are referenced to a Henry Hub (HH) price of $4.39 per Mcf. Oil and NGL prices are referenced to a Cushing, OK West Texas Intermediate (WTI) crude oil price of $93.26 per barrel and an NGL price of $28.14 per barrel. These reference prices are held constant in accordance with SEC guidelines. Management believes that the presentation of PV-10 value may be considered a non-GAAP financial measure as defined in Item 10(e) of Regulation S-K. Therefore, we have included a reconciliation of the measure to the most directly comparable GAAP financial measure (standardized measure of discounted future net cash flows in footnote (2) below). Management believes that the presentation of PV-10 value provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and gas companies. Because many factors that are unique to each individual company may impact the amount of future income taxes to be paid, the use of the pre-tax measure provides greater comparability when evaluating companies. It is relevant and useful to investors for evaluating the relative monetary significance of Sable's oil and natural gas properties. Further, investors may utilize the measure as a basis for comparison of the relative size and value of Sable’s reserves to other companies. Management also uses this pre-tax measure when assessing the potential return on investment related to its oil and natural gas properties and in evaluating acquisition candidates. The PV-10 value is not a measure of financial or operating performance under GAAP, nor is it intended to represent the current market value of the estimated oil and natural gas reserves owned by Sable. PV-10 value should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows as defined under GAAP. The after-tax PV-10 value of Net Total Proved Reserves (or “Standardized Measure of Discounted Future Net Cash Flows”) is $4,509,237.
Reserve estimation procedures
Overview
We have established a system of internal controls over our reserve estimation process, which we believe provides us reasonable assurance that reserve estimates have been prepared in accordance with the SEC and Financial Accounting Standards Board (the “FASB”) standards. These controls include oversight by trained technical personnel employed by us and by the use of qualified independent petroleum engineers to evaluate our proved reserves on an annual basis. Our estimated proved reserves as of December 31, 2014 were derived from engineering evaluation reports prepared by Crest Engineering Services, Inc.
Qualifications of technical manager and consultants
Chris Coley, our Vice President - Engineering & Production, is the person within the Company who is primarily responsible for overseeing the preparation of the reserve estimates. Mr. Coley joined the Company in 2014 with nine years of relevant
operations, reservoir, completions and production engineering experience. Mr. Coley holds a Bachelor of Science degree in Petroleum Engineering from Texas Tech University.
Crest Engineering Services, Inc. is an independent petroleum engineering consulting firm registered in the State of Texas, and W. Waterson Calhoun, President, Reservoir Engineer is the technical person primarily responsible for evaluating the proved reserves covered by its report. Mr. Calhoun has 25 years experience in evaluating oil and gas reserves. Mr. Calhoun holds a Bachelor of Science degree in Petroleum Engineering from the University of Texas at Austin. He is a Registered Professional Engineer in the State of Texas and is a member of the Society of Petroleum Engineers and the Society of Petroleum Evaluation Engineers.
Other information concerning our proved reserves
Proved reserves are the estimated quantities that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production of these reserves may be substantially different from the original estimate. Revisions result primarily from new information obtained from development drilling and production history, and changes in economic factors. Oil reserves, which include condensate and natural gas liquids, are stated in barrels and natural gas reserves are stated in thousands of cubic feet.
The PV-10 value was prepared utilizing the twelve-month un-weighted arithmetic average of the first day of the month price for the period January through December 2014, discounted at 10% per annum on a pretax basis, and is not intended to represent the current market value of the estimated oil and natural gas reserves owned by Sable Operating. For further information concerning the present value of future net revenues from these proved reserves, see Supplemental Oil & Gas Data to the Notes to Consolidated Financial Statements.
Numerous uncertainties exist in estimating quantities of proved reserves. Reserve estimates are imprecise and subjective and may change at any time as additional information becomes available. Furthermore, estimates of oil and natural gas reserves are projections based on engineering data. There are uncertainties inherent in the interpretation of this data as well as the projection of future rates of production. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As of December 31, 2014 and 2013, we did not have any delivery commitments.
We believe Sable Operating has taken all necessary steps to fully comply with Rule 4-10(a) of Regulation S-X for oil and natural gas reserves.
Item 3.
Item 3. Legal Proceedings
Other than ordinary routine litigation incidental to our business, we are not party to any material pending legal proceedings.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
A public trading market for our common stock began trading on April 1, 2011, and our common stock is now traded in very limited quantities under the symbol “NYTE” on the OTCQB market tier, an interdealer quotation system operated by OTC Markets Group, Inc. The range of closing prices for our common stock, as reported during each quarter during the years ended December 31, 2014 and 2013 was as follows.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. As of March 27, 2015, the closing price of our common stock was $0.15 per share.
Holders
As of March 27, 2015, we had approximately 35,157,501 shares of common stock outstanding held by 382 stockholders of record.
Dividends
We have not historically and do not currently anticipate that we will declare or pay cash dividends on our common stock in the foreseeable future. We will pay dividends on our common stock only if and when declared by our Board of Directors. The ability of our Board of Directors to declare a dividend is subject to restrictions imposed by Delaware law and by restrictions under certain of our financing arrangements. In determining whether to declare dividends, our Board of Directors will consider these restrictions as well as our financial condition, results of operations, working capital requirements, future prospects and other factors it considers relevant.
Securities Authorized For Issuance Under Equity Compensation Plans
In November 2012, we established our 2013 Equity Incentive Plan for the purpose of attracting and retaining the services of key employees, consultants, and non-employee members of our board of directors and to provide such persons with a proprietary interest in the Company through the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and/or other awards. It is our intent that these awards will:
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increase the interest of such persons in our welfare,
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furnish an incentive to such persons to continue their services for the Company, and
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provide a means through which we may attract able persons as employees, contractors, and non-employee members of our board of directors.
In addition, we have granted performance-based stock awards to certain employees of the Company and its subsidiaries pursuant to terms negotiated under individual employment agreements for such employees with no exercise price. The following table sets forth the number of shares of restricted common stock outstanding under such plans and the number of shares that remain available for issuance under such plans, as of December 31, 2014:
Recent Sales of Unregistered Securities
Share Repurchase Program
In April 2013, our Board of Directors approved the repurchase of up to an aggregate of 2.7 million shares of our common stock, or approximately 10% of outstanding common shares. The repurchases will be made from time-to-time on the open market at prevailing market prices. The repurchase program is expected to continue over the next twelve months unless extended or shortened by the Board of Directors. The timing and amount of any repurchase will depend on economic and market conditions, the trading price and other factors and any purchases will be executed in compliance with applicable laws and regulations. The plan does not obligate the Company to acquire any particular amount of common stock and can be implemented, suspended or discontinued at any time without prior notice at the Company’s sole discretion. The share repurchase program will be funded with the Company’s available working capital. During the year ended December 31, 2013, the Company acquired a total of 1,450 shares at an average price per share of $0.24. Based on the average of daily high / low price per share for the year ended December 31, 2013, or $0.23 per share, the approximate dollar value of shares that may yet be purchased under the plan is $621,000. The Company did not acquire any shares for the year ended December 31, 2014.
Issuance and Sale of Securities
On June 20, 2014, the Board of Directors (the “Board”) of the Company approved the sale and issuance of 8,013,902 shares of Common Stock of the Company to Cory Hall in exchange for consideration of $1,001,738 in accordance with the Securities Purchase Agreement executed on June 20, 2014 between the Company and Mr. Hall. (the “Hall Offering”). The Hall Offering was made in reliance on the exemption provided by Rule 506(b) promulgated under the Securities Act of 1933, as amended, and certain provisions of Regulation D thereunder based on Mr. Hall’s status as an accredited investor.
In connection with the transactions described above, effective June 23, 2014, the Board approved the expansion of the size of the Board from three to four members and appointed Cory Hall to the vacancy on the Board created by such expansion. At this time, Mr. Hall is not appointed to any Board committees. Mr. Hall is 39 years old and has no family relationships with anyone on the Board or any of the officers of the Company. In addition to his appointment as a member of the Board, effective June 20, 2014, Mr. Hall was also appointed as the President and Chief Operating Officer of the Company.
In February 2014, we initiated a $1,000,000 offering of convertible debt ("12% Convertible Debenture") to fund our ongoing working capital needs. The offering was subsequently increased to $2,000,000. Terms of the 12% Convertible Debenture were as follows: (i) $100,000 per unit with interest at a rate of 12% per annum payable monthly with a maturity of three years from the date of issuance; (ii) convertible at any time prior to maturity at $0.50 per share of the Company's common stock; and, (iii) each unit includes a three-year warrant to purchase up to 50,000 shares of the Company's common stock at an exercise price of $0.50 per share for a period of three years from the effective date of the warrant. As of December 31, 2014, we had raised $1,950,000 under the 12% Convertible Debenture offering including warrants to purchase up to 915,000 shares of the Company's common stock.
Item 6.
Item 6. Selected Financial Data
The information is not required under Regulation S-K for “smaller reporting companies.”
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Overview
Our strategy is to enhance value for our shareholders by:
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Growing reserves and production through exploration and development;
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Applying technically-proved drilling and completion technologies to continue our successful exploration and development program;
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Identifying, accessing and exploring emerging oil and liquids rich resources; and
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Upholding the ethical and business standards of the Company and maintaining the highest standards of health, safety, and environmental performance.
We are an energy holding company consisting of one operating segment represented by the operations of our wholly-owned subsidiary, Sable Operating Company, Inc., an exploration and production company engaged in the acquisition, development and production of oil and natural gas reserves from low-risk, high rate-of-return wells in carbonate reservoirs. By focusing on early, low and no-cost entry into “tight oil” resource plays in North Texas, using multiple entry methods, Sable Operating has acquired overriding and working interests in nearly 107,000 leasehold acres primarily in the Fort Worth Basin of North Texas. We believe these plays can be developed uniformly over expansive geographical areas with a high rate of success due to the recent advancements in horizontal drilling and multi-stage hydraulic fracturing technologies.
Sable and subsidiaries are collectively referred to herein as “we,” “us,” “our,” “its,” and the “Company”.
Results of Operations
The following discussion is intended to provide information relevant to an understanding of our financial condition, changes in our financial condition and our results of operations and cash flows and should be read in conjunction with the accompanying consolidated financial statements, including the notes thereto.
Year ended December 31, 2014 compared to the year ended December 31, 2013
Revenues.
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Land Services. Revenues from land services decreased 57% to $187,303 for the year ended December 31, 2014 compared to the prior year of $434,906 as we have shifted our focus toward holding and developing oil and natural gas properties.
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Oil and Natural Gas Sales. Oil and natural gas sales increased 202% to $662,290 for the year ended December 31, 2014 compared to the prior year of $219,160 primarily due to the acquisition of the Panther Creek property production in the fourth quarter of 2014.
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Sale of oil and natural gas interests. Sales of oil and natural gas interests were down 77% to $62,262 for the year ended December 31, 2014 compared to the prior year of $276,092 as we have shifted our focus toward holding and developing oil and natural gas properties.
Lease operating expenses. Lease operating expenses increased 788% to $770,312 in the current year ended December 31, 2014 compared to $86,740 in the prior year ended December 31, 2013 due primarily to non-recurring LOE costs of $496,745 incurred to rebuild the Panther Creek property following the acquisition in the fourth quarter of 2014.
Depletion, depreciation, and amortization ("DD&A"). DD&A increased 359% to $459,981 in the current year ended December 31, 2014 compared to $100,207 in the prior year period due primarily to an increase in overall depreciable assets including depletion recognized on the Panther Creek wells totaling approximately $366,746.
Selling, general and administrative expenses ("SG&A"). SG&A expenses increased 11%, by $334,846 to $3,389,447 for the year ended December 31, 2014 compared to $3,054,601 in the prior year due to increases in salary, wages and benefits; acquisition related expenses; and consulting fees partially offset by decreased legal and professional fees and bad debt expense.
Exploration. Exploration costs totaling $112,763 were incurred in 2014, primarily geological & geophysical costs, as we began developing the Panther Creek properties. We did not incur any exploration costs in 2013.
Loss on sale of assets. We incurred a loss on sale of assets of $134,106 in 2014 relating to payments from restricted cash for 2010 tax payments for a previously divested entity.
Impairment loss. Impairment loss increased 28% in 2014 compared to the prior year as we recognized an impairment charge totaling $453,968 related to the Newman and Coley wells based on the year end reserve study compared to the $355,865 impairment charge in 2013 related to the six non-operated wells in Jack County, Texas that were impaired due to on-going legal, financial, and operating difficulties of the wells' third-party operator.
Interest expense. Interest expense increased 677% to $557,006 for the year ended December 31, 2014 compared to $71,685 in the prior year period due primarily to the issuance of the 12% Convertible Debentures during the year and the issuance of the 13% Secured Notes in the fourth quarter of 2014.
Adjusted EBITDAX
To assess the operating results of our segments, our chief operating decision maker analyzes net income (loss) before income taxes, interest expense, DD&A, impairments, gains or losses resulting from the sale of assets other than dispositions of oil and natural gas interests, or resolution of commercial disputes, and changes in fair value attributable to derivative liabilities (“Adjusted EBITDAX”). Our definition of Adjusted EBITDAX, which is not a GAAP measure, excludes interest expense to allow for assessment of operating results without regard to our financing methods or capital structure. Similarly, DD&A and impairments are excluded from Adjusted EBITDAX as a measure of operating performance because capital expenditures are evaluated at the time capital costs are incurred. In addition, changes in fair value attributable to derivative liabilities are excluded from Adjusted EBITDAX since these unrealized (gains) losses are not considered to be a measure of asset-operating performance. Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Company’s financial condition and results of operations and that Adjusted EBITDAX is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures and make distributions to stockholders.
Adjusted EBITDAX, as we define it, may not be comparable to similarly titled measures used by other companies. Therefore, our consolidated Adjusted EBITDAX should be considered in conjunction with net income (loss) and other performance measures prepared in accordance with GAAP, such as operating income or cash flow from operating activities. Adjusted EBITDAX has important limitations as an analytical tool because it excludes certain items that affect net income (loss) and net cash provided by operating activities. Adjusted EBITDAX should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP. Below is a reconciliation of consolidated Adjusted EBITDAX to consolidated net loss as reported on our consolidated statements of operations.
Liquidity and Capital Resources
Our working capital needs have historically been satisfied through operations, equity and debt investments from private investors, loans with financial institutions, and through the sale of assets. Historically, our primary use of cash has been to pay
for acquisitions and investments, service our debt, and for general working capital requirements. As of December 31, 2014, we had cash and cash equivalents totaling $205,999 on hand.
We cannot be certain that our existing sources of cash will be adequate to meet our liquidity requirements including cash requirements that may be due under existing debt obligations as well as amounts due to our vendors in the normal course of business. For the year ended December 31, 2014, we incurred a net loss from continuing operations of $4,629,534 and have an accumulated deficit totaling $23,807,498, all of which casts substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing from shareholders or other sources to meet its obligations and repay its liabilities arising from normal business operations when they come due.
We intend to seek substantial sources of liquidity. In addition, management has implemented plans to improve liquidity through cash flows generated from improvements to results from existing operations. There can be no assurance that we will be successful with our plans or that our results of operations will materially improve in either the short-term or long-term and accordingly, we may be unable to meet our obligations as they become due.
At December 31, 2014, we had outstanding long term debt obligations totaling $10,963,915 net of discount, of which $282,791 is determined to be due in one year or less. None of our debt obligations have negative covenant requirements.
In January 2014, we entered into a $100,000 secured promissory note agreement with a third party to provide working capital to the Company. The secured promissory note was due in four months from the date of issuance. Under the terms of the secured promissory note, the loan paid interest at a rate of 18%, plus an accommodation fee, such that including the interest payable under the loan, an amount ranging from $5,000 to $20,000, depending upon the number of months the secured promissory note remained outstanding, plus 12,500 shares of the Company's common stock. In February 2014, the holder of the secured promissory note transferred their outstanding principal due under the agreement to the Company's private offering of three-year 12% convertible debentures, and the secured promissory note was deemed paid in full. (See discussion regarding 12% convertible debentures below.)
In February 2014, we entered into two $100,0000 secured bridge loans ("Secured Bridge Loans") with two third parties to provide working capital to the Company. Under the terms of the Secured Bridge Loans, principal is due in forty days with interest payable at 18%, plus an accommodation fee, such that combined with the interest due and payable, a sum equal to $20,000, plus 25,000 shares of the Company's common stock. In March 2014, in consideration of an additional 25,000 shares of the Company's common stock, the maturity date of both Secured Bridge Loans was extended. In April 2014, the Company made a partial payment totaling $140,000 on the Secured Bridge Loans. In May 2014, one of the Secured Bridge Loans was paid in full. At June 30, 2014, amounts due under the remaining Secured Bridge Loan totaled $20,700, of which $15,700 represents accrued and unpaid interest.
In February 2014, we initiated a $1,000,000 offering of convertible debt ("12% Convertible Debentures") to fund our ongoing working capital needs. Terms of the 12% Convertible Debentures were as follows: (i) $100,000 per unit with interest at
a rate of 12% per annum payable monthly with a maturity of three years from the date of issuance; (ii) convertible at any time prior to maturity at $0.75 per share of the Company's common stock; (iii) each unit included a three-year warrant to purchase up to 30,000 shares of the Company's common stock at an exercise price of $0.75 per share for a period of three years from the effective date of the warrant; and, (iv) an anti-dilution provision that requires a reduction in the conversion price should at-market issuances of the Company’s common stock be issued below the stated conversion price prior to August 31, 2014. The offering was subsequently extended to $2,000,000 with the terms modified as follows: (i) convertible at any time prior to maturity at $0.50 per share of the Company's common stock; (ii) each unit included a three-year warrant to purchase up to 50,000 shares of the Company's common stock at an exercise price of $0.50 per share for a period of three years from the effective date of the warrant. One unit was issued with a maturity of one year from the date of issuance. As of December 31, 2014, we had raised $1,950,000 under the 12% Convertible Debenture offering including warrants to purchase up to 915,000 shares of the Company's common stock.
On October 15, 2014, the Company completed the acquisition of 19,881 acres, the Panther Creek property, held by production in the Fort Worth Basin at a purchase price of $9,500,000 from Upham Oil & Gas Co., L.P. of Mineral Wells, Texas. The acquisition of Panther Creek was financed primarily by issuance of Secured Notes of $8,900,000; bearing interest at the rate of 13% per annum with a maturity in three years. In addition, each Secured Lender will receive (i) a pro rata share of a 3.0% overriding royalty interest effective at closing, (ii) on the date that the principal and interest on the Secured Notes is paid in full a record assignment of such Secured Lender's pro rata share of a 33.33% working interest.
RKJ Holdings, LLC is one of the Lenders under the Loan Agreement as of October 14, 2014. RKJ Holdings, LLC is owned and managed by Mr. Cory R. Hall, the President and Chief Operating Officer of Sable and a member of the Sable Board of Directors. As a Lender, RKJ Holdings loaned Sable $2,850,000 at closing.
In connection with the transactions described above, effective October 14, 2014, Sable issued warrants exercisable for approximately 4,895,000 shares of common stock of Sable to the Lenders on such date, at an exercise price of $0.50 per share, in consideration of the distribution of the Loan proceeds to Sable, pursuant to warrant agreements with each of the Lenders. As a Lender, Mr. Hall’s entity, RKJ Holdings, LLC was issued warrants to purchase 1,567,500 shares of NYTEX common stock as part of the transactions contemplated by the Loan Agreement.
Each of the warrants issued on October 14, 2014 in connection with the transactions contemplated by the Loan Agreement are exercisable for a two year period beginning on October 14, 2014 and ending on October 14, 2016. As of December 31, 2014 we had raised $9,650,000 under the 13% Secured Notes offering including warrants to purchase up to 5,307,500 of the Company's common stock.
Cash Flows
The following table summarizes our cash flows and has been derived from our audited financial statements for the years ended December 31, 2014 and 2013.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we review these estimates based on information that is currently available. Changes in facts and circumstances may cause us to revise our estimates. The most significant estimates relate to revenue recognition, depreciation, depletion and amortization, the assessment of impairment of long-lived assets and oil and natural gas properties, income taxes, and fair value. Actual results could differ from estimates under different assumptions and conditions, and such results may affect operations, financial position, or cash flows.
Cash and Cash Equivalents
We consider all demand deposits, money market accounts, and highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents reported on the consolidated balance sheet approximates fair value. We maintain funds in bank accounts which, from time to time, exceed federally insured limits.
Accounts Receivable
We provide credit in the normal course of business to our customers and perform ongoing credit evaluations of those customers. We maintain an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. A portion of our receivables are from the operators of producing wells in which we maintain ownership interests. These operators market our share of crude oil and natural gas production. The ability to collect is dependent upon the general economic conditions of the purchasers/participants and the oil and gas industry.
Marketable Securities
We determine the appropriate classification of our investments in marketable securities at the time of acquisition and reevaluate such determinations at each balance sheet date. Marketable securities are classified as held to maturity when we have the positive intent and ability to hold securities to maturity. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with the unrealized gains and losses recognized in earnings. Marketable securities not classified as held to maturity or as trading, are classified as available for sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income (loss) and reported in shareholders’ equity. We have classified all of our marketable securities as available for sale. The fair value of substantially all securities is determined by quoted market prices. The estimated fair value of securities for which there are no quoted market prices is based on similar types of securities that are traded in the market.
We review our marketable securities on a regular basis to determine if any security has experienced an other-than-temporary decline in fair value. We consider several factors including the length of the time and the extent to which the fair value has been below cost, the financial condition and near-term prospects of the affiliated entity, and other factors, in our review. If we determine that an other-than-temporary decline exists in a marketable security, we write down the investment to its market value and record the related write-down as an investment loss in our Consolidated Statement of Operations.
Property and equipment
Property and equipment are recorded at cost less accumulated depreciation, depletion, and amortization (“DD&A”). Costs of improvements that appreciably improve the efficiency or productive capacity of existing properties or extend their lives are capitalized. Maintenance and repairs are expensed as incurred. Upon retirement or sale, the cost of properties and equipment, net of the related accumulated DD&A, is removed and, if appropriate, gain or loss is recognized in the respective period’s consolidated statement of operations.
For our oil and natural gas properties, we follow the successful efforts method of accounting for oil and natural gas exploration and development costs. Under this method of accounting, all property acquisition costs and costs of exploratory wells are capitalized when incurred, pending determination of whether additional proved reserves are found. If an exploratory well does not find additional reserves, the costs of drilling the well are charged to expense. The costs of development wells, whether productive or nonproductive, are capitalized. Geological and geophysical costs on exploratory prospects and the costs of carrying and retaining unproved properties are expensed as incurred.
Long-lived Assets
Long-lived assets are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is generally measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If it is determined that the carrying amount may not be recoverable, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is the estimated value at which the asset could be bought or sold in a transaction between willing parties. We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as the price of oil and natural gas, production volumes and costs, drilling activity, and economic conditions could significantly affect these estimates.
We evaluate impairment of our oil and natural gas properties on a property-by-property basis and estimate the fair value based on discounted cash flows expected to be generated from the production of proved reserves.
Deposits Held in Trust
We record a liability for funds held on behalf of outside investors in oil and natural gas exploration projects, which are to be paid to the project operator as capital expenditures are billed. The liability is reduced as we make payments on behalf of those outside investors to the operator of the project.
Asset Retirement Obligations
We recognize liabilities for retirement obligations associated with tangible long-lived assets, such as producing well sites when there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the consolidated balance sheet. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement cost. The asset retirement cost is depreciated using a systematic and rational method similar to that used for the associated property and equipment.
Fair Value Measurements
Certain of our assets and liabilities are measured at fair value at each reporting date. Fair value represents the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants. This price is commonly referred to as the “exit price”.
Fair value measurements are classified according to a hierarchy that prioritizes the inputs underlying the valuation techniques. This hierarchy consists of three broad levels. Level 1 inputs on the hierarchy consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2 measurements are based on inputs other than quoted prices that are generally observable for the asset or liability. Common examples of Level 2 inputs include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in markets not considered to be active. Level 3 measurements have the lowest priority and are based upon inputs that are not observable from objective sources. The most common Level 3 fair value measurement is an internally developed cash flow model. We use appropriate valuation techniques based on the available inputs to measure the fair values of our assets and liabilities. When available, we measure the fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.
The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable, and accrued expenses reported on the accompanying consolidated balance sheets approximates fair value due to their short-term nature. The fair value of debt is the estimated amount we would have to pay to repurchase our debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at each balance sheet date. Debt fair values are based on quoted market prices for identical instruments, if available, or based on valuations of similar debt instruments.
Revenue Recognition
Revenues from the sales of natural gas and crude oil are recorded when product delivery occurs and title and risk of loss pass to the customer, the price is fixed or determinable, and collection is reasonably assured. The Company uses the sales method of accounting for oil and natural gas revenues. Under this method, revenues are recognized based on the actual volumes of natural gas and oil sold to purchasers. The volume sold may differ from the volumes the Company may be entitled to, based on the Company's individual interest in the property. Periodically, imbalances between production and nomination volumes can occur for various reasons. In cases where imbalances have occurred, a production imbalance receivable or liability will be recorded when determined. If an imbalance exists at the time the wells’ reserves are depleted, settlements are made among the joint interest owners under a variety of arrangements.
Revenues from land services are recorded when title work is completed and the customer has been invoiced for services provided. Revenues from the sale of interests in oil and natural gas properties are recorded once a formal agreement has been reached and the agreement has been consummated through the exchange of consideration.
•Land services revenue - Land services revenues consist of fees generated from analyzing land and mineral title reports, leasehold title analysis and reports, land title runsheets, sourcing, negotiating and acquiring leases, document preparation and performing title curative functions. Such revenues had previously been reported as Other revenues on the consolidated statements of operations. Sable provides land services to its customers by identifying the landowners and performing various land services identified above. The buyer (Sable’s customer) pays the landowner directly for the undeveloped lease acreage. Sable does not take title to the leasehold acreage and the buyer’s purchase from the landowner is non-recourse. For its services, Sable receives fees directly from its customer for services provided for clearing title, etc., generally based on a per acre amount. There is no substantial performance obligation or a retained interest by Sable as we do not obtain an interest in the leasehold acreage (not a conveyance of interests).
•Sale of oil and natural gas interests - As there is a very competitive market to purchase oil and natural gas lease interests, especially in newer oil and natural gas plays with increasing acreage costs, Sable may purchase undeveloped leasehold acreage from landowners and take title to the leasehold. However, holding the leasehold acreage is generally short term in nature (less than 90 days) as we only acquire the undeveloped property when an identified customer has already agreed to the 100% re-purchase of the leasehold acreage from Sable. Accordingly, we do not acquire the leasehold acreage on a speculative basis nor for our own development. There is no substantial performance obligation or retained interest by Sable as all land services have
been performed and Sable sells 100% of the leasehold interest. The difference between the sale price and the amount (cost) paid for the lease by Sable is recognized as a gain on sale in accordance with ASC 932-360-55-8. Such gains are not deemed to be incidental or peripheral transactions as providing land services and facilitating the purchase of oil and natural gas leasehold interest for its customers are transactions that are part of Sable’s principal ongoing operations, thus reported within the Company’s revenues.
Share Based Compensation
We grant share-based awards to acquire goods and/or services, to members of our Board of Directors, and to selected employees. All such awards are measured at fair value on the date of grant and are recognized as a component of general and administrative expenses in the accompanying consolidated statements of operations over the applicable requisite service periods.
Income Taxes
We are subject to current income taxes assessed by the federal government and various state jurisdictions in the United States. In addition, we account for deferred income taxes related to these jurisdictions using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for the future tax benefits attributable to the expected utilization of existing tax net operating loss carryforwards and other types of carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
We recognize the financial statement effects of tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon ultimate settlement with a taxing authority. We have not taken a tax position that, if challenged, would have a material effect on the consolidated financial statements or the effective tax rate for the years ended December 31, 2014 and 2013. There were no interest and penalties related to unrecognized tax positions for the years ended December 31, 2014 and 2013. The tax years subject to examination by tax jurisdictions in the United States are 2011 to 2013.
Net Loss Per Common Share
Basic net loss per common share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per common share is calculated in the same manner, but also considers the impact to net loss and common shares for the potential dilution from stock options, stock warrants and any outstanding convertible securities.
The Company has issued potentially dilutive instruments in the form of our restricted common stock granted and not yet issued, common stock warrants, common stock options granted to our employees and directors, 12% Convertible Debentures, and our Series A Convertible Preferred Stock. The Company did not include any of these instruments in its calculation of diluted net loss per share during the periods because to include them would be anti-dilutive due to the Company's loss from continuing operations during the periods.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU No, 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We are currently evaluating the impact of adopting the guidance on our financial statements.
The FASB has issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of
discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization’s results from continuing operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. We are currently evaluating the impact of adopting the guidance on our financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information is not required under Regulation S-K for “smaller reporting companies.”
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required by this Item 8 is included in our Consolidated Financial Statements beginning on page of this Annual Report on Form 10-K.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness in 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.
Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our operating results could be harmed. 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. Based on our evaluation, our management concluded that there are material weaknesses in our internal control over financial reporting. The material weaknesses identified did not result in the restatement of any previously reported financial statements or any related financial disclosure, nor does management believe that it had any effect on the accuracy of the Company’s financial statements for the current reporting period. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness relates to not having sufficient technical accounting personnel to ensure monitoring and review of financial reporting work performed in the preparation of financial statements, footnotes and financial data provided to the Company’s registered public accounting firm in connection with the annual audit. All of our financial reporting is carried out by our Controller. A material weakness relates to minimal segregation of duties. This lack of accounting staff results in a lack of segregation of duties and accounting technical expertise necessary for an effective system of internal control. All unexpected results are investigated. At any time, if it appears that any control can be implemented to continue to mitigate such weaknesses, it is immediately implemented. We are currently evaluating staffing needs. As soon as practical, we will hire sufficient accounting staff and implement appropriate procedures for monitoring and review of work performed. Because of the material weakness described above, management concluded that, as of December 31, 2014, our internal control over financial reporting was not effective based on the criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO").
Changes in Internal Control Over Financial Reporting
Other than as described above, there have not been any other changes in our internal control over financial reporting during the year ended December 31, 2014, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this Item 10 is incorporated by reference to our definitive proxy statement relating to the 2015 Annual Meeting of Stockholders, which will be filed with the SEC no later than April 30, 2015.
Item 11.
Item 11. Executive Compensation
Information required by this Item 11 is incorporated by reference to our definitive proxy statement relating to the 2015 Annual Meeting of Stockholders, which will be filed with the SEC no later than April 30, 2015.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Information required by this Item 12 is incorporated by reference to our definitive proxy statement relating to the 2015 Annual Meeting of Stockholders, which will be filed with the SEC no later than April 30, 2015.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this Item 13 is incorporated by reference to our definitive proxy statement relating to the 2015 Annual Meeting of Stockholders, which will be filed with the SEC no later than April 30, 2015.
Item 14.
Item 14. Principal Accounting Fees and Services
Information required by this Item 14 is incorporated by reference to our definitive proxy statement relating to the 2015 Annual Meeting of Stockholders, which will be filed with the SEC no later than April 30, 2015.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a) EXHIBITS
1. The Consolidated Financial Statements of Sable Natural Resources Corporation are listed on the Index set forth on page.
2. Exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index attached hereto.
(b) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because they are not required, not applicable, or the information is included in the Company’s Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NYTEX Energy Holdings, Inc.
By:
/s/ Michael K. Galvis
Michael K. Galvis
President and Chief Executive Officer
March 31, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Sable Natural Resources Corporation (formerly NYTEX Energy Holdings, Inc.)
We have audited the accompanying consolidated balance sheets of Sable Natural Resources Corporation (formerly NYTEX Energy Holdings, Inc.) and subsidiaries (the “Company”), as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows for the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sable Natural Resources Corporation (formerly NYTEX Energy Holdings, Inc.) and subsidiaries, as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company will need additional working capital to fund operations. This condition raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/s/ Whitley Penn LLP
Dallas, Texas
March 31, 2015
SABLE NATURAL RESOURCES CORPORATION
Consolidated Balance Sheets
See accompanying Notes to Consolidated Financial Statements
SABLE NATURAL RESOURCES CORPORATION
Consolidated Statements of Operations
See accompanying Notes to Consolidated Financial Statements
SABLE NATURAL RESOURCES CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
See accompanying Notes to Consolidated Financial Statements
SABLE NATURAL RESOURCES CORPORATION
Consolidated Statements of Stockholders’ Equity (Deficit)
See accompanying Notes to Consolidated Financial Statements
SABLE NATURAL RESOURCES CORPORATION
Consolidated Statements of Cash Flows
See accompanying Notes to Consolidated Financial Statements
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
NOTE 1. NATURE OF BUSINESS
Sable Natural Resources Corporation (“Sable”), which was formerly known as NYTEX Energy Holdings, Inc., is an energy holding company with principal operations centralized in its wholly-owned subsidiary, Sable Operating Company, Inc. (“Sable Operating”) which was formerly known as NYTEX Petroleum, Inc. Sable Operating is an early-stage exploration and production company engaged in the acquisition, development, and production of oil and natural gas reserves from low-risk, high rate-of-return wells in carbonate reservoirs.
Sable and subsidiaries are collectively referred to herein as the “Company,” “we,” “us,” and “our.”
Sable and its subsidiaries are headquartered in Dallas, Texas.
Liquidity
We cannot be certain that our existing sources of cash will be adequate to meet our liquidity requirements including cash requirements that may be due under existing debt obligations as well as amounts due to our vendors in the normal course of business. For the year ended December 31, 2014, we incurred a net loss of $4,629,534 and have an accumulated deficit totaling $23,807,498, all of which casts substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing from shareholders or other sources to meet its obligations and repay its liabilities arising from normal business operations when they come due.
We intend to seek substantial sources of liquidity. In addition, management has implemented plans to improve liquidity through cash flows generated from development of new business initiatives within the oil & gas industry and improvements to results from existing operations. There can be no assurance that we will be successful with our plans or that our results of operations will materially improve in either the short-term or long-term and accordingly, we may be unable to meet our obligations as they become due.
A fundamental principle of the preparation of financial statements in accordance with generally accepted accounting principles is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate. Our consolidated financial statements have been prepared on a going concern basis and do not reflect any adjustments that might specifically result from the outcome of this uncertainty.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. The consolidated financial statements include the accounts of Sable and entities in which it holds a controlling interest. All intercompany transactions have been eliminated. Certain prior-period amounts have been reclassified to conform to the current-year presentation. This has not affected previously reported results.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we review these estimates based on information that is currently available. Changes in facts and circumstances may cause us to revise our estimates. The most significant estimates relate to revenue recognition, depreciation, depletion and amortization, the assessment of impairment of long-lived assets and oil and natural gas properties, income taxes, and fair value. Actual results could differ from estimates under different assumptions and conditions, and such results may affect operations, financial position, or cash flows.
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
We consider all demand deposits, money market accounts, and highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents reported on the consolidated balance sheet approximates fair value. We maintain funds in bank accounts which, from time to time, exceed federally insured limits.
Accounts Receivable
We provide credit in the normal course of business to our customers and perform ongoing credit evaluations of those customers. We maintain an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. A portion of our receivables are from the operators of producing wells in which we maintain ownership interests. These operators market our share of crude oil and natural gas production. The ability to collect is dependent upon the general economic conditions of the purchasers/participants and the oil and gas industry. Our Allowance for doubtful accounts was $331,689 and $554,401 as of December 31, 2014 and 2013, respectively. During the year ended December 31, 2014 we did not recognize any bad debt expense. During the year ended December 31, 2013, we recognized $549,818 in bad debt expense which is reported in general and administrative expenses on the accompanying Consolidated Statement of Operations.
Marketable Securities
We determine the appropriate classification of our investments in marketable securities at the time of acquisition and reevaluate such determinations at each balance sheet date. Marketable securities are classified as held to maturity when we have the positive intent and ability to hold securities to maturity. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with the unrealized gains and losses recognized in earnings. Marketable securities not classified as held to maturity or as trading, are classified as available for sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income (loss) and reported in shareholders’ equity. We have classified all of our marketable securities as available for sale. The fair value of substantially all securities is determined by quoted market prices. The estimated fair value of securities for which there are no quoted market prices is based on similar types of securities that are traded in the market.
We review our marketable securities on a regular basis to determine if any security has experienced an other-than-temporary decline in fair value. We consider several factors including the length of the time and the extent to which the fair value has been below cost, the financial condition and near-term prospects of the affiliated entity, and other factors, in our review. If we determine that an other-than-temporary decline exists in a marketable security, we write down the investment to its market value and record the related write-down as an investment loss in our Consolidated Statement of Operations. We have recognized a loss on sale of our marketable securities of $27,755 for the year ended December 31, 2013.
Restricted cash
On May 4, 2012, (the “Closing Date”), we entered into an agreement with a third party, FDF Resources Holdings LLC (the” Purchaser”), which resulted in the sale of 100% of the outstanding interests of FDF. The total consideration for the sale was $62.5 million. In accordance with the Merger Agreement, $6,250,000 of the total consideration was set aside to be held in escrow and is reported as restricted cash on the accompanying consolidated balance sheets. The funds held in escrow are subject to distribution in accordance with terms set forth in the Merger Agreement including final closing date net working capital. The remaining balance at December 31, 2014 of $2,986,154 will be distributed to liquidate the preferred shareholders on May 15, 2015.
Property and equipment
Property and equipment are recorded at cost less accumulated depletion, depreciation, and accretion (“DD&A”). Costs of improvements that appreciably improve the efficiency or productive capacity of existing properties or extend their lives are capitalized. Maintenance and repairs are expensed as incurred. Upon retirement or sale, the cost of properties and equipment, net of the related accumulated DD&A, is removed and, if appropriate, gain or loss is recognized in the respective period’s consolidated statement of operations.
For our oil and natural gas properties, we follow the successful efforts method of accounting for oil and natural gas exploration and development costs. Under this method of accounting, all property acquisition costs and costs of exploratory wells are capitalized when incurred, pending determination of whether additional proved reserves are found. If an exploratory well does not find additional reserves, the costs of drilling the well are charged to expense. The costs of development wells, whether productive or nonproductive, are capitalized. Geological and geophysical costs on exploratory prospects and the costs of carrying and retaining unproved properties are expensed as incurred.
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
Long-lived Assets
Long-lived assets are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is generally measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If it is determined that the carrying amount may not be recoverable, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is the estimated value at which the asset could be bought or sold in a transaction between willing parties. We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as the price of oil and natural gas, production volumes and costs, drilling activity, and economic conditions could significantly affect these estimates.
We evaluate impairment of our oil and natural gas properties on a property-by-property basis and estimate the fair value based on discounted cash flows expected to be generated from the production of proved reserves. During 2013, we recognized an impairment charge totaling $355,865 related to our non-operated interest in six wells in Jack County, Texas. Based on our year end reserve study we have recorded an impairment charge of $453,968 against our Newman and Coley wells in Jack County, TX to align our cost basis in these wells with their estimated net present value.
Deposits Held in Trust
We record a liability for funds held on behalf of outside investors in oil and natural gas exploration projects, which are to be paid to the project operator as capital expenditures are billed. The liability is reduced as we make payments on behalf of those outside investors to the operator of the project.
Asset Retirement Obligations
We recognize liabilities for retirement obligations associated with tangible long-lived assets, such as producing well sites when there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the consolidated balance sheet. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement cost. The asset retirement cost is depreciated using a systematic and rational method similar to that used for the associated property and equipment.
The following table reflects the changes in ARO for the years ended December 31, 2014 and 2013:
Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable, and accrued expenses reported on the accompanying consolidated balance sheets approximates fair value due to their short-term nature. The carrying value of certain long-term debt instruments approximates fair value since these instruments bear market rates of interest. Additional non-interest bearing long-term instruments have been reduced by a market interest rate. They approximate fair value as a result of this imputed interest.
Revenue Recognition
Revenues from the sales of natural gas and crude oil are recorded when product delivery occurs and title and risk of loss pass to the customer, the price is fixed or determinable, and collection is reasonably assured. The Company uses the sales method of accounting for oil and natural gas revenues. Under this method, revenues are recognized based on the actual volumes of natural gas and oil sold to purchasers. The volume sold may differ from the volumes the Company may be entitled to, based on the
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
Company's individual interest in the property. Periodically, imbalances between production and nomination volumes can occur for various reasons. In cases where imbalances have occurred, a production imbalance receivable or liability will be recorded when determined. If an imbalance exists at the time the wells’ reserves are depleted, settlements are made among the joint interest owners under a variety of arrangements.
Revenues from land services are recorded when title work is completed and the customer has been invoiced for services provided. Revenues from the sale of interests in oil and natural gas properties are recorded once a formal agreement has been reached and the agreement has been consummated through the exchange of consideration.
•Land services revenue - Land services revenues consist of fees generated from analyzing land and mineral title reports, leasehold title analysis and reports, land title runsheets, sourcing, negotiating and acquiring leases, document preparation and performing title curative functions. Such revenues had previously been reported as Other revenues on the consolidated statements of operations. Sable provides land services to its customers by identifying the landowners and performing various land services identified above. The buyer (Sable’s customer) pays the landowner directly for the undeveloped lease acreage. Sable does not take title to the leasehold acreage and the buyer’s purchase from the landowner is non-recourse. For its services, Sable receives fees directly from its customer for services provided for clearing title, etc., generally based on a per acre amount. There is no substantial performance obligation or a retained interest by Sable as we do not obtain an interest in the leasehold acreage (not a conveyance of interests).
•Sale of oil and natural gas interests - As there is a very competitive market to purchase oil and natural gas lease interests, especially in newer oil and natural gas plays with increasing acreage costs, Sable may purchase undeveloped leasehold acreage from landowners and take title to the leasehold. However, holding the leasehold acreage is generally short term in nature (less than 90 days) as we only acquire the undeveloped property when an identified customer has already agreed to the 100% re-purchase of the leasehold acreage from Sable. Accordingly, we do not acquire the leasehold acreage on a speculative basis nor for our own development. There is no substantial performance obligation or retained interest by Sable as all land services have been performed and Sable sells 100% of the leasehold interest. The difference between the sale price and the amount (cost) paid for the lease by Sable is recognized as a gain on sale in accordance with GAAP. Such gains are not deemed to be incidental or peripheral transactions as providing land services and facilitating the purchase of oil and natural gas leasehold interest for its customers are transactions that are part of Sable’s principal ongoing operations, thus reported within the Company’s revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the years ended December 31, 2014 and 2013 are summarized below :
Share Based Compensation
We grant share-based awards to acquire goods and/or services, to members of our Board of Directors, and to selected employees. All such awards are measured at fair value on the date of grant and are recognized as a component of general and administrative expenses in the accompanying consolidated statements of operations over the applicable requisite service periods.
Income Taxes
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
We are subject to current income taxes assessed by the federal government and various state jurisdictions in the United States. In addition, we account for deferred income taxes related to these jurisdictions using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for the future tax benefits attributable to the expected utilization of existing tax net operating loss carryforwards and other types of carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
We recognize the financial statement effects of tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon ultimate settlement with a taxing authority. We have not taken a tax position that, if challenged, would have a material effect on the consolidated financial statements or the effective tax rate for the years ended December 31, 2014 and 2013. There were no interest and penalties related to unrecognized tax positions for the years ended December 31, 2014 and 2013. The tax years subject to examination by tax jurisdictions in the United States are 2011 to 2013.
Deferred Financing Costs
In connection with debt financing, the Company has issued warrants. The fair value of the warrants when the debt is originated is recorded to debt financing costs, and these costs are amortized to interest expense over the life of the debt instrument using the straight line method. Amortization of deferred financing costs for the year ended December 31, 2014 was $242,498, and none for the year ended December 31, 2013.
Net Loss Per Common Share
Basic net loss per common share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per common share is calculated in the same manner, but also considers the impact to net loss and common shares to reflect the potential dilution that could occur if dilutive share-based instruments were exercised. There is no dilution effect on loss per share due to the net loss for the period, however, the Company has the following potentially dilutive securities outstanding:
Recently Issued Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU No, 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We are currently evaluating the impact of adopting the guidance on our financial statements.
The FASB has issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
Components of an Entity. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization’s results from continuing operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. We are currently evaluating the impact of adopting the guidance on our financial statements.
NOTE 3. ACQUISITION
On October 15, 2014, the Company completed the acquisition of 19,881 acres ("Panther Creek") held by production in the Fort Worth Basin at a purchase price of $9,500,000 from Upham Oil & Gas Co., L.P. of Mineral Wells, Texas. The acquisition was financed primarily by issuance of Secured Notes of $8,900,000; bearing interest at the rate of 13% per annum with a maturity in three years. In addition, each Secured Lender will receive (i) a pro rata share of a 3.0% overriding royalty interest effective at closing, (ii) on the date that the principal and interest on the Secured Notes is paid in full a record assignment of such Secured Lender's pro rata share of a 33.33% working interest. We recorded an accrued liability for the 33.33% working interest at October 31, 2014 of $3,166,666 reflecting the proportionate share of the acquisition value, which was reduced by a gain of $113,394 at year end to reflect the reduction of the liability due to a proportionate share of depletion on the property.
RKJ Holdings, LLC is one of the Lenders under the Loan Agreement as of October 14, 2014. RKJ Holdings, LLC is owned and managed by Mr. Cory R. Hall, the President and Chief Operating Officer of Sable and a member of the Sable Board of Directors. As a Lender, RKJ Holdings loaned Sable $2,850,000 at closing.
In connection with the transactions described above, effective October 14, 2014, Sable issued warrants exercisable for approximately 4,895,000 shares of common stock of Sable to the Lenders on such date, at an exercise price of $0.50 per share, in consideration of the distribution of the Loan proceeds to Sable, pursuant to warrant agreements with each of the Lenders. As a Lender, Mr. Hall’s entity, RKJ Holdings, LLC was issued warrants to purchase 1,567,500 shares of NYTEX common stock as part of the transactions contemplated by the Loan Agreement.
Each of the warrants issued on October 14, 2014 in connection with the transactions contemplated by the Loan Agreement are exercisable for a two year period beginning on October 14, 2014 and ending on October 14, 2016. We recorded a derivative liability related to these warrants, see Note 6 - "Derivative Liabilities" for more information.
Transaction costs incurred with the Panther Creek acquisition included $401,033 in referral fees for the property acquisition and $420,500 in consulting fees to assist in structuring and closing the acquisition and financing. Revenues and earnings of the Panther Creek property since the acquisition are - Revenues $240,296 and direct operating costs $399,153.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
Pro forma results of operations
The following table presents the unaudited pro forma results of operations for the years ended December 31, 2014 and 2013 as though the acquisition of Panther Creek had occurred at January 1, 2013:
NOTE 4. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2014 and 2013 consist of the following:
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
NOTE 5. OIL AND NATURAL GAS PROPERTIES AND EQUIPMENT
Oil and natural gas properties and equipment at December 31, 2014 and 2013 consists of the following:
Depletion, depreciation and accretion related to our properties and equipment was $459,981 and $100,207 for the years ended December 31, 2014 and 2013, respectively.
NOTE 6. DERIVATIVE LIABILITIES
At December 31, 2014 and 2013, we had one derivative on our consolidated balance sheet which was related to the warrants issued to the holders of the Company’s Series A Convertible Preferred Stock. The agreement setting forth the terms of the warrants include an anti-dilution provision that requires a reduction in the instrument’s exercise price should subsequent at-market issuances of the Company’s common stock be issued below the instrument’s original exercise price of $2.00 per share. Accordingly, we consider the warrants to be a derivative; and, as a result, the fair value of the derivative is included as a derivative liability on the accompanying consolidated balance sheets. At December 31, 2014 and 2013, the fair value of the warrants issued to the holders of the Series A Convertible Preferred Stock was $33,300 and $2,510, respectively. During the year ended December 31, 2014 we recorded a loss on the derivative of $30,790 to reflect the change in value.
Beginning on October 14, 2014 we issued warrants to the holders of the Company’s 13% Secured Notes. The agreement setting forth the terms of the warrants include an anti-dilution provision that requires a reduction in the instrument’s exercise price should subsequent at-market issuances of the Company’s common stock be issued below the instrument’s original exercise price of $0.50 per share. Accordingly, we consider the warrants to be a derivative; and, as a result, the fair value of the derivative is included as a derivative liability on the accompanying consolidated balance sheets. At December 31, 2014 the fair value of the warrants issued to the holders of the 13% Secured Notes was $583,825. The aggregate valuation of the warrants when issued was $1,078,888 so at year end we recognized a gain on the derivative of $495,063 to reflect the change in value.
Significant unobservable inputs to the Monte Carlo simulation for valuing our derivative liabilities are:
Changes in fair value of the derivative liabilities are included as a separate line item within other income (expense) in the accompanying consolidated statement of operations for the years ended December 31, 2014 and 2013.
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
NOTE 7. DEBT
A summary of our outstanding debt obligations is presented as follows:
Debt maturities as of December 31, 2014 are as follows:
13% Secured Notes
On October 15, 2014, the Company completed the acquisition of 19,881 acres held by production in the Fort Worth Basin at a purchase price of $9,500,000 from Upham Oil & Gas Co., L.P. of Mineral Wells, Texas. The acquisition was financed primarily by issuance of Secured Notes of $8,900,000; bearing interest at the rate of 13% per annum with a maturity in three years. In addition, each Secured Lender will receive (i) a pro rata share of a 3.0% overriding royalty interest effective at closing, (ii) on the date that the principal and interest on the Secured Notes is paid in full a record assignment of such Secured Lender's pro rata share of a 33.33% working interest.
Payment terms on the 13% Secured Notes are as follows: Interest only on each Note shall be due and payable quarterly in arrears commencing on January 15, 2015, and continuing on the fifteenth (15) day of each April, July, October, and January thereafter through April 15, 2016. Commencing on July 15, 2016, and continuing on the fifteenth (15) day of each October, January, April and July thereafter, principal and interest shall be due and payable quarterly based upon a fifteen (15) year amortization schedule. The unpaid principal balance, and all accrued and unpaid interest, shall be due and payable on the Maturity Date, October 15, 2017.
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
RKJ Holdings, LLC is one of the Lenders under the Loan Agreement as of October 14, 2014. RKJ Holdings, LLC is owned and managed by Mr. Cory R. Hall, the President and Chief Operating Officer of Sable and a member of the Sable Board of Directors. As a Lender, RKJ Holdings loaned Sable $2,850,000 at closing.
As of December 31, 2014 we had raised $9,650,000 under the 13% Secured Notes offering including warrants to purchase up to 5,307,500 of the Company's common stock.
12% Convertible Debentures
In February 2014, we initiated a $1,000,000 offering of convertible debt ("12% Convertible Debentures") to fund our ongoing working capital needs. Terms of the 12% Convertible Debentures were as follows: (i) $100,000 per unit with interest at
a rate of 12% per annum payable monthly with a maturity of three years from the date of issuance; (ii) convertible at any time prior to maturity at $0.75 per share of the Company's common stock; (iii) each unit included a three-year warrant to purchase up to 30,000 shares of the Company's common stock at an exercise price of $0.75 per share for a period of three years from the effective date of the warrant; and, (iv) an anti-dilution provision that requires a reduction in the conversion price should at-market issuances of the Company’s common stock be issued below the stated conversion price prior to August 31, 2014. The offering was subsequently extended to $2,000,000 with the terms modified as follows: (i) convertible at any time prior to maturity at $0.50 per share of the Company's common stock; (ii) each unit included a three-year warrant to purchase up to 50,000 shares of the Company's common stock at an exercise price of $0.50 per share for a period of three years from the effective date of the warrant. One unit was issued with a maturity of one year from the date of issuance. As of December 31, 2014, we had raised $1,950,000 under the 12% Convertible Debenture offering including warrants to purchase up to 915,000 shares of the Company's common stock.
Payment terms are as follows: The Company shall pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Debenture at the rate of 12% per annum, payable in arrears on the first business day of each month following the date of closing and on the maturity date. The debentures mature ranging from March 5, 2015 through December 30, 2017.
The sale of common stock on June 20, 2014 was a "Subsequent Equity Sale" as defined in the 12% Convertible Debentures wherein the stated conversion price of the debenture to common stock is adjusted. As a result the debentures issued prior to March 31, 2014 with a stated conversion price of $0.75 were adjusted to a $0.64 conversion price. Debentures issued after March 31, 2014 and before June 20, 2014 with a stated conversion price of $0.50 were adjusted to a $0.43 conversion price. The fair value of the warrants was calculated using the Black Sholes model, and were recorded as a discount to the Convertible Debentures to be amortized to deferred financing cost over the life of the debenture, and a corresponding credit to equity at the inception of the note.
Francis Promissory Note
In connection with the FDF acquisition, on November 23, 2010, we entered into a promissory note payable to a former interest holder of FDF (“Francis Promissory Note”) in the face amount of $750,000. The Francis Promissory Note is an unsecured, non-interest bearing loan that requires quarterly payments of $37,500 and matures October 1, 2015. For the years ended December 31, 2014 and 2013, we have recorded the Francis Promissory Note as a discounted debt of $182,165 and $200,051, respectively, using an imputed interest rate of 9%.
Other Loans
In November 2012, we entered into a ten-month promissory note with a third party to finance premiums related to certain insurance policies. The promissory note bears an annual interest rate of 5.5% with principal and interest payments of $8,109 due monthly through maturity in August 2013. The note was paid in full in August 2013.
In December 2012, we entered into an unsecured, non-interest bearing promissory note with a former vendor in the amount of $342,500 as a settlement for outstanding payables due to the former vendor. The promissory note required an initial payment of $75,000 with monthly payments of $7,431 due through maturity, on December 31, 2015. For the years ended December 31, 2014 and 2013, we have recorded the promissory note as a discounted debt of $96,960 and $160,969, respectively, using an imputed interest rate of 7.5%.
In December 2013, we entered into a ten-month promissory note with a third party to finance premiums related to certain insurance policies. The promissory note bears an annual interest rate of 5.74% with principal and interest payments of $5,689 due monthly through maturity in September 2014.
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
In January 2014, we entered into a $100,000 secured promissory note agreement with an unrelated third party to provide working capital to the Company. The secured promissory note was due in four months from the date of issuance. Under the terms of the secured promissory note, the loan paid interest at a rate of 18%, plus an accommodation fee, such that including the interest payable under the loan, an amount ranging from $5,000 to $20,000, depending upon the number of months the secured promissory note remained outstanding, plus 12,500 shares of the Company's common stock. In February 2014, the holder of the secured promissory note transferred their principal due under the agreement to the Company's private offering of three-year 12% convertible debentures and the secured promissory note was deemed paid in full. (See discussion regarding 12% convertible debentures below.)
In February 2014, we entered into two $100,000 secured bridge loans ("Secured Bridge Loans") with two unrelated third parties to provide working capital to the Company. Under the terms of the Secured Bridge Loans, principal is due in forty days with interest payable at 18%, plus an accommodation fee, such that combined with the interest due and payable, a sum equal to $20,000, plus 25,000 shares of the Company's common stock. In March 2014, in consideration of an additional 25,000 shares of the Company's common stock, the maturity date of both Secured Bridge Loans was extended. In April 2014, the Company made a partial payment totaling $140,000 on the Secured Bridge Loans. In May 2014, one of the Secured Bridge Loans was paid in full, and in September 2014 the second Secured Bridge Loan was paid in full.
We also have a secured equipment loan outstanding that requires a monthly principal and interest payment of $524.53 based on a fixed interest rate of 7.5% and matures in March of 2016, as well as secured equipment loans that require monthly principal and interest payments totaling $2,534.94 based on a fixed interest rate of 5% that mature in October of 2019.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain equipment and office space under non-cancelable operating leases which provide for minimum annual rentals. Future minimum obligations under these lease agreements at December 31, 2014 are as follows:
Total lease rental expense for the years ended December 31, 2014 and 2013 was $108,447 and $85,352 respectively.
Litigation
We may become involved from time to time in litigation on various matters, which are routine to the conduct of our business. We believe that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial position or operations, although any adverse decision in these cases, or the costs of defending or settling such claims, could have a material adverse effect on our financial position, operations, and cash flows.
Environmental
We are subject to extensive federal, state, and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require us to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated.
NOTE 9. STOCKHOLDERS’ EQUITY
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
The authorized capital of Sable consists of 200 million shares of common stock, par value $0.001 per share; and 10 million shares of Series A Convertible Preferred Stock, par value $0.001 per share. The holders of Series A Convertible Preferred Stock have the same voting rights and powers as the holders of common stock. Each holder of Series A Convertible Preferred Stock may, at any time, convert their shares of Series A Convertible Preferred Stock into shares of common stock at an initial conversion ratio of one-to-one. For the years ended December 31, 2014 and 2013, there were no conversions to shares of common stock related to the Company’s Series A Convertible Preferred Stock.
Private Placements - Common Stock
On June 20, 2014, the Board of Directors of the Company approved the sale and issuance of 8,013,902 shares of Common Stock of the Company to Cory R. Hall in exchange for $1,001,738 in accordance with that certain Securities Purchase Agreement executed on June 20, 2014 between the Company and Mr. Hall (the “Offering”). The Offering was made in reliance on the exemption provided by Rule 506(b) promulgated under the Securities Act of 1933, as amended, and certain provisions of Regulation D thereunder based on Mr. Hall’s status as an accredited investor.
Other Common Stock Issuances
For the years ended December 31, 2014 and 2013, we issued 302,404 and 76,987 shares, respectively, of our common stock to certain employees and individuals. The fair value of the shares for the years ended December 31, 2014 and 2013 of approximately $221,765 and $61,106, respectively, was recorded as selling, general and administrative expense in the accompanying consolidated statements of operations.
Restructuring of Series A Convertible Preferred Stock
On August 31, 2012, Sable’s Amended and Restated Certificate of Designation in respect of the Series A Convertible Preferred Stock was approved by written consent of the holders of a majority of the total outstanding voting power of Sable’s voting securities (the “Restructuring”). On September 12, 2012, we commenced mailing to all holders of the Company’s common stock and Series A Convertible Preferred Stock, a definitive information statement related to Sable’s Amended and Restated Certificate of Designation. On October 2, 2012 (“Effective Date”), we filed the Amended and Restated Certificate of Designation with the Secretary of State of the State of Delaware. The Amended and Restated Certificate of Designation amended the terms of our Series A Convertible Preferred Stock as follows:
(i)
The 9% dividend payable with respect to the shares of Series A Convertible Preferred Stock ceased to accrue effective as of June 15, 2012 (the “Termination Date”) and, thereafter, no dividends will be payable with respect to such shares unless declared by the Company’s board of directors;
(ii)
In exchange for all accrued and unpaid dividends as of the Termination Date, each holder of Series A Convertible Preferred Stock (a “Series A Holder”), as of the record date of July 24, 2012 (the “Record Date”), was issued shares of our common stock at a rate of one (1) share of our common stock for each $1.00 of accrued and unpaid dividends due such holder (collectively, the “Dividend Common Shares”). As a result, in October 2012 the Company issued an aggregate of approximately 768,090 Dividend Common Shares to the Series A Holders;
(iii)
The original terms of the Series A Convertible Preferred Stock also provided for a liquidation preference of $1.50 per share which would have been payable on a liquidation event involving the Company. As part of the Restructuring and in consideration for reducing the liquidation preference to $1.00 per share and eliminating the right to declare a deemed liquidation event, in October 2012 the Company issued to the Series A Holders, as of the Record Date, shares of our common stock at a rate of 0.42735 shares for each share of Series A Preferred held by them, or an aggregate of approximately 2,463,214 common shares (the “Liquidation Adjustment Common Shares”);
(iv)
As part of the Restructuring, in October 2012 we paid to the Series A Holders as of the Record Date, a restructuring fee in the amount of 0.0075% of the original $1.00 per share purchase price of the Series A Convertible Preferred Stock, with such fee totaling approximately $43,230; and
(v)
At any time following the Effective Date of the Restructuring, the Company has the right to redeem any or all of the outstanding shares of Series A Convertible Preferred Stock at the original purchase price of $1.00 per share. Further, the Company is required to redeem outstanding shares of Series A Convertible Preferred Stock, from time-to-time, upon any release to the Company of any portion of the $6,250,361 currently being held in the post-closing escrow fund (reported as restricted cash on the accompanying consolidated balance sheet at December 31, 2012) in connection with the sale of FDF on May 4, 2012, which mandatory redemption would
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
be made by the Company out of funds legally available therefor to the extent of 100% of the amount of funds released at that time. Each redemption would be applied pro rata among all Series A Holders.
In October 2012, we issued the Dividend Common Shares and Liquidation Adjustment Common Shares to the Series A Holders, and along with the payment of the restructuring fee, were recognized as a charge to retained earnings as a dividend and a reduction to earnings available to common shareholders for the year ended December 31, 2012. Accordingly, subsequent to the Effective Date, the Series A Convertible Preferred Stock is presented outside of permanent equity as mezzanine equity on the accompanying consolidated balance sheets.
Redemption of Series A Convertible Preferred Stock
On March 28, 2013, we provided notice to the holders of our Series A Convertible Preferred Stock of our election to redeem on May 1, 2013 (the "Redemption Date") an aggregate $1 million in principal amount of outstanding shares of the Series A Convertible Preferred Stock at a redemption price of $1.00 per share. Pursuant to the terms of the Amended and Restated Certificate of Designation, the Series A Convertible Preferred Stock was redeemed pro rata based on the number of shares held by each holder of record relative to the total number of Series A Convertible Preferred shares outstanding as of the Redemption Date. On May 1, 2013, we redeemed a total of 999,958 shares of Series A Convertible Preferred Stock.
On November 15, 2013, we provided notice to the holders of our Series A Convertible Preferred Stock of our election to redeem on December 17, 2013 an additional $1,039,907 in aggregate principal amount of outstanding shares of the Series A Convertible Preferred Stock at a redemption price of $1.00 per share. On December 17, 2013, we redeemed a total of 1,039,907 shares of Series A Convertible Preferred Stock. There were no redemptions for the year ended December 31, 2014.
Treasury Stock
In April 2013, our Board of Directors approved the repurchase of up to an aggregate of 2.7 million shares of our common stock, or approximately 10% of our outstanding common shares. The repurchases were made from time-to-time on the open market at prevailing market prices. The repurchase program continued over the next twelve months and has now been suspended. The timing and amount of any repurchase will depend on economic and market conditions, the trading price and other factors and any purchases will be executed in compliance with applicable laws and regulations. The plan does not obligate the Company to acquire any particular amount of common stock and can be implemented, suspended or discontinued at any time without prior notice at the Company’s sole discretion. The share repurchase program will be funded with the Company’s available working capital. During the year ended December 31, 2013, we repurchased a total of 1,450 shares of our common stock on the open market. These shares were purchased at an average cost of $0.24 per share, for a total cost of $343. There were no shares repurchased during the year ended December 31, 2014.
Warrants
In connection with the private placement offering of 13% Secured Notes during the year ended December 31, 2014, we issued warrants to the holders to purchase up to 5,307,500 shares of common stock at an exercise price of $0.50 per share. The warrants may be exercised for a period of two years from the date of grant. The 13% Secured Note warrants are considered a derivative liability, see Note 11 - "Fair Value Measurements". The 13% Secured Note warrants were fair valued using the Monte Carlo simulation at $0.19 each when issued and then revalued at December 31, 2014 at $0.11 each which generated a $495,063 gain on the change in the fair value of the derivative liability.
Significant unobservable inputs to the Monte Carlo simulation for valuing the 13% Secured Note warrant derivative liabilities are:
In connection with the private placement offering of 12% Convertible Debentures during the year ended December 31, 2014, we issued warrants to the holders to purchase up to 915,000 shares of common stock at a weighted average $0.52 exercise price of per share. The warrants may be exercised for a weighted average period of 2.8 years from the date of grant. The 12% Convertible Debenture warrants are not considered to be a derivative liability as the exercise price is indexed to the Company's
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
stock after August 20, 2014. The total fair value of the 12% Convertible Debenture warrants issued during the year ended December 31, 2014 was $106,219. The Black Scholes model was used to calculate fair value of the 12% Convertible Debenture warrants with the following range of inputs:
In connection with the private placement offering of Series A Convertible Preferred Stock during the year ended December 31, 2011, we issued warrants to the holders to purchase up to 126,000 shares of common stock at an exercise price of $2.00 per share. The warrants may be exercised for a period of three years from the date of grant. There were no warrants issued or exercised during the years ended December 31, 2014 and 2013.
In addition, during the year ended December 31, 2011, we issued warrants to purchase up to 16,800 shares of Series A Convertible Preferred Stock to the placement agent of the private placement offering of Series A Convertible Preferred Stock. The warrants may be exercised for a period of three years from date of grant at an exercise price of $1.00 per share.
For the years ended December 31, 2014 and 2013, we did not issue any shares of common stock related to the exercise of warrants granted in connection with the issuance of Series A Convertible Preferred Stock. During the first quarter 2012, we extended the exercise dates on these warrants for an additional 24 months from the original effective date of the warrant.
The fair value of our warrants is determined using the Black-Scholes option pricing model and the Monte Carlo simulation. The expected term of each warrant is estimated based on the contractual term or an expected time-to-liquidity event. The volatility assumption is estimated based on expectations of volatility over the term of the warrant as indicated by implied volatility. The risk-free interest rate is based on the U.S. Treasury rate for a term commensurate with the expected term of the warrant. A summary of warrant activity for the years ended December 31, 2014 and 2013 is as follows:
NOTE 10. STOCK BASED COMPENSATION
In November 2012, the Board of Directors adopted the 2013 Equity Incentive Plan for the purpose of attracting and retaining the services of key employees, consultants, and non-employee members of the Board of Directors and to provide such persons with a proprietary interest in the Company through the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and/or other awards. At December 31, 2014 , 3.1 million shares of the 5.0 million shares of Sable common stock originally authorized for awards under the 2013 Equity Incentive Plan remained available for future issuance.
During the year ended December 31, 2014 the Company granted nonqualified stock options to purchase an aggregate 625,000 shares of the Company’s common stock at $0.10 per share were awarded; 1/3 of these options vested immediately, the remainder vest ratably over a service period of two years. The Company also granted a total of 945,000 shares of restricted stock and such awards also vest over a three year period. The total grant date fair value of all of these awards was approximately $519,295.
During the year ended December 31, 2013 the Company granted nonqualified stock options to purchase an aggregate 227,000 shares of the Company’s common stock at $0.42 per share; these options vest ratably over a service period of three years.
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
A total of 136,200 shares of restricted stock were granted and such awards vest over a three year period. The total grant date fair value of all of these awards was approximately $101,000.
Stock Options
We utilize the Black-Scholes option pricing model to measure the fair value of stock options granted to employees and directors. For the year ended December 31, 2014 and 2013, we recognized $84,946 and $11,354, respectively, in stock-based compensation related to stock options. At December 31, 2014, the unrecognized compensation expense related to stock options which is expected to be recognized over a weighted average period of 1.73 years is approximately $129,176. The intrinsic value of outstanding and exercisable stock options a December 31, 2014 was $27,083.
The following table summarizes our stock option activity for the years ended December 31, 2014 and 2013:
The following table shows the weighted average assumptions used in the Black-Scholes-Merton calculation of the fair value of the stock option grants for the years ended December 31, 2014 and 2013:
Restricted Stock
Restricted stock awards are awards of common stock that are subject the restrictions on transfer and to a risk of forfeiture if the awardee terminates employment with the Company prior to the lapse of the restrictions. The fair value of such stock was determined using the closing price on the grant date and compensation expense is recorded over the applicable vesting periods. For the years ended December 31, 2014 and 2013, we recognized $106,467 and $56,194, respectively, of stock-based compensation expense related to restricted stock awards. At December 31, 2014, the unrecognized compensation expense related to restricted stock awards which is expected to be recognized over a weighted average period of 1.91 years is approximately $230,867.
The following table summarizes our restricted stock activity for the years ended December 31, 2014 and 2013:
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
NOTE 11. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We utilize a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.
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Level 1 - Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.
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Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments.
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Level 3 - Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.
As discussed in Note 6, we consider certain of our warrants to be derivatives, and, as a result, the fair value of the derivative liabilities are reported on the accompanying consolidated balance sheets. We value the derivative liabilities using a Monte Carlo simulation which contains significant unobservable, or Level 3, inputs. The use of valuation techniques requires us to make various key assumptions for inputs into the model, including assumptions about the expected behavior of the instruments’ holders and expected future volatility of the price of our common stock. At certain common stock price points within the Monte Carlo simulation, we assume holders of the instruments will convert into shares of our common stock. In estimating the fair value, we estimated future volatility by considering the historic volatility of the Company's stock over a one year period.
We classify our marketable securities as available-for-sale, which are reported at fair value. Unrealized holding gains and losses, net of the related income tax effect, if any, on available-for-sale securities are excluded from income and are reported as accumulated other comprehensive income in stockholders’ equity. Realized gains and losses from securities classified as available-for-sale are included in income. We measure the fair value of our marketable securities based on quoted prices for identical securities in active markets, or Level 1 inputs. The realized earnings from our marketable securities portfolio include realized gains and losses, based upon specific identification, and dividend and interest income. During the fourth quarter of 2013, we sold all of our marketable securities for total gross proceeds of $494,625 resulting in a realized loss of $27,755 on sale of marketable securities as presented in our consolidated statement of operations for the year ended December 31, 2013.
We review our marketable securities to determine whether a decline in fair value of a security below the cost basis is other than temporary. Should the decline be considered other than temporary, we write down the cost basis of the security and
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
include the loss in current earnings as opposed to an unrealized holding loss. No losses for other than temporary impairments in our marketable securities portfolio were recognized during the years ended December 31, 2014 and 2013.
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
Significant unobservable inputs to the Monte Carlo simulation for valuing our derivative liabilities are:
NOTE 12. INCOME TAXES
For the years ended December 31, 2014 and 2013, we had a loss before income taxes of $4,629,534 and $2,787,558, respectively. The components of the income tax benefit (provision) are as follows:
At December 31, 2014, we have accumulated net operating losses totaling $20,169,384. The net operating loss carryforwards will begin to expire in 2028 if not utilized. Based upon all available objective evidence, including the Company’s loss history, management believes it is more likely than not that the net deferred assets related to our net operating losses will not be fully realized. Accordingly, we have provided a valuation allowance against those deferred tax assets at December 31, 2014 and 2013.
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
Total income taxes differed from the amounts computed by applying the statutory income tax rate to income (loss) from continuing operations before income taxes. The sources of these differences are as follows:
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are presented below:
Deferred tax assets and liabilities included in the consolidated balance sheets are as follows:
We are subject to income taxes in the U.S. federal jurisdiction and various states jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, we are no longer subject to U.S. federal, state and/or local income tax examinations by authorities for the tax years before 2011.
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
NOTE 13. RELATED PARTY TRANSACTIONS
RKJ Holdings, LLC is one of the Lenders under the Loan Agreement as of October 14, 2014. RKJ Holdings, LLC is owned and managed by Cory R. Hall, the President and Chief Operating Officer of Sable and a member of the Sable Board of Directors. As a Lender, RKJ Holdings loaned Sable $2,850,000 at closing.
On August 27, 2014 the Company received a loan from Mr. Hall in the amount of $500,000 to secure an extension on the closing date for the acquisition of the Panther Creek property. The loan will be due when the Company closes the financing of the acquisition and is at zero interest. At December 31, 2014 the balance due on the loan was $480,000.
NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized below:
NOTE 15. SUBSEQUENT EVENTS
On January 22, 2015 the Company extended the expiration of 2,977,951 outstanding Founder's Warrants for an additional three years so that all will expire if not exercised on February 1, 2018.
As of March 20, 2015 the Company has issued an additional $1,675,000 in 13% Secured Notes under the same terms as described in Note 7 - Debt.
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
SUPPLEMENTAL DISCLOSURE OF OIL & GAS OPERATIONS (Unaudited)
The following tables set forth supplementary disclosures for oil and producing activities in accordance with FASB ASC Topic 932, Extractive Activities - Oil and Gas.
Capitalized Costs Relating to Oil and Gas Producing Activities
Costs Incurred
A summary of costs incurred in oil and natural gas property acquisition, development, and exploration activities (both capitalized and charged to expense) for the years ended December 31, 2014 and 2013, is as follows.
Results of Operations for Producing Activities
The following table presents the results of operations for our oil and natural gas producing activities for the years ended December 31, 2014 and 2013.
Reserve Quantity Information
Proved reserves are the estimated quantities that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production of these reserves may be substantially different from the original estimate. Revisions result primarily from new information obtained from development drilling and production history, and changes in economic factors. Oil reserves, which include condensate and natural gas liquids, are stated in barrels and natural gas reserves are stated in thousands of cubic feet.
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
We maintain internal controls designed to provide reasonable assurance that the estimates of proved reserves are computed and reported in accordance with the rules and regulations provided by the SEC. Numerous uncertainties exist in estimating quantities of proved reserves.
Chris Coley, our Vice President - Engineering & Production, is the person within the Company who is primarily responsible for overseeing the preparation of the reserve estimates. Mr. Coley joined the Company in 2014 with nine years of relevant operations, reservoir, completions and production engineering experience. Mr. Coley holds a Bachelor of Science degree in Petroleum Engineering from Texas Tech University.
Crest Engineering Services, Inc. is an independent petroleum engineering consulting firm registered in the State of Texas, and W. Waterson Calhoun, President, Reservoir Engineer is the technical person primarily responsible for evaluating the proved reserves covered by its report. Mr. Calhoun has 25 years experience in evaluating oil and gas reserves. Mr. Calhoun holds a Bachelor of Science degree in Petroleum Engineering from the University of Texas at Austin. He is a Registered Professional Engineer in the State of Texas and is a member of the Society of Petroleum Engineers and the Society of Petroleum Evaluation Engineers.
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves
The following table, which presents a standardized measure of discounted future net cash flows (“standardized measure”) and changes in such cash flows, is presented pursuant to ASC 932. In computing this data, assumptions other than those required by the FASB could produce different results. Accordingly, the standardized measure should not be construed as being representative of management's estimate of the Company’s future cash flows or the value of the Company’s proved oil and natural gas reserves. Probable and possible reserves, which may become proved in the future, are excluded from the calculations. Furthermore, prices used to determine the standardized measure of discounted cash flows are influenced by seasonal demand and other factors and may not be the most representative in estimating future revenues or reserve data.
Our reserve calculations and future cash inflows as of December 31, 2014 and 2013 have been prepared and presented under SEC rules. These rules are effective for fiscal years ending on or after December 31, 2009, and require SEC reporting companies to prepare their reserves estimates using revised reserve definitions and revised pricing based on a 12-month unweighted average of the first-day-of-the-month pricing. The previous rules required that reserve estimates be calculated using last-day-of-the-period pricing. The average prices used for 2014 and 2013 under these new rules were $93.26 and $96.60 per Bbl for oil and $4.39 and $3.68 per Mcf for natural gas, respectively, each as adjusted for location, grade and quality. Future price changes were considered only to the extent provided by contractual arrangements in existence at year-end. Future development and production costs were computed by estimating the expenditures to be incurred in developing and producing the proved oil and natural gas reserves at the end of the year, based on year-end costs. Future income tax expenses were computed by applying the year-end statutory tax rate to the future pre-tax net cash flows relating to our proved oil and natural gas reserves.
SABLE NATURAL RESOURCES CORPORATION
Notes to Consolidated Financial Statements
The standardized measure of our proved oil and natural gas reserves at December 31, 2014 and 2013, which represents the present value of estimated future cash flows using a discount rate of 10% a year, is as follows:
Changes in the standardized measure of our proved oil and natural gas reserves for the years ended December 31, 2014 and 2013, were as follows:
EXHIBIT INDEX
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* Filed herewith
** Furnished herewith
*** In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.