UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the year ended December
31, 2014 |
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period
from ______________to ______________ |
Commission File Number 000-52738
CROSS BORDER RESOURCES, INC.
(Exact Name of Registrant as Specified
in Its Charter)
| Nevada |
98-0555508 |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
|
2515 McKinney Avenue, Suite 900
Dallas, TX |
75201 |
| (Address of Principal Executive Offices) |
(Zip Code) |
(210) 226-6700
(Registrant’s Telephone Number,
Including Area Code)
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, par value $.001
(Title of class)
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes☒
No
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Act.
☐ Yes ☒ No
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
☐ Yes ☒ No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
☐ Yes ☒ No
Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
☒ Yes ☐ No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
| Large
accelerated filer ☐ |
Accelerated
filer ☐ |
| Non-accelerated filer ☐ (Do not check if a smaller reporting company) |
Smaller
reporting company ☒ |
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
As of June 30, 2014 (the last
business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s
common stock (based on a reported closing market price of $0.35 per share on the OTCBB) held by non-affiliates of the registrant
was approximately $1.1 million. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant
are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial
owners are, in fact, affiliates of the registrant.
As of May 19, 2015, there were
17,336,226 shares of common stock, $.001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
CROSS BORDER RESOURCES, INC.
FORM 10-K
TABLE OF CONTENTS
Forward-Looking Statements
This Annual Report on Form 10-K
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are not historical facts,
including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements
preceded by, followed by or that include the words “may,” “could,” “would,” “should,”
believe,” “expect,” anticipate,” “plan,” “estimate,” “target,” “project,”
“intend,” “understand,” or similar expressions and the negative of such words and expressions, although
not all forward-looking statements contain such words or expressions.
Forward-looking statements are
only predictions and are not guarantees of performance. These statements generally relate to our plans, objectives and expectations
for future operations and are based on management’s current beliefs and assumptions, which in turn are based on its experience
and its perception of historical trends, current conditions and expected future developments as well as other factors it believes
are appropriate under the circumstances. Although we believe that the plans, objectives and expectations reflected in or suggested
by the forward-looking statements are reasonable, there can be no assurance that actual results will not differ materially from
those expressed or implied in such forward-looking statements. Forward-looking statements also involve risks and uncertainties.
Many of these risks and uncertainties are beyond our ability to control or predict and could cause results to differ materially
from the results discussed in such forward-looking statements. Such risks and uncertainties include, but are not limited to, the
following:
| · |
our ability to raise additional capital to fund future capital expenditures; |
| |
|
| · |
our ability to generate sufficient cash flow from operations, borrowings or other sources to enable us to fully develop and produce our oil and natural gas properties; |
| |
|
| · |
our
ability to comply with debt covenants; |
| |
|
| · |
declines or volatility in the prices we receive for our oil and natural gas; |
| |
|
| · |
general economic conditions, whether internationally, nationally or in the regional and local market areas in which we do business; |
| |
|
| · |
risks associated with drilling, including completion risks, cost overruns and the drilling of non-economic wells or dry holes; |
| |
|
| · |
uncertainties associated with estimates of proved oil and natural gas reserves; |
| |
|
| · |
the presence or recoverability of estimated oil and natural gas reserves and the actual future production rates and associated costs; |
| |
|
| · |
risks and liabilities associated with acquired companies and properties; |
| |
|
| · |
risks related to integration of acquired companies and properties; |
| |
|
| · |
potential defects in title to our properties; |
| |
|
| · |
cost and availability of drilling rigs, equipment, supplies, personnel and oilfield services; |
| |
|
| · |
geological concentration of our reserves; |
| |
|
| · |
environmental or other governmental regulations, including legislation of hydraulic fracture stimulation; |
| |
|
| · |
our ability to secure firm transportation for oil and natural gas we produce and to sell the oil and natural gas at market prices; |
| |
|
| · |
exploration and development risks; |
| |
|
| · |
management’s ability to execute our plans to meet our goals; |
| |
|
| · |
our ability to retain key members of our management team; |
| |
|
| · |
weather conditions; |
| |
|
| · |
actions or inactions of third-party operators of our properties; |
| |
|
| · |
costs and liabilities associated with environmental, health and safety laws; |
| |
|
| · |
our ability to find and retain highly skilled personnel; |
| |
|
| · |
operating hazards attendant to the oil and natural gas business; |
| |
|
| · |
competition in the oil and natural gas industry; and |
| |
|
| · |
the other factors discussed under Item 1A. “Risk Factors” in this report. |
Forward-looking statements speak
only as of the date hereof. All such forward-looking statements and any subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained
or referred to in this section and any other cautionary statements that may accompany such forward-looking statements. Except
as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements.
Glossary of Oil and
Natural Gas Terms
The following are abbreviations and definitions
of terms commonly used in the oil and natural gas industry and this Annual Report on Form 10-K.
“Bbl”
One stock tank barrel or 42 U.S. gallons liquid volume of oil or other liquid hydrocarbons.
“Boe”
One barrel of oil equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil and 42 gallons of natural
gas liquids to one Bbl of oil.
“Boe/d”
Boe per day.
“Btu”
A British thermal unit is a measurement of the heat generating capacity of natural gas. One Btu is the heat required to raise the
temperature of a one-pound mass of pure liquid water one degree Fahrenheit at the temperature at which water has its greatest density
(39 degrees Fahrenheit).
“completion”
The process of treating a drilled well followed by the installation of permanent equipment for the production of oil or natural
gas, or in the case of a dry well, the reporting of abandonment to the appropriate agency.
“condensate”
A mixture of hydrocarbons that exists in the gaseous phase at original reservoir temperature and pressure, but that, when produced,
is in the liquid phase at surface pressure and temperature.
“developed acreage”
The number of acres that are allocated or assignable to productive wells or wells capable of production.
“development
costs” Costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering
and storing the oil and natural gas. More specifically, development costs, including depreciation and applicable operating costs
of support equipment and facilities and other costs of development activities, are costs incurred to:
| · | gain access to and prepare well locations for drilling, including surveying well locations for
the purpose of determining specific development drilling sites, clearing ground, draining, road building, and relocating public
roads, natural gas lines, and power lines, to the extent necessary in developing the proved reserves; |
| · | drill and equip development wells, development-type stratigraphic test wells, and service wells,
including the costs of platforms and of well equipment such as casing, tubing, pumping equipment, and the wellhead assembly; |
| · | acquire, construct, and install production facilities such as lease flow lines, separators, treaters,
heaters, manifolds, measuring devices, and production storage tanks, natural gas cycling and processing plants, and central utility
and waste disposal systems; and |
| · | provide improved recovery systems. |
“development
well” A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon
known to be productive.
“dry well”
A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production
exceed production expenses and taxes.
“exploration
costs” Costs incurred in identifying areas that may warrant examination and in examining specific areas that are considered
to have prospects of containing oil and natural gas reserves, including costs of drilling exploratory wells and exploratory-type
stratigraphic test wells.
“exploratory
well” A well drilled for the purpose of discovering new reserves in unproven areas.
“field”
An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural
feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the
underground productive formations.
“formation”
A layer of rock which has distinct characteristics that differ from nearby rock.
“gross acres”
The total acres in which a working interest is owned.
“Henry Hub”
The pricing point for natural gas futures contracts traded on the NYMEX.
“horizontal well”
A well that is drilled vertically to a certain depth and then drilled at a right angle within a specific interval.
“hydraulic fracturing”
or “fracing” A process involving the injection of fluids, usually consisting mostly of water, but typically
including small amounts of sand and other chemicals, in order to create fractures extending from the wellbore through the rock
formation to enable oil or natural gas to move more easily through the rock pores to a production well.
“lease operating
expenses” The expenses, usually recurring, which pay for operating the wells and equipment on a producing lease.
“MBbl”
One thousand barrels of oil or other liquid hydrocarbons.
“MBoe”
One thousand barrels of oil equivalent.
“Mcf”
One thousand cubic feet of natural gas.
“Mcf/d”
One thousand cubic feet of natural gas per day.
“MMBoe”
One million barrels of oil equivalent.
“MMBtu”
One million British thermal units.
“MMcf”
One million cubic feet of natural gas.
“natural gas”
Natural gas and natural gas liquids.
“net acres”
The sum of the fractional working interests owned in gross acres.
“NYMEX”
The New York Mercantile Exchange.
“oil”
Oil and condensate.
“overriding royalty
interest” An interest in an oil and/or natural gas property entitling the owner to a share of oil and natural gas production
free of costs of production.
“PDP”
Proved developed producing reserves.
“PDNP”
Proved developed non-producing reserves.
“play”
A term applied to a portion of the exploration and production cycle following the identification by geologists and geophysicists
of areas with potential natural gas and oil reserves.
“plugging and
abandonment” Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum
will not escape into another or to the surface. Regulations of many states require plugging of abandoned wells.
“producing well”
A well found to be capable of producing either oil or natural gas in sufficient quantities to justify completion as an oil or natural
gas well.
“production costs”
Costs incurred to operate and maintain wells and related equipment and facilities, including depreciation and applicable operating
costs of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities.
They become part of the cost of oil and natural gas produced. Examples of production costs (sometimes called lifting costs) are:
| · | costs of labor to operate the wells and related equipment and facilities; |
| · | repairs and maintenance; |
| · | materials, supplies, and fuel consumed and supplies utilized in operating the wells and related
equipment and facilities; |
| · | property taxes and insurance applicable to proved properties and wells and related equipment
and facilities; and |
“productive well”
A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production
exceed production expenses and taxes.
“proved developed
reserves” Reserves that can be expected to be recovered through existing wells with existing equipment and operating
methods.
“proved properties”
Properties with proved reserves.
“proved reserves”
Those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable
certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions,
operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire,
unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are
used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain
that it will commence the project within a reasonable time. The area of the reservoir considered as proved includes (i) the area
identified by drilling and limited by fluid contacts, if any, and (ii) adjacent undrilled portions of the reservoir that can, with
reasonable certainty, be judged to be continuous with it and to contain economically producible oil or natural gas on the basis
of available geoscience and engineering data. In the absence of data on fluid contacts, proved quantities in a reservoir are limited
by the lowest known hydrocarbons, or LKH, as seen in a well penetration unless geoscience, engineering, or performance data and
reliable technology establishes a lower contact with reasonable certainty. Where direct observation from well penetrations has
defined a highest known oil, or HKO, elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned
in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology
establish the higher contact with reasonable certainty. Reserves which can be produced economically through application of improved
recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when (i) successful
testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the
operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes
the reasonable certainty of the engineering analysis on which the project or program was based, and (ii) the project has been approved
for development by all necessary parties and entities, including governmental entities. Existing economic conditions include prices
and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the
12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of
the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding
escalations based upon future conditions.
“proved undeveloped
reserves” Reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where
a relatively major expenditure is required.
“PUD”
Proved undeveloped reserves.
“PV-10”
When used with respect to oil and natural gas reserves, PV-10 means the estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and future development and abandonment costs, using prices and costs
in effect at the determination date, before income taxes, and without giving effect to non-property-related expenses, discounted
to a present value using an annual discount rate of 10% in accordance with the guidelines of the SEC.
“reasonable certainty”
If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered.
If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal
or exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as
changes due to increased availability of geoscience (geological, geophysical, and geochemical), engineering, and economic data
are made to estimated ultimate recovery, or EUR, with time, reasonably certain EUR is much more likely to increase or remain constant
than to decrease.
“recompletion”
The process of re-entering an existing wellbore that is either producing or not producing and completing new reservoirs in an attempt
to establish or increase existing production.
“reserves”
Estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible as of a
given date by application of development prospects to known accumulations. In addition, there must exist, or there must be a reasonable
expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering
oil and natural gas or related substances to market, and all permits and financing required to implement the project.
“reservoir”
A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined
by impermeable rock or water barriers and is separate from other reservoirs.
“sand”
A geological term for a formation beneath the surface of the Earth from which hydrocarbons are produced. Its make-up is sufficiently
homogenous to differentiate it from other formations.
“shale”
Fine-grained sedimentary rock composed mostly of consolidated clay or mud. Shale is the most frequently occurring sedimentary rock.
“spacing”
The distance between wells producing from the same reservoir. Spacing is often expressed in terms of acres, e.g., 40-acre spacing,
and is often established by regulatory agencies.
“standardized
measure” The present value of estimated future cash inflows from proved oil and natural gas reserves, less future development,
abandonment, production and income tax expenses, discounted at 10% per annum to reflect the timing of future cash flows and using
the same pricing assumptions as were used to calculate PV-10. Standardized measure differs from PV-10 because standardized measure
includes the effect of future income taxes.
“stratigraphic
test well” A drilling effort, geologically directed, to obtain information pertaining to a specific geologic condition.
Such wells customarily are drilled without the intention of being completed for hydrocarbon production.
“undeveloped
acreage” Lease acreage on which wells have not been drilled or completed to a point that would permit the production
of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves.
“vertical well”
An oil or natural gas wellbore that is drilled from the surface to the depth of interest without directional deviation.
“wellbore”
The hole drilled by the bit that is equipped for oil or natural gas production on a completed well. Also called well or borehole.
“working interest”
The right granted to the lessee of a property to explore for and to produce and own oil, natural gas, or other minerals. The working
interest owners bear the exploitation, development, and operating costs on either a cash, penalty, or carried basis.
PART I
Item 1. Business
In
this Annual Report on Form 10-K, references to “we,” “us,” “our,” or the “Company”
refer to Cross Border Resources, Inc. and its subsidiaries on a consolidated basis.
Our Company
We
are an oil and gas exploration company. We currently own over 865,893 gross (approximately 146,922 net) mineral
and lease acres in New Mexico. Approximately 12,825 of these net acres exist within the Permian Basin. A significant majority
of our acreage consists of either owned mineral rights or leases held by production, allowing us to hold lease rental
payments to under $5,000 annually. The majority of our acreage interests consists of non-operated working interests except
for certain core San Andres properties which we operate.
Current
development of our acreage is focused on our prospective Bone Spring acreage located in the heart of the 1st and 2nd Bone Spring
play. This play encompasses approximately 4,390 square miles across both New Mexico and Texas. We currently own varying, non-operated
working interests in both Eddy and Lea Counties, New Mexico, along with our working interest partners that include Cimarex, Apache,
Oxy Permian, Occidental, Oxy USA and, Mewbourne; all having significant footprints within this play.
History
We
were originally formed on October 25, 2005 under the name “Language Enterprises Corp.” We subsequently changed
our name to Doral Energy Corp. On July 29, 2008, we acquired a working interest in 66 producing oil fields and approximately
186 wells (the “Eddy County Properties”) in and around Eddy County, New Mexico. As a result of our acquisition of the
Eddy County Properties, we changed our business focus to the acquisition, exploration, operation and development of oil and gas
projects, and we ceased being a “shell company.” On August 4, 2008, we filed our Form 8-K that included the information
that would be required if we were filing a general form for registration of securities on Form 10 as a smaller reporting company.
Effective
January 3, 2011, we completed the acquisition of Pure Energy Group, Inc. as contemplated pursuant to the Pure Merger Agreement
among our company, Doral Sub, Pure L.P. and Pure Sub, a wholly owned subsidiary of Pure L.P. Pursuant to the provisions of
the Pure Merger Agreement, all of Pure L.P.’s oil and gas assets and liabilities were transferred to Pure Sub. Pure Sub was
then merged with and into Doral Sub, with Doral Sub continuing as the surviving corporation. Upon completion of the Pure Merger,
the outstanding shares of Pure Sub were converted into an aggregate of 9,981,536 shares of our common stock. Since the Pure Merger,
Pure L.P. has distributed all of its shares of our common stock to the partners of Pure L.P. so that Pure L.P. is no longer a shareholder
of our company.
Effective
January 4, 2011, following closing of the Pure Merger, Doral Sub was merged with and into our company, with our company continuing
as the surviving corporation. Upon completing the merger of Doral Sub with and into our company, we changed our name to “Cross
Border Resources, Inc.”
On
April 21, 2015, we entered into a purchase and sale agreement (the “PSA”) with RMR Operating, LLC (“RMR Operating”),
Black Rock Capital, Inc. (“Black Rock”), RMR KS Holdings, LLC (“RMR KS”) and Black Shale Minerals, LLC
(“Buyer”). Each of us, RMR Operating, Black Rock and RMR KS is an operating subsidiary (together, the “Operating
Subsidiaries”) of Red Mountain Resources, Inc. (“RMR,” and together with the Operating Subsidiaries, the “Companies”).
Pursuant
to the PSA the Operating Subsidiaries sold, assigned, transferred and conveyed to Buyer, effective as of April 1, 2015, fifty percent
(50%) of their right, title, and interest in and to certain oil and natural gas assets and properties (the “Assets”),
including their oil and natural gas leasehold interests, wells, contracts, and oil and natural gas produced after April 1, 2015
(the “Sale”). The aggregate purchase price for the Assets under the PSA was $25.0 million, subject to certain adjustments,
including post-closing adjustments for any title or environmental benefits or title or environmental defects resulting from Buyer’s
title and environmental reviews.
Our Strengths
Large
Acreage Position Consisting of Mineral Ownership and Leasehold Held by Production. Our acreage consists of more than
146,922 net mineral acres within the Permian Basin region of New Mexico and Southwest New Mexico. The majority of our acreage
is made up of mineral ownership which carries no drilling commitments or leasehold obligations. We own minerals in both the
Permian Basin region and Southwest New Mexico. Cross Border’s producing leasehold acreage is located entirely within
the active Permian Basin region and is currently held by existing production. The combination of perpetual mineral ownership
and unexpired leasehold held by production uniquely positions us as a strong Permian Basin exploration and production company with
continued growth potential.
Existing
Infrastructure. All of our producing Permian properties are located within established oil and natural gas producing
areas or existing fields. We seek to enhance existing production in these properties by using engineering and geological expertise.
These areas also have a fully developed transportation infrastructure, which allows us to transport our oil and natural gas to
market without long-term delay or significant investment.
Our Properties
Currently, substantially
all of our producing oil and natural gas properties are concentrated in the Permian Basin. The Permian Basin covers an area approximately
250 miles wide and 300 miles long in West Texas and Southeast New Mexico. The Permian Basin is one of the most prolific onshore
oil and natural gas producing regions in the United States. It is characterized by an extensive production history, mature infrastructure,
long reserve life and hydrocarbon potential in multiple producing formations.
Planned Operations
At
the end of fiscal 2014, we elected to participate in the drilling of three wells (0.2 net) that remained in progress at
December 31, 2014 and two wells (0.1 net) that are planned for fiscal 2015. Due to the asset sale on April 21, 2015, the
Company is reassessing its planned operations for fiscal 2015 other than the aforementioned wells in which the Company has
already elected to participate.
Competition
The
oil and natural gas industry is highly competitive and we compete with a substantial number of other companies that have greater
resources than we do. The largest of these companies explore for, produce and market oil and natural gas, carry on refining operations
and market the resultant products on a worldwide basis. The primary areas in which we encounter substantial competition are in
our drilling and development operations, locating and acquiring prospective oil and natural gas properties and reserves and attracting
and retaining highly skilled personnel. There is also competition between producers of oil and natural gas and other industries
producing alternative energy and fuel. Furthermore, competitive conditions may be substantially affected by various forms of energy
legislation and/or regulation considered from time to time by the United States government; however, it is not possible to predict
the nature of any such legislation or regulation that may ultimately be adopted or its effects upon our future operations. Such
laws and regulations may, however, substantially increase the costs of exploring for, developing or producing oil and natural
gas and may prevent or delay the commencement or continuation of a given operation. The effect of these risks cannot be accurately
predicted.
Insurance
We
currently maintain oil and gas commercial general liability protection relating to all of our oil and gas operations (including
environmental and pollution claims) with a total limit of coverage in the amount of $2,000,000 (with no deductible) and excess
liability protection with a total limit of $3,000,000 (with a deductible of $10,000).
As
is common in the oil and gas industry, we will not insure fully against all risks associated with our business either because such
insurance is not available or because premium costs are considered prohibitive. In addition, pollution and environmental risks
generally are not fully insurable. A loss not fully covered by insurance could have a material adverse effect on our business,
financial condition and results of operations.
Employees
As
of December 31, 2014, we had no employees. We engage the services of our Interim President and Chief Accounting Officer on a consulting
or contract basis. We engage additional part-time consultants on an as-needed basis. We are not a party to any collective bargaining
agreements and have not experienced any strikes or work stoppages.
Hydraulic Fracturing
Policies and Procedures
We
contract with third parties to conduct hydraulic fracturing as a means to maximize the productivity of our oil and natural gas
wells in almost all of our wells. Hydraulic fracturing involves the injection of water, sand, gel and chemicals under pressure
into formations to fracture the surrounding rock and stimulate production.
Although
average drilling and completion costs for each area will vary, as will the cost of each well within a given area, on average approximately
50% of the drilling and completion costs for our wells are associated with hydraulic fracturing activities. These costs are treated
in the same way that all other costs of drilling and completing our wells are treated and are built into and funded through our
normal capital expenditures budget. A change to any federal and state laws and regulations governing hydraulic fracturing could
impact these costs and adversely affect our business and financial results. See “Risk Factors — Federal and state legislative
and regulatory initiatives as well as governmental reviews relating to hydraulic fracturing could result in increased costs and
additional operating restrictions or delays as well as adversely affect our level of production.”
The
protection of groundwater quality is important to us. Our policy and practice is to ensure our service providers follow all applicable
guidelines and regulations in the areas where we have hydraulic fracturing operations.
We
believe that the hydraulic fracturing operations on our properties are conducted in compliance with all state and federal regulations
and in accordance with industry standard practices for groundwater protection. These protective measures include setting surface
casing at a depth sufficient to protect fresh water zones as determined by applicable state regulatory agencies, and cementing
the casing to create a permanent isolating barrier between the casing pipe and surrounding geological formations. The casing plus
the cement are intended to prevent contact between the fracturing fluid and any aquifers during the hydraulic fracturing or other
well operations. For recompletions of existing wells, the production casing is pressure tested prior to perforating the new completion
interval. Injection rates and pressures are monitored at the surface during our hydraulic fracturing operations. Pressure is monitored
on both the injection string and the immediate annulus to the injection string.
The
vast majority of hydraulic fracturing treatments are made up of water and sand or other kinds of man-made propping agents. Our
service providers track and report chemical additives that are used in the fracturing operation as required by the applicable governmental
agencies.
Hydraulic
fracturing requires the use of a significant amount of water. All produced water, including fracture stimulation water, is disposed
of in a way that does not impact surface waters. All produced water is disposed of in permitted and regulated disposal facilities.
Environmental Matters and Regulation
Our exploration, development
and production operations are subject to various federal, state and local laws and regulations governing health and safety, the
discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may,
among other things: require the acquisition of permits to conduct exploration, drilling and production operations; govern the
amounts and types of substances that may be released into the environment in connection with oil and natural gas drilling and
production; restrict the way we handle or dispose of our wastes or of naturally occurring radioactive materials generated by our
operations; cause us to incur significant capital expenditures to install pollution control or safety related equipment operating
at our facilities; limit or prohibit construction or drilling activities in sensitive areas such as wetlands, wilderness areas
or areas inhabited by endangered or threatened species; impose specific health and safety criteria addressing worker protection;
require investigatory and remedial actions to mitigate pollution conditions caused by our operations or attributable to former
operations; impose obligations to reclaim and abandon well sites and pits and impose substantial liabilities on us for pollution
resulting from our operations. Failure to comply with these laws and regulations may result in the assessment of administrative,
civil and criminal penalties, the imposition of remedial obligations and the issuance of orders enjoining some or all of our operations
in affected areas.
Additionally,
the United States Congress and federal and state agencies frequently revise environmental, health and safety laws and regulations,
and their interpretations thereof, and any changes that result in more stringent and costly operational requirements or waste
handling, disposal, cleanup and remediation requirements for the oil and natural gas industry could have a significant impact
on our operating costs. The trend in environmental regulation is to place more restrictions and limitations on activities that
may affect the environment, and thus, any changes in environmental laws and regulations or new interpretations of enforcement
policies that result in more stringent and costly waste handling, storage, transport, disposal or remediation requirements could
have a material adverse effect on our financial condition and results of operations. We may be unable to pass on such increased
compliance costs to our customers.
We have been
notified by the Bureau of Land Management (“BLM”) that environmental deficiencies exist on our Tom Tom Tomahawk field
in Chaves and Roosevelt counties in New Mexico. We have submitted a plan to remediate such activities to the BLM and the plan
has been accepted. Before work can commence, we have to perform certain procedures such as sampling the soil. For the year ending
December 31, 2012, we recorded a non-cash charge of $2,100,000 which is management’s best estimate of the costs to remediate
the environmental deficiencies. This estimate could materially differ from actual expenditures. We cannot assure you that the
passage of more stringent laws and regulations in the future will not have a further negative impact on our business, financial
condition or results of operations.
The following
is a summary of the more significant existing environmental, health and safety laws and regulations to which our business is subject
and for which compliance may have a material adverse impact on our capital expenditures, financial condition or results of operations.
Comprehensive Environmental
Response, Compensation and Liability Act
Comprehensive
Environmental Response, Compensation and Liability Act (“CERCLA”), also known as the “Superfund” law, and
comparable state statutes impose joint and several liability for costs of investigation and remediation and for natural resource
damages without regard to fault or legality of the original conduct, on certain classes of persons with respect to the release
into the environment of substances designated under CERCLA as hazardous substances. These classes of persons, or so–called
potentially responsible parties (“PRPs”) include the current and past owners or operators of a site where the release
occurred and anyone who transported or disposed or arranged for the transport or disposal of a hazardous substance found at the
site. CERCLA also authorizes the Environmental Protection Agency (the “EPA”) and, in some instances, third parties
to take actions in response to threats to public health or the environment and to seek to recover from the PRPs the costs of such
action. Many states have adopted comparable or more stringent state statutes.
Although CERCLA
generally exempts “petroleum” from the definition of hazardous substance, in the course of our operations, we will
generate, transport and dispose or arrange for the disposal of wastes that may fall within CERCLA’s definition of hazardous
substances. Comparable state statutes may not contain a similar exemption for petroleum. We may also be the owner or operator of
sites on which hazardous substances have been released.
Solid and Hazardous Waste
Handling
The Resource
Conservation and Recovery Act (“RCRA”) and comparable state statutes regulate the generation, transportation, treatment,
storage, disposal and cleanup of solid and hazardous waste. Although oil and natural gas waste generally is exempt from regulations
as hazardous waste under RCRA, we will generate waste as a routine part of our operations that may be subject to RCRA and not all
state and local laws contain a comparable exemption. Further, there is no guarantee that the EPA or individual states will not
adopt more stringent requirements for the handling of non–hazardous waste or categorize some non–hazardous waste as
hazardous in the future. Any such change could result in an increase in our costs to manage and dispose of waste, which could have
a material adverse effect on our financial condition and results of operations.
It is also
possible that our oil and natural gas operations may require us to manage naturally occurring radioactive materials, or NORM.
NORM is present in varying concentrations in sub-surface formations, including hydrocarbon reservoirs, and may become concentrated
in scale, film and sludge in equipment that comes in contract with crude oil and natural gas production and processing streams.
Some states have enacted regulations governing the handling, treatment, storage and disposal of NORM.
Clean Water Act
The Clean Water
Act and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills
and leaks of produced water and other oil and natural gas wastes, and fill materials into state waters and waters of the United
States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of certain permits
issued by the EPA or an analogous state agency. Spill prevention, control and countermeasure (“SPCC”) requirements
under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters
in the event of a petroleum hydrocarbon tank spill, rupture or leak. In addition, the Clean Water Act and analogous state laws
require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities.
The Clean Water Act also prohibits the discharge of dredge and fill material in regulated waters, including wetlands, unless authorized
by a permit issued by the United States Army Corps of Engineers. Federal and state regulatory agencies can impose administrative,
civil and criminal penalties, as well as require remedial or mitigation measures, for non–compliance with discharge permits
or other requirements of the Clean Water Act and analogous state laws and regulations. In the event of an unauthorized discharge
of wastes, we may be liable for penalties and costs of remediation.
The Oil Pollution
Act of 1990 (“OPA 90”) and its regulations impose requirements on “responsible parties” related to the
prevention of oil spills and liability for damages resulting from oil spills into or upon navigable waters, adjoining shorelines
or in the exclusive economic zone of the United States. A “responsible party” under the OPA 90 may include the owner
or operator of an onshore facility. The OPA 90 subjects responsible parties to strict, joint and several financial liability for
removal costs and other damages, including natural resource damages, caused by an oil spill that is covered by the statute. It
also imposes other requirements on responsible parties, such as the preparation of an oil spill contingency plan. Failure to comply
with the OPA 90 may subject a responsible party to civil or criminal enforcement action. We may conduct operations on acreage located
near, or that affects, navigable waters subject to the OPA 90. We believe that compliance with applicable requirements under the
OPA 90 will not have a material and adverse effect on us.
Safe Drinking Water Act
The Safe Drinking
Water Act (the “SDWA”) regulates, among other things, underground injection operations. Hydraulic fracturing continues
to be under intense regulatory scrutiny both at the federal level and at the state level. In past legislative sessions, the United
States Congress considered two companion bills that if passed would have imposed on our hydraulic fracturing operations significantly
more stringent requirements. In addition to subjecting the injection of hydraulic fracturing to the SDWA regulatory and permitting
requirements, the proposed legislation would require the disclosure of the chemicals within the hydraulic fluids, which could make
it easier for our competition to copy our operations and for third parties opposing hydraulic fracturing to initiate legal proceedings
based on allegations that specific chemicals used in the process could adversely affect ground water. If this or similar legislation
is enacted, we could incur substantial compliance costs and the requirements could negatively impact our ability to conduct fracturing
activities on our assets.
Many states
have considered or adopted legislation or regulations requiring the disclosure of the chemicals used in hydraulic fracturing. Texas
has adopted such a program, which is administered by the Railroad Commission of Texas. The Wyoming Oil and Gas Conservation Commission
also passed a rule requiring disclosure of hydraulic fracturing fluid. In addition, a number of states in which we plan to conduct,
are currently conducting, or may in the future conduct, hydraulic fracturing operations regulatory reviews hydraulic fracturing
and new regulations from such reviews could restrict or limit our access to shale formations or could delay our operations or make
them more costly.
The BLM has
released its final rule regulating hydraulic fracturing on federal and certain tribal lands in March 2015, which will be effective
on June 24, 2015. The rules impose disclosure requirements on the use of hydraulic fracturing chemicals. These rules also require
BLM approval prior to hydraulic fracturing. BLM also will require operators to meet other substantive requirements relating to
well integrity and recordkeeping.
In March 2015,
lawmakers in the United States Congress introduced a package of bills intended to improve the regulation and safeguards for hydraulic
fracturing. This includes the Fracturing Responsibility and Awareness of Chemicals Act (S. 785), which is intended to increase
environmental protections for communities where natural gas drilling takes place. The bill would require drillers to disclose the
chemicals that go into the ground during the hydraulic fracturing process. Also included is the Safe Hydration is an American Right
in Energy Development Act (H.R. 1515). The legislation would require testing of water contamination near hydraulic fracturing sites
and public disclosure of the testing results.
In February
2014, the EPA issued revised guidance under the SDWA, providing direction about how it will address the use of diesel in hydraulic
fracturing activities. The revised guidance provides a definition of diesel fuels and discusses how the EPA’s Underground
Injection Control rules will be applied to hydraulic fracturing. Further, in March 2010, the EPA announced that it would conduct
a wide-ranging study on the effects of hydraulic fracturing on drinking water resources. An update of the study was released in
December 2012, with final results expected in 2016. This additional regulatory scrutiny could make it difficult to perform hydraulic
fracturing and increase our costs of compliance and doing business.
Air Emissions
Our operations
are subject to federal, state and local regulations for the control of emissions from sources of air pollution under the Clean
Air Act (“CAA”) and analogous state and local programs. Federal and state laws require new and modified sources of
air pollutants to obtain permits prior to commencing construction and also impose various monitoring and reporting requirements.
Major sources of air pollutants are subject to more stringent, federally imposed requirements including additional permits. Federal
and state laws designed to control hazardous or toxic air pollutants may require installation of additional controls. Administrative
enforcement actions for failure to comply strictly with air pollution regulations or permits are generally resolved by payment
of monetary fines and correction of any identified deficiencies. Alternatively, regulatory agencies could bring lawsuits for civil
penalties or require us to forego construction, modification or operation of certain air emission sources.
On April 17,
2012, the EPA signed final rules under the CAA regarding emissions from oil and natural gas operations. The EPA rule subjects oil
and natural gas operations to regulation under the New Source Performance Standards (“NSPS”) and National Emissions
Standards for Hazardous Air Pollutants (“NESHAPS”), programs under the CAA, and imposes new and amended requirements
under both programs. The new rules, among other things, amend standards applicable to natural gas processing plants and would expand
the NSPS to include all oil and natural gas operations, imposing requirements on those operations. The EPA also imposed NSPS standards
for completions of hydraulically fractured natural gas wells, requiring the use of reduced emission completion techniques. The
adopted rules allowed in most circumstances, until January 1, 2015, facilities to combust natural gas that would escape during
completion activities as an alternative to the reduced emission completion techniques. The NESHAPS proposal includes maximum achievable
control technology standards for certain glycol dehydrators and storage vessels, and revises applicability provisions, alternative
test protocols and the availability of the startup, shutdown and maintenance exemption. These new requirements may result in increased
operating and compliance costs, increased regulatory burdens and delays in our operations. Compliance with such rules could result
in significant costs, including increased capital expenditures and operating costs, and could adversely impact our business.
Climate Change Legislation
In response
to certain scientific studies suggesting that emissions of carbon dioxide, methane and other greenhouse gases (“GHGs”)
are contributing to the warming of the Earth’s atmosphere and other climatic changes, the United States Congress has considered
legislation to reduce such emissions. To date, the United States Congress has failed to enact a comprehensive GHG program. Some
states, either individually or on a regional level, have considered or enacted legal measures to reduce GHG emissions. Although
most of the state-level initiatives have to date focused on large sources of GHG emissions, it is possible that smaller sources
of emissions could become subject to GHG emission limitations. The cost of complying with these programs could be significant.
The EPA published
finding that emissions of GHGs presented an endangerment to public health and the environment. These findings by the EPA allowed
the agency to proceed through a rule-making process with the adoption and implementation of regulations that would restrict emissions
of GHGs under existing provisions of the CAA. Consequently, the EPA adopted two sets of regulations that would require a reduction
in emissions of GHGs from motor vehicles and could trigger permit review for GHG emissions from certain stationary sources. On
June 3, 2010, the EPA published its final rule to address permitting of GHG emissions from stationary sources under the prevention
of significant deterioration (“PSD”) and Title V permitting programs. The final rule tailors the PSD and Title V permitting
programs to apply to qualifying stationary sources of GHG emissions in a multi-step process, beginning January 2, 2011, with the
largest sources first subject to permitting.
On June 23,
2014, the U.S. Supreme Court issued its decision in Utility Air Regulatory Group v. EPA (No. 12-1146). The
Court said that the EPA may not treat GHGs as an air pollutant for purposes of determining whether a source is a major source required
to obtain a PSD or Title V permit. The Court also said that PSD permits that are otherwise required (based on emissions of other
pollutants) may continue to require limitations on GHG emissions based on the application of Best Available Control Technology
(BACT). The EPA is currently evaluating the implications of the Court’s decision and awaiting further action by the U.S.
Courts.
In addition,
the EPA has adopted a rule requiring the reporting of GHG emissions from specified large GHG emission sources in the United States.
On November 8, 2010, the EPA finalized its regulations to expand its final rule on GHG emissions reporting to include onshore and
offshore oil and natural gas production facilities and onshore oil and natural gas processing, transmission, storage and distribution
facilities. Reporting of GHG emissions from such facilities is required on an annual basis beginning in 2012 for emissions occurring
in 2011. While we believe that we will be able to substantially comply with such reporting requirements without any material adverse
effect to our financial condition, since such reporting requirements with respect to GHG emissions are new in the oil and natural
gas industry, there can be no assurance that our reports will initially be in substantial compliance or that such requirements
will not develop into more stringent and costly obligations that may have a significant impact on our operating costs. The adoption
and implementation of any regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and
operations could require us to incur costs to reduce emissions of GHGs associated with our operations or could adversely affect
demand for the oil and natural gas we produce. Any one of these climate change regulatory and legislative initiatives could have
a material adverse effect on our business, financial condition and results of operations.
Finally, it
should be noted that some scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may
produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts and
floods and other climatic events; if any such effects were to occur, they could have a material adverse effect on our business
and results of operations.
OSHA and Other Laws and Regulations
on Employee Health and Safety
To the extent
not preempted by other applicable laws, we are subject to the requirements of the Occupational Safety and Health Act (“OSHA”)
and comparable state statutes, where applicable. These laws and the implementing regulations strictly govern the protection of
the health and safety of employees. The OSHA hazard communication standard, the EPA community right–to–know regulations
under the Title III of CERCLA and similar state statutes, where applicable, require us to organize and maintain information about
hazardous materials used or, as applicable, produced in our operations and that this information be provided to employees, state
and local government authorities and, where applicable, citizens. OSHA may enforce workplace safety regulations through issuance
of citations for violations of its standards, which include, but are not limited to, those regarding hazard communication, personal
protective equipment, general environmental controls, and materials handling and storage. We believe that we are in substantial
compliance with these requirements where applicable and with other applicable OSHA and comparable requirements.
National Environmental Policy
Act
Oil and natural
gas exploration and production activities on federal lands may be subject to the National Environmental Policy Act (“NEPA”)
which requires federal agencies, including the U.S. Department of the Interior, to evaluate major agency actions having the potential
to significantly impact the environment. In the course of such evaluations, an agency will prepare an Environmental Assessment
that assesses the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more
detailed Environmental Impact Statement that may be made available for public review and comment. All of our current exploration
and production activities, as well as proposed exploration and development plans, on federal lands require governmental permits
that are subject to the requirements of NEPA. This process has the potential to delay or impose additional conditions upon the
development of oil and natural gas projects.
Endangered Species Act
TheEndangered
Species Act, as amended (the “ESA”), and analogous state statutes restrict activities that may affect endangered and
threatened species or their habitats. While some of our facilities may be located in areas that are designated as habitat for endangered
or threatened species, we believe that we are in substantial compliance with the ESA. However, the designation of previously unidentified
endangered or threatened species could cause us to incur additional costs or become subject to operating restrictions or bans in
the affected areas.
Other Regulation of the Oil and
Natural Gas Industry
The oil and
natural gas industry is extensively regulated by numerous federal, state and local authorities. 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.
These laws and regulations may also restrict the rate of oil and natural gas production below the rate that would otherwise be
possible. The regulatory burden on the oil and natural gas industry increases the cost of doing business in the industry and consequently
affects profitability.
Failure to comply
with applicable laws and regulations can result in substantial penalties and possibly cessation of drilling and production operations.
The regulatory burden on the industry increases the cost of doing business and affects profitability. We believe that we are in
substantial compliance with existing requirements and such compliance will not have a material adverse effect on our financial
condition, cash flows or results of operations. Nevertheless, such laws and regulations are frequently amended or reinterpreted.
Therefore, we are unable to predict the future costs or impact of compliance. Additional proposals and proceedings that affect
the oil and natural gas industry are regularly considered by the United States Congress, the states, the Federal Energy Regulatory
Commission (“FERC”) and the courts. We cannot predict when or whether any such proposals may become effective.
Drilling and Production
Our operations
are subject to various types of regulation at the federal, state and local levels. These types of regulation include requiring
permits for the drilling of wells, drilling bonds and reports concerning operations. The states and some counties and municipalities
in which we operate also regulate one or more of the following:
| · | the method of drilling and casing wells; |
| · | the surface use and restoration of properties upon which wells are drilled;
and |
| · | the plugging and abandonment of wells. |
State laws,
including Texas, regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and
natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploitation while other states
rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties
and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production
from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the
ratability of production. These laws and regulations may limit the amount of oil and natural gas we can produce from our wells
or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance
tax with respect to the production and sale of oil and natural gas within its jurisdiction.
In addition,
11 states have enacted surface damage statutes (“SDAs”). These laws are designed to compensate for damage caused by
mineral development. Most SDAs contain entry notification and negotiation requirements to facilitate contact between operators
and surface owners and users. Most also contain bonding requirements and specific expenses for exploration and producing activities.
Costs and delays associated with SDAs could impair operational effectiveness and increase development costs.
We do not control
the availability of transportation and processing facilities used in the marketing of our production. For example, we may have
to shut-in a productive natural gas well because of a lack of available natural gas gathering or transportation facilities.
If we conduct
operations on federal, state or Indian oil and natural gas leases, these operations must comply with numerous regulatory restrictions,
including various non-discrimination statutes, royalty and related valuation requirements, and certain of these operations must
be conducted pursuant to certain on-site security regulations and other appropriate permits issued by the Bureau of Land Management,
the Bureau of Ocean Energy Management, Regulation and Enforcement or other appropriate federal or state agencies.
Transportation of Oil
Sales of oil
are not currently regulated and are made at negotiated prices. Nevertheless, the United States Congress could reenact price controls
in the future.
Our sales of
oil are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is
also subject to rate and access regulation. The FERC regulates interstate oil pipeline transportation rates under the Interstate
Commerce Act. In general, interstate oil pipeline rates must be cost-based, although settlement rates agreed to by all shippers
are permitted and market based rates may be permitted in certain circumstances. Effective January 1, 1995, the FERC implemented
regulations establishing an indexing system (based on inflation) for transportation rates for oil that allowed for an annual increase
or decrease in the cost of transporting oil to the purchaser, effective July 1 of each year. The FERC reviews the indexing methodology
every five years. In its latest order on the methodology, issued in December 2010, the FERC concluded that an index level of the
Producer Price Index for Finished Goods plus 2.65 percent should be established for the five-year period commencing July 1, 2011.
Intrastate oil
pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline
regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state.
Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation
of oil transportation rates will not affect our operations in any way that is of material difference from those of our competitors
who are similarly situated.
Further, interstate
and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard,
common carriers must offer service to all similarly situated shippers requesting service on the same terms and under the same rates.
When shipper nominations exceed full capacity, access is governed by prorationing provisions set forth in the pipelines’
published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us
to the same extent as to our similarly situated competitors.
Transportation and Sales of
Natural Gas
Historically,
the transportation and sale for resale of natural gas in interstate commerce has been regulated by the FERC under the Natural Gas
Act of 1938 (the “NGA”), the Natural Gas Policy Act of 1978 (the “NGPA”), and regulations issued under
those statutes. In the past, the federal government has regulated the prices at which natural gas could be sold. While sales by
producers of natural gas can currently be made at market prices, the United State Congress could reenact price controls in the
future. Deregulation of wellhead natural gas sales began with the enactment of the NGPA and culminated in adoption of the Natural
Gas Wellhead Decontrol Act which removed all price controls affecting wellhead sales of natural gas effective January 1, 1993.
FERC regulates
interstate natural gas transportation rates, and terms and conditions of service, which affects the marketing of natural gas that
we produce, as well as the revenues we receive for sales of our natural gas. Since 1985, the FERC has endeavored to make natural
gas transportation more accessible to natural gas buyers and sellers on an open and non-discriminatory basis. The FERC has stated
that open access policies are necessary to improve the competitive structure of the interstate natural gas pipeline industry and
to create a regulatory framework that will put natural gas sellers into more direct contractual relations with natural gas buyers
by, among other things, unbundling the sale of natural gas from the sale of transportation and storage services. Beginning in 1992,
the FERC issued a series of orders, beginning with Order No. 636, to implement its open access policies. As a result, the interstate
pipelines’ traditional role of providing the sale and transportation of natural gas as a single service has been eliminated
and replaced by a structure under which pipelines provide transportation and storage service on an open access basis to others
who buy and sell natural gas. Although the FERC’s orders do not directly regulate natural gas producers, they are intended
to foster increased competition within all phases of the natural gas industry.
The price at
which we sell natural gas is not currently subject to federal rate regulation and, for the most part, is not subject to state regulation.
However, with regard to our physical sales of these energy commodities, we are required to observe anti-market manipulation laws
and related regulations enforced by the FERC and/or the Commodity Futures Trading Commission (the “CFTC”). See “—Other
Federal Laws and Regulations Affecting Our Industry—Energy Policy Act of 2005.” Should we violate the anti-market manipulation
laws and regulations, we could also be subject to related third party damage claims by, among others, sellers, royalty owners and
taxing authorities. In addition, pursuant to Order No. 704, some of our operations may be required to annually report to the FERC
on May 1 of each year for the previous calendar year. Currently, Order No. 704 requires certain natural gas market participants
to report information regarding their reporting of transactions to price index publishers and their blanket sales certificate status,
as well as certain information regarding their wholesale, physical natural gas transactions for the previous calendar year depending
on the volume of natural gas transacted. See “—Other Federal Laws and Regulations Affecting Our Industry—FERC
Market Transparency Rules.”
Gathering services,
which occur upstream of jurisdictional transmission services, are regulated by the states. In addition, intrastate natural gas
transportation and facilities are also subject to regulation by state regulatory agencies, and certain transportation services
provided by intrastate pipelines are also regulated by the FERC. The basis for regulation of intrastate natural gas transportation
and gathering the degree of regulatory oversight and scrutiny given to intrastate natural gas pipeline and gathering pipeline rates
and services varies from state to state. Insofar as such regulation within a particular state will generally affect all intrastate
natural gas shippers within the state on a comparable basis, we believe that the regulation of similarly situated intrastate natural
gas transportation in any states in which we operate and ship natural gas on an intrastate basis will not affect our operations
in any way that is of material difference from those of our competitors. Like the regulation of interstate transportation rates,
the regulation of intrastate transportation rates affects the marketing of natural gas that we produce, as well as the revenues
we receive for sales of our natural gas.
State Natural Gas Regulation
Various states,
including Texas, regulate the drilling for, and the production, gathering and sale of, natural gas, including imposing severance
taxes and requirements for obtaining drilling permits. States also regulate the method of developing new fields, the spacing and
operation of wells and the prevention of waste of natural gas resources. States may regulate rates of production and may establish
maximum daily production allowables from natural gas wells based on market demand or resource conservation, or both. States do
not regulate wellhead prices or engage in other similar direct economic regulation, but there can be no assurance that they will
not do so in the future. The effect of these regulations may be to limit the amounts of natural gas that may be produced from our
wells and to limit the number of wells or locations we can drill.
Other Federal Laws and Regulations
Affecting Our Industry
Energy Policy Act of 2005
On August 8,
2005, President Bush signed into law the Energy Policy Act of 2005 (the “EPAct 2005”). The EPAct 2005 is a comprehensive
compilation of tax incentives, authorized appropriations for grants and guaranteed loans, and significant changes to the statutory
policy that affects all segments of the energy industry. Among other matters, the EPAct 2005 amends the NGA to add an anti-manipulation
provision which makes it unlawful for any entity to engage in prohibited behavior to be prescribed by the FERC, and furthermore
provides the FERC with additional civil penalty authority. The EPAct 2005 provides the FERC with the power to assess civil penalties
of up to $1.0 million per day for violations of the NGA and increases the FERC’s civil penalty authority under the NGPA from
$5,000 per violation per day to $1.0 million per violation per day. On January 19, 2006, the FERC issued Order No. 670, a rule
that implements the anti-manipulation provision of the EPAct 2005 and makes it unlawful for any entity, directly or indirectly,
in connection with the purchase or sale of natural gas subject to the jurisdiction of the FERC, or the purchase or sale of transportation
services subject to the jurisdiction of the FERC: (1) to use or employ any device, scheme or artifice to defraud; (2) to make any
untrue statement of material fact or omit to make any such statement necessary to make the statements made not misleading; or (3)
to engage in any act, practice, or course of business that operates as a fraud or deceit upon any person. The anti-manipulation
rules and enhanced civil penalty authority reflect an expansion of the FERC’s NGA enforcement authority. Should we fail to
comply with all applicable FERC administered statutes, rules, regulations and orders, we could be subject to substantial penalties
and fines.
FERC Market Transparency Rules
On April 19,
2007, the FERC issued a final rule on the annual natural gas transaction reporting requirements, as amended by subsequent orders
on rehearing, or Order No. 704. Under Order No. 704, wholesale buyers and sellers of more than 2.2 million MMBtu of physical natural
gas in the previous calendar year, including interstate and intrastate natural gas pipelines, natural gas gatherers, natural gas
processors, natural gas marketers and natural gas producers are required to report, on May 1 of each year, aggregate volumes of
natural gas purchased or sold at wholesale in the prior calendar year to the extent such transactions utilize, contribute to or
may contribute to the formation of price indices. It is the responsibility of the reporting entity to determine which individual
transactions should be reported based on the guidance of Order No. 704. Order No. 704 also requires market participants to indicate
whether they report prices to any index publishers and, if so, whether their reporting complies with the FERC’s policy statement
on price reporting. In 2011, a federal appellate court determined that FERC does not have legal authority to impose reporting requirements
on wholly-intrastate pipelines.
Additional proposals
and proceedings that might affect the natural gas industry are pending before the United State Congress, the FERC and the courts.
We cannot predict the ultimate impact of these or the above regulatory changes to our natural gas operations. We do not believe
that we would be affected by any such action materially differently than similarly situated competitors.
Item 1A. Risk Factors
Risks Related to Our Business
We
may not have sufficient capital to operate our business as presently contemplated.
The oil and natural
gas industry is capital intensive. We make and expect to continue to make significant capital expenditures in our business for
the exploration, development, production and acquisition of oil and natural gas reserves. Improvement in commodity prices may result
in an increase in our actual capital expenditures.
At the end
of fiscal 2014, we elected to participate in the drilling of three wells (0.2 net) that remained in progress at December 31,
2014 and two wells (0.1 net) that are planned for fiscal 2015. Due to the asset sale on April 21, 2015, the Company is
reassessing its planned operations for fiscal 2015 other than the aforementioned wells in which the Company has already
elected to participate.
Our cash flows
from operations and access to capital are subject to a number of variables, including:
| · | the level of oil and natural gas we are able to produce from existing
wells; |
| · | the prices at which our oil and natural gas are sold; |
| · | our ability to acquire, locate and produce new reserves; and |
| · | the ability of our banks to lend. |
Debt financing
could lead to:
| · | a substantial portion of operating cash flow being dedicated to the
payment of principal and interest; |
| · | us being more vulnerable to competitive pressures and economic downturns;
and |
| · | restrictions on our operations, including our ability to pay dividends.
|
If sufficient
capital resources are not available, we might be forced to cease operations entirely, curtail developmental and exploratory drilling
and other activities or be forced to sell some assets on an untimely or unfavorable basis, which would have a material adverse
effect on our business, financial condition and results of operations.
Our outstanding debt contains covenants
restricting certain actions we may take.
Our
credit agreement with Independent Bank contains various covenants restricting certain actions we may take, including, but not limited
to, incurring additional indebtedness, entering into any merger, selling any of our assets, making certain investments and paying
dividends. The credit agreement also contains various financial covenants requiring us to maintain a certain ratio of debt
compared to EBITDAX (as defined in the credit agreement). These restrictions and covenants may adversely effect our operations.
We may have difficulty managing
growth in our business, which could adversely affect our financial condition and results of operations.
Growth
in accordance with our business plan, if achieved, could place a significant strain on our financial, technical, operational and
management resources. As we expand our activities and increase the number of projects we are evaluating or in which we participate,
there will be additional demands on our financial, technical, operational and management resources. The failure to continue to
upgrade our technical, administrative, operating and financial control systems or the occurrences of unexpected expansion difficulties,
including the failure to recruit and retain experienced managers, geologists, engineers and other professionals in the oil and
natural gas industry, could have a material adverse effect on our business, financial condition and results of operations and our
ability to timely execute our business plan.
A decline in oil and natural
gas prices may adversely affect our results of operations, financial condition or ability to meet our capital expenditure obligations
and financial commitments.
Our revenues,
operating results and future rate of growth are substantially dependent upon the prevailing prices of, and demand for, oil and
natural gas. Oil prices have declined substantially in recent months and may remain at or below current levels in the near future.
The market price of crude oil has decreased approximately 50% since June 2014 as a result of market uncertainties over the supply
and demand of oil due to increased production in certain regions, decisions made by OPEC, the current state of the global economy
and concerns over future global oil demand. Lower oil and natural gas prices, such as the recent substantial decline
in oil prices, may reduce the amount of oil and natural gas that we can produce economically, make some wells uneconomical to drill
or operate, reduce our ability to develop our properties, reduce our ability to offset the natural decline in production from producing
wells through new development and result in lower reserves. Historically, oil and natural gas prices and markets have been volatile,
and they are likely to continue to be volatile in the future.
A decrease in
oil or natural gas prices will not only reduce revenues and profits, but will also reduce the quantities of reserves that are commercially
recoverable and may result in charges to earnings for impairment of the value of these assets. The recent substantial decline in
oil prices may adversely impact the ultimate development of the quantity of reserves that we reported at December 31, 2014. If
oil or natural gas prices continue to decline in the future, we might not be able to generate sufficient cash flow from operations
to meet our obligations and make planned capital expenditures. Oil and natural gas prices are subject to wide fluctuations in response
to relatively minor changes in the supply of, and demand for, oil and natural gas, market uncertainty and a variety of additional
factors that are beyond our control. Among the factors that could cause fluctuations are:
| |
• |
market expectations regarding supply and demand for oil and natural gas; |
| |
|
|
| |
• |
decreased demand due to weak global economic growth; |
| |
|
|
| |
• |
levels of production and other activities of the Organization of Petroleum Exporting Countries and other oil and natural gas producing nations; |
| |
|
|
| |
• |
market expectations about future prices; |
| |
|
|
| |
• |
the level of global oil and natural gas exploration, production activity and inventories; |
| |
|
|
| |
• |
political conditions, including embargoes, in or affecting oil and natural gas production activities; |
| |
|
|
| |
• |
increased production due to new extraction developments and improved extraction and production methods; and |
| |
|
|
| |
• |
the price and availability of alternative fuels. |
Our business,
results of operations, future rate of growth and quantities of reserves that are commercially recoverable depend heavily on the
prices we receive for oil sales. Oil prices also affect our cash flows available for capital expenditure obligations and financial
commitments. No assurance can be given that future oil prices will be at levels which enable us to do business profitably or at
levels that make it economically viable to produce from certain wells. A decline in oil or natural gas prices may have a material
adverse effect on our business, financial condition and results of operations.
Properties that we acquire
may not produce as projected, and we may be unable to accurately predict reserve potential, identify liabilities associated with
the properties or obtain protection from sellers against such liabilities.
We may acquire
additional interests in oil and natural gas properties. Any future acquisitions will require an assessment of recoverable reserves,
title, future oil and natural gas prices, operating costs, potential environmental hazards and liabilities, potential tax and Employee
Retirement Income Security Act liabilities, and other liabilities and other similar factors. Generally, it is not feasible for
us to review in detail every individual property involved in an acquisition, and our review efforts are normally focused on the
higher-valued properties. Even a detailed review of properties and records may not reveal existing or potential problems, nor will
it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. We do not
inspect every well that we acquire. Potential problems, such as deficiencies in the mechanical integrity of equipment or environmental
conditions that may require significant remedial expenditures, are not necessarily observable even when we inspect a well. Any
unidentified problems could result in material liabilities and costs that negatively impact our financial condition and results
of operations.
Even if we are
able to identify problems with an acquisition, the seller may be unwilling or unable to provide effective contractual protection
or indemnity against all or part of these problems. Even if a seller agrees to provide indemnity, the indemnity may not be fully
enforceable and may be limited by floors and caps on such indemnity. In addition, we may acquire oil and natural gas properties
that contain commercially productive reserves which are less than predicted. Any of these factors could have a material adverse
effect on our results of operations and reserve growth.
Our failure to successfully
identify, complete and integrate future acquisitions of properties or businesses could reduce our earnings and slow our growth.
There is intense
competition for acquisition opportunities in our industry. Competition for acquisitions may increase the cost of, or cause us to
refrain from, completing acquisitions. Our ability to complete acquisitions is dependent upon, among other things, our ability
to obtain debt and equity financing and, in some cases, regulatory approvals. Further, these acquisitions may be in geographic
regions in which we do not currently operate, which could result in unforeseen operating difficulties and difficulties in coordinating
geographically dispersed operations, personnel and facilities. In addition, if we enter into new geographic markets, we may be
subject to additional and unfamiliar legal and regulatory requirements. Compliance with regulatory requirements may impose substantial
additional obligations on us and our management, cause us to expend additional time and resources in compliance activities and
increase our exposure to penalties or fines for non-compliance with such additional legal requirements. Completed acquisitions
could require us to invest further in operational, financial and management information systems and to attract, retain, motivate
and effectively manage additional employees. The inability to effectively manage the integration of acquisitions could reduce our
focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our earnings and growth. Our financial
position and results of operations may fluctuate significantly from period to period, based on whether or not significant acquisitions
are completed in particular periods.
We cannot control the development
of the properties we do not operate, which may adversely affect our production, revenues and results of operations.
We do not operate the
majority of the properties in which we have an interest. As a result, we have limited ability to exercise influence over, and control
the risks associated with, the operation of these properties. The success and timing of our drilling and development activities
on those properties depend upon a number of factors outside of our control, including:
| · | the timing and amount of capital expenditures; |
| · | the operators’ expertise and financial resources; |
| · | the approval of other participants in drilling wells; and |
| · | the selection of suitable technology. |
As a result of
any of the above or an operator’s failure to act in ways that are in our best interest, our allocated production revenues
and results of operations could be adversely affected.
Drilling for and producing
oil and natural gas are speculative activities and involve numerous risks and substantial and uncertain costs that could adversely
affect us.
Our future financial
condition and results of operations will depend on the success of our acquisition, exploitation, development and production activities.
Our oil and natural gas exploration and production activities are subject to numerous risks beyond our control, including the risk
that drilling will not result in commercially productive oil or natural gas reservoirs. Our decisions to acquire, explore, develop
or otherwise exploit drilling locations or properties will depend in part on the evaluation of data obtained through geophysical
and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying
interpretations. In addition, our cost of drilling, completing and operating wells is often uncertain before drilling commences.
Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. Further, many factors may curtail,
delay or cancel our scheduled drilling projects, including the following:
| · | shortages of or delays in obtaining equipment and qualified personnel;
|
| · | facility or equipment malfunctions; |
| · | unexpected operational events; |
| · | pressure or irregularities in geological formations; |
| · | adverse weather conditions, such as flooding; |
| · | reductions in oil and natural gas prices; |
| · | delays imposed by or resulting from compliance with regulatory requirements;
|
| · | proximity to and capacity of transportation facilities; |
| · | limitations in the market for oil and natural gas; and |
| · | costs and availability of drilling rigs, equipment, supplies, personnel
and oilfield services. |
Even if drilled,
our completed wells may not produce reserves of oil or natural gas that are commercially productive or that meet our earlier estimates
of economically recoverable reserves. A productive well may become uneconomic if water or other deleterious substances are encountered,
which impair or prevent the production of oil and/or natural gas from the well. Our overall drilling success rate or our drilling
success rate for activity within a particular project area may decline. Unsuccessful drilling activities could result in a significant
decline in our production and revenues and materially harm our operations and financial condition by reducing our available cash
and resources.
Reserve estimates depend
on many assumptions that may turn out to be inaccurate.
Any material
inaccuracies in our reserve estimates or underlying assumptions could materially affect the quantities and present values of our
reserves. This Annual Report on Form 10-K contains estimates of our proved oil and natural gas reserves and PV-10 and standardized
measure of our proved oil and natural gas reserves. The process of estimating oil and natural gas reserves is complex. It requires
interpretations of available technical data and various assumptions, including assumptions relating to economic factors. Any significant
inaccuracies in these interpretations or assumptions could materially affect the estimated quantities of reserves and amount of
PV-10 and standardized measure that we may report. The process of preparing these estimates requires the projection of production
rates and timing of development expenditures and analysis of available geological, geophysical, production and engineering data,
and the extent, quality and reliability of this data can vary. The process also requires economic assumptions relating to matters
such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds.
Actual future
production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable
oil and natural gas reserves most likely will vary from our estimates. Any significant variance could materially affect the estimated
quantities of reserves and amount of PV-10 and standardized measure that we may report. In addition, we may adjust estimates of
proved reserves and amount of PV-10 and standardized measure to reflect production history, results of exploration and development,
prevailing oil and natural gas prices and other factors, many of which are beyond our control. Moreover, there can be no assurance
that our reserves will ultimately be produced or that our proved undeveloped reserves will be developed within the periods anticipated.
Any significant variance in the assumptions could materially affect the estimated quantity our reserves and amount of PV-10 and
standardized measure.
Investors should
not assume that the PV-10 of our proved reserves is the current market value of our estimated oil and natural gas reserves. PV-10
is based on prices and costs in effect on the date of the estimate. Actual future prices, costs, and the volume of produced reserves
may differ materially from those used in the PV-10 estimate.
Approximately 41% of our total
estimated proved reserves as of December 31, 2014 were classified as proved undeveloped and may not be ultimately developed or
produced.
As of December
31, 2014, approximately 41% of our total estimated proved reserves were undeveloped. Recovery of proved undeveloped reserves requires
significant capital expenditures and successful drilling operations. The future drilling of proved undeveloped reserves is highly
dependent upon our ability to fund our capital expenditures, which we estimate will be approximately $1.0 million to $2.0 million
for 2015. We cannot be sure that these estimated costs are accurate, and we may be unable to obtain sufficient capital. Further,
our drilling efforts may be delayed or unsuccessful, and actual reserves may prove to be less than current reserve estimates,
which could have a material adverse effect on our financial condition, future cash flows and results of operations.
If we are unable to find purchasers
of our natural gas, it could harm our profitability.
There generally
are only a limited number of natural gas transmission companies with existing pipelines in the vicinity of a natural gas well or
wells. In the event that producing natural gas properties are not subject to purchase contracts or that any such contracts terminate
and other parties do not purchase our natural gas production, there is no assurance that we will be able to enter into purchase
contracts with any transmission companies or other purchasers of natural gas and there can be no assurance regarding the price
which such purchasers would be willing to pay for such natural gas. There presently exists an oversupply of natural gas in the
marketplace, the extent and duration of which is not known. Such oversupply may result in reductions of purchases by principal
natural gas pipeline purchasers.
We may be required to write
down the carrying values of our oil and natural gas properties.
Oil prices have
declined substantially in recent months and may remain at or below current levels in the near future. There is a risk that due
to the recent decline in oil prices or future declines in oil prices, we could be required to write down the carrying value of
our oil and natural gas properties, which would reduce our earnings and shareholders’ equity. We follow the successful efforts
method of accounting for our oil and natural gas properties. Under this method, the costs of productive wells, developmental dry
holes and productive leases are capitalized. The acquisition costs of unproved acreage are initially capitalized and are carried
at cost, net of accumulated impairment provisions, until such leases are transferred to proved properties or charged to exploration
expense as impairments of unproved properties. Exploration costs, such as exploratory geological and geophysical costs, delay rentals
and exploration overhead, are charged to expense as incurred. Exploratory drilling costs, including the cost of stratigraphic test
wells, are initially capitalized but charged to exploration expense if and when the well is determined to be non-productive. The
capitalized costs of our oil and natural gas properties may not exceed their estimated fair market value. When evaluating our proved
properties, we are required to test for potential write-downs at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets, which is typically on a field-by-field basis. If capitalized costs exceed future
cash flows, we write down the costs of proved properties to our estimate of fair market value, which is generally estimated using
a discounted cash flow approach. When evaluating our unproved properties, we write down the capitalized costs of the unproved properties
if it is determined that the costs are not likely to be recoverable. Any such charge will not affect our cash flow from operating
activities, but will reduce our earnings and shareholders’ equity.
Unless we replace oil and natural
gas reserves, our production and cash flows will decline.
Our future success
will depend on our ability to find, develop or acquire additional reserves that are commercially productive. If we are unable to
replace reserves through drilling or acquisitions, our level of production and cash flows will be adversely affected. In general,
production from oil and natural gas properties declines as reserves are depleted, with the rate of decline depending on reservoir
characteristics. Our total proved reserves decline as reserves are produced unless we conduct other successful exploration and
development activities or acquire properties containing proved reserves, or both. Our ability to make the necessary capital investment
to maintain or expand our asset base of oil and natural gas reserves would be impaired to the extent cash flow from operations
is reduced and external sources of capital become limited or unavailable. We may not be successful in exploring for, developing
or acquiring additional reserves. We also may not be successful in raising funds to acquire, explore or develop additional reserves.
Prospects that we decide to
drill may not yield oil or natural gas in commercially viable quantities.
Prospects that
we decide to drill that do not yield oil or natural gas in commercially productive quantities will adversely affect our financial
condition and results of operations. Our prospects are in various stages of evaluation, and may range from a prospect which is
ready to drill to a prospect that will require substantial additional seismic data processing and interpretation and other technical
analysis. There is no way to predict in advance of drilling and testing whether any particular prospect will yield oil or natural
gas in sufficient quantities to recover drilling or completion costs or to be commercially productive. The use of seismic data
and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling
whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in commercial quantities.
We cannot assure you that the analogies we draw from available data from other wells, more fully explored prospects or producing
fields will be applicable to our drilling prospects.
Market conditions or transportation
impediments may hinder access to oil and natural gas markets or delay production.
Market conditions,
the unavailability of satisfactory oil and natural gas transportation or the remote location of our drilling operations may restrict
our access to oil and natural gas markets or delay production. The availability of a ready market for oil and natural gas production
depends on a number of factors, including the demand for and supply of oil and natural gas, the proximity of reserves to pipelines
or trucking and terminal facilities and the availability of trucks and other transportation equipment. We may be required to shut-in
wells or delay initial production for lack of a viable market or because of inadequacy or unavailability of pipeline or gathering
system capacity. When that occurs, we will be unable to realize revenue from those wells until the production can be tied to a
gathering system. This can result in considerable delays from the initial discovery of a reservoir to the actual production of
the oil and natural gas and realization of revenues.
Delays in obtaining permits
by us for our operations could impact our business.
We are
required to obtain permits from one or more governmental agencies in order to perform drilling and completion activities,
including hydraulic fracturing. Such permits are typically required by state agencies, but can also be required by federal
and local governmental agencies. As with all governmental permitting processes, there is a degree of uncertainty as to
whether a permit will be granted, the time it will take for a permit to be issued, and the conditions which may be imposed in
connection with the granting of the permit. Hydraulic fracturing activities has been particularly scrutinized. New York, for
example, previously issued a moratorium currently in effect on the issuance of permits for inland drilling and completion
activities. Subject to an Executive Order issued by Governor Paterson on December 13, 2010, the New York Department of
Environmental Conservation will not issue permits for drilling and completion activities until it completes a final
environmental impact study following public comment. Texas is not currently considering such a measure. In addition, on May
17, 2012, the Governor of Vermont signed a bill banning hydraulic fracturing in the state of Vermont. Additionally,
on December 17, 2014, the Governor of New York announced the state’s decision to officially ban high-volume hydraulic
fracturing. If we are unable to obtain the necessary permits for our operations, it could have a material adverse effect on
our results of operations and profitability.
Our operations are subject
to hazards inherent in the oil and natural gas industry.
We implement
hydraulic fracturing in our operations, a process involving the injection of fluids—usually consisting mostly of water but
typically including small amounts of several chemical additives—as well as sand in order to create fractures extending from
the wellbore through the rock formation to enable oil or natural gas to move more easily through the rock pores to a production
well. Risks inherent to our industry include the potential for significant losses associated with damage to the environment. Equipment
design or operational failures, or vehicle operator error can result in explosions and discharges of toxic gases, chemicals and
hazardous substances, and, in rare cases, uncontrollable flows of natural gas or well fluids into environmental media, as well
as personal injury, loss of life, long-term suspension or cessation of operations and interruption of our business and/or the business
or livelihood of third parties, damage to geologic formations, environmental media and natural resources, equipment and/or facilities
and property. In addition, we use and generate hazardous substances and wastes in our operations and may become subject to claims
relating to the release of such substances into the environment. In addition, some of our current properties are, or have been,
used for industrial purposes, which could contain currently unknown contamination that could expose us to governmental requirements
or claims relating to environmental remediation, personal injury and/or property damage. These conditions could expose us to liability
for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental
damages and, in an extreme case, could materially impair our profitability, competitive position or viability. Depending on the
frequency and severity of such liabilities or losses, it is possible that our operating costs, insurability and relationships with
employees and regulators could be materially impaired.
Our business and operations
may be adversely affected by regulations affecting the oil and natural gas industry.
Our business
and operations are subject to and impacted by a wide array of federal, state, and local laws and regulations on the exploration
for and development, production, and marketing of oil and natural gas, the operation of oil and natural gas wells, taxation, and
environmental and safety matters. Many laws and regulations require drilling permits and govern the spacing of wells, rates of
production, prevention of waste and other matters. The technical requirements of these laws and regulations are becoming increasingly
stringent, complex and costly to implement. The high cost of compliance with applicable regulations may cause us to limit or discontinue
our operation and development activities.
Changes in regulations
and laws relating to the oil and natural gas industry could result in our operations being disrupted or curtailed by government
authorities. For example, oil and natural gas exploration and production may become less cost effective and decline as a result
of increasingly stringent environmental requirements (including land use policies responsive to environmental concerns and delays
or difficulties in obtaining environmental permits). A decline in exploration and production, in turn could have a material adverse
effect on our business, financial condition, results of operations and cash flows.
The unavailability or high
cost of drilling rigs, equipment, supplies, personnel and oilfield services could adversely affect our ability to execute exploration
plans on a timely basis and within budget.
We are highly
dependent upon third-party services. The cost of oilfield services typically fluctuates based on demand for those services. There
is no assurance that we will be able to contract for such services on a timely basis or that the cost of such services will remain
at a satisfactory or affordable level. Shortages or the high cost of drilling rigs, equipment, supplies or personnel could delay
or adversely affect our exploration operations, which could have a material adverse effect on our business, financial condition
or results of operations.
Production of oil and natural
gas could be materially and adversely affected by natural disasters or severe or unseasonable weather.
Production of
oil and natural gas could be materially and adversely affected by natural disasters or severe weather. Repercussions of natural
disasters or severe weather conditions may include:
| · | evacuation of personnel and curtailment of operations; |
| · | damage to drilling rigs or other facilities, resulting in suspension
of operations; |
| · | inability to deliver materials to worksites; and |
| · | damage to pipelines and other transportation facilities. |
In addition,
our hydraulic fracturing operations require significant quantities of water. Texas recently has experienced drought conditions.
Any diminished access to water for use in hydraulic fracturing, whether due to usage restrictions or drought or other weather conditions,
could curtail our operations or otherwise result in delays in operations or increased costs.
Operating hazards, natural
disasters or other interruptions of our operations could result in potential liabilities, which may not be fully covered by our
insurance.
The oil and natural
gas business generally, and our operations specifically, are subject to certain operating hazards such as:
| · | accidents resulting in serious bodily injury and the loss of life or
property; |
| · | liabilities from accidents or damage by our equipment; |
| · | cratering (catastrophic failure); |
| · | uncontrollable flows of oil, natural gas or well fluids; |
| · | abnormally pressurized formations; |
| · | pollution and other damage to the environment; and |
In addition,
our operations are susceptible to damage from natural disasters such as flooding or tornados, which involve increased risks of
personal injury, property damage and marketing interruptions. The occurrence of one of these operating hazards may result in injury,
loss of life, suspension of operations, environmental damage and remediation and/or governmental investigations and penalties.
The payment of any of these liabilities could reduce, or even eliminate, the funds available for exploration and development, or
could result in a loss of our properties. In addition, pollution and environmental risks generally are not fully insurable. If
a significant accident or other event occurs and is not fully covered by insurance, it could materially adversely affect our financial
condition, results of operations and cash flows.
Our insurance
might be inadequate to cover our liabilities. Insurance costs are expected to continue to increase over the next few years, and
we may decrease coverage and retain more risk to mitigate future cost increases. If we incur substantial liability, and the damages
are not covered by insurance or are in excess of policy limits, then our business, results of operations and financial condition
may be materially adversely affected.
We may not be able to keep
pace with technological developments in our industry.
The oil and natural
gas industry is characterized by rapid and significant technological advancements and introductions of new products and services
using new technologies. As others use or develop new technologies, we may be placed at a competitive disadvantage or competitive
pressures may force us to implement those new technologies at substantial costs. In addition, other oil and natural gas companies
may have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the
future allow them to implement new technologies before we can. We may not be able to respond to these competitive pressures and
implement new technologies on a timely basis or at an acceptable cost. If one or more of the technologies we use now or in the
future were to become obsolete or if we are unable to use the most advanced commercially available technology, our business, financial
condition and results of operations could be materially adversely affected.
Competition in the oil and
natural gas industry is intense, and many of our competitors have resources that are greater than ours.
We operate in
a highly competitive environment for developing and acquiring properties, marketing oil and natural gas and securing equipment
and trained personnel. As a relatively small oil and natural gas company, many of our competitors, major and large independent
oil and natural gas companies, possess and employ financial, technical and personnel resources substantially greater than ours.
Those companies may be able to develop and acquire more prospects and productive properties than our financial or personnel resources
permit. Our ability to acquire additional prospects and discover reserves in the future will depend on our ability to evaluate
and select suitable properties and execute our exploration and development activities in a highly competitive environment. Also,
there is substantial competition for capital available for investment in the oil and natural gas industry. Larger competitors may
be better able to withstand sustained periods of unsuccessful drilling and absorb the burden of changes in laws and regulations
more easily than we can, which would adversely affect our competitive position. We may not be able to compete successfully in the
future in developing reserves, acquiring prospective oil and natural gas properties and reserves, attracting and retaining highly
skilled personnel and raising additional capital.
We may be unable to diversify
our operations to avoid any downturn in the oil and natural gas industry.
Because of our
limited financial resources, it is unlikely that we will be able to diversify our operations the way companies with greater financial
resources are able to do. Our inability to diversify our activities will subject us to economic fluctuations within the oil and
natural gas industry and therefore increase the risks associated with our operations as limited to one industry.
Certain federal income tax
deductions currently available with respect to oil and natural gas exploration and development may be eliminated as a result of
future legislation.
President Obama’s
proposed Fiscal Year 2015 Budget includes proposed legislation that would, if enacted into law, make significant changes to United
States tax laws, including the elimination or postponement of certain key United States federal income tax incentives currently
available to oil and natural gas exploration and production companies. It is unclear whether these or similar changes
will be enacted and, if enacted, how soon any such changes could become effective. The passage of any legislation as a result of
these proposals or any other similar changes in United States federal income tax laws could eliminate certain tax deductions that
are currently available with respect to oil and natural gas exploration and development.
Federal and state legislative
and regulatory initiatives as well as governmental reviews relating to hydraulic fracturing could result in increased costs and
additional operating restrictions or delays as well as adversely affect our level of production.
Hydraulic fracturing
is an important and common practice that is used to stimulate production of hydrocarbons from tight formations. The process involves
the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production.
The process is typically regulated by state oil and gas commissions. However, the EPA has asserted federal regulatory authority
over certain hydraulic fracturing practices. Also, legislation has been introduced, but not enacted, in Congress to provide for
federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the fracturing process. Certain states,
including Texas, and municipalities have adopted, or are considering adopting, regulations that have imposed, or that could impose,
more stringent permitting, disclosure, disposal and well construction requirements on hydraulic fracturing operations. For example,
in December 2011, the Railroad Commission of Texas finalized regulations requiring public disclosure of all the chemicals in fluids
used in the hydraulic fracturing process. Local ordinances or other regulations may regulate or prohibit the performance of well
drilling in general and hydraulic fracturing in particular. If new laws or regulations that significantly restrict or regulate
hydraulic fracturing are adopted, such legal requirements could cause project delays and make it more difficult or costly for us
to perform fracturing to stimulate production from a formation. These delays or additional costs could adversely affect the determination
of whether a well is commercially viable. Restrictions on hydraulic fracturing could also reduce the amount of oil and natural
gas that we are ultimately able to produce in commercial quantities.
In
addition, a number of federal agencies have analyzed, are analyzing, or have been requested to review, a variety
of environmental issues associated with hydraulic fracturing. The White House Council on Environmental Quality is
coordinating an administration-wide review of hydraulic fracturing practices, and a committee of the United States House
of Representatives has conducted an investigation of hydraulic fracturing practices. The EPA commenced a study of the
potential environmental effects of hydraulic fracturing on drinking water and groundwater, with initial results released in
December 2012. Moreover, the EPA announced on October 20, 2011 that it was also launching a study
regarding wastewater resulting from hydraulic fracturing activities. On August 16, 2012, the EPA published final rules
under the CAA that, among other things, imposed NSPS standards for completions of hydraulically fractured natural gas wells,
requiring the use of reduced emission completion techniques.
In addition,
the U.S. Department of Energy is conducting an investigation into hydraulic fracturing practices the agency could recommend to
better protect the environment from drilling using hydraulic fracturing completion methods. Also, the U.S. Department of the Interior
is considering disclosure requirements or other mandates for hydraulic fracturing on federal lands. Additionally, certain members
of Congress have called upon the U.S. Government Accountability Office to investigate how hydraulic fracturing might adversely
affect water resources; the Securities and Exchange Commission (“SEC”) to investigate the natural gas industry and
any possible misleading of investors or the public regarding the economic feasibility of pursuing natural gas deposits in shales
by means of hydraulic fracturing; and the U.S. Energy Information Administration to provide a better understanding of that agency’s
estimates regarding natural gas reserves, including reserves from shale formations, as well as uncertainties associated with those
estimates. These ongoing or proposed studies, depending on their degree of pursuit and any meaningful results obtained, could spur
initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory mechanisms.
Our business exposes us to liability
and extensive regulation on environmental matters, which could result in substantial expenditures.
Our operations
are subject to numerous U.S. federal, state and local laws and regulations relating to the protection of the environment, including
those governing the discharge of materials into the water and air, the generation, management and disposal of hazardous substances
and wastes and the clean-up of contaminated sites. We could incur material costs, including clean-up costs, fines and civil and
criminal sanctions, injunctive relief and third-party claims for property damage and personal injury as a result of violations
of, or liabilities under, environmental laws and regulations. Such laws and regulations not only expose us to liability for our
own activities, but may also expose us to liability for the conduct of others or for actions by us that were in compliance with
all applicable laws at the time those actions were taken. In addition, we could incur substantial expenditures complying with environmental
laws and regulations, including future environmental laws and regulations which may be more stringent, for example, the regulation
of GHG emissions under the federal CAA, or state or regional regulatory programs. Regulation of GHG emissions by the EPA, or various
states in the United States in areas in which we conduct business, could have an adverse effect on our operations and demand for
our oil and natural gas production. Moreover, the EPA has shown a general increased scrutiny on the oil and gas industry through
its GHG, CAA and SDWA regulations.
On August 16, 2012,
the EPA published final rules under the CAA regarding emissions from oil and natural gas operations. The EPA rule subjects oil
and natural gas operations to regulation under the NSPS and NESHAPS, programs under the CAA, and imposes new and amended requirements
under both programs. The new rules, among other things, amend standards applicable to natural gas processing plants and would
expand the NSPS to include all oil and natural gas operations, imposing requirements on those operations. The EPA also imposed
NSPS standards for completions of hydraulically fractured natural gas wells, requiring the use of reduced emission completion
techniques. The adopted rules allow facilities, in most circumstances until January 1, 2015, to combust natural gas that would
escape during completion activities as an alternative to the reduced emission completion techniques. The NESHAPS rules includes
MACT standards for certain glycol dehydrators and storage vessels, and revises applicability provisions, alternative test protocols
and the availability of the startup, shutdown and maintenance exemption. These new requirements may result in increased operating
and compliance costs, increased regulatory burdens and delays in our operations.
Additionally, we have been notified by the BLM
that environmental deficiencies exist on our Tom Tom Tomahawk field in Chaves and Roosevelt counties in New Mexico. We
have submitted a plan to remediate such activities to the BLM and the plan has been accepted. Before work can commence,
we have to perform certain procedures such as sampling the soil. For the year ended December 31, 2012, we recorded a non-cash
charge of $2,100,000 which is management’s best estimate of the costs to remediate the environmental deficiencies. This
estimate could materially differ from actual expenditures. If this occurs on any of our other properties, it could have a
material adverse effect on our financial condition and results of operations.
The EPA’s implementation
of climate change regulations could result in increased operating costs and reduced demand for our oil and natural gas production.
Although federal
legislation regarding the control of emissions of GHGs, for the present, appears unlikely, the EPA has been implementing regulatory
measures under existing CAA authority and some of those regulations may affect our operations. GHGs are certain gases, including
carbon dioxide, a product of the combustion of natural gas, and methane, a primary component of natural gas, that may be contributing
to the warming of the Earth’s atmosphere, resulting in climatic changes. These GHG regulations could require us to incur
increased operating costs and could have an adverse effect on demand for our oil and natural gas production.
On June 3, 2010,
the EPA published its so-called GHG tailoring rule that will phase in federal prevention of significant deterioration permit requirements
for new sources and modifications, and Title V operating permits for all sources, that have the potential to emit specific quantities
of GHGs. Those permitting provisions, should they become applicable to our operations, could require controls or other measures
to reduce GHG emissions from new or modified sources, and we could incur additional costs to satisfy those requirements. On November
30, 2010, the EPA published a rule establishing GHG reporting requirements for sources in the petroleum and natural gas industry,
requiring those sources to monitor, maintain records on, and annually report their GHG emissions, with the first annual report
for 2011 being due in September 2012. Although this rule does not limit the amount of GHGs that can be emitted, it requires us
to incur costs to monitor, record keep and report GHG emissions associated with our operations.
We have identified material
weaknesses in our internal control over financial reporting. These material weaknesses, if not corrected, could affect the reliability
of our financial statements and have other adverse consequences.
Under Section
404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on internal control over financial
reporting. This report must contain, among other matters, an assessment of the effectiveness of our internal control over financial
reporting, including a statement as to whether or not our internal control over financial reporting is effective. This assessment
must include disclosure of any material weaknesses in our internal control over financial reporting identified by our management.
We have identified
material weaknesses in our internal control over financial reporting as of December 31, 2014 relating
primarily to the fact that we have a limited number of internal and external staff and therefore are not able to implement proper
segregation of duties and review procedures. Failure to have effective internal controls could lead to a misstatement of our financial
statements. If, as a result of deficiencies in our internal controls, we cannot provide reliable financial statements, our business
decision process may be adversely affected, our business and operating results could be harmed, investors could lose confidence
in our reported financial information, the price of our common shares could decrease and our ability to obtain additional financing,
or additional financing on favorable terms, could be adversely affected. In addition, failure to maintain effective internal control
over financial reporting could result in investigations or sanctions by regulatory authorities.
We intend to
take further action to remediate the material weaknesses and improve the effectiveness of our internal control over financial reporting.
However, we can give no assurances that the measures we may take will remediate the material weaknesses identified or that any
additional material weaknesses will not arise in the future due to our failure to implement and maintain adequate internal control
over financial reporting. In addition, even if we are successful in strengthening our controls and procedures, those controls and
procedures may not be adequate to prevent or identify irregularities or ensure the fair presentation of our financial statements
included in our periodic reports filed with the SEC.
Our officers and directors
are engaged in other business activities and conflicts of interest may arise in their daily activities which may not be resolved
in our favor.
Certain
conflicts of interest may exist between us and our officers and directors. Our officers and directors have other business
interests to which they devote their attention, and we expect they will continue to do so. As a result, conflicts of
interest or potential conflicts of interest may arise from time to time that can be resolved only through the officers or directors
exercising such judgment as is consistent with fiduciary duties to their other business interests and to us. These conflicts
of interest may not be resolved in our favor.
Compliance with changing
regulation of corporate governance and public disclosure will result in additional expenses and pose challenges for our management.
Changing laws,
regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Act and the rules and
regulations promulgated thereunder, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public companies and
significantly increased the costs and risks associated with accessing the U.S. public markets. Our management team will need to
devote significant time and financial resources to comply with both existing and evolving standards for public companies, which
will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating
activities to compliance activities.
Risks Related to Our Common
Stock
We may raise additional capital in
the future through issuances of securities and such additional funding may be dilutive to shareholders or impose operational restrictions.
We may raise additional
capital in the future to help fund our operations through sales of shares of our common stock or securities convertible into shares
of our common stock, as well as issuances of debt. Such additional financing may be dilutive to our shareholders, and debt financing,
if available, may involve restrictive covenants which may limit our operating flexibility, including the ability to pay dividends.
If additional capital is raised through the issuances of shares of our common stock or securities convertible into shares of our
common stock, the percentage ownership of existing shareholders will be reduced. These shareholders may experience additional dilution
in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of
the holders of our common stock.
We do not intend to pay
dividends in the future.
We have not
paid dividends on our common stock and do not intend to pay dividends in the foreseeable future. The payment of cash dividends
in the future will be dependent on our revenues and earnings, if any, capital requirements and general financial condition and
will be entirely within the discretion of our board of directors at such time. It is the present intention of our board of directors
to retain earnings, if any, to fund our future growth, and there is no assurance we will ever pay dividends in the future. As a
result, any gain you will realize on our securities will result solely from the appreciation of such securities.
Because we are quoted on the pink
sheets instead of an exchange or national quotation system, our investors may have more difficulty selling their stock or may
experience negative volatility in the market price of our stock.
Our common
stock is traded on the pink sheets, which is subject to greater volatility than a national exchange or quotation system. This
volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent
administrative supervision of bid and ask quotations, lower trading volume, and market conditions. Investors in our common stock
may experience high fluctuations in the market price and volume of the trading market for our securities. These fluctuations,
when they occur, have a negative effect on the market price for our common stock. Accordingly, our stockholders may not be able
to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of
time until the market for our common stock improves.
Trading in our common stock
has been limited, and our stock price could potentially be subject to substantial fluctuations.
Trading in
our common stock has been limited. Historically, our stock price has been affected substantially by a relatively modest volume
of transactions and could be again so affected. If our stock price falls, our stockholders may not be able to sell their stock
when desired or at desirable prices.
The value of our common stock
might be affected by matters not related to our own operating performance.
The value of our common
stock may be affected by matters that are not related to our operating performance and which are outside of our control. These
matters include the following:
| · | general domestic and worldwide economic conditions; |
| · | industry conditions, including fluctuations in the price of oil and
natural gas; |
| · | governmental regulation of the oil and natural gas industry, including
environmental regulation and regulation of fracture stimulation activities; |
| · | liabilities inherent in oil and natural gas operations; |
| · | geological, technical, drilling and processing problems; |
| · | unanticipated operating events which can reduce production or cause
production to be shut in or delayed; |
| · | failure to obtain industry partner and other third party consents and
approvals, when required; |
| · | stock market volatility and market valuations; |
| · | competition for, among other things, capital, acquisition of reserves,
undeveloped land and skilled personnel; |
| · | political conditions in oil and natural gas producing regions; |
| · | revenue and operating results failing to meet expectations in any particular
period; |
| · | investor perception of the oil and natural gas industry; |
| · | limited trading volume of our common stock; |
| · | announcements relating to our business or the business of our competitors;
|
| · | our ability to raise additional funds. |
In the past,
companies that have experienced volatility in the trading price of their common stock have been the subject of securities class
action litigation. We might become involved in securities class action litigation in the future. Such litigation often results
in substantial costs and diversion of management’s attention and resources and could have a material adverse effect on our
business, financial condition and results of operation.
Our common stock is subject
to penny stock regulation.
Our shares
are subject to the provisions of Section 15(g) and Rule 15g-9 of the Exchange Act, commonly referred to as the “penny stock”
rule, which set forth certain requirements for transactions in penny stocks. The SEC generally defines penny stock to be any equity
security that has a market price less than $5.00 per share, subject to certain exceptions. Rule 3a51-1 provides that any equity
security is considered to be penny stock unless that security is: registered and traded on a national securities exchange meeting
specified criteria set by the SEC; authorized for quotation on the NASDAQ Stock Market; issued by a registered investment company;
excluded from the definition on the basis of price (at least $5.00 per share) or the registrant's net tangible assets; or exempted
from the definition by the SEC. Since our shares are deemed to be “penny stock”, trading in the shares will be subject
to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and
accredited investors.
FINRA Sales Practice requirements
may also limit a stockholder's ability to buy and sell our stock.
In addition
to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“FINRA”) has
adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial
status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there
is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements
make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability
to buy and sell our stock and have an adverse effect on the market for our shares.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our producing oil and
natural gas properties are located in the Permian Basin of Southeastern New Mexico, in Chaves, Eddy, Lea, and Roosevelt counties.
We also have significant undeveloped acreage in Chaves, De Baca, Eddy, Grant, Hidalgo, Lea, Sierra, Socorro, Roosevelt, and San
Juan counties.
Title to Properties
As
is customary in the oil and natural gas industry, we generally conduct a preliminary title examination prior to the acquisition
of properties or leasehold interests. Prior to commencement of operations on such acreage, a thorough title examination will usually
be conducted and any significant defects will be remedied before proceeding with operations. We believe the title to our
leasehold properties is good, defensible and customary with practices in the oil and natural gas industry, subject to such exceptions
that we believe do not materially detract from the use of such properties. With respect to our properties of which we are not
the record owner, we rely instead on contracts with the owner or operator of the property or assignment of leases, pursuant to
which, among other things, we generally have the right to have our interest placed on record.
Our
properties are generally subject to royalty, overriding royalty and other interests customary in the industry, liens incident to
agreements, current taxes and other burdens, minor encumbrances, easements and restrictions. We do not believe any of these burdens
will materially interfere with our use of these properties. Substantially all of our material properties are pledged as collateral
under our line of credit with Independent Bank.
Summary of Oil and Natural Gas Reserves
Proved Reserves
The following table
sets forth our estimated net proved reserves as of December 31, 2014
| | |
| |
Reserves |
| Estimated Proved Reserves Data: (1) | |
Oil / Condensate (MBbls) | |
Natural Gas (MMcf) | |
Natural Gas
Liquids
(MBbls) | |
Total (MBoe) |
| Proved developed reserves | |
| 916 | | |
| 2,200 | | |
| 82 | | |
| 1,364 | |
| Proved undeveloped reserves | |
| 780 | | |
| 1,050 | | |
| 0 | | |
| 955 | |
| Total proved reserves | |
| 1,696 | | |
| 3,250 | | |
| 82 | | |
| 2,319 | |
| | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| (1) | Prices used are based on the 12-month unweighted arithmetic average of the first-day-of-the-month
price for each month in the period January 2014 through December 2014. For oil volumes, the average NYMEX posted price of $94.99
per Bbl is adjusted for quality, transportation fees and a regional price differential. For natural gas volumes, the average Henry
Hub spot price of $4.35 per Mmbtu is adjusted for energy content, transportation fees and a regional price differential. The adjusted
volume-weighted average product prices over the life of the properties are $88.59 per barrel of oil, $30.47 per barrel of NGL,
and $6.11 per Mcf of gas. |
The following table
sets forth our estimated PV-10 and standardized measure of discounted net cash flows as of December 31, 2014.
| |
As of
December 31, 2014 |
| PV-10 (1) | |
$ | 56,026,473 | |
| Standardized measure | |
$ | 36,771,891 | |
| (1) | PV-10
is a non-GAAP financial measure as defined by the SEC. The closest GAAP measure to PV-10
is the standardized measure of discounted net cash flows. The standardized measure differs
from PV-10 because standardized measure includes the effect of future income taxes. We
believe that the presentation of PV-10 is relevant and useful to our investors as supplemental
disclosure to the standardized measure, or after-tax amount, because it presents the
discounted future net cash flows attributable to our proved reserves before taking into
account future corporate income taxes and our current tax structure. The following table
provides a reconciliation of our PV-10 to our standardized measure:1 |
| PV-10 | |
$ | 56,026,473 | |
| Future income taxes | |
| (26,902,690 | ) |
| Discount of future income taxes at 10% per annum | |
| 7,648,108 | |
| Standardized measure | |
$ | 36,771,891 | |
Estimates of proved
developed and undeveloped reserves are inherently imprecise and are continually subject to revision based on production history,
results of additional exploration and development, price changes and other factors. See “—Qualifications of Technical
Persons and Internal Controls Over Reserves Estimation Process.”
At December 31, 2014,
our estimated proved reserves were 2,319 MBoe, an increase of 13.0% compared to 2,052 MBoe at December 31, 2013. During fiscal
2014, we added estimated proved reserves of 330 MBoe through field extensions. Revisions to previous estimates increased increased
reserves by 127 MBoe. These increases in reserves were offset by production of 190 MBoe. The revisions to previous estimates were
primarily due to better than expected production.
Proved Undeveloped Reserves
Our
proved undeveloped reserves at December 31, 2014 were 955 MBoe, consisting of 780 MBbl of oil, 0 MBbl of NGLs, and 1,050 MMcf
of natural gas. During 2014, we converted 103 MBoe of proved undeveloped reserves to proved developed producing reserves
as the result of the completion of development wells in the Turkey Track area and in the Red Lake area. As of December
31, 2014, estimated future development costs relating to the development of our proved undeveloped reserves was $16.7 million.
All of our currently identified proved undeveloped reserves are scheduled to be drilled by December 31, 2019.
Qualifications of Technical Persons
and Internal Controls Over Reserves Estimation Process
Our
reserve reports were prepared by Cawley, Gillespie & Associates, Inc. (“CG&A”), independent petroleum engineers.
CG&A estimated 100% of our proved reserves in accordance with petroleum engineering and evaluation principles set forth in
the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information promulgated by the Society of Petroleum
Engineers (“SPE Standards”) and definitions and guidelines established by the SEC.
The
technical persons responsible for preparing the reserves estimates presented herein meet the requirements regarding qualifications,
independence, objectivity and confidentiality set forth in the SPE Standards.
The
principal person at CG&A who prepared the reserve report is Mr. Zane Meekins. Mr. Meekins has been a practicing consulting
petroleum engineer at CG&A since 1989. Mr. Meekins is a Registered Professional Engineer in the State of Texas (License No.
71055) and has over 24 years of practical experience in petroleum engineering, with over 21 years of experience in the estimation
and evaluation of reserves. He graduated from Texas A&M University in 1987 with a Bachelor of Science degree in Petroleum Engineering.
Mr. Meekins meets or exceeds the requirements regarding qualifications, independence, objectivity and confidentiality set forth
in the SPE Standards. He is proficient in judiciously applying industry standard practices to engineering and geoscience evaluations
as well as applying SEC and other industry reserve definitions and guidelines.
As
indicated elsewhere in this report, we have no full-time employees and instead rely on the availability of internal staff of Red
Mountain, the majority holder of our common stock, to assist us in working with our independent petroleum engineers to ensure the
integrity, accuracy and timeliness of data furnished to them in their reserves estimation process. Our technical team consults
regularly with representatives of CG&A. We review with them our properties and discuss methods and assumptions used
in their preparation of our year-end reserves estimates. While we have no formal committee specifically designated to review reserves
reporting and the reserves estimation process, a copy of the reserve report is reviewed with representatives of CG&A and our
internal technical staff before we disseminate any of the information. Additionally, our senior management reviews and approves
the CG&A reserve report and any internally estimated significant changes to our proved reserves on an annual basis.
Estimates
of oil and natural gas reserves are projections based on a process involving an independent third party engineering firm’s
collection of all required geologic, geophysical, engineering and economic data, and such firm’s complete external preparation
of all required estimates and are forward-looking in nature. These reports rely upon various assumptions, including assumptions
required by the SEC, such as constant oil and natural gas prices, operating expenses and future capital costs. The process also
requires assumptions relating to availability of funds and timing of capital expenditures for development of our proved undeveloped
reserves. These reports should not be construed as the current market value of our reserves. The process of estimating oil and
natural gas reserves is also dependent on geological, engineering and economic data for each reservoir. Because of the uncertainties
inherent in the interpretation of this data, we cannot be certain that the reserves will ultimately be realized. Our actual results
could differ materially. See “Note 13—Supplemental Information Relating to Oil and Natural Gas Producing Activities
(Unaudited)” to our audited consolidated financial statements for additional information regarding our oil and natural gas
reserves.
Under
SEC rules, proved reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data,
can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and
under existing economic conditions, operating methods, and government regulations. The term “reasonable certainty”
implies a high degree of confidence that the quantities of oil and/or natural gas actually recovered will equal or exceed the estimate.
To achieve reasonable certainty, Neal employs technologies consistent with the standards established by the Society of Petroleum
Engineers. The technologies and economic data used in the estimation of our proved reserves include, but are not limited to, well
logs, geologic maps and available downhole and production data, seismic data and well test data.
Summary of Oil and Natural Gas Properties
and Projects
Production, Price and Cost History
The following table
presents net production sold, average sales prices and production costs and expenses for the years ended December 31, 2014 and
2013.
| | |
Year ended December 31, |
| | |
2014 | |
2013 |
| | |
|
| Revenue | |
| | | |
| | |
| Oil and natural gas sales | |
$ | 12,352,299 | | |
$ | 13,125,960 | |
| | |
| | | |
| | |
| Net production sold | |
| | | |
| | |
| Oil (Bbl) | |
| 127,688 | | |
| 122,666 | |
| Natural gas (Mcf) | |
| 277,128 | | |
| 282,864 | |
| Natural gas liquids(Bbl) | |
| 16,317 | | |
| 9,223 | |
| Total (Boe) | |
| 190,193 | | |
| 179,033 | |
| | |
| | | |
| | |
| Average sales prices | |
| | | |
| | |
| Oil ($/Bbl) | |
$ | 82.52 | | |
$ | 93.17 | |
| Natural gas ($/Mcf | |
| 4.87 | | |
| 4.56 | |
| Natural gas liquids ($/Bbl | |
| 28.49 | | |
| 28.11 | |
| Total average price ($/Boe) | |
$ | 64.94 | | |
$ | 73.32 | |
| | |
| | | |
| | |
| Costs and expenses (per Boe) | |
| | | |
| | |
| Production taxes | |
$ | 5.25 | | |
$ | 6.96 | |
| Lease operating expenses | |
| 12.03 | | |
| 12.85 | |
| Natural gas transportation and marketing expenses | |
| 0.54 | | |
| 0.44 | |
| Environmental cleanup | |
| 0.00 | | |
| 0.00 | |
| Impairment | |
| 0.00 | | |
| 0.00 | |
| Depreciation, depletion, and amortization | |
| 18.75 | | |
| 27.60 | |
| Accretion of discount on asset retirement obligation | |
| 0.98 | | |
| 0.83 | |
| General and administrative expense | |
| 3.66 | | |
| 6.02 | |
Developed and Undeveloped Acreage
The following table
presents our total gross and net developed and undeveloped acreage as of December 31, 2014:
Developed Acres | |
Undeveloped Acres |
Gross (1) | |
Net (2) | |
Gross (1) | |
Net (2) |
| | 9,277 | | |
| 3,834 | | |
| 856,616 | | |
| 290,009 | |
__________________
(1) “Gross”
means the total number of acres in which we have a working interest.
(2) “Net”
means the sum of the fractional working interests that we own in gross acres.
Our
developed leasehold acreage is held by production, which means that these leases are active as long as we produce oil or natural
gas from the acreage or comply with certain lease terms. Upon ceasing production, these leases will expire. Additionally, we have
significant undeveloped acreage which consists of mineral rights and, accordingly, does not expire.
Productive Wells
The following table
presents the total gross and net productive wells by oil or natural gas completion as of December 31, 2014. We own
royalty interests in 23 gross wells (average of 0.58%), which have been excluded from these well counts:
| Oil
Wells |
|
Natural
Gas Wells |
| Gross(1) |
|
Net(2) |
|
Gross(1) |
|
Net(2) |
| 149 |
|
56.0 |
|
37 |
|
4.4 |
(1) “Gross”
means the total number of wells in which we have a working interest.
(2) “Net”
means the sum of the fractional working interests that we own in gross wells.
Drilling Activity
The following table
summarizes the number of net productive and dry development wells and net productive and dry exploratory wells we drilled during
the periods indicated and refers to the number of wells completed during the period, regardless of when drilling was initiated.
At December 31, 2014, we had three wells (0.2 net) being drilled or awaiting completion.
| | |
Development
Wells | |
Exploratory
Wells |
| Year Ended December 31, | |
Productive | |
Dry | |
Productive | |
Dry |
| | 2014 | | |
| 0.86 | | |
| — | | |
| — | | |
| — | |
| | 2013 | | |
| 1.88 | | |
| — | | |
| — | | |
| — | |
| | 2012 | | |
| 1.91 | | |
| — | | |
| 0.13 | | |
| — | |
As of April 1, 2015, the aforementioned working interest and net revenue interest were proportionately reduced by 50% pursuant
to the terms of the Sale.
Item 3. Legal
Proceedings
The information under
the heading “Litigation” contained in Note 9, “Commitments and Contingencies,” of our financial
statements included in Part II, Item 8 of this Form 10-K is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Price for Our Common Stock
Our common stock
is quoted on the pink sheets under the symbol “XBOR.” The following table sets forth the range of high and low
bid prices for our common stock for the periods indicated. The over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
| | |
High | |
Low |
| Fiscal Year 2014: | |
| | | |
| | |
| Fourth Quarter | |
$ | 1.25 | | |
$ | 0.75 | |
| Third Quarter | |
$ | 1.64 | | |
$ | 1.11 | |
| Second Quarter | |
$ | 1.75 | | |
$ | 0.85 | |
| First Quarter | |
$ | 1.23 | | |
$ | 0.37 | |
| Fiscal Year 2013: | |
| | | |
| | |
| Fourth Quarter | |
$ | 0.60 | | |
$ | 0.27 | |
| Third Quarter | |
$ | 0.69 | | |
$ | 0.30 | |
| Second Quarter | |
$ | 0.67 | | |
$ | 0.35 | |
| First Quarter | |
$ | 0.90 | | |
$ | 0.63 | |
Holders
As of April 30, 2015,
there were approximately 39 holders of our common stock, including nominee holders such as bank and brokerage firms who hold shares
for beneficial owners.
Dividends
We
have not paid any cash dividends on our common stock to date. The payment of any dividends is within the discretion of our Board
of Directors. However, our credit agreement with Independent Bank restricts our ability to pay dividends. Accordingly, it
is the present intention of the Board of Directors to retain all earnings, if any, for use in the business operations and, accordingly,
the Board does not anticipate declaring any dividends in the foreseeable future. The payment of dividends in the future, if any,
will be contingent upon restrictions contained in our credit agreement, our revenues and earnings, if any, capital requirements
and our general financial condition.
Sales of Unregistered Securities
We have not made any
sales of unregistered securities during the year ended December 31, 2014 that was not disclosed previously in a Quarterly Report
on Form 10-Q or in a Current Report on Form 8-K.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
The following discussion
and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial
statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical
financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Our results and the timing of selected events may differ materially from those anticipated in these forward-looking
statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this Annual
Report on Form 10-
Company
We
are an oil and gas exploration company. We currently own over 865,893 gross (approximately 146,922 net) mineral and lease
acres in New Mexico and Texas. Approximately 12,825 of these net acres exist within the Permian Basin. A significant majority
of our acreage consists of either owned mineral rights or leases held by production, allowing us to hold lease rental payments
to under $5,000 annually. The majority of our acreage interests consists of non-operated working interests except for certain
core San Andres properties which we operate.
Current
development of our acreage is focused on our prospective Bone Spring acreage located in the heart of the 1st and 2nd Bone Spring
play. This play encompasses approximately 4,390 square miles across both New Mexico and Texas. We currently own varying, non-operated
working interests in both Eddy and Lea Counties, New Mexico, along with our working interest partners that include Cimarex, Apache,
Oxy Permian, Occidental, Oxy USA and, Mewbourne; all having significant footprints within this play, and are adding to those footprints
through lease and corporate acquisitions.
History
We
were originally formed on October 25, 2005 under the name “Language Enterprises Corp.” We subsequently changed
our name to Doral Energy Corp. On July 29, 2008, we acquired a working interest in 66 producing oil fields and approximately
186 wells (the “Eddy County Properties”) in and around Eddy County, New Mexico. As a result of our acquisition of
the Eddy County Properties, we changed our business focus to the acquisition, exploration, operation and development of oil and
gas projects, and we ceased being a “shell company.” On August 4, 2008, we filed our Form 8-K that included the information
that would be required if we were filing a general form for registration of securities on Form 10 as a smaller reporting company.
Effective
January 3, 2011, we completed the acquisition of Pure Energy Group, Inc. as contemplated pursuant to the Pure Merger Agreement
among our company, Doral Sub, Pure L.P. and Pure Sub, a wholly owned subsidiary of Pure L.P. Pursuant to the provisions
of the Pure Merger Agreement, all of Pure L.P.’s oil and gas assets and liabilities were transferred to Pure Sub. Pure Sub
was then merged with and into Doral Sub, with Doral Sub continuing as the surviving corporation. Upon completion of the Pure Merger,
the outstanding shares of Pure Sub were converted into an aggregate of 9,981,536 shares of our common stock. Since the Pure Merger,
Pure L.P. has distributed all of its shares of our common stock to the partners of Pure L.P. so that Pure L.P. is no longer a
shareholder of our company.
Effective January 4, 2011, following closing of the Pure Merger, Doral Sub was merged with and into our company, with our company
continuing as the surviving corporation. Upon completing the merger of Doral Sub with and into our company, we changed our name
to “Cross Border Resources, Inc.”
On
April 21, 2015, we entered into a purchase and sale agreement (the “PSA”) with RMR Operating, LLC (“RMR Operating”),
Black Rock Capital, Inc. (“Black Rock”), RMR KS Holdings, LLC (“RMR KS”) and Black Shale Minerals, LLC
(“Buyer”). Each of us, RMR Operating, Black Rock and RMR KS is an operating subsidiary (together, the “Operating
Subsidiaries”) of Red Mountain Resources, Inc. (“RMR,” and together with the Operating Subsidiaries, the “Companies”).
Pursuant
to the PSA the Operating Subsidiaries sold, assigned, transferred and conveyed to Buyer, effective as of April 1, 2015, fifty percent
(50%) of their right, title, and interest in and to certain oil and natural gas assets and properties (the “Assets”),
including their oil and natural gas leasehold interests, wells, contracts, and oil and natural gas produced after April 1, 2015
(the “Sale”). The aggregate purchase price for the Assets under the PSA was $25.0 million, subject to certain adjustments,
including post-closing adjustments for any title or environmental benefits or title or environmental defects resulting from Buyer’s
title and environmental reviews.
Significant Fiscal 2014 Operations
During fiscal 2014, Cross Border completed
seven wells (0.9 net).
Three
of these wells were in the Turkey Track area. The first, Zircon 12/7 GF Federal Com 1H, a 2nd Bone Spring completion was completed
in May 2014 and achieved a 10-day average rate of 1,028 Boe/d (87% oil). Cross Border owns an approximately 16% working interest
and 13% net revenue interest in the well. Another 2nd Bone Spring completion, Bradley 31 B2DA Fed Com 1H, was completed in September
2014 and achieved a 10-day average production rate of 790 BOE/d (88% oil). We own 7.0% working interest 6.1% net revenue interest
in the well. The third well, Zircon 2 B1EH State 2H, was completed in July 2014 in the 1st Bone Spring sand. The well achieved
a 10-day average production rate of 549 BOE/d (81% oil). We own 12.5% working interest and 10.0% net revenue interest in the well.
These three wells are operated by Mewbourne Oil Company.
We
also completed three vertical Yeso wells in the Red Lake area. Southern Union 30G State 3 and Horseshoe State 3 were both completed
in June 2014. We own approximately 14.8% working interest and 11.7% net revenue interest in Southern Union 30G State 3 and approximately
12.5% working interest and 9.7% net revenue interest in Horseshoe State 3. Both of these wells were completed in June 2014.Early
production rates from the wells were 137 Boe/d (88% oil) and 140 Boe/d (86% oil), respectively. The third well, Horseshoe State
4, was completed in December 2014, with early production averaging 109 Boe/d (84% oil). We own approximately 16.7% working interest
and 12.5% net revenue interest in the well. These three Red Lake area wells are operated by LRE Operating.
The
seventh completion was Perla Verde 31 State 2H, a 3rd Bone Spring well operated by XTO Energy. This well was completed in December
2014 and achieved a 10 day average rate of 853 Boe/d (90% oil). Cross Border owns 6.3% working interest and 4.7% net revenue interest
in the well.
On
December 31, 2014, we had three wells in progress that were either drilling or awaiting completion. They are Perla Verde 31 State
2H, an XTO-operated 3rd Bone Spring horizontal, Zircon 12/7 B2JK Federal Com 1H, a Mewbourne-operated 2nd Bone Spring horizontal,
and Scooter Federal Com 1H, a COG-operated 2nd Bone Spring horizontal. We own a working interest of 4.7%, 16.5%, and 0.8%, respectively,
in these wells.
As of April 1, 2015, the aforementioned working interest and net revenue interest were proportionately reduced by 50% pursuant
to the terms of the Sale.
Planned Operations
At
the end of fiscal 2014, we elected to participate in the drilling of three wells (0.2 net) that remained in progress
at December 31, 2014 and two wells (0.1 net) that are planned for fiscal 2015. Due to the asset sale on April 21, 2015, the
Company is reassessing its planned operations for fiscal 2015 other than the aforementioned wells in which the Company has
already elected to participate.
Critical Accounting
Policies and Estimates
Our discussion and
analysis of our financial condition and results of operations is based upon our financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosures. Our significant accounting policies are described in “Note 3—Summary
of Significant Accounting Policies” to our consolidated financial statements included in this Annual Report on Form 10-K.
We have identified below policies that are of particular importance to the portrayal of our financial position and results of operations
and which require the application of significant judgment by management. These estimates are based on historical experience, information
received from third parties, and on various other assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following
critical accounting policies affect the significant judgments and estimates used in the preparation of our consolidated financial
statements.
Oil and
Gas Properties
We follow the
successful efforts method of accounting for our oil and natural gas producing activities. Costs to acquire mineral interests in
oil and natural gas properties and to drill and equip development wells and related asset retirement costs are capitalized. Costs
to drill exploratory wells are capitalized pending determination of whether the wells have proved reserves. If we determine that
the wells do not have proved reserves, the costs are charged to expense. There were no exploratory wells capitalized pending determination
of whether the wells have proved reserves at December 31, 2014 or 2013. Geological and geophysical costs, including seismic studies
and costs of carrying and retaining unproved properties, are charged to expense as incurred. We capitalize interest on expenditures
for significant exploration and development projects that last more than six months while activities are in progress to bring
the assets to their intended use. Through December 31, 2014, we had capitalized no interest costs because our exploration and
development projects generally lasted less than six months. Costs incurred to maintain wells and related equipment are charged
to expense as incurred.
On the sale
or retirement of a complete unit of a proved property, the cost and related accumulated depreciation, depletion and amortization
are eliminated from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial
unit of proved property, the cost is charged to accumulated depreciation, depletion and amortization, with a resulting gain or
loss recognized in income.
Capitalized
amounts attributable to proved oil and natural gas properties are depleted by the unit-of-production method over proved reserves
using the unit conversion ratio of six Mcf of natural gas to one Boe. The ratio of six Mcf of natural gas to one Boe is based on
energy equivalency, rather than price equivalency. Given current price differentials, the price for a Boe for natural gas differs
significantly from the price for a barrel of oil.
It is common
for operators of oil and natural gas properties to request that joint interest owners pay for large expenditures, typically for
drilling new wells, in advance of the work commencing. This right to call for cash advances
is typically found in the operating agreement that joint interest owners in a property adopt. We record these advance payments
in prepaid and other current assets in its property account and release this account when the actual expenditure is later billed
to it by the operator.
On the sale
of an entire interest in an unproved property for cash or cash equivalents, gain or loss on the sale is recognized, taking into
consideration the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an
unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.
Impairment
of Long-Lived Assets
We
evaluate our long-lived assets for potential impairment in their carrying values whenever events or changes in circumstances indicate
such impairment may have occurred. Oil and natural gas properties are evaluated for potential impairment by field. Other properties
are evaluated for impairment on a specific asset basis or in groups of similar assets, as applicable. An impairment on proved properties
is recognized when the estimated undiscounted future net cash flows of an asset are less than its carrying value. If an impairment
occurs, the carrying value of the impaired asset is reduced to its estimated fair value, which is generally estimated using a discounted
cash flow approach. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is
added to the capitalized costs to be amortized.
Unproved
oil and natural gas properties do not have producing properties. As reserves are proved through the successful completion of exploratory
wells, the cost is transferred to proved properties. The cost of the remaining unproved basis is periodically evaluated by management
to assess whether the value of a property has diminished. To do this assessment, management considers estimated potential reserves
and future net revenues from an independent expert, our history in exploring the area, our future drilling plans per our capital
drilling program prepared by our reservoir engineers and operations management and other factors associated with the area. Impairment
is taken on the unproved property cost if it is determined that the costs are not likely to be recoverable. The valuation is subjective
and requires management to make estimates and assumptions which, with the passage of time, may prove to be materially different
from actual results.
In
the second quarter of 2012, the Company determined to sell its Wolfberry assets located in Texas. As a result of that
decision, management conducted an impairment evaluation of those assets which resulted in a non cash impairment charge of approximately
$1,776,000.
Additionally,
during the fourth quarter of 2012, management conducted an impairment evaluation of its proved and unproved oil and natural gas
properties. As a result of the evaluation, management recorded a non cash impairment charge of approximately $857,945,
primarily related to a decline in the value of proved reserves. There were no impairment charges in the year ended December 31,
2013. In the third quarter of 2014, the Company recorded a non cash impairment charge of $6,500,000.
Recent Accounting Pronouncements
In
April 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures
of Components of an Entity(“ASU 2014-08”). ASU 2014-08 revises the definition of discontinued operations by limiting
discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have)
a major effect on an entity’s operations and financial results, removing the lack of continuing involvement criteria and
requiring discontinued operations reporting for the disposal of an equity method investment that meets the definition ofdiscontinued
operations. The update also requires expanded disclosures for discontinued operations, including disclosure of pretax profit or
loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. The update
is effective prospectively to all periods beginning after December 15, 2014. Currently, the Company does not expect the adoption
of ASU 2014-08 to have a material impact on our financial statements or results of operations.
Effective
January 1, 2016, the Company will be required to adopt the amended guidance of Accounting Standards Codification (ASC) Topic 718,
Compensation - Stock Compensation, which seeks to resolve the diversity in practice that exists when accounting for share-based
payments. The amended guidance requires a performance target that affects vesting and that could be achieved after the requisite
service period to be treated as a performance condition.
The
Company will be required to adopt the amended guidance either prospectively to all awards granted or modified after the effective
date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual
period presented in the consolidated financial statements and to all new or modified awards thereafter. The Company does not expect
the adoption of this amended guidance to impact financial results.
Effective
January 1, 2016, the Company will be required to adopt the amended guidance of ASC Topic 810, Consolidation (Topic 810), which
seeks to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability
corporations, and securitization structures. The amended guidance changes the analysis that a reporting entity must perform to
determine whether it should consolidate certain types of legal entities. The changes include, among others, modification of the
evaluation whether limited partnerships and similar legal entities are variable interest entities or voting interest entities
and elimination of the presumption that a general partner should consolidate a limited partnership. The Company will be required
to adopt Topic 810 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective
basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. The Company
has not yet completed its assessment of the impact of the amended guidance on its financial statements but does not expect the
adoption of this amended guidance to have a significant impact on financial results.
Effective
January 1, 2017, the Company will be required to adopt the new guidance of ASC Topic 606, Revenue from Contracts with Customers
(Topic 606), which will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires
the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires
the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations
in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the
contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company will be required
to adopt Topic 606 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective
basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. If the
Company elects the modified retrospective approach, it will be required to provide additional disclosures of the amount by which
each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect
before the change, and an explanation of the reasons for significant changes. The Company has not yet completed its assessment
of the impact of the new guidance on its consolidated financial statements. On April 29, 2015, the Financial Accounting Standards
Board issued a proposed Accounting Standards Update (FASB) to defer the effective date of Topic 606 to annual reporting periods
beginning after December 15, 2017, including interim reporting periods within that reporting period. If the FASB proceeds with
the deferral of the effective date as proposed, this will mean the Company will be required to adopt the new guidance of ASC 606
effective January 1, 2018.
In
August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(“ASU 2014-15”), an amendment to FASB Accounting Standards Codification (“ASC”) Topic 205, Presentation
of Financial Statements. This update provides guidance on management’s responsibility in evaluating whether there is substantial
doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This ASU 2014-15
is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption
is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on our financial statements or
results of operations. If events occur in future periods that could affect our ability to continue as a going concern, we will
provide the disclosures required by ASU 2014-15.
The
Company has reviewed other recently issued, but not yet adopted, accounting standards in order to determine their effects, if
any, on our results of operations, financial position and cash flows. Based on that review, we believe that none of these recent
pronouncements will have a significant effect on our current or future earnings or operations.
Results of Operations
Year Ended December 31, 2014 Compared
to Year Ended December 31, 2013
The following table
presents net production sold, average sales prices and production costs and expenses for the years ended December 31, 2014 and
2013.
| | |
Year ended December 31, |
| | |
2014 | |
2013 |
| | |
|
| Revenue | |
| | | |
| | |
| Oil and natural gas sales | |
$ | 12,352,299 | | |
$ | 13,125,960 | |
| | |
| | | |
| | |
| Net production sold | |
| | | |
| | |
| Oil (Bbl) | |
| 127,688 | | |
| 122,666 | |
| Natural gas (Mcf) | |
| 277,128 | | |
| 282,864 | |
| Natural gas liquids(Bbl) | |
| 16,317 | | |
| 9,223 | |
| Total (Boe) | |
| 190,193 | | |
| 179,033 | |
| | |
| | | |
| | |
| Average sales prices | |
| | | |
| | |
| Oil ($/Bbl) | |
$ | 82.52 | | |
$ | 93.17 | |
| Natural gas ($/Mcf | |
| 4.87 | | |
| 4.56 | |
| Natural gas liquids ($/Bbl | |
| 28.49 | | |
| 28.11 | |
| Total average price ($/Boe) | |
$ | 64.94 | | |
$ | 73.32 | |
| | |
| | | |
| | |
| Costs and expenses (per Boe) | |
| | | |
| | |
| Production taxes | |
$ | 5.25 | | |
$ | 6.96 | |
| Lease operating expenses | |
| 12.03 | | |
| 12.85 | |
| Natural gas transportation and marketing expenses | |
| 0.54 | | |
| 0.44 | |
| Environmental cleanup | |
| 0.00 | | |
| 0.00 | |
| Depreciation, depletion, amortization, and impairment | |
| 18.75 | | |
| 27.60 | |
| Accretion of discount on asset retirement obligation | |
| 0.98 | | |
| 0.83 | |
| General and administrative expense | |
| 3.66 | | |
| 6.02 | |
Revenues and Production
Oil and Natural
Gas Production. During the year ended December 31, 2014, we had total production sold of 190,193 Boe, compared to total production
sold of 179,033 Boe during the year ended December 31, 2013. The increase in total production sold was attributable to newly completed
wells in the fiscal year. For the year ended December 31, 2014, 67.1% of our production sold was oil, 24.3% was natural gas, and
8.6% was natural gas liquids, compared to 68.5% oil, 26.3% was natural gas, and 5.2% was natural gas liquids for the year ended
December 31, 2013.
Oil and Natural
Gas Sales. During the year ended December 31, 2014, we had oil and natural gas sales of $12.4 million, as compared to $13.1
million during the year ended December 31, 2013. The decrease in oil and natural gas sales was primarily attributable to lower
realized prices during the fiscal year.
Costs and Expenses
Operating Costs.
During the year ended December 31, 2014, we incurred operating costs of $2.3 million, as compared to $2.3 million during the year
ended December 31, 2013.
Production Taxes.
Production taxes were $1.0 million for the year ended December 31, 2014, as compared to $1.2 million for the year ended December
31, 2013.
Depreciation,
Depletion, Amortization, and Impairment. For the year ended December 31, 2014, depreciation, depletion, and amortization expense
was $9.1 million, as compared to $4.9 million for the year ended December 31, 2013. The increase in depreciation, depletion, amortization,
and impairment was primarily attributable to a $6.5 million non cash impairment charge recorded in the third quarter of 2014.
General and Administrative
Expense. General and administrative expense was $0.7 million for the year ended December 31, 2014 as compared to $1.0 million
for the year ended December 31, 2013.
Other Expense.
Other expense was $1.4 million for the year ended December 31, 2014 as compared to $0.1 milion for the year ended December 31,
2013. The increase in other expenses is attributable to a $0.9 million loss on settlement of litigation, a decrease in losses of
derivatives of approximately $0.3, a reduction in interest expense of approximately $0.2 million. In the 2013 period the company
incurred approximately $0.9 million related to the gain on settlement of debt which did not recur in the 2014 period.
Liquidity and Capital Resources
General
Our primary sources
of liquidity are cash flow from operations and borrowings under our line of credit. Our ability to fund planned capital expenditures
and to make acquisitions depends upon our future operating performance, availability of borrowings under our line of credit and
availability of equity and debt financing, which is affected by prevailing economic conditions in our industry and financial, business
and other factors, some of which are beyond our control. Our cash flow from operations is mainly influenced by the prices we receive
for our oil and natural gas production and the quantity of oil and natural gas we produce. Prices for oil and natural gas are affected
by national and international economic and political conditions, national and global supply and demand for hydrocarbons, seasonal
weather influences and other factors beyond our control.
Capital Expenditures
Most of our capital
expenditures are for the exploration, development, and production of oil and natural gas reserves. For 2014, we had capital expenditures
of approximately $5.0 million for the development of oil and natural gas properties. We anticipate capital expenditures of between
$0.5 million and $2.0 million for 2015. See “—Planned
Operations” for more information about our planned capital expenditures.
Liquidity
At December 31, 2014,
we had $0.4 million in cash and cash equivalents and $8.2 million outstanding under our credit facility with Independent Bank.
At December 31, 2014, we had $0 of availability under the credit facility. At December 31, 2014, we had working capital of $3.3
million as compared to a working capital deficit of $0.4 million at December 31, 2013. Excluding assets held for sale, we would
have had a working capital deficit of $10.7 million.
Cash Flows
Net cash provided by
operating activities was $8.7 million for the year ended December 31, 2014, compared to net cash provided by operating activities
of $7.0 million for the year ended December 31, 2013.
Net cash used in investing
activities decreased to $5.0 million for the year ended December 31, 2014 from $9.3 million for the year ended December 31, 2013
due to a decrease in capital expenditures for the continued development of our oil and natural gas properties.
During the year ended
December 31, 2014, net cash used by financing activities was $4.0 million, as compared to $2.8 million during the year ended December
31, 2013.
Indebtedness
Notes Payable- Green Shoe
In
connection with the January 4, 2011 merger discussed history above, the Company, as the accounting acquirer, assumed an unsecured
loan from Green Shoe Investments Ltd. (“Green Shoe”) in the principal amount of $487,000 at an interest rate of
5.0%
On April 26, 2011,
the Company entered into a Loan Agreement with Green Shoe, and the Company executed and delivered a Promissory Note to Green Shoe
in connection therewith. The amount of the Promissory Note and the loan from Green Shoe (the “Green Shoe Loan”) was
$550,936 and the purpose of the Green Shoe Loan was to consolidate and extend all of the loans owed by the Company and its predecessors
to Green Shoe including without limitation the following: (i) loan dated May 9, 2008 in the principal amount of $100,000, (ii)
loan dated May 23, 2008 in the principal amount of $150,000, (iii) loan dated July 18, 2008 in the principal amount of $50,000,
(iv) loan dated February 24, 2009 in the principal amount of $100,000, and (v) loan dated April 29, 2009 in the principal amount
of $87,000 plus accrued interest of $63,936. The Green Shoe Loan is unsecured.
Beginning March 31,
2011 (the effective date of the Promissory Note), the amounts owed under the Promissory Note began to accrue interest at a rate
of 9.99%, and the Promissory Note provided that no payments of principal or interest were due until the maturity date of September
30, 2012. The Company is obligated to pay all accrued interest and make a principal payment equal to one-third of the principal
owed upon the closing of an equity offering resulting in a specified amount of net proceeds to the Company. In addition, Green
Shoe was granted the right to convert the principal and interest owed into shares of common stock of the Company at a conversion
price of $4.00 per share. The principal balance of the note as of September 30, 2012 was $367,309.
The debt and associated
accrued interest were not repaid at maturity on September 30, 2012. On October 22, 2012, the Company received notice from the lender’s
counsel that it would be considered in default on the note beginning November 1, 2012 if the note and accrued interest were not
paid in full. From November 1, 2012, the note began to accrue interest at the default rate of 18%. On November 30, 2012, Jackson
Street Investors, LLC purchased the note from Green Shoe Investments. Subsequently, on December 12, 2012, Red Mountain Resources,
Inc. purchased the note from Jackson Street Investors, LLC. As of December 31, 2012, the note had a principal balance of $367,309
and an accrued interest balance of $62,924.
On February 28, 2013,
the Company’s Board of Directors approved a resolution to modify the terms of the note so that the conversion price was reduced
from $4.00 to $1.50 per share. On February 28, 2013, Red Mountain Resources, Inc. converted the principal balance of $367,309 and
accrued interest balance of $73,611 into 293,947 shares of the Company’s common stock.
Notes Payable- Little Bay
In connection with
the merger, the Company, as the accounting acquirer, assumed an unsecured loan from Little Bay Consulting SA (“Little Bay”)
in the principal amount of $520,000 at an interest rate of 5%.
On April 26, 2011,
the Company entered into a Loan Agreement with Little Bay, and the Company executed and delivered a Promissory Note to Little Bay
in connection therewith. The amount of the Promissory Note and the loan from Little Bay (the “Little Bay Loan”) was
$595,423 and the purpose of the Little Bay Loan was to consolidate and extend all of the loans owed by the Company and its predecessors
to Little Bay including without limitation the following: (i) loan dated March 7, 2008 in the original principal amount of $220,000,
(ii) loan dated July 18, 2008 in the original principal amount of $100,000, and (iii) loan dated October 3, 2008 in the principal
amount of $200,000 plus accrued interest of $75,423. The Little Bay Loan is unsecured.
Beginning March 31,
2011 (the effective date of the Promissory Note), the amounts owed under the Promissory Note began to accrue interest at a rate
of 9.99%, and the Promissory Note provided that no payments of principal or interest were due until the maturity date of September
30, 2012. The Company is obligated to pay all accrued interest and make a principal payment equal to one-third of the principal
owed upon the closing of an equity offering resulting in a specified amount of net proceeds to the Company. In addition, Little
Bay was granted the right to convert the principal and interest owed into shares of common stock of the Company at a conversion
price of $4.00 per share. The principal balance of the note as of September 30, 2012 is $396,969.
The debt and associated
accrued interest were not repaid at maturity on September 30, 2012. On October 22, 2012, the Company received notice from the lender’s
counsel that it would be considered in default on the note beginning November 1, 2012 if the note and accrued interest were not
paid in full. From November 1, 2012, the note began to accrue interest at the default rate of 18%. On November 30, 2012, Jackson
Street Investors, LLC purchased the note from Little Bay Consulting, S.A. Subsequently, on December 12, 2012, Red Mountain Resources,
Inc. purchased the note from Jackson Street Investors, LLC. As of December 31, 2012, the note had a principal balance of $396,969
and an accrued interest balance of $68,005.
On February 28, 2013,
the Company’s Board of Directors approved a resolution to modify the terms of the note so that the conversion price was reduced
from $4.00 to $1.50 per share. On February 28, 2013, Red Mountain Resources, Inc. converted the principal balance of $396,969 and
accrued interest balance of $79,555 into 317,683 shares of the Company’s common stock.
Line of Credit – Texas Capital
Bank
As of December
31, 2011, the borrowing base on the Texas Capital Bank (“TCB”) line of credit was $4,500,000. Effective March 1, 2012,
the borrowing base was increased to $9,500,000. The interest rate was calculated at the greater of the adjusted base rate or 4%.
The line of credit was collateralized by producing wells and was to mature on January 14, 2014. As the result of the sale of certain
interests in oil and gas properties, effective August 1, 2012, the borrowing base was reduced by $750,000 and that amount was
repaid to TCB out of the sale proceeds. On February 5, 2013, this line of credit was paid off and replaced with a revolving credit
facility.
Credit Facility
On February
5, 2013, the Company entered into the Credit Agreement with Red Mountain Resources, Inc., Black Rock Capital, Inc. and
RMR Operating, LLC (the Company, Red Mountain Resources, Inc., Black Rock Capital, Inc. and RMR Operating, LLC, jointly
and severally, the “Borrowers”) and Independent Bank, as Lender. The Credit Agreement provides for an up to
$100.0 million revolving credit facility (as amended, the “Credit Facility”) with an initial commitment of $20.0
million and a maturity date of February 5, 2016. The borrowing base under the Credit Facility is determined at
the discretion of the Lender based on, among other things, the Lender’s estimated value of the proved reserves
attributable to the Borrowers’ oil and natural gas properties that have been mortgaged to the Lender, and is subject to
regular redeterminations on September 30 and March 31 of each year, and interim redeterminations described in the Credit
Agreement and potentially monthly commitment reductions, in each case which may reduce the amount of the borrowing base.
Effective September 12, 2013, the borrowing base was increased to $30.0 million from $20.0 million. As of December 31, 2013,
the borrowing base and commitment were $30.0 million. As of December 31, 2013, the Company had $12.2 million outstanding
under the Credit Facility and had availability of $12.6 million. As of December 31, 2014 the Company had $8.2 million
outstanding under the Credit Facility and had availability of $0.
On March 11, 2015,
the Company entered into an amendment and waiver (the “Third Amendment”) to the Senior First Lien Secured Credit Agreement,
dated February 5, 2013, as amended (the “Credit Agreement”), with RMR, Black Rock and RMR Operating (together with
the Company, the “Borrowers”) and Independent Bank (“Lender”). Pursuant to the Third Amendment, (i) the
Lender waived any default or right to exercise any remedy as a result of the failure by the Borrowers to be in compliance with
the requirements of Section 6.18 of the Credit Agreement with respect to the permitted ratio of consolidated current assets to
consolidated current liabilities of Borrowers for the fiscal quarter ended September 30, 2014; and (ii) the borrowing base was
decreased from $30 million to $27.8 million, effective as of March 1, 2015, and the commitment amount was decreased to $27.8 million,
subject to monthly commitment reductions of $350,000 beginning March 1, 2015.
On April 21, 2015,
the Company entered into an amendment (the “Fourth Amendment”) to the Credit Agreement, with the other Borrowers and
the Lender. Pursuant to the Fourth Amendment, the borrowing base was decreased from $27.8 million to $12.4 million, effective as
of April 21, 2015, and the commitment amount was decreased to $12.4 million. In addition, the monthly commitment reduction amount
was set to $0 as of April 1, 2015.
Amounts outstanding
under the Credit Facility bear interest at a rate per annum equal to the greater of (x) the U.S. prime rate as published in The
Wall Street Journal’s “Money Rates” table in effect from time to time and (y) 4.0%. Interest is payable monthly
in arrears on the last day of each calendar month. As of December 31, 2014, the interest rate was 4%. Borrowings under the Credit
Facility are secured by first priority liens on substantially all the property of each of the Borrowers and are unconditionally
guaranteed by Doral West Corp. and Pure Energy Operating, Inc., each a subsidiary of Cross Border.
The Credit Agreement
also contains financial covenants, measured as of the last day of each fiscal quarter of the Company. As of December 31, 2014,
the Company received waivers from the lenders for covenants that were not in compliance.
Pursuant to the Credit
Agreement, at least one of the Borrowers is required to have acceptable hedge agreements in place at all times effectively hedging
at least 50% of the oil volumes of the Borrowers. Pursuant to the terms of the Credit Agreement, the Company has agreements hedging a portion of the future oil production of the Borrowers.
Contractual Obligations
The following table
presents a summary of our contractual obligations at December 31, 2014:
| | |
Payments Due By Period |
| (in thousands) | |
Less than
one year | |
One to
three years | |
Three to
five years | |
More than five years | |
Total |
| Line of credit | |
$ | — | | |
$ | 8,200,000 | | |
$ | — | | |
$ | — | | |
$ | 8,200,000 | |
| Environmental cleanup | |
| 2,057,175 | | |
| — | | |
| — | | |
| — | | |
| 2,057,175 | |
| Asset retirement obligations | |
| — | | |
| — | | |
| — | | |
| 1,594,710 | | |
| 1,594,710 | |
| Total | |
$ | 2,057,175 | | |
$ | 8,200,000 | | |
$ | — | | |
$ | 1,594,710 | | |
$ | 11,851,885 | |
Off-Balance Sheet Arrangements
As of December 31,
2014, we did not have any off-balance sheet arrangements as defined by Regulation S-K.
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and
Supplementary Data
Our financial
statements required by this item are included in this report beginning on page F-1 and are incorporated herein by reference.
Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls
and Procedures
Evaluation of Disclosure Controls and
Procedures
Disclosure controls
and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated
and communicated to our management, including our principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives.
Under the supervision
and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated
the effectiveness of our disclosure controls and procedures as of December 31, 2014 and, based on that evaluation, and as a result
of the material weaknesses described below, our principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures were not effective at the reasonable assurance level.
Management’s Report on Internal
Control Over Financial Reporting
Our 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. Internal control over financial reporting is designed to provide reasonable assurance regarding
the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance
with GAAP. Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance
with GAAP, and that our receipts and expenditures are being made only in accordance with the authorizations of our management
and board of directors and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on our financial statements.
Because of inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. However, these
inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
Our management, under
the supervision and with the participation of our principal executive officer and principal financial and accounting officer,
assessed the effectiveness of our internal control over financial reporting as of December 31, 2014 based on criteria established
in Internal Control — Integrated Framework created by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, our management concluded that our internal control over financial reporting was not effective
as of December 31, 2014 because of the identification of the material weaknesses identified below.
A material weakness
(as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements
will not be prevented or detected on a timely basis. During the course of our assessment, management identified the following
material weaknesses:
- lack of accounting expertise to appropriately
apply GAAP for complex or non-recurring transactions; and
- lack of sufficient accounting personnel to
properly design and implement internal control over financial reporting.
This Annual Report
on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control
over financial reporting as such report is not required for non-accelerated filers.
Management’s Plan for Remediation
of Our Material Weaknesses
Management will continue
to review and assess our system of internal control over financial reporting as well as the new members of our accounting staff
and their increased levels of accounting expertise. During this review and assessment, we will continue to implement enhancements
to our system of internal controls where appropriate. Finally, we will continue to evaluate the employees and contractors involved
in the preparation of our financial statements, the need to engage outside consultants with accounting and tax expertise to assist
us in accounting for complex transactions and the hiring of additional accounting staff as necessary to timely prepare our financial
statements. Management currently believes it will be able to remedy the material weaknesses described above over the next 12 months.
Changes in Internal Control Over Financial
Reporting
There have been no
changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive
Officers and Corporate Governance
Directors and Executive Officers
Our current directors
and executive officers are as follows:
|
Name |
|
Age |
|
Position |
| Alan W. Barksdale |
|
37 |
|
Chairman of the Board of Directors |
| Earl M. Sebring |
|
65 |
|
Interim President |
| Kenneth S. Lamb |
|
39 |
|
Chief Accounting Officer, Secretary, and Treasurer |
| Richard F. LaRoche Jr. |
|
69 |
|
Director |
| Paul N. Vassilakos |
|
37 |
|
Director |
| John W. Hawkins |
|
69 |
|
Director |
Alan W. Barksdale
has been Chairman of the Board of Directors since May 2012. Mr. Barksdale has been the Chief Executive Officer and Chairman of
the Board of Directors of Red Mountain Resources, Inc. since June 2011, its President since July 2012, and served as its Interim
Acting Chief Financial Officer from June 2011 to August 2011. Mr. Barksdale has also been the owner and president of StoneStreet
and president and manager of StoneStreet Group, advisory and management services and merchant banking firms, since 2008. Mr. Barksdale
has also been the president of AWB Enterprises, Inc., a holding company, since November 2011. From January 2004 to April 2010,
Mr. Barksdale served as a director in the Capital Markets Group of Crews & Associates, an investment banking firm. From August
2003 to October 2003, Mr. Barksdale served as an investment banker at Stephens Inc., an investment banking firm. From 2002 to 2003,
Mr. Barksdale was an investment banker at Crews & Associates. Mr. Barksdale’s experience in operating, managing, financing
and investing in more than 200 wells in Louisiana, New Mexico and Texas, combined with his over ten years of capital markets experience
and contacts and relationships, provides our Board of Directors with invaluable management and operational direction.
In 2004, the National
Association of Securities Dealers, Inc. (“NASD”) alleged that Mr. Barksdale solicited an attorney to make contributions
to officials of an issuer with which Stephens Inc. was engaging in municipal securities business when Mr. Barksdale was employed
as an investment banker of Stephens Inc. Without admitting or denying the allegations, Mr. Barksdale entered into an acceptance,
waiver and consent decree that provided for a 30-day suspension from associating with any NASD member and a $5,000 fine.
Earl M. Sebring
has been our Interim President since June 2012. Mr. Sebring is an exploration geologist with 35 years of experience. Since
August 2000, Mr. Sebring has been the owner and President of Sebring Exploration Texas, Inc., an independent exploration company.
In 1982, Mr. Sebring became an exploration geologist for Wagner and Brown, eventually becoming Exploration Manager. As Exploration
Manager, Mr. Sebring was responsible for handling all foreign and domestic exploration and production efforts. This included directing
exploration efforts, staffing those efforts as required, and securing outside industry funding. Mr. Sebring began his career at
City Service Oil Company in 1976 where his responsibilities included ascertaining petroleum commercial prospectivity in frontier
basins around the world through the use of core, log, geochemical, and out crop data. Mr. Sebring has been involved in drilling,
managing, consulting or investing in locations such as the Permian Basin, Gulf Coast, Oklahoma, Southern France, Southern United
Kingdom, Argentina, Columbia, Kodiak Shelf of Alaska, Philippines, Southern Australia, Louisiana, New Mexico, Oklahoma and Athabasca
Tar Sands. Mr. Sebring graduated from the University of Texas in 1976, where he received a Bachelor's Degree in Geology.
Kenneth S. Lamb
has been our Chief Accounting Officer, Secretary, and Treasurer since August 2012. Mr. Lamb has significant experience in corporate
accounting, financial reporting, and corporate governance. From December 2008 until May 2011, he was employed by Transatlantic
Petroleum, Ltd., an international oil and gas company engaged in the acquisition, exploration, development, and production of crude
oil and natural gas, serving as its Director of Internal Audit from December 2008 to July 2010 and its Manager of Financial Reporting
and Internal Controls from August 2010 to May 2011. From July 2007 until November 2008, Mr. Lamb was employed with the Brink's
Company, a company providing security-related services for banks, retailers and other commercial and governmental customers, as
Internal Audit Supervisor where he managed financial audits in numerous different countries. Mr. Lamb began his career with PricewaterhouseCoopers
in 2000 and worked for KPMG from 2005 to 2006. He received a B.B.A. in Accounting and a B.A. in History from Sam Houston State
University and is a licensed Certified Public Accountant.
Richard F. LaRoche
Jr was appointed as a director of the Company effective January 3, 2011, upon closing of the Pure Merger. Mr. LaRoche served
27 years with National HealthCare Corporation (“NHC”) as Secretary and General Counsel and 14 years as Senior Vice
President, retiring from these positions in May 2002. He has served as a Board member of NHC since 2002. Mr. LaRoche serves as
a director of Lodge Manufacturing Company (privately held). He also served on the boards of National Health Investors, Inc. from
1991 through 2008, National Health Realty, Inc. from 1998 through 2007 and Trinsic, Inc. from 2004 through 2006. Mr. LaRoche continues
to serve on NHC’s Board of Directors and on that Board’s Audit Committee, Nominating and Corporate Governance Committee
and Compensation Committee.
He has a law degree
from Vanderbilt University (1970) and an A.B. degree from Dartmouth College (1967).
Mr. LaRoche brings
significant experience to this Board. He has served as both an independent board member to a large publicly-held company and acted
as general counsel to that company. The Company sought a director who could provide leadership as the Company developed its policies
and procedures, and Mr. LaRoche has provided that direction and leadership. Mr. LaRoche’s legal and board experience were
the primary factors considered in connection with his election to the Board.
Paul N. Vassilakos
has been a director since May 2012. From November 2011 through February 2012, Mr. Vassilakos served as Chief Executive Officer,
Chief Financial Officer and director of Soton Holdings Group, Inc., a publicly held company now known as Rio Bravo Oil, Inc. Since
November 2013, Mr. Vassilakos has been the Chief Executive Officer of Cullen Agricultural Holding Corp. (“CAH”) and
served as its assistant treasurer from October 2009 to November 2013. CAH is seeking to consummate a business combination with
Long Island Brand Beverages LLC, a growth oriented company focused on the ready-to-drink tea segment in the beverage industry.
In July 2007, Mr. Vassilakos founded Petrina Advisors, Inc., a privately held advisory firm providing investment banking services,
and has served as its president since its formation. Mr. Vassilakos also founded and, since December 2006, serves as the vice president
of Petrina Properties Ltd., a privately held real estate holding company. From February 2002 through June 2007, Mr. Vassilakos
served as vice president of Elmsford Furniture Corp., a privately held furniture retailer in the New York area. Mr. Vassilakos
brings extensive public company and capital markets experience, as well as his professional contacts and experience, to our Board
of Directors.
John W. Hawkins
was appointed as a director of the Company effective January 3, 2011, effective upon closing of the Pure Merger. Mr. Hawkins has
over 30 years experience in management and accounting for NYSE listed companies. He previously served as interim CFO of Pure L.P.
and Aztec Energy Partners. In 2002, he retired as VP-Treasurer of Dillard Department Stores after 28 years of service. As VP-Treasurer
of Dillard’s, he managed the treasury department, assisted with the annual audits, managed payroll department, tax department,
accounts payable department, worker’s compensation and general liability department, and the employee benefits department.
He was one of the 401(k) and pension plan administrators. He was heavily involved in the acquisition of 16 companies totaling approximately
$2.5 billion in revenue. Mr. Hawkins received a BBA with a major in accounting from Midwestern University. Mr. Hawkins qualifies
as an audit committee financial expert. In addition, his experience with publicly traded companies and his historical knowledge
of the Pure operations and assets prior to the Pure merger were significant factors that led to his election to the Board. Mr.
Hawkins has served on the board of directors of the Self Insurance Institute of America, Ronald McDonald House of Little Rock,
Texas,Self Insured Association, and as chairman of the advisory board of Certergy Inc.
Audit Committee
The primary functions
of the Audit Committee are to assist the Board of Directors of the Company in fulfilling its oversight responsibilities with respect
to: (i) the Company’s systems of internal controls regarding finance, accounting, legal compliance and ethical behavior;
(ii) the Company’s auditing, accounting and financial reporting processes generally; (iii) the Company’s financial
statements and other financial information provided by the Company to its stockholders, the public and others; (iv) the Company’s
compliance with legal and regulatory requirements; and (v) the performance of the Company’s corporate audit department and
independent auditors. Consistent with these functions, the Committee will encourage continuous improvement of, and foster adherence
to, the Company’s policies, procedures and practices at all levels.
The members of the
Audit Committee are not full-time employees of the Company and may or may not be accountants or auditors by profession or experts
in the fields of accounting or auditing and, in any event, do not serve in such capacity. Consequently, it is not the duty of the
Committee to conduct audits or to determine that the Company’s financial statements and disclosures are complete and accurate
and are in accordance with generally accepted accounting principles and applicable rules and regulations.
The members of the
Audit Committee are John W. Hawkins, Paul N. Vassilakos and Richard F. LaRoche, Jr. John W. Hawkins serves as chair of the Audit
Committee and the Board has determined that he qualifies as an audit committee financial expert. Mr. Hawkins is independent as
such term as defined by both NASDAQ Marketplace Rule 5605 and SEC Rule 10A-3(b)(1). The Audit Committee meets at least four times
per year (on a quarterly basis). As part of its job to foster open communications, the Audit Committee does meet in separate executive
sessions without management and the Company’s independent auditors to discuss any matters that the Audit Committee believes
should be discussed privately.
The charter of the
Audit Committee is available on the Investor Relations section of the Company’s website (www.xbres.com) by clicking “Investor
Relations” and then “Corporate Governance.”
Nominating and Corporate Governance
Committee
The purpose of the
Nominating and Corporate Governance Committee is to provide assistance to the Board of Directors in identifying and recommending
candidates qualified to serve as directors of the Company, to review the composition of the Board of Directors, to develop, review
and recommend governance policies and principles for the Company and to review periodically the performance of the Board of Directors.
The Nominating and
Corporate Governance Committee considers candidates for Board membership suggested by its members and other Board members as well
as management and stockholders. The Nominating and Corporate Governance Committee among many factors, considers qualities of high
personal and professional ethics, values and integrity It also examines the skills, diversity, backgrounds and experience with
business and other organizations of director nominees. Also, the Nominating and Corporate Governance Committee looks for candidates
with the ability and willingness to commit adequate time to, as well as a commitment to representing the long-term interests of
Cross Border.
The members of the
Nominating and Corporate Governance Committee are John W. Hawkins, Paul N. Vassilakos, and Richard F. LaRoche, Jr. Mr. LaRoche
serves as chair of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee meets at
least annually.
The charter of the
Nominating and Corporate Governance Committee is available on the Investor Relations section of the Company’s website (www.xbres.com)
by clicking “Investor Relations” and then “Corporate Governance.”
The Nominating and
Corporate Governance Committee has adopted the following procedures by which security holders may recommend nominees to the Company’s
board of directors(as well as presenting shareholder proposals for consideration by the shareholders at the next annual meeting):
The Nominating and
Corporate Governance Committee will consider all nominees and shareholder proposals presented to it in writing provided that such
nominees and proposals are received by the Committee no later than the first day of the fourth quarter (October 1) of the Company’s
fiscal year for consideration for nomination by the Nominating and Corporate Governance Committee at the following annual shareholders’
meeting to be held in or around May of the following year. Written requests should be sent to the Company’s address to the
attention of the Chair of the Nominating and Corporate Governance Committee.
Compensation Committee
The purpose of the
Compensation Committee of the Board of Directors is to discharge the responsibilities of the Board relating to compensation of
the Company’s executive officers and to review and approve senior officers’ compensation.
Under the Charter of
the Compensation Committee, the Compensation Committee is required to meet at least annually and more frequently as necessary or
appropriate. Special meetings of the Committee may be called on two hours notice by the Chairman of the Board or the Committee
Chairman. A majority of the Committee constitutes a quorum and the Committee may act only on the affirmative vote of a majority
of the members present at the meeting.
The members of the
Compensation Committee are John W. Hawkins, Paul N. Vassilakos, and Richard F. LaRoche, Jr. Mr. Vassilakos serves as chair of the
Compensation Committee.
The charter of the
Compensation Committee is available on the Investor Relations section of the Company’s website (www.xbres.com) by clicking
“Investor Relations” and then “Corporate Governance.”
Code of Ethics
In connection with
the Pure Merger, we adopted a Code of Business Conduct and Ethics applicable to all of our employees and directors, including our
principal executive officer and principal financial officer, which is a “code of ethics” as defined by applicable rules
of the SEC. A copy of the Company’s Code of Ethics can be found on the Company’s website, under the Investor Relations-
Corporate Governance tabs (http://xbres.investorroom.com/corp-governance).
If we make any amendments
to our Code of Ethics other than technical, administrative, or other non-substantive amendments, or grant any waivers, including
implicit waivers, from a provision of our Code of Ethics to our principal executive officer and principal financial officer, or
certain other finance executives, we will disclose the nature of the amendment or waiver, its effective date and to whom it applies
in a Current Report on Form 8-K filed with the SEC.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the
Exchange Act (“Section 16(a)”) requires our executive officers and directors, and persons who beneficially own more
than 10% of our equity securities, to file reports of ownership and changes in ownership with the SEC. Based solely on our review
of Forms 3, 4 and 5 furnished to us as required under the rules of the Exchange Act, we have no knowledge of any failure to report
on a timely basis any transaction required to be disclosed under Section 16(a).
Item 11. Executive Compensation
The following table
sets forth information concerning compensation of our Named Executive Officers for the years ended December 31, 2013 and 2014.
The Named Executive Officers are: our Interim President and our Chief Accounting Officer, Secretary, and Treasurer.
Summary
Compensation Table
Name
and Principal Position | |
Year
Ended | |
Salary
($) | |
Bonus
($) | |
Stock
Awards ($) | |
All
Other Compensation ($) | |
Total
($) |
Earl
M. Sebring | |
| December
31, 2014 | | |
| 200,000 | | |
| — | | |
| — | | |
| — | | |
| 200,000 | |
| Interim President | |
| December
31, 2013 | | |
| 200,000 | | |
| — | | |
| — | | |
| — | | |
| 200,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Kenneth
S. Lamb (1) | |
| December
31, 2014 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| Chief Accounting | |
| December
31, 2013 | | |
| — | | |
| — | | |
| — | | |
| 20,000 | | |
| 20,000 | |
| Officer, Secretary, and Treasurer | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
_________________________________
| (1) |
Mr. Lamb is an employee of Red Mountain Resources, the Company’s largest shareholder, and receives no direct remuneration from the Company. The Company reimburses Red Mountain Resources for a portion of Mr. Lamb’s salary, upon request. No such reimbursement request was made in 2014. In 2013, the Company reimbursed $20,000. Such amounts are reported as all other compensation in the table above. |
Employment Agreements
Nature of Services Provided by Earl
Sebring and Kenneth Lamb
Neither Mr. Sebring nor Mr. Lamb are employees
of the Company. Their services as officers of the Company can be terminated at any time by the Board of Directors. The Company
pays Mr. Sebring $16,667 per month for his services as Interim President. The Company reimburses Red Mountain Resources, Inc. (the
Company’s largest shareholder) for Mr. Lamb’s services as Chief Accounting Officer, Secretary, and Treasurer, upon
request from Red Mountain Resources. Mr. Lamb is an employee of Red Mountain Resources, Inc., and serves as Red Mountain Resources,
Inc.’s Controller.
Indemnification Agreements
The Company has
indemnificatieon agreements with each of its directors and officers. These agreements, among other things, require the Company
to indemnify each director and officer to the fullest extent permitted by applicable law, against any and all expenses of a proceeding,
in the event that such person was, is or becomes a party to or witness or other participant in such proceeding by reason of such
person’s service as a member of the Company’s board of directors or as an officer.
Director Compensation
Our Board of Directors
approved a compensation program for non-employee directors, as follows:
| · | Each non-employee director receives an annual cash fee of $8,000; |
| · | Each non-employee director receives a cash fee of $500 for each telephonic
meeting of the Board and committee that such director participates in; |
| · | Each non-employee director receives a cash fee of $1,500 for each in
person meeting of the Board and committee that such director participates in; and |
| · | Each non-employee director receives a cash fee of $500 for each in person
meeting held with management that such director participates in. |
All directors are reimbursed
for their costs incurred in attending meetings of the Board of Directors or of the committees on which they serve. Members of our
Board of Directors are appointed to hold office until the next annual meeting of our stockholders or until his or her successor
is elected and qualified, or until he or she resigns or is removed in accordance with the provisions of the Nevada Revised Statutes.
Director Compensation Table
The table below reflects
compensation paid to non-employee directors for the year ended December 31, 2014.
|
Name |
Fees
Earned or
Paid in Cash ($) |
| Alan W. Barksdale |
8,000 |
| Paul N. Vassilakos |
8,000 |
| John W. Hawkins |
8,000 |
| Richard F. LaRoche Jr |
8,000 |
Risk Management Relating to Compensation
Policies
Due to the limited
nature of compensation that we currently pay, particularly performance – based compensation, we do not believe there are
any risks arising from our compensation policies and practices that are reasonably likely to have a material adverse effect on
us.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table
sets forth information regarding the beneficial ownership of our common stock as of May 15, 2015 by (i) each person known by us
to be the beneficial owner of more than 5% of our outstanding shares of common stock; (ii) each of our Named Executive Officers
and directors and (iii) all of our executive officers and directors as a group.
Name and Address of Beneficial Owner (1) | |
Amount of
Beneficial
Ownership (2) | |
Percentage of
Outstanding
Common Stock (2) |
| Alan W. Barksdale | |
| — | | |
| — | |
| Richard F. LaRoche, Jr. | |
| 838,331 | (3) | |
| 4.8 | % |
| John W. Hawkins | |
| 10,000 | | |
| * | |
| Paul N. Vassilakos | |
| — | | |
| — | |
| Earl M. Sebring | |
| — | | |
| — | |
| Kenneth S. Lamb | |
| — | | |
| — | |
| All executive officers and directors as a group (6 persons) | |
| 848,331 | | |
| 4.8 | % |
| Red Mountain Resources, Inc. and Subsidiaries | |
| 16,830,598 | (4) | |
| 84.8 | % |
| 2515 McKinney Ave, Suite 900 | |
| | | |
| | |
Dallas, TX 75201
|
_______________________
* Less
than one percent
| (1) | Unless noted otherwise, the address for the above individuals is 2515 McKinney Ave., Suite 900, Dallas,
Texas 75201. Unless noted otherwise, each of the above persons has sole voting and investment power with respect to all shares
of common stock beneficially owned by them. |
| (2) | Based on 17,336,226 shares of common stock issued and outstanding on December 31, 2014. |
| (3) | Mr. LaRoche is deemed the beneficial owner of 838,331 Shares, or 4.8% of the Issuer’s outstanding
common stock, which ownership includes: (i) 94,984 Shares held by LaRoche Family, L.P., of which Mr. LaRoche is a general partner;
(ii) 485,013 Shares held by LaRoche Enterprises, L.P., of which Mr. LaRoche is a general partner; (iii) 100,000 Shares held by
Bushy Forest L.P.; of which Mr. LaRoche is a general partner; (iv) warrants to purchase 133,334 Shares held by LaRoche Enterprises,
L.P, of which Mr. LaRoche is general partner; and (v) stock options to purchase 25,000 Shares held by Mr. LaRoche. As general partner
of LaRoche Family, L.P., LaRoche Enterprises, L.P. and Bushy Forest, L.P., Mr. LaRoche has sole power to vote and to dispose of
the Shares; accordingly, he is deemed to have beneficial ownership over such shares. However, Mr. LaRoche disclaims beneficial
ownership of Shares held by the limited partnerships except to the extent of his pecuniary interest therein. |
| (4) | Based on Amendment No. 14 to Schedule 13D filed on May 6, 2013, each of Red Mountain Resources, Inc.
and Alan Barksdale is deemed to be the beneficial owner of 16,830,598 shares of the Issuer’s Common Stock, or approximately
84.8% of the Issuer’s outstanding Common Stock. This represents 14,327,767 shares of Common Stock held by Red Mountain Resolurces,
Inc. This also includes: (i) warrants to purchase 366,667 shares of Common Stock held by Red Mountain Resources, Inc. and (ii)
warrants to purchase 2,136,164 shares of Common Stock of the Issuer held by Black Rock Capital, Inc., all of which are immediately
exercisable. Barksdale is the Chief Executive Officer of Red Mountain Resources, Inc. and an officer of Black Rock Capital, Inc.
As such, Alan Barksdale has the authority to vote the shares of Common Stock on behalf of Red Mountain Resources, Inc. and Black
Rock Capital, Inc. Black Rock Capital, Inc. is deemed to be the beneficial owner of 2,136,164 shares of the Issuer’s Common
Stock, or approximately 11.0% of the Issuer’s outstanding Common Stock. This represents immediately exercisable warrants
to purchase 2,136,134 shares of Common Stock held by Black Rock Capital, Inc. |
Equity Compensation Plans
Effective April 29,
2009, our Board of Directors adopted our 2009 Stock Incentive Plan (the “2009 Plan”). The purpose of the 2009 Plan
is to enhance our long-term stockholder value by offering opportunities to our directors, officers, employees and eligible consultants
(“Participants”) to acquire and maintain stock ownership in us in order to give these persons the opportunity to participate
in our growth and success, and to encourage them to remain in our service.
The 2009 Plan allows
us to grant awards to our officers, directors and employees. In addition, we may grant awards to individuals who act as consultants
to us, so long as those consultants do not provide services connected to the offer or sale of our securities in capital raising
transactions and do not directly or indirectly promote or maintain a market for our securities.
On adoption, a total
of 8,500,000 shares of our common stock were available for issuance under the 2009 Plan. Effective July 28, 2010, we amended and
restated our 2009 Plan to increase the total number of shares authorized for issuance under the 2009 Plan to 14,500,000 shares.
However, under the terms of the 2009 Plan, at any time after August 1, 2010, the authorized number of shares available under the
2009 Plan may be increased by our Board of Directors, provided that the total number of shares issuable under the 2009 Plan cannot
exceed 15% of the total number of shares of common stock outstanding.
Awards may be granted
in the form of options to purchase shares of our common stock (“Option Awards”) or in the form of shares of our common
stock (“Stock Awards”). Option Awards granted under the 2009 Plan may be made in the form of incentive stock options
and non-qualified stock options. Incentive stock options granted under the 2009 Plan are those intended to qualify as “incentive
stock options” as defined under Section 422 of the Internal Revenue Code. However, in order to qualify as “incentive
stock options” under Section 422 of the Internal Revenue Code, the 2009 Plan must be approved by our stockholders within
12 months of its adoption. The 2009 Plan has not been approved by our stockholders and there is no assurance that the 2009 Plan
will be approved by our stockholders. Non-qualified stock options granted under the 2009 Plan are Option Awards that do not qualify
as incentive stock options under Section 422 of the Internal Revenue Code. Stock Awards may be made subject to such terms, conditions
and restrictions as the plan administrator may, in its sole discretion, decide, including transfer restrictions and vesting provisions.
On May 26, 2009, we filed a Registration Statement on Form S-8 (Registration Number 333-159480) under the Securities Act of 1933,
as amended (the “Securities Act”), to register 8,500,000 shares of our common stock available for issuance under the
2009 Plan.
On August 10, 2010,
we filed a Registration Statement on Form S-8 (Registration Number 333-168724) under the Securities Act to register an additional
6,000,000 shares of our common stock available for issuance under the 2009 Plan as amended and restated. The total registered shares
available for issuance under the 2009 Plan was reduced to 263,636 shares by the 1-for-55 reverse split effective December 27, 2010.
The 2009 Plan expressly provides that the number of shares may be increased to the number of shares issued under the 2009 Plan
provided that it does not exceed 15% of the outstanding shares. The total number of shares underlying currently outstanding options
issued under the Plan is 87,500. The registration statement was terminated by the Company in April 2015.
The following
table sets forth certain information concerning all equity compensation plans previously approved by stockholders and all
previous equity compensation plans not previously approved by stockholders, as of the most recently completed fiscal year. In
April 2015, the registration statements relating to the 2009 Plan were terminated by the Company.
| Plan Category | |
Number of
Securities
to be Issued
Upon
Exercise of Outstanding
Options, Warrants,
and Rights
(a) | |
Weighted- Average
Exercise Price of Outstanding Options, Warrants and Rights (b) | |
Number of
Securities Remaining
Available for Future
Issuance
Under
Equity Compensation
Plans
(Excluding Securities
Reflected in column (a)) (c) |
| Equity compensation plans approved by security holders | |
— | |
— | |
— |
| Equity compensation plans not approved by security holders | |
| 87,500 | | |
$ | 4.80 | | |
| 2,357,792 | |
| Total | |
| 87,500 | | |
$ | 4.80 | | |
| 2,357,792 | |
| (1) | The total number of securities available for issuance under the plan
cannot exceed 15% of the total number of shares of common stock outstanding. Therefore, as of May 15, 2015, the number of securities
remaining available is 15% of 16,301,946 (2,445,292) less outstanding options (87,500). |
Item 13. Certain Relationships and
Related Transactions, and Director Independence
Certain Relationships and Related Transactions
We and RMR are party to a Technical Services Agreement under which RMR incurs costs on our behalf, primarily related to wells
in the Company's Tom Tom and Tomahawk fields. During the twelve months ended December 31, 2014, RMR incurred approximately
$1,880,000 on our behalf. During the period ended December 31, 2014, we advanced RMR $5,880,000 to use for its general and
administrative and operating costs. Effective June 30, 2014 and December 31, 2014 RMR assumed $3,000,000 and $1,000,000, respectively,
of our obligation under the Credit Facility.
Independence of Directors
The standards relied
upon the Board in determining whether a director is “independent” are those set forth in the rules of the NYSE MKT
LLC (formerly, NYSE Amex). The NYSE MKT LLC generally defines “independent directors” as a person other than an executive
officer or employee of a company, who does not have a relationship with the company that would interfere with the director’s
exercise of independent judgment in carrying out the responsibilities of a director. Consistent with these standards, our Board
of Directors has affirmatively determined that Messrs. Hawkins, LaRoche, and Vassilakos are our independent directors.
Item 14. Principal Accountant Fees
And Services
Aggregate
fees for professional services provided to us by Darilek, Butler & Associates, PLLC, our principal accountant for the years
ended December 31, 2014 and 2013 were as follows:
| | |
Year ended December 31, |
| | |
2014 | |
2013 |
| Audit Fees(a) | |
$ | 202,300 | | |
$ | 205,100 | |
| Audit-Related Fees(b) | |
| 30,450 | | |
| 84,000 | |
| Tax Fees(c) | |
| — | | |
| — | |
| All Other Fees | |
| — | | |
| — | |
| Total | |
$ | 232,750 | | |
$ | 289,100 | |
_________________
| (a) | Audit services billed consisted of the audits of our annual financial statements and reviews of our
quarterly condensed financial statements. |
| (b) | Audit-related fees includes professional services in connection with procedures related to various
other audit and special reports. |
| (c) | Tax fees include tax compliance and tax planning. |
Audit Committee Approval
The Company’s
board of directors has adopted a procedure for pre-approval of all fees charged by its independent registered public accounting
firm. Under the procedure, the audit committee of the Company’s board of directors approves the engagement letter with respect
to audit, tax and review services. Other fees are subject to pre-approval by the audit committee. The audit, audit-related fees
and tax fees paid to Darilek Butler & Associates, PLLC with respect to 2014 and 2013 were pre-approved by the audit committee.
PART IV
| Item 15. |
Exhibits and Financial Statement Schedules |
| |
|
|
| |
(a) |
The following documents are filed as part of this Annual Report on Form 10-K: |
| |
|
|
| 1. |
Report of Independent Registered Public Accounting Firm |
| |
Balance Sheets as of December 31, 2014 and 2013 |
| |
Statements of Operations for the Years Ended December 31, 2014 and 2013 |
| |
Statements of Stockholders’ Equity for the Years Ended December 31, 2014 and 2013 |
| |
Statements of Cash Flows for the Years Ended December 31, 2014 and 2013 |
| |
Notes to Financial Statements |
| |
|
|
| 2. |
Exhibits required to be filed by Item 601 of Regulation S-K |
The exhibits
required to be filed by this Item 15 are set forth in the Exhibit Index accompanying this report.
Cross Border Resources, Inc.
Balance Sheets
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
| ASSETS |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Current Assets |
|
|
|
|
|
|
| Cash and Cash Equivalents |
|
$ |
356,950 |
|
|
$ |
726,239 |
|
| Accounts Receivable – Oil and Natural Gas Sales |
|
|
1,594,990 |
|
|
|
2,086,239 |
|
| Accounts Receivable – Related Party |
|
|
— |
|
|
|
24,630 |
|
| Prepaid Expenses & Other Current Assets |
|
|
71,598 |
|
|
|
87,443 |
|
| Assets Held for Sale |
|
|
15,617,472 |
|
|
|
— |
|
| Current Tax Asset |
|
|
19,600 |
|
|
|
19,600 |
|
| Total Current Assets |
|
|
17,660,610 |
|
|
|
2,944,151 |
|
| |
|
|
|
|
|
|
|
|
| Oil and Gas Properties |
|
|
27,243,106 |
|
|
|
56,561,040 |
|
| Less: Accumulated Depletion, Amortization, and Impairment |
|
|
(11,956,319 |
) |
|
|
(20,941,867 |
) |
| Net Oil and Gas Properties |
|
|
15,286,787 |
|
|
|
35,619,173 |
|
| |
|
|
|
|
|
|
|
|
| Other Assets |
|
|
|
|
|
|
|
|
| Other Property and Equipment, net of Accumulated Depreciation of $110,278 and $95,828 in 2014 and 2013, respectively |
|
|
26,258 |
|
|
|
34,641 |
|
| Restricted Cash |
|
|
214,751 |
|
|
|
206,087 |
|
| Deferred financing costs |
|
|
47,512 |
|
|
|
91,242 |
|
| Other Assets |
|
|
54,324 |
|
|
|
54,324 |
|
| Total Other Assets |
|
|
342,845 |
|
|
|
386,294 |
|
| |
|
|
|
|
|
|
|
|
| TOTAL ASSETS |
|
$ |
33,290,242 |
|
|
$ |
38,949,618 |
|
The accompanying notes are an integral
part of these financial statements.
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Current Liabilities |
|
|
|
|
|
|
| Accounts Payable - Trade |
|
$ |
1,865,625 |
|
|
$ |
1,268,257 |
|
| Accrued Expenses & Other Payables |
|
|
664,368 |
|
|
|
63,101 |
|
| Derivative Liability |
|
|
— |
|
|
|
38,109 |
|
| Line of Credit |
|
|
8,200,000 |
|
|
|
— |
|
| Environmental Liability – Current Portion |
|
|
2,057,175 |
|
|
|
1,400,000 |
|
| Liabilities Associated with Assets Held for Sale |
|
|
1,594,711 |
|
|
|
— |
|
| Deferred Tax Liability |
|
|
19,600 |
|
|
|
19,600 |
|
| Total Current Liabilities |
|
|
14,401,479 |
|
|
|
2,789,067 |
|
| |
|
|
|
|
|
|
|
|
| Non-Current Liabilities |
|
|
|
|
|
|
|
|
| Asset Retirement Obligations |
|
|
1,594,710 |
|
|
|
3,514,898 |
|
| Environmental Liability, Net of Current Portion |
|
|
— |
|
|
|
687,973 |
|
| Line of Credit |
|
|
— |
|
|
|
12,200,000 |
|
| Total Non-Current Liabilities |
|
|
1,594,710 |
|
|
|
16,402,871 |
|
| Total Liabilities |
|
|
15,996,189 |
|
|
|
19,191,938 |
|
| |
|
|
|
|
|
|
|
|
| Commitments & Contingencies (Note 8) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Stockholders’ Equity |
|
|
|
|
|
|
|
|
| Common Stock ($0.001 par value; 99,000,000 shares authorized and 17,336,226 issued and outstanding as of December 31, 2014 and as of December 31, 2013, respectively) |
|
|
17,336 |
|
|
|
17,336 |
|
| Additional Paid in Capital |
|
|
33,462,473 |
|
|
|
33,462,473 |
|
| Accumulated Deficit |
|
|
(16,185,756 |
) |
|
|
(13,722,129 |
) |
| Total Stockholders’ Equity |
|
|
17,294,053 |
|
|
|
19,757,680 |
|
| |
|
|
|
|
|
|
|
|
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
33,290,242 |
|
|
$ |
38,949,618 |
|
The accompanying notes are an integral
part of these financial statements.
Cross Border
Resources, Inc.
Statements of Operations
| |
|
Years Ended December 31, |
|
| |
|
2014 |
|
|
2013 |
|
| Revenues |
|
|
|
|
|
|
|
|
| Oil and gas sales |
|
$ |
12,352,299 |
|
|
$ |
13,125,960 |
|
| |
|
|
|
|
|
|
|
|
| Expenses: |
|
|
|
|
|
|
|
|
| Operating costs |
|
|
2,287,908 |
|
|
|
2,300,899 |
|
| Natural gas marketing and transportation expenses |
|
|
102,736 |
|
|
|
78,211 |
|
| Production taxes |
|
|
999,395 |
|
|
|
1,246,153 |
|
| Depreciation, depletion, amortization, and impairment |
|
|
9,154,536 |
|
|
|
4,941,614 |
|
| Accretion expense |
|
|
185,773 |
|
|
|
148,364 |
|
| General and administrative |
|
|
695,613 |
|
|
|
1,007,065 |
|
| Total expense |
|
|
13,425,961 |
|
|
|
9,722,306 |
|
| |
|
|
|
|
|
|
|
|
| Income (loss) from operations |
|
|
(1,073,662 |
) |
|
|
3,403,654 |
|
| |
|
|
|
|
|
|
|
|
| Other income (expense): |
|
|
|
|
|
|
|
|
| Gain (loss) on derivatives |
|
|
(3,479 |
) |
|
|
(269,769) |
|
| Loss on settlement of litigation |
|
|
(900,000 |
) |
|
|
— |
|
| Gain on settlement of debt |
|
|
— |
|
|
|
858,429 |
|
| Interest expense |
|
|
(486,488 |
) |
|
|
(639,578 |
) |
| Miscellaneous other income (expense) |
|
|
— |
|
|
|
— |
|
| Total other income (expense) |
|
|
(1,389,967 |
) |
|
|
(50,918 |
) |
| |
|
|
|
|
|
|
|
|
| Income
(loss) before income taxes |
|
|
(2,463,629 |
) |
|
|
3,352,736 |
|
| |
|
|
|
|
|
|
|
|
| Current tax benefit |
|
|
(— |
) |
|
|
(— |
) |
| Deferred tax expense |
|
|
— |
|
|
|
— |
|
| Income tax expense |
|
|
— |
|
|
|
— |
|
| Net
(loss) income |
|
$ |
(2,463,629 |
) |
|
$ |
3,352,736 |
|
| |
|
|
|
|
|
|
|
|
| Net
income (loss) per share: |
|
|
|
|
|
|
|
|
| Basic |
|
|
(0.14 |
) |
|
|
0.20 |
|
| Fully diluted |
|
$ |
(0.12 |
) |
|
$ |
0.16 |
|
| Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
| Basic |
|
|
17,336,226 |
|
|
|
17,169,041 |
|
| Fully diluted |
|
|
21,023,726 |
|
|
|
20,856,541 |
|
The accompanying notes are an integral
part of these financial statements.
Cross Border Resources, Inc.
Statements of Cash Flows
| |
|
Years Ended December 31, |
|
| |
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
| CASH
FLOWS (LOSS) FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
| Net income |
|
$ |
(2,463,629 |
) |
|
$ |
3,352,736 |
|
| Adjustments to reconcile net income (loss) to cash used by operating activities: |
|
|
|
|
|
|
|
|
| Depreciation, depletion, amortization, and impairment |
|
|
9,154,536 |
|
|
|
4,941,614 |
|
| Gain on settlement of creditors liability |
|
|
— |
|
|
|
(350,800 |
) |
| Gain on conversion of notes payable |
|
|
— |
|
|
|
(485,416 |
) |
| Settlement of environmental liability |
|
|
(20,798 |
) |
|
|
(12,027 |
) |
| Loss on settlement of litigation |
|
|
— |
|
|
|
— |
|
| Accretion of asset retirement obligations |
|
|
185,773 |
|
|
|
148,364 |
|
| Amortization of deferred financing costs |
|
|
43,730 |
|
|
|
9,803 |
|
| Change in derivative instruments |
|
|
(38,109) |
|
|
|
328,897 |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| Accounts receivable |
|
|
685,645 |
|
|
|
1,083,856 |
|
| Accounts receivable – related party |
|
|
24,630 |
|
|
|
— |
|
| Prepaid expenses and other current assets |
|
|
(176,534 |
) |
|
|
375,666 |
|
| Accounts payable |
|
|
597,368 |
|
|
|
(2,245,392) |
|
| Restricted cash |
|
|
8,664 |
|
|
|
(206,087) |
|
| Accrued expenses |
|
|
648,846 |
|
|
|
7,527 |
|
| Interest payable |
|
|
— |
|
|
|
(— |
) |
| |
|
|
|
|
|
|
|
|
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
|
|
8,650,122 |
|
|
|
6, 948,741 |
|
| |
|
|
|
|
|
|
|
|
| CASH FLOWS USED IN INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
| Capital expenditures - oil and gas properties |
|
|
(5,013,345 |
) |
|
|
(9,253,152 |
) |
| Capital expenditures - other assets |
|
|
(6,066 |
) |
|
|
— |
|
| NET CASH USED IN INVESTING ACTIVITIES |
|
|
(5,019,411 |
) |
|
|
(9,253,152 |
) |
| |
|
|
|
|
|
|
|
|
| CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
| Borrowings on line of credit |
|
|
— |
|
|
|
12,200,000 |
|
| Reduction of principal on line of credit |
|
|
(4,000,000 |
) |
|
|
— |
|
| Payments on line of credit |
|
|
(— |
) |
|
|
(8,750,000 |
) |
| Repayments to creditors |
|
|
(— |
) |
|
|
(660,911 |
) |
| |
|
|
|
|
|
|
|
|
| NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES |
|
|
(4,000,000 |
) |
|
|
2,789,089 |
|
| |
|
|
|
|
|
|
|
|
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
(369,289) |
|
|
|
484,678 |
|
| Cash
and cash equivalents, beginning of period year |
|
|
726,239 |
|
|
|
241,561 |
|
| Cash
and cash equivalents, end of year |
|
$ |
356,950 |
|
|
$ |
726,239 |
|
| |
|
|
|
|
|
|
|
|
| Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
| Interest paid |
|
$ |
443,067 |
|
|
$ |
518,756 |
|
| Income taxes paid |
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
| NON-CASH TRANSACTIONS |
|
|
|
|
|
|
|
|
| Revisions of ARO |
|
$ |
(554,287 |
) |
|
$ |
— |
|
| Issuance of common stock to settle liability |
|
$ |
— |
|
|
|
(692,967) |
|
| Additions
of ARO |
|
$ |
46,447 |
|
|
$ |
51,290 |
|
The accompanying notes are an integral
part of these financial statements.
Cross Border Resources, Inc.
Statements of Equity
For the years ended December 31, 2014
and 2013
| |
Common Stock | |
| |
| |
|
| | |
Shares | |
Amount | |
Additional Paid-in Capital | |
Accumulated Deficit | |
Total |
| | |
| |
| |
| |
| |
|
| Balance at December 31, 2012 | |
| 16,301,946 | | |
$ | 16,302 | | |
$ | 32,770,540 | | |
$ | (17,074,865 | ) | |
$ | 15,711,977 | |
Issuance of shares to Red Mountain Resources, Inc. upon conversion of unsecured liabilities
| |
| 611,630 | | |
| 612 | | |
| 409,180 | | |
| — | | |
| 409,792 | |
| Issuance of shares to settle creditors payable claims | |
| 422,650 | | |
| 422 | | |
| 282,753 | | |
| — | | |
| 283,175 | |
| Net income loss attributable to shareholders | |
| — | | |
| — | | |
| — | | |
| 3,352,736 | | |
| 3,352,736 | |
| Balance at December 31, 2013 | |
| 17,336,226 | | |
| 17,336 | | |
| 33,462,473 | | |
| (13,722,129 | ) | |
| 19,757,680 | |
| Net loss attributable to shareholders | |
| — | | |
| — | | |
| — | | |
| (2,463,629 | ) | |
| (2,463,629 | ) |
| Balance at December 31, 2014 | |
| 17,336,226 | | |
$ | 17,336 | | |
$ | 33,462,473 | | |
$ | (16,185,758 | ) | |
$ | 17,294,051` | |
Cross Border Resources, Inc.
Notes to Financial Statements
1. Organization
Nature of Operations
Cross Border
Resources, Inc. (the Company) is an independent natural gas and oil company engaged in the exploration,
development, exploitation, and acquisition of natural gas and oil reserves in North America. The Company’s
area of focus is the State of New Mexico, particularly southeastern New Mexico. The Company has two wholly-owned
subsidiaries, which are inactive: Doral West Corporation and Pure Energy Operating, Inc, and accordingly are not consolidated
in these financial statements.
2. Going
Concern
At December 31, 2014, the Company had working capital of $3,259,133 (including Assets Held for Sale of $15,617,472) and outstanding
debt of $8,200,000 (consisting of a line of credit). The company would have a working capital deficit of $10,763,628 (excluding
Assets Held for Sale, Net of ARO Liabilities associated with the Assets Held for Sale). The Company was not in compliance
with the covenants of its line of credit with Independent Bank and had no availability under this line of credit. The Company
currently does not have sufficient funds to repay these obligations. The Company is exploring available financing options,
including the sale of debt, equity, or assets. If the Company is unable to finance its operations on acceptable terms or at
all, its business, financial condition and results of operations may be materially and adversely affected. As a result of
these conditions, there is substantial doubt regarding the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to
continue as a going concern.
3. Summary
of Significant Accounting Policies
Reclassification
Certain amounts
have been reclassified to conform with the current period presentation. The amounts reclassified did not have an effect on the
Company’s results of operations or stockholders’ equity.
Cash and cash equivalents
The Company considers
all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. At times,
the amount of cash and cash equivalents on deposit in financial institutions exceeds federally insured limits. The Company monitors
the soundness of the financial institutions and believes the Company’s risk is negligible.
Financial instruments
The carrying amounts
of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and
long-term debt, approximate fair value as of December 31, 2014 and 2013.
Oil and natural gas properties
The Company follows
the successful efforts method of accounting for its oil and natural gas producing activities. Costs to acquire mineral
interests in oil and natural gas properties and to drill and equip development wells and related asset retirement costs are capitalized.
Costs to drill exploratory wells are capitalized pending determination of whether the wells have proved reserves. If the Company
determines that the wells do not have proved reserves, the costs are charged to expense. There were no exploratory wells capitalized
pending determination of whether the wells have proved reserves at December 31, 2014 or December 31, 2013. Geological and geophysical
costs, including seismic studies and costs of carrying and retaining unproved properties, are charged to expense as incurred. The
Company capitalizes interest on expenditures for significant exploration and development projects that last more than six months
while activities are in progress to bring the assets to their intended use. Through December 31, 2014, the Company had capitalized
no interest costs because its exploration and development projects generally lasted less than six months. Costs incurred to maintain
wells and related equipment are charged to expense as incurred.
On the sale or retirement
of a complete unit of a proved property, the cost and related accumulated depreciation, depletion and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proved
property, the cost is charged to accumulated depreciation, depletion and amortization, with a resulting gain or loss recognized
in income.
Capitalized amounts
attributable to proved oil and natural gas properties are depleted by the unit-of-production method over proved reserves using
the unit conversion ratio of six Mcf of gas to one barrel of oil equivalent (“Boe”). The ratio of six Mcf of natural
gas to one Boe is based upon energy equivalency, rather than price equivalency. Given current price differentials, the price for
a Boe for natural gas differs significantly from the price for a barrel of oil.
It is common for
operators of oil and natural gas properties to request that joint interest owners pay for large expenditures, typically for drilling
new wells, in advance of the work commencing. This right to call for cash advances is typically found in the operating agreement
that joint interest owners in a property adopt. The Company records these advance payments in prepaid and other current assets
and release this account when the actual expenditure is later billed to it by the operator.
On the sale of an
entire interest in an unproved property for cash or cash equivalents, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an unproved property
is sold, the amount received is treated as a reduction of the cost of the interest retained.
Impairment of long-lived assets
The Company evaluates
its long-lived assets for potential impairment in their carrying values whenever events or changes in circumstances indicate such
impairment may have occurred. Oil and natural gas properties are evaluated for potential impairment by field. Other properties
are evaluated for impairment on a specific asset basis or in groups of similar assets, as applicable. An impairment on proved properties
is recognized when the estimated undiscounted future net cash flows of an asset are less than its carrying value. If an impairment
occurs, the carrying value of the impaired asset is reduced to its estimated fair value, which is generally estimated using a discounted
cash flow approach. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is
added to the capitalized costs to be amortized.
Unproved oil and
natural gas properties do not have producing properties. As reserves are proved through the successful completion of exploratory
wells, the cost is transferred to proved properties. The cost of the remaining unproved basis is periodically evaluated by management
to assess whether the value of a property has diminished. To do this assessment, management considers estimated potential reserves
and future net revenues from an independent expert, the Company’s history in exploring the area, the Company’s future
drilling plans per its capital drilling program prepared by the Company’s reservoir engineers and operations management and
other factors associated with the area. Impairment is taken on the unproved property cost if it is determined that the costs are
not likely to be recoverable. The valuation is subjective and requires management to make estimates and assumptions which, with
the passage of time, may prove to be materially different from actual results.
Revenue and accounts receivable
The Company recognizes
revenue for its production when the quantities are delivered to, or collected by, the purchaser. Prices for such production are
generally defined in sales contracts and are readily determinable based on certain publicly available indices. All transportation
costs are included in lease operating expense.
Accounts receivable—oil
and natural gas sales consist of uncollateralized accrued revenues due under normal trade terms, generally requiring payment within
30 to 60 days of production. Accounts receivable—other consist of amounts owed from interest owners of the Company’s
operated wells. No interest is charged on past-due balances. Payments made on all accounts receivable are applied to
the earliest unpaid items. The Company reviews accounts receivable periodically and reduces the carrying amount by a valuation
allowance that reflects its best estimate of the amount that may not be collectible. There was no reserve for bad debts
as of December 31, 2014 or December 31, 2013.
Other property
Furniture, fixtures
and equipment are carried at cost. Depreciation of furniture, fixtures and equipment is provided using the straight-line method
over estimated useful lives ranging from three to ten years. Gain or loss on retirement or sale or other disposition of assets
is included in income in the period of disposition.
Income taxes
The Company is subject
to U.S. federal income taxes along with state income taxes in New Mexico. When tax returns are filed, it is highly certain that
some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about
the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position
is recognized in the financial statements in the period during which, based on all available evidence, management believes it is
more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes,
if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement
with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured
as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated
interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with
unrecognized tax benefits are classified as additional income taxes in the Company’s Statements of Operations. The Company
accrues interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.
Deferred tax assets
and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using the tax rate in effect for the year in which those temporary differences are expected to be recovered or settled.
The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the year of the enacted tax
rate change. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that
it is more likely than not that some portion of the deferred tax asset will not be realized.
Asset retirement obligations
Asset retirement
obligations (“AROs”) associated with the retirement of tangible long-lived assets are recognized as liabilities with
an increase to the carrying amounts of the related long-lived assets in the period incurred. The cost of the tangible asset, including
the asset retirement cost, is depreciated over the useful life of the asset. AROs are recorded at estimated fair value, measured
by reference to the expected future cash outflows required to satisfy the retirement obligations discounted at the Company’s
credit-adjusted risk-free interest rate. Accretion expense is recognized over time as the discounted liabilities are accreted
to their expected settlement value. If estimated future costs of AROs change, an adjustment is recorded to both the ARO and the
long-lived asset. Revisions to estimated AROs can result from changes in retirement cost estimates, revisions to estimated inflation
rates and changes in the estimated timing of abandonment.
Earnings per common share
The Company reports
basic earnings per common share, which excludes the effect of potentially dilutive securities, and diluted earnings per common
share, which includes the effect of all potentially dilutive securities, unless their impact is anti-dilutive.
Recently issued accounting pronouncements
In
April 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures
of Components of an Entity(“ASU 2014-08”). ASU 2014-08 revises the definition of discontinued operations by limiting
discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have)
a major effect on an entity’s operations and financial results, removing the lack of continuing involvement criteria and
requiring discontinued operations reporting for the disposal of an equity method investment that meets the definition ofdiscontinued
operations. The update also requires expanded disclosures for discontinued operations, including disclosure of pretax profit or
loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. The update
is effective prospectively to all periods beginning after December 15, 2014. Currently, the Company does not expect the adoption
of ASU 2014-08 to have a material impact on our financial statements or results of operations.
Effective
January 1, 2016, the Company will be required to adopt the amended guidance of Accounting Standards Codification (ASC) Topic 718,
Compensation - Stock Compensation, which seeks to resolve the diversity in practice that exists when accounting for share-based
payments. The amended guidance requires a performance target that affects vesting and that could be achieved after the requisite
service period to be treated as a performance condition.
The
Company will be required to adopt the amended guidance either prospectively to all awards granted or modified after the effective
date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual
period presented in the consolidated financial statements and to all new or modified awards thereafter. The Company does not expect
the adoption of this amended guidance to impact financial results.
Effective
January 1, 2016, the Company will be required to adopt the amended guidance of ASC Topic 810, Consolidation (Topic 810), which
seeks to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability
corporations, and securitization structures. The amended guidance changes the analysis that a reporting entity must perform to
determine whether it should consolidate certain types of legal entities. The changes include, among others, modification of the
evaluation whether limited partnerships and similar legal entities are variable interest entities or voting interest entities
and elimination of the presumption that a general partner should consolidate a limited partnership. The Company will be required
to adopt Topic 810 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective
basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. The Company
has not yet completed its assessment of the impact of the amended guidance on its financial statements but does not expect the
adoption of this amended guidance to have a significant impact on financial results.
Effective
January 1, 2017, the Company will be required to adopt the new guidance of ASC Topic 606, Revenue from Contracts with Customers
(Topic 606), which will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires
the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires
the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations
in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the
contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company will be required
to adopt Topic 606 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective
basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. If the
Company elects the modified retrospective approach, it will be required to provide additional disclosures of the amount by which
each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect
before the change, and an explanation of the reasons for significant changes. The Company has not yet completed its assessment
of the impact of the new guidance on its consolidated financial statements. On April 29, 2015, the Financial Accounting Standards
Board issued a proposed Accounting Standards Update (FASB) to defer the effective date of Topic 606 to annual reporting periods
beginning after December 15, 2017, including interim reporting periods within that reporting period. If the FASB proceeds with
the deferral of the effective date as proposed, this will mean the Company will be required to adopt the new guidance of ASC 606
effective January 1, 2018.
In
August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(“ASU 2014-15”), an amendment to FASB Accounting Standards Codification (“ASC”) Topic 205, Presentation
of Financial Statements. This update provides guidance on management’s responsibility in evaluating whether there is substantial
doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This ASU 2014-15
is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption
is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on our financial statements or
results of operations. If events occur in future periods that could affect our ability to continue as a going concern, we will
provide the disclosures required by ASU 2014-15.
The
Company has reviewed other recently issued, but not yet adopted, accounting standards in order to determine their effects, if
any, on our results of operations, financial position and cash flows. Based on that review, we believe that none of these recent
pronouncements will have a significant effect on our current or future earnings or operations.
4. Asset retirement obligations
The following is a description of the
changes to the Company’s asset retirement obligations for the years ended December 31, 2014 and December 31, 2013:
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
| Asset retirement obligations at beginning of year |
|
$ |
3,515,898 |
|
|
$ |
3,317,358 |
|
| Loss on Settlement |
|
|
(926 |
) |
|
|
— |
|
| Settlement of liabilities |
|
|
(3,314 |
) |
|
|
(1,114 |
) |
| Revision of previous estimates |
|
|
(554,287 |
) |
|
|
— |
|
| Accretion expense |
|
|
185,773 |
|
|
|
148,364 |
|
| Additions |
|
|
46,447 |
|
|
|
51,290 |
|
| Asset retirement obligations at end of year |
|
$ |
3,189,421 |
|
|
$ |
3,515,898 |
|
| ARO classified as liabilities associated with assets held for sale |
|
|
1,594,711 |
|
|
|
— |
|
| ARO, Non-Current |
|
$ |
1,594,710 |
|
|
$ |
3,515,898 |
|
5. Property and equipment
Oil and natural gas properties
The following table
sets forth the capitalized costs under the successful efforts method for oil and natural gas properties:
| |
|
December 31, |
|
December 31, |
|
| |
|
2014 |
|
2013 |
|
| |
|
|
|
|
|
| Oil and natural gas properties |
|
$ |
27,243,106 |
|
$ |
56,561,040 |
|
| Less accumulated depletion and impairment |
|
|
(11,956,319 |
) |
|
(20,941,867 |
) |
| Net oil and natural gas properties capitalized costs |
|
$ |
15,286,787 |
|
$ |
35,619,173 |
|
Capitalized costs
related to proved oil and natural gas properties, including wells and related equipment and facilities, are evaluated for impairment
based on the Company’s analysis of undiscounted future net cash flows. If undiscounted future net cash flows are insufficient
to recover the net capitalized costs related to proved properties, then the Company recognizes an impairment charge in income equal
to the difference between carrying value and the estimated fair value of the properties. Estimated fair values are determined using
discounted cash flow models. The discounted cash flow models include management’s estimates of future oil and natural gas
production, operating and development costs, and discount rates.
Uncertainties affect
the recoverability of these costs as the recovery of the costs outlined above are dependent upon the Company obtaining and maintaining
leases and achieving commercial production or sale.
During the year ended December 31, 2014, the Company recorded a $6.5 million impairment charge against its oil and gas assets. Additionally,
the Company reclassified half of its oil and gas assets to assets held for sale.
Other property and equipment
The historical cost
of other property and equipment, presented on a gross basis with accumulated depreciation is summarized as follows:
| |
|
December 31, |
|
December 31, |
|
| |
|
2014 |
|
2013 |
|
| |
|
|
|
|
|
| Other property and equipment |
|
$ |
136,535 |
|
$ |
130,470 |
|
| Less accumulated depreciation |
|
|
(110,277 |
) |
|
(95,828 |
) |
| Net property and equipment |
|
$ |
26,258 |
|
$ |
34,641 |
|
6. Stockholders’ equity and earnings per
share
2011 Equity Financing
On May 26, 2011,
the Company closed a private offering exempt from registration under the Securities Act of 1933 pursuant to Rule 506 of Regulation
D promulgated thereunder. In the offering, the Company issued an aggregate of 3,600,000 units. Each unit
was sold at $1.50 and was comprised of one share of common stock and one five-year warrant to purchase a share of common stock
at an exercise price of $2.25 per share. The warrants became exercisable on November 26, 2011. The
Company agreed to use the net proceeds from the sale of the units for general business and working capital purposes and not to
use such proceeds for the redemption of any common stock or common stock equivalents.
The investors in
the offering (“Selling Stockholders”) received registration rights. The Company agreed to file a registration
statement covering the resale of the common stock issued and the common stock underlying the warrants issued to the Selling Stockholders
within sixty days after the closing date. If the registration statement was not declared effective by the SEC within
the time periods defined within the agreement, then the Company would have made pro rata cash payments to each Selling Stockholder as
liquidated damages in an amount equal to 1.0% of the aggregate amount invested by such Selling Stockholder for each 30-day
period or pro rata for any portion thereof following the date by which such Registration Statement should have been effective. If
at the time of exercise of the warrants there is no effective registration statement covering the resale of the shares underlying
the warrant, then the Selling Stockholders have the right at such time to exercise warrants in full or in part on a cashless basis.
The Company filed an S-1 registration statement registering the shares on July 25, 2011, which was declared effective on August
5, 2011. In April 2015, the foregoing registration statement was terminated by the Company.
In addition to registration
rights, the Selling Stockholders were offered a right of first refusal to participate in future offerings of common stock if the
principal purpose of which was to raise capital. This right of first refusal terminated upon the one-year anniversary
of the closing date.
Warrants
In connection with
the equity offering closed on May 26, 2011, the Company issued warrants to purchase an aggregate of 3,600,000 shares of the Company’s
common stock at a per share price of $2.25 (the "$2.25 Warrants"). The Company also has outstanding warrants
to purchase 3,125 shares of the Company’s common stock at a per share price of $5.00. The $2.25 Warrants became
exercisable in November 2011 and expire in November 2015. On the date of issuance, the warrants were valued at $898,384. Management
determined the fair value of the warrants based upon the Black-Scholes option model with a volatility based on the historical closing
price of common stock of industry peers and the closing price of the Company’s common stock on the OTCBB on the date of issuance.
The volatility and remaining term was 50% and 2.92 years, respectively. The Company does not expect the immediate exercise of these
warrants as the exercise price exceeds the average closing market price for the Company's common stock. Furthermore, no assurances
can be made that any of the warrants will ever be exercised for cash or at all.
Stock Options
In 2011, the Company
issued options to purchase 87,500 shares of its common stock at $4.80 to its directors. For the year ended
December 31, 2014 and 2013, there was no stock based compensation.
Stock option activity
summary is presented in the table below:
| |
|
|
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
|
|
average |
|
| |
|
|
|
|
Weighted- |
|
|
Remaining |
|
| |
|
|
|
|
average |
|
|
Contractual |
|
| |
|
Number of |
|
|
Exercise |
|
|
Term |
|
| |
|
Shares |
|
|
Price |
|
|
(years) |
|
| Outstanding and exercisable December 31, 2012 |
|
87,500 |
|
$ |
4.80 |
|
|
4.08 |
|
| Granted |
|
— |
|
|
— |
|
|
— |
|
| Cancelled |
|
— |
|
|
— |
|
|
— |
|
| Exercised |
|
— |
|
|
— |
|
|
— |
|
| Forfeited |
|
— |
|
|
— |
|
|
— |
|
| Expired |
|
— |
|
|
— |
|
|
— |
|
| Outstanding and exercisable at December 31, 2013 |
|
87,500 |
|
$ |
4.80 |
|
|
3.08 |
|
| Granted |
|
— |
|
|
— |
|
|
— |
|
| Cancelled |
|
— |
|
|
— |
|
|
— |
|
| Exercised |
|
— |
|
|
— |
|
|
— |
|
| Forfeited |
|
— |
|
|
— |
|
|
— |
|
| Expired |
|
— |
|
|
— |
|
|
— |
|
| Outstanding and exercisable at December 31, 2014 |
|
87,500 |
|
$ |
4.80 |
|
|
2.08 |
|
There is no intrinsic
value in the outstanding options since the option price is in excess of the market price of the Company's common stock.
The fair value of
the options granted during 2011 was estimated at the date of grant using the Black-Scholes option-pricing model with the following
assumptions:
| Closing market price of stock on grant date |
$3.11 |
| Risk-free interest rate |
2.43% |
| Dividend yield |
0.00% |
| Volatility factor |
50% |
| Expected life |
2.5 years |
The Company elected to use the “simplified” method
to calculate the estimated life of options granted to employees. The use of the “simplified” method has been extended
until such time when the Company has sufficient information to make more refined estimates on the estimated life of its options.
The expected stock price volatility was calculated by averaging the historical volatility of the Company’s common stock over
a term equal to the expected life of the options.
Issuance of Common Shares to Settle Creditors Payable
The Company entered into settlement agreements with two of
the creditors payable arising out of the 2002 bankruptcy. The Company paid the creditors $633,975 in cash and the Company’s
largest shareholder, Red Mountain Resources, Inc. (“RMR”), issued approximately 750,000 shares of its common stock
to the creditors in settlement of the claims. In return for RMR issuing its shares to the creditors payable, the Company issued
RMR 422,650 shares of its common stock.
Conversion of Notes Payable
On February 28, 2013, RMR, the holder of the Green Shoe and
Little Bay notes, elected to convert the outstanding notes and accrued interest into common shares. The board of directors of the
Company had previously resolved to change the conversion feature from $4.00 per common share to $1.50 per common share. As a result,
the Company issued 611,630 common shares to RMR.
7. Related party transactions
The Company and RMR are party to a Technical Services Agreement
under which RMR incurs costs on behalf of the Company, primarily related to wells in the Company’s Tom Tom and Tomahawk fields.
During the year ended December 31, 2014, RMR incurred approximately $1,880,000 on behalf of the Company. During the period
ended December 31, 2014, the Company advanced RMR $5,880,000 to use for its general and administrative and operating costs. Effective
June 30, 2014 and December 31, 2014 RMR assumed $3,000,000 and $1,000,000, respectively, of the Company’s obligation under
the Credit Facility
The net amount of $0 is shown on the Company’s balance
sheet under the caption Accounts Receivable – Related Party.
8. Long term debt
Operating Line of Credit
On February 5, 2013, the
Company entered into a Senior First Lien Secured Credit Agreement with RMR, Black Rock Capital, Inc. and RMR Operating, LLC, as
borrowers (the “Borrowers”) and Independent Bank, as Lender, providing for an up to $100,000,000 credit facility (the
“Credit Facility”). RMR owns approximately 83% of the outstanding common stock of Cross Border, and Black Rock and
RMR Operating are wholly owned subsidiaries of RMR. On February 5, 2013, the Company drew $8,900,000 on the line of credit and
used those funds to pay off its prior line of credit and associated accrued interest. On February 29, 2013, the Company drew $2,000,000
and on May 24, 2013, the Company drew a further $1,300,000 on the line of credit and used those funds to pay accounts payable related
to the drilling program. Effective June 30, 2014, RMR assumed the Company’s obligations with respect to $3,000,000 of the
Company’s outstanding borrowings under the Credit Facility in exchange for the satisfaction and discharge of a $2,900,000
intercompany payable from RMR to the Company. Effective December 31, 2014, RMR assumed the Company’s obligation with respect
to $1,000,000 of the Company’s outstanding borrowings under the Credit Facility in exchange for the satisfaction and discharge
of a $1,000,000 intercompany payable from RMR to the Company.
The borrowing base under
the Credit Facility is determined at the discretion of the Lender based on, among other things, the Lender’s estimated value
of the proved reserves attributable to the Borrowers’ oil and natural gas properties that have been mortgaged to the Lender,
and is subject to regular redeterminations on September 30 and March 31 of each year, and interim redeterminations described in
the Credit Agreement and potentially monthly commitment reductions, in each case which may reduce the amount of the borrowing base.
As of December
31, 2014, the Company’s outstanding borrowings under the line of credit were $8,200,000 and the Company was not in
compliance with all debt covenants. The Company received waivers from the lenders for covenants that were not in compliance.
On March 11, 2015, the
Company entered into an amendment and waiver (the “Third Amendment”) to the Senior First Lien Secured Credit Agreement,
dated February 5, 2013, as amended (the “Credit Agreement”), with RMR, Black Rock and RMR Operating (together with
the Company, the “Borrowers”) and Independent Bank (“Lender”). Pursuant to the Third Amendment, (i) the
Lender waived any default or right to exercise any remedy as a result of the failure by the Borrowers to be in compliance with
the requirements of Section 6.18 of the Credit Agreement with respect to the permitted ratio of consolidated current assets to
consolidated current liabilities of Borrowers for the fiscal quarter ended September 30, 2014; and (ii) the borrowing base was
decreased from $30 million to $27.8 million, effective as of March 1, 2015, and the commitment amount was decreased to $27.8 million,
subject to monthly commitment reductions of $350,000 beginning March 1, 2015.
On April 21, 2015, the
Company entered into an amendment (the “Fourth Amendment”) to the Credit Agreement, with the other Borrowers and the
Lender. Pursuant to the Fourth Amendment, the borrowing base was decreased from $27.8 million to $12.4 million, effective as of
April 21, 2015, and the commitment amount was decreased to $12.4 million. In addition, the monthly commitment reduction amount
was set to $0 as of April 1, 2015.
9. Commitments and contingencies
Litigation
The Company, the Company’s former Chief Executive Officer,
and the Company’s former Chief Operating Officer are party to a lawsuit with a former employee. On May 4, 2011, Clifton M.
(Marty) Bloodworth initially filed a lawsuit in the State District Court of Midland County, Texas, against Doral West Corp. d/b/a
Doral Energy Corp. (the predecessor entity of Cross Border) (“Doral Energy”) and Everett Willard Gray II, the Company’s
former Chief Executive Officer. Mr. Bloodworth later amended his lawsuit to name Horace Patrick Seale, the Company’s former
Chief Operating Officer, as an additional defendant. Mr. Bloodworth generally alleges that Mr. Gray and Mr. Seale, as agents of
the Company, made false representations which induced Mr. Bloodworth to enter into an employment contract that was subsequently
breached by the Company. The claims that Mr. Bloodworth has alleged are: breach of his employment agreement with Doral Energy,
fraud in the inducement and common law fraud, civil conspiracy, breach of fiduciary duty, and violation of the Texas Deceptive
Trade Practices Act. Mr. Bloodworth is seeking damages of approximately $280,000. Mr. Gray, Mr. Seale and the Company deny that
Mr. Bloodworth’s claims have any merit.
The Company was previously party to an engagement letter,
dated February 7, 2012 (the “Engagement Letter”) with KeyBanc Capital Markets Inc. (“KeyBanc”) pursuant
to which KeyBanc was to act as exclusive financial advisor to the Company’s board of directors in connection with a possible
“Transaction” (as defined in the Engagement Letter). The Engagement Letter was formally terminated by the Company on
August 21, 2012. The Engagement Letter provided that KeyBanc would be entitled to a fee upon consummation of a Transaction within
a certain period of time following termination of the Engagement Letter. On May 16, 2013, KeyBanc delivered an invoice to the Company
representing a fee and out-of-pocket expenses purportedly owed by the Company to KeyBanc as a result of the consummation of a purported
Transaction that KeyBanc asserts had been consummated within the required time period. The Company disputed that any Transaction
was consummated and that KeyBanc was entitled to any fees or out-of-pocket expenses. The Company filed a complaint seeking (i)
a declaration that it was not liable to KeyBanc for any amounts in connection with the Engagement Letter, (ii) attorneys’
fees, and (iii) costs of suit. KeyBanc filed a counterclaim seeking (i) compensatory damages, (ii) interest, (iii) expenses and
court costs, and (iv) reasonable and necessary attorneys’ fees. The matter was originally filed in the 44th Judicial District
Court for the State of Texas, Dallas County but was subsequently removed to the United States District Court for the Northern District
of Texas, Dallas Division. On August 26, 2014, the Company entered into a settlement agreement with KeyBanc, settling a lawsuit
between the parties. In connection with the settlement, the Company agreed to pay KeyBanc $900,000 in three equal installments
of $300,000 each on or before August 28, 2014, October 31, 2014 and December 31, 2014, and the parties agreed to mutual releases
of liability related to the Engagement Letter. This balance was paid in full at December 31, 2014.
In addition to the foregoing, in the ordinary course of business,
the Company is periodically a party to various litigation matters that it does not believe will have a material adverse effect
on its results of operations or financial condition.
Environmental Contingencies
The Company is subject to federal and state laws and regulations
relating to the protection of the environment. Environmental risk is inherent in all oil and natural gas operations, and the Company
could be subject to environmental cleanup and enforcement actions. The Company manages this environmental risk through appropriate
environmental policies and practices to minimize the impact to the Company.
As of December 31, 2014 and 2013, the Company had approximately $2.1 million in environmental remediation liabilities related to the Company’s operated
Tom Tom and Tomahawk fields located in Chaves and Roosevelt counties in New Mexico. In February 2013, the Bureau of Land Management
(“BLM”) accepted the Company’s remediation plan for the Tom Tom and Tomahawk fields. The Company is working
in conjunction with the BLM to initiate remediation on a site-by-site basis. This is management’s best estimate of the costs
of remediation and restoration with respect to these environmental matters, although the ultimate cost could differ materially.
Inherent uncertainties exist in these estimates due to unknown conditions, changing governmental regulation, and legal standards
regarding liability, and emerging remediation technologies for handling site remediation and restoration. Pursuant
to the PSA dated April 21, 2015 between the Companies and the Buyer, the Companies retained certain obligations and covenanted
to bear and pay all costs attributable to the Tom Tom and Tomahawk fields as further defined in the PSA. The Company expects to
incur the remaining costs during the next fiscal year.
10. Price risk management activities
ASC 815-25 (formerly
SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”) requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value of each derivative are recorded each period in
current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. When choosing to designate a derivative as a hedge, management formally documents
the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the
item, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will
be assessed, and a description of the method of measuring effectiveness. This process includes linking all derivatives that are
designated as cash-flow hedges to specific cash flows associated with assets and liabilities on the balance sheet or to specific
forecasted transactions. Based on the above, management has determined the swaps noted below do not qualify for hedge accounting
treatment.
At December 31,
2014, the Company had a net derivative asset of $0, as compared to a net derivative liability of $38,109 at December 31, 2013. The
change in net derivative asset/liability is recorded as non-cash mark-to-market income or loss. Mark-to-market income
of $0 was recorded in the twelve months ended December 31, 2014 as compared to mark-to-market income of $283,831 during the
year ended December 31, 2013. Net realized hedge settlement loss for the year ended December 31, 2014
was $3,479 as compared to net realized hedge settlement loss of $14,062 for the twelve months ended December 31, 2013. The
combination of these two components of derivative expense/income is reflected in "Other Income (Expense)" on the Statements
of Operations as "Gain (loss) on derivatives."
As of December
31, 2014, the Company had not crude oil swaps in place remaining.
| |
|
|
|
|
|
Price |
|
Volumes |
|
Fair Value of Outstanding
Derivative Contracts (1)
as of |
|
| Transaction |
|
|
|
|
|
Per |
|
Per |
|
|
December 31, |
|
|
December |
|
| Date |
|
Type (2) |
|
Beginning |
|
Ending |
|
Unit |
|
Month |
|
|
2014 |
|
|
31, 2013 |
|
| November 2011 |
|
Swap |
|
12/01/2011 |
|
11/30/2014 |
|
$93.50 |
|
2,000 |
|
|
— |
|
|
(62,730) |
|
| February 2012 |
|
Swap |
|
03/01/2012 |
|
02/28/2014 |
|
$106.50 |
|
1,000 |
|
|
— |
|
|
24,621 |
|
| |
|
$ |
— |
|
$ |
(38,109) |
|
| (1) The fair value of the Company's outstanding transactions is presented on the balance sheet by counterparty. All of our derivatives were with the same counterparty. The balance is shown as current or long-term based on our estimate of the amounts that will be due in the relevant time periods at currently predicted price levels. Amounts in parentheses indicate liabilities. |
|
(2) These crude oil hedges were entered
into on a per barrel delivered price basis, using the NYMEX - West Texas Intermediate Index, with settlement for each calendar
month occurring following the expiration date, as determined by the contracts. |
11. Fair Value Measurements
Fair value measurements
are based upon inputs that market participants use in pricing an asset or liability, which are classified into two categories:
observable inputs and unobservable inputs. Observable inputs represent market data obtained from independent sources, whereas unobservable
inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without
undue cost and effort. These two types of inputs are further prioritized into the following fair value input hierarchy:
| |
Level 1 – |
quoted prices for identical assets or liabilities in active markets. |
| |
Level 2 – |
quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means. |
| |
Level 3 – |
unobservable inputs for the asset or liability. |
The fair value
input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level
input that is significant to the measurement in its entirety.
The following tables
summarize the valuation of the Company’s financial assets and liabilities at December 31, 2014 and December 31, 2013:
| | |
Fair Value Measurements at Reporting Date Using |
| | |
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | |
Significant or Other Observable Inputs (Level 2) | |
Significant Unobservable Inputs (Level 3) | |
Fair Value at December 31, 2014 |
| | |
| |
| |
| |
|
| Liabilities | |
| | | |
| | | |
| | | |
| | |
| Environmental liability | |
$ | — | | |
$ | — | | |
$ | (2,057,175 | ) | |
$ | (2,057,175 | ) |
| Assets associated with liabilities held for sale | |
| — | | |
| — | | |
| (1,594,711 | ) | |
| (1,594,711 | ) |
| Asset retirement obligations (non-recurring) | |
$ | — | | |
$ | — | | |
$ | (1,594,710 | ) | |
$ | (1,594,710 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
|
| Total | |
$ | — | | |
$ | — | | |
$ | (5,246,596 | ) | |
$ | (5,246,596 | ) |
| | |
Fair Value Measurements at Reporting Date Using |
| |
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | |
Significant or Other Observable Inputs (Level 2) | |
Significant Unobservable Inputs (Level 3) | |
Fair Value at December 31, 2013 |
| Assets: | |
| | | |
| | | |
| | | |
| | |
| Commodities derivatives | |
$ | — | | |
$ | 3,504 | | |
$ | — | | |
$ | 3,504 | |
| Total | |
$ | — | | |
$ | 3,504 | | |
$ | — | | |
$ | 3,504 | |
| | |
| | | |
| | | |
| | | |
| | |
| Liabilities: | |
| | | |
| | | |
| | | |
| | |
| Environmental liability | |
$ | — | | |
$ | — | | |
$ | (2,086,973 | ) | |
$ | (2,086,973 | ) |
| Commodities derivatives | |
| — | | |
| (38,109 | ) | |
| | | |
| (38,109 | ) |
| Asset retirement obligations (non-recurring) | |
| — | | |
| — | | |
| (3,514,898 | ) | |
| (3,514,898 | ) |
| Total | |
$ | — | | |
$ | (38,109 | ) | |
$ | (5,601,871 | ) | |
$ | (5,639,980 | ) |
12. Supplemental
information relating to oil and natural gas producing activities (unaudited)
Costs incurred in oil and natural gas property acquisition,
exploration and development
Set forth below is certain information
regarding the costs incurred for oil and gas property acquisition, development and exploration activities:
| | |
Year Ended December 31, |
| | |
2014 | |
2013 |
| Property acquisition costs: | |
| | | |
| | |
| Unproved properties | |
$ | — | | |
$ | — | |
| Proved properties | |
| — | | |
| — | |
| Exploration costs | |
| — | | |
| — | |
| Development costs (1) | |
| 4,360,946 | | |
| 8,312,662 | |
| Total costs incurred | |
$ | 4,360,946 | | |
$ | 8,312,662 | |
| |
(1) |
For the years ended December 31, 2014 and 2013, development costs included ($508,711) and $51,290, respectively, in non-cash, asset retirement costs. |
|
| |
| |
Results of operations for oil and natural gas producing
activities
Set forth below is certain information
regarding the results of operations for oil and gas producing activities:
| | |
Year Ended December 31, |
| | |
2014 | |
2013 |
| Revenues | |
$ | 12,352,299 | | |
$ | 13,125,960 | |
| Production costs | |
| 2,287,908 | | |
| 2,300,899 | |
| Depletion and impairment | |
| 9,154,536 | | |
| 4,941,614 | |
| Accretion expense | |
| 185,773 | | |
| 148,364 | |
| Natural gas marketing | |
| 102,736 | | |
| 78,211 | |
| Production taxes | |
| 999,395 | | |
| 1,246,153 | |
| Results of operations | |
$ | (378,049 | ) | |
$ | 4,410,719 | |
Proved reserves
Cawley,
Gillespie and Associates, Inc, independent petroleum engineers estimated 100% of the proved reserve information for the Company
properties as of December 31, 2014 and 2013. Each year’s estimate of proved reserves and related valuations
were also prepared in accordance with then-current provisions of ASC 932, Extractive Activities.
Estimates of proved reserves are inherently
imprecise and are continually subject to revision based on production history, results of additional exploration and development,
price changes and other factors. All of the Company’s estimated oil and natural gas reserves are attributable to properties
within the United States. A summary of the Company’s changes in quantities of proved oil and natural gas reserves for the
years ended December 31, 2014 and 2013 are as follows:
| | |
Oil (MBbl) | |
Natural Gas (MMcf) | |
Total (Mboe) |
| December 31, 2012 | |
| 1,271 | | |
| 1,695 | | |
| 1,554 | |
| Acquisitions | |
| — | | |
| — | | |
| — | |
| Extensions and Discoveries | |
| 371 | | |
| 817 | | |
| 507 | |
| Revisions to Previous Estimates | |
| 11 | | |
| 906 | | |
| 161 | |
| Production | |
| (123 | ) | |
| (283 | ) | |
| (170 | ) |
| December 31, 2013 | |
| 1,530 | | |
| 3,135 | | |
| 2,052 | |
| Acquisitions | |
| — | | |
| — | | |
| — | |
| Extensions and Discoveries | |
| 250 | | |
| 477 | | |
| 330 | |
| Revisions to Previous Estimates | |
| 43 | | |
| 503 | | |
| 127 | |
| Production | |
| (128 | ) | |
| (375 | ) | |
| (190 | ) |
| December 31, 2014 | |
| 1,695 | | |
| 3,740 | | |
| 2,319 | |
| | |
| | | |
| | | |
| | |
| Proved Developed Reserves | |
| | | |
| | | |
| | |
| December 31, 2013 | |
| 804 | | |
| 2,215 | | |
| 1,173 | |
| December 31, 2014 | |
| 916 | | |
| 2,691 | | |
| 1,364 | |
| | |
| | | |
| | | |
| | |
| Proved Undeveloped Reserves | |
| | | |
| | | |
| | |
| December 31, 2013 | |
| 726 | | |
| 920 | | |
| 879 | |
| December 31, 2014 | |
| 780 | | |
| 1,050 | | |
| 955 | |
Standardized measure of discounted future net
cash flows relating to proved reserves
Future cash inflows were computed by
applying the average on the closing price on the first day of each month for the 12-month period prior to December 31, 2014 to
estimated future production. Future production and development costs are computed by estimating the expenditures to be incurred
in developing and producing the proved oil and natural gas reserves at year end, based on year-end costs and assuming continuation
of existing economic conditions.
Future income tax expenses are calculated
by applying appropriate year-end tax rates to future pre-tax net cash flows relating to proved oil and natural gas reserves, less
the tax basis of properties involved.
Future income tax expenses give effect
to permanent differences, tax credits and loss carryforwards relating to the proved oil and natural gas reserves. Future net cash
flows are discounted at a rate of 10% annually to derive the standardized measure of discounted future net cash flows. This calculation
procedure does not necessarily result in an estimate of the fair market value of the Company’s oil and natural gas properties.
The standardized measure of discounted
future net cash flows relating to proved oil and natural gas reserves are as follows:
| | |
Year Ended December 31, |
| | |
2014 | |
2013 |
| Future cash inflows | |
$ | 172,561,969 | | |
$ | 153,544,250 | |
| Future production costs | |
| (48,818,696 | ) | |
| (41,381,543 | ) |
| Future development costs | |
| (18,080,062 | ) | |
| (18,821,422 | ) |
| Future income tax expense | |
| (26,902,690 | ) | |
| (20,243,102 | ) |
| Future net cash flows | |
| 78,760,521 | | |
| 73,098,179 | |
| 10% annual discount for estimated timing of cash flows | |
| (41,988,630 | ) | |
| (36,817,148 | ) |
| Standardized measure of discounted future net cash flows | |
$ | 36,771,891 | | |
$ | 36,281,031 | |
Changes in standardized measure of discounted
future net cash flows
The changes in the standardized measure
of discounted future net cash flows relating to proved oil and natural gas reserves are as follows:
| | |
Year Ended December 31, |
| | |
2014 | |
2013 |
| Balance, beginning of year | |
$ | 36,281,031 | | |
$ | 28,147,572 | |
| Net change in sales and transfer prices and in production (lifting) costs related to future production | |
| 1,728,874 | | |
| 9,374,986 | ) |
| Changes in estimated future development costs | |
| 5,076,840 | | |
| 4,042,730 | |
| Sales and transfers of oil and natural gas produced during the period | |
| (8,962,260 | ) | |
| (10,825,061 | ) |
| Net change due to extensions and discoveries | |
| 8,255,840 | | |
| 12,107,955 | ) |
| Net change due to revisions in quantity estimates | |
| 3,182,507 | | |
| 3,883,464 | |
| Previously estimated development costs incurred during the period | |
| (4,360,946 | ) | |
| (8,312,662 | ) |
| Accretion of discount | |
| 4,899,710 | | |
| 2,747,142 | |
| Other | |
| (2,791,193 | ) | |
| (672,750 | ) |
| Net change in income taxes | |
| (6,538,512 | ) | |
| (4,212,345 | ) |
| Balance, end of year | |
$ | 36,771,891 | | |
$ | 36,281,031 | |
13. Income Taxes
Total
income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal statutory tax rates to pre-tax
income:
| |
|
Year Ended December 31, |
| in thousands |
|
2014 |
|
2013 |
| |
|
|
|
|
| Income taxes at U.S. statutory rate |
|
|
(838) |
|
|
|
1,140 |
|
| State taxes, net of federal impact |
|
|
(65) |
|
|
|
88 |
|
| Change in valuation allowance |
|
|
937 |
|
|
|
(1,229 |
) |
| Permanent differences |
|
|
0 |
|
|
|
1 |
|
| Other differences |
|
|
(34 |
) |
|
|
0 |
|
| Total |
|
|
0 |
|
|
|
0 |
|
Deferred tax assets/(liabilities) consist of the following:
| |
|
Year Ended December 31, |
| (in thousands) |
|
2014 |
|
2013 |
| Derivatives |
|
|
(0 |
) |
|
|
(34) |
|
| Valuation allowance |
|
|
(6,909 |
) |
|
|
(5,972 |
) |
| Difference in depreciation and capitalization methods-natural gas properties, |
|
|
(8,826 |
) |
|
|
(3,444 |
) |
| Accrued expenses |
|
|
776 |
|
|
|
765 |
|
| Net operating losses |
|
|
14,959 |
|
|
|
8,685 |
|
| Total |
|
|
0 |
|
|
|
0 |
|
Deferred tax
assets and liabilities are the result of temporary differences between the financial statement carrying values and tax bases of
assets and liabilities. The Company’s net deferred tax assets and liabilities are recorded as a long-term liability of $0
at December 31, 2014 and 2013, respectively.
As of December
31, 2014, the Company had net operating loss carryfowards (“NOLs”) of approximately $40.8 million which will begin
to expire, if unused, in 2026.
The Company
continually assesses both positive and negative evidence to determine whether it is more likely than not that deferred tax assets
can be realized prior to their expiration. Management monitors Company-specific, oil and natural gas industry and worldwide
economic factors and assesses the likelihood that the Company's NOLs and other deferred tax attributes in the United States, state,
and local tax jurisdictions will be utilized prior to their expiration. The Company establishes a valuation allowance
to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax
asset will not be realized. At December 31, 2014, and 2013 the Company had a valuation allowance of $6.9 million and $6.0 million,
respectively, related to its deferred tax assets.
The company
recognizes 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 financial statements or the
effective tax rate for the periods ended December 31, 2014 and December 31, 2013. There were no interest and penalties related
to unrecognized tax positions for the periods ended December 31, 2014 and December 31, 2013. The tax years subject to examination
by tax jurisdictions in the United States are 2008 through 2014.
14. Assets and Liabilities
Associated with Assets Held for Sale
On April 21, 2015, the Company entered
into a purchase and sale agreement (the “PSA”) with RMR Operating, LLC (“RMR Operating”), Black Rock Capital,
Inc. (“Black Rock”), RMR KS Holdings, LLC (“RMR KS”) and Black Shale Minerals, LLC (“Buyer”).
Each of the Company, RMR Operating, Black Rock and RMR KS is an operating subsidiary (together, the “Operating Subsidiaries”)
of Red Mountain Resources, Inc. (“RMR,” and together with the Operating Subsidiaries, the “Companies”).
Pursuant to the PSA the Operating Subsidiaries
sold, assigned, transferred and conveyed to Buyer, effective as of April 1, 2015, fifty percent (50%) of their right, title, and
interest in and to certain oil and natural gas assets and properties (the “Assets”), including their oil and natural
gas leasehold interests, wells, contracts, and oil and natural gas produced after April 1, 2015 (the “Sale”). The aggregate
purchase price for the Assets under the PSA was $25.0 million, subject to certain adjustments, including post-closing adjustments
for any title or environmental benefits or title or environmental defects resulting from Buyer’s title and environmental
reviews.
As of December 31, 2014, the carrying
values of the Company’s ownership in half of its interest in its oil and gas properties, mineral interests, and leaseholds
were included in assets and liabilities held for sale in the accompanying balance sheet and were comprised of the following (the
Company had no assets held for sale as of December 31, 2013):
| | |
December 31, |
| | |
2014 |
| | |
|
| Composition of assets included in assets held for sale: | |
|
| Oil and Gas Properties, Net | |
$ | 15,617,472 | |
Composition of liabilities included in liabilities held for sale: | |
| | |
| Asset Retirement Obligations | |
$ | 1,594,711 | |
Non-current assets and liabilities held
for sale are presented in current assets and current liabilities, respectively, within the balance sheet. Assets held for sale
are not depreciated, depleted or amortized and they are measured at the lower of the fair value less costs to sell and their carrying
amount. Comparative period balance sheets are not restated.
15. Subsequent Events
Purchase and Sale Agreement
On April 21, 2015, the Company entered into
a purchase and sale agreement (the “PSA”) with RMR Operating, LLC (“RMR Operating”), Black Rock Capital,
Inc. (“Black Rock”), RMR KS Holdings, LLC (“RMR KS”) and Black Shale Minerals, LLC (“Buyer”).
Each of the Company, RMR Operating, Black Rock and RMR KS is an operating subsidiary (together, the “Operating Subsidiaries”)
of Red Mountain Resources, Inc. (“RMR,” and together with the Operating Subsidiaries, the “Companies”).
Pursuant to the PSA the Operating Subsidiaries
sold, assigned, transferred and conveyed to Buyer, effective as of April 1, 2015, fifty percent (50%) of their right, title, and
interest in and to certain oil and natural gas assets and properties (the “Assets”), including their oil and natural
gas leasehold interests, wells, contracts, and oil and natural gas produced after April 1, 2015 (the “Sale”). The aggregate
purchase price for the Assets under the PSA was $25.0 million, subject to certain adjustments, including post-closing adjustments
for any title or environmental benefits or title or environmental defects resulting from Buyer’s title and environmental
reviews.
The PSA contains customary representations,
warranties and covenants. Pursuant to the PSA, the Operating Subsidiaries and Buyer have agreed to indemnify each other, their
respective affiliates and their respective employees, officers, directors, managers, shareholders, members, partners, or representatives
from and against all losses that such indemnified parties incur arising from any breach of representations, warranties or covenants
in the PSA and certain other matters.
The Companies intend to use the cash consideration
from the Sale to repay a portion of the outstanding balance on the Credit Agreement (as defined below), pay accounts receivable
and for working capital.
Third Amendment and Waiver to the Credit Agreement
On
March 11, 2015, the Company entered into an amendment and waiver (the “Third Amendment”) to the Senior First Lien
Secured Credit Agreement, dated February 5, 2013, as amended (the “Credit Agreement”), with RMR, Black Rock and RMR
Operating (together with the Company, the “Borrowers”) and Independent Bank (“Lender”). Pursuant to the
Third Amendment, (i) the Lender waived any default or right to exercise any remedy as a result of the failure by the Borrowers
to be in compliance with the requirements of Section 6.18 of the Credit Agreement with respect to the permitted ratio of consolidated
current assets to consolidated current liabilities of Borrowers for the fiscal quarter ended September 30, 2014; and (ii) the
borrowing base was decreased from $30 million to $27.8 million, effective as of March 1, 2015, and the commitment amount was decreased
to $27.8 million, subject to monthly commitment reductions of $350,000 beginning March 1, 2015.
Fourth Amendment to the Credit Agreement
In conjunction with
the PSA, on April 21, 2015, the Company entered into an amendment (the “Fourth Amendment”) to the Credit Agreement,
with the other Borrowers and the Lender. Pursuant to the Fourth Amendment, the borrowing base was decreased from $27.8 million
to $12.4 million, effective as of April 21, 2015, and the commitment amount was decreased to $12.4 million. In addition, the monthly
commitment reduction amount was set to $0 as of April 1, 2015.
The Company has evaluated its subsequent
events through the date of the financial statements that were available for filing with the SEC.
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.
| Dated: May 19, 2015 |
|
|
| |
|
|
| |
CROSS BORDER RESOURCES, INC. |
| |
|
|
| |
By: |
/s/ Earl M. Sebring |
| |
|
Earl M. Sebring |
| |
|
Interim President |
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.
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| /s/ Alan W. Barksdale |
|
Chairman of the Board of Directors |
|
May 19, 2015 |
| Alan W. Barksdale |
|
|
|
|
| |
|
|
|
|
| /s/ Earl M. Sebring |
|
Interim President |
|
May 19,
2015 |
| Earl M. Sebring |
|
(Principal Executive Officer) |
|
|
| |
|
|
|
|
| /s/ Kenneth S. Lamb |
|
Chief Accounting Officer, Secretary, and Treasurer |
|
May 19, 2015 |
| Kenneth S. Lamb |
|
(Principal Financial and Accounting Officer) |
|
|
| |
|
|
|
|
| /s/ Paul N. Vassilakos |
|
Director |
|
May 19, 2015 |
| Paul N. Vassilakos |
|
|
|
|
| |
|
|
|
|
| /s/ Richard F. LaRoche, Jr. |
|
Director |
|
May 19, 2015 |
| Richard F. LaRoche, Jr. |
|
|
|
|
| |
|
|
|
|
| /s/ John W. Hawkins |
|
Director |
|
May 19, 2015 |
| John W. Hawkins |
|
|
|
|
EXHIBIT INDEX
| Exhibit No. |
Name of Exhibit |
| 2.1 |
Agreement and Plan of Merger entered into on December 2, 2010 among Doral Energy Corp., Doral Acquisition Corp., Pure Gas Partners II, L.P. and Pure Energy Group, Inc. (14) |
| 2.2 |
Agreement and Plan of Merger entered into on December 24, 2010 between Doral Acquisition Corp. (as subsidiary merging entity) and Doral Energy Corp. (as parent surviving entity) with the surviving entity changing its name to Cross Border Resources, Inc. (16) |
| 3.1 |
Articles of Incorporation. (1) |
| 3.2 |
Certificate of Change Pursuant to NRS 78.209 increasing the authorized capital of common stock to 2,500,000,000 shares, par value $0.001 per share (25-for-1 Stock Split). (3) |
| 3.3 |
Articles of Merger between Language Enterprises Corp. (as surviving entity) and Doral Energy Corp. (as merging entity). (4) |
| 3.4 |
Certificate of Change Pursuant to NRS 78.209 decreasing the authorized capital of common stock to 400,000,000 shares, par value $0.001 per share (1-for-6.25 Reverse Split). (5) |
| 3.5 |
Certificate of Change Pursuant to NRS 78.209 increasing the authorized capital of common stock to 2,000,000,000 shares, par value $0.001 per share (5-for-1 Stock Split). (6) |
| 3.6 |
Certificate of Change Pursuant to NRS 78.209 decreasing the authorized capital of common stock to 36,363,637 shares, par value $0.001 per share (1-for-55 Stock Split). (15) |
| 3.7 |
Certificate of Merger between Doral Acquisition Corp. (as merging entity) and Doral Energy Corp. (as surviving entity). (16) |
| 3.8 |
Articles of Merger between Doral Acquisition Corp. (as merging entity) and Doral Energy Corp. (as surviving entity). (16) |
| 3.9 |
Amended
and Restated Bylaws as amended by Amendments No. 1 and No. 2. |
| 4.1 |
Trust Indenture of Pure Energy Group, Inc. and Pure Gas Partners II, L.P. assumed by the Company. (16) |
| 4.2 |
Form of Common Stock Warrant. (23) |
| 10.1 |
Loan and Cancellation of Convertible Note Agreement between Doral Energy Corp. and Edward Ajootian dated March 3, 2010. (7) |
| 10.2 |
Debt Settlement Agreement with War Chest Multi-Strategy Fund, LLC dated March 8, 2010. (7) |
| 10.3 |
Amendment Agreement dated March 12, 2010 to Debt Settlement Agreement with War Chest Multi- Strategy Fund, LLC. (7) |
| 10.4 |
Release and Settlement Agreement between Doral Energy Corp. and Macquarie Bank Limited dated March 8, 2010. (7) |
| 10.5 |
Purchase and Sale Agreement dated April 30, 2010 between Doral Energy Corp. and Alamo Resources LLC. (8) |
| 10.6 |
Purchase and Sale Agreement dated June 14, 2010 between Doral Energy Corp., John R. Stearns and John R. Stearns Jr. (9) |
| 10.7 |
Amended and Restated 2009 Stock Incentive Plan. (10) |
| 10.8 |
Debt Settlement Agreement dated September 16, 2010 between the Company and War Chest Multi- Strategy Fund, LLC. (11) |
| 10.9 |
Debt Settlement Agreement dated September 16, 2010 between the Company and Barclay Lyons, LLC. (11) |
| 10.10† |
Separation Agreement dated June 15, 2010 between Doral Energy Corp. and H. Patrick Seale. (12) |
| 10.11† |
Debt Settlement Agreement dated November 24, 2010 between the Company and WS Oil & Gas Limited. (13) |
| 10.12 |
Amended and Restated Credit Agreement between Cross Border Resources, Inc. and Texas Capital Bank, N.A. dated January 31, 2011. (18) |
| 10.13† |
Employment Agreement with Everett Willard “Will” Gray II. (19) |
| 10.14† |
Nonqualified Stock Option Award Agreement with Everett Willard “Will” Gray II. (19) |
| 10.15† |
Employment Agreement with Lawrence J. Risley. (19) |
| 10.16† |
Nonqualified Stock Option Award Agreement with Lawrence J. Risley. (19) |
| 10.17† |
Employment Agreement with P. Mark Stark. (19) |
| 10.18† |
Nonqualified Stock Option Award Agreement with P. Mark Stark. (19) |
| 10.19† |
Consulting Agreement with BDR, Inc. (19) |
| 10.20† |
Nonqualified Stock Option Award Agreement with BDR, Inc. (19) |
| 10.21 |
Loan Agreement by and between Green Shoe Investments Ltd. and the Company. (20) |
| 10.22 |
Promissory Note to Green Shoe Investments Ltd. (20) |
| 10.23 |
Loan Agreement by and between Little Bay Consulting SA and the Company. (20) |
| 10.24 |
Promissory Note to Little Bay Consulting SA. (20) |
| 10.25† |
Separation Agreement and Release with BDR, Inc. (22) |
| 10.26 |
Consent Waiver and First Amendment to Amended and Restated Credit Agreement with Texas Capital Bank, N.A. (25) |
| 10.27† |
First Amendment to Employment Agreement with Everett Willard “Will” Gray II. (25) |
| 10.28† |
First Amendment to Employment Agreement with Lawrence J. Risley. (25) |
| 10.29† |
Letter Agreement with Nancy S. Stephenson. (25) |
| 10.30 |
Letter Agreement with American Standard Energy Corp. (21) |
| 10.31 |
Senior
First Lien Secured Credit Agreement, dated February 5, 2013, among Cross Border Resources, Inc., Red Mountain Resources,
Inc., Black Rock Capital, Inc. and RMR Operating, LLC, as borrowers, and Independent Bank, as lender (*) (26)
|
| 10.32 |
Amendment
and Waiver, effective as of September 12, 2013, by and among Independent Bank, as Lender, and Red Mountain Resources, Inc.,
Cross Border Resources, Inc., Black Rock Capital, Inc. and RMR Operating, LLC, as Borrowers. (*)
|
| 10.33 |
Amendment and Waiver, effective as of March 1, 2015, by and among Independent
Bank, as Lender, and Red Mountain Resources, Inc., Cross Border Resources, Inc., Black Rock Capital, Inc. and RMR Operating,
LLC, as Borrowers. (*) (27)
|
| 10.34 |
Amendment, effective as of April 21, 2015, by and among Independent Bank, as
Lender, and Red Mountain Resources, Inc., Cross Border Resources, Inc., Black Rock Capital, Inc. and RMR Operating, LLC, as
Borrowers. (*) (27)
|
| 21.1 |
List of Subsidiaries. (23) |
| 23.1 |
Consent of Darilek, Butler & Associates PLLC. |
| 23.3 |
Consent of Engineering Firm |
| 24.1 |
Power of Attorney (included in signature block to this Annual Report on Form 10-K). |
| 31.1 |
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*) |
| 31.2 |
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*) |
| 32.1 |
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (*) |
|
32.2
|
Certification of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99.1* |
Evaluation of Oil and Gas Reserves of Cross Border Resources, Inc., Effective Date: January 1, 2015. (*) |
| (1) |
Filed as an exhibit to our Registration Statement on Form SB-2 filed on September 11, 2006. |
| (2) |
Filed as an exhibit to our Annual Report on Form 10-KSB for the year ended July 31, 2007 filed on October 30, 2007. |
| (3) |
Filed as an exhibit to our Current Report on Form 8-K filed on January 9, 2008. |
| (4) |
Filed as an exhibit to our Current Report on Form 8-K filed on April 28, 2008. |
| (5) |
Filed as an exhibit to our Current Report on Form 8-K filed on January 29, 2009. |
| (6) |
Filed as an exhibit to our Current Report on Form 8-K filed on September 14, 2009. |
| (7) |
Filed as an exhibit to our Quarterly Report on Form 10-Q filed on March 22, 2010. |
| (8) |
Filed as an exhibit to our Current Report on Form 8-K filed on May 6, 2010. |
| (9) |
Filed as an exhibit to our Current Report on Form 8-K filed on June 18, 2010. |
| (10) |
Filed as an exhibit to our Current Report on Form 8-K filed on July 30, 2010. |
| (11) |
Filed as an exhibit to our Current Report on Form 8-K filed on October 1, 2010. |
| (12) |
Filed as an exhibit to our Annual Report on Form 10-K filed on November 15, 2010. |
| (13) |
Filed as an exhibit to our Current Report on Form 8-K filed on December 1, 2010. |
| (14) |
Filed as an exhibit to our Current Report on Form 8-K filed on December 6, 2010. |
| (15) |
Filed as an exhibit to our Current Report on Form 8-K filed on December 29, 2010. |
| (16) |
Filed as an exhibit to our Current Report on Form 8-K filed on January 7, 2011. |
| (17) |
Filed as an exhibit to our Current Report on Form 8-K filed on January 19, 2011. |
| (18) |
Filed as an exhibit to our Current Report on Form 8-K filed on February 8, 2011. |
| (19) |
Filed as an exhibit to our Current Report on Form 8-K filed on March 25, 2011. |
| (20) |
Filed as an exhibit to our Current Report on Form 8-K filed on April 28, 2011. |
| (21) |
Filed as an exhibit to our Current Report on Form 8-K filed on November 23, 2011. |
| (22) |
Filed as an exhibit to our Current Report on Form 8-K filed on June 3, 2011. |
| (23) |
Filed as an exhibit to our Registration Statement on Form S-1/A on August 2, 2011. |
| (24) |
Filed as an exhibit to our Current Report on Form 8-K filed on November 16, 2011. |
| (25) |
Filed as an exhibit to our Current Report on Form 8-K filed on March 6, 2012. |
| (26) |
Filed as an exhibit to our Current Report on Form 8-K filed on February
11, 2013
|
| (27) |
Filed as an exhibit to our Current Report on Form 8-K filed on April
28, 2015
|
| 101.INS** |
XBRL Instance Document
|
| 101.SCH** |
XBRL Taxonomy Extension Schema Document
|
| 101.CAL** |
XBRL Taxonomy Extension Calculation
Linkbase Document
|
| 101.DEF** |
XBRL Taxonomy Extension Definition Linkbase
Document
|
| 101.LAB** |
XBRL Taxonomy Extension Label Linkbase
Document
|
| 101.PRE** |
XBRL Taxonomy Extension Presentation Linkbase Document |
| † | Indicates a compensation contract or arrangement with management. |
Exhibit 10.31
$100,000,000.00
SENIOR FIRST LIEN SECURED CREDIT AGREEMENT
Among
RED MOUNTAIN RESOURCES, INC., CROSS
BORDER RESOURCES, INC., BLACK ROCK CAPITAL, INC., AND
RMR OPERATING, LLC
as Borrowers,
and
INDEPENDENT BANK
as Lender
February 5, 2013
TABLE OF CONTENTS
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
16
|
|
|
|
|
16
|
|
|
|
|
17
|
| |
|
|
|
|
|
|
17
|
|
|
|
|
17
|
|
|
|
|
18
|
|
|
|
|
20
|
|
|
|
|
20
|
|
|
|
|
20
|
|
|
|
|
21
|
|
|
|
|
21
|
|
|
|
|
24
|
|
|
|
|
25
|
|
|
|
|
26
|
|
|
|
|
26
|
|
|
|
|
27
|
|
|
|
|
28
|
|
|
|
|
28
|
|
|
|
|
29
|
| |
|
|
|
|
|
|
29
|
|
|
|
|
29
|
|
|
|
|
32
|
| |
|
|
|
|
|
|
32
|
|
|
|
|
32
|
|
|
|
|
32
|
|
|
|
|
33
|
|
|
|
|
33
|
|
|
|
|
33
|
|
|
|
|
33
|
|
|
|
|
34
|
|
|
|
|
34
|
|
|
|
|
34
|
|
|
|
|
34
|
|
|
|
|
35
|
|
|
|
|
35
|
|
|
|
|
36
|
|
|
|
|
36
|
|
|
|
|
37
|
|
|
|
|
37
|
|
|
|
|
37
|
|
|
|
|
37
|
|
|
|
|
38
|
|
|
|
|
38
|
|
|
|
|
38
|
|
|
|
|
38
|
|
|
|
|
39
|
|
|
|
|
39
|
|
|
|
|
39
|
|
|
|
|
39
|
|
|
|
|
39
|
| |
|
|
|
|
|
|
40
|
|
|
|
|
40
|
|
|
|
|
40
|
|
|
|
|
41
|
|
|
|
|
41
|
|
|
|
|
41
|
|
|
|
|
41
|
|
|
|
|
45
|
|
|
|
|
45
|
|
|
|
|
45
|
|
|
|
|
45
|
|
|
|
|
46
|
|
|
|
|
46
|
|
|
|
|
46
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
47
|
|
|
|
|
47
|
|
|
|
|
47
|
|
|
|
|
47
|
|
|
|
|
47
|
|
|
|
|
47
|
|
|
|
|
48
|
| |
|
|
|
|
|
|
48
|
|
|
|
|
48
|
|
|
|
|
51
|
|
|
|
|
51
|
|
|
|
|
52
|
|
|
|
|
52
|
|
|
|
|
52
|
|
|
|
|
52
|
|
|
|
|
53
|
|
|
|
|
53
|
|
|
|
|
54
|
|
|
|
|
55
|
|
|
|
|
55
|
|
|
|
|
55
|
|
|
|
|
55
|
|
|
|
|
55
|
|
|
|
|
56
|
|
|
|
|
56
|
Senior First Lien Secured Credit Agreement – Page ii
|
|
|
|
56
|
|
|
|
|
56
|
|
|
|
|
56
|
|
|
|
|
56
|
|
|
|
|
56
|
|
|
|
|
57
|
| |
|
|
|
|
|
|
57
|
|
|
|
|
57
|
|
|
|
|
59
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
60
|
|
|
|
|
60
|
| |
|
|
|
|
|
|
60
|
| |
|
|
|
|
|
60
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
61
|
|
|
|
|
61
|
| |
|
|
|
|
|
|
61
|
|
|
|
|
61
|
|
|
|
|
61
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
|
|
62
|
|
|
|
|
62
|
|
|
|
|
62
|
|
|
|
|
63
|
|
|
|
|
63
|
|
|
|
|
63
|
|
|
|
|
63
|
|
|
|
|
63
|
|
|
|
|
64
|
|
|
|
|
64
|
|
|
|
|
64
|
|
|
|
|
64
|
Senior First Lien Secured Credit Agreement – Page iii
EXHIBITS:
|
Exhibit A
|
-
|
Borrowing Base Oil and Gas Properties
|
|
Exhibit B
|
-
|
Not Applicable
|
|
Exhibit C
|
-
|
Form of Compliance Certificate
|
|
Exhibit D
|
-
|
Form of Note
|
|
Exhibit E
|
-
|
Form of Notice of Borrowing
|
|
Exhibit F
|
-
|
Not Applicable
|
SCHEDULES:
|
Schedule 1
|
-
|
Borrower and Lender Information
|
|
Schedule 1.01
|
-
|
Excluded Subsidiaries
|
|
Schedule 4.01
|
-
|
Equity Interests
|
|
Schedule 4.05
|
-
|
Material Adverse Changes
|
|
Schedule 4.07
|
-
|
Litigation and Disputes
|
|
Schedule 4.12
|
-
|
Casualties
|
|
Schedule 4.13
|
-
|
Restrictions; Defaults
|
|
Schedule 4.16
|
-
|
Gas Imbalances
|
|
Schedule 4.19
|
-
|
Material Agreements; Debt Instruments
|
|
Schedule 4.20
|
-
|
Hedging Agreements
|
|
Schedule 4.21
|
-
|
Suspension and Offsets
|
|
Schedule 4.22
|
-
|
Other Oil and Gas Properties
|
|
Schedule 4.25
|
-
|
Purchasers of Production
|
|
Schedule 6.01
|
-
|
Liens
|
|
Schedule 6.02
|
-
|
Debt
|
|
Schedule 6.07
|
-
|
Investments
|
Senior First Lien Secured Credit Agreement – Page iv
SENIOR FIRST LIEN SECURED CREDIT AGREEMENT
This Senior First Lien Secured Credit Agreement dated as of February 5, 2013 (the “Closing Date”) is among RED MOUNTAIN RESOURCES, INC., a Florida corporation, CROSS BORDER RESOURCES, INC., a Nevada corporation, BLACK ROCK CAPITAL, INC., an Arkansas corporation and RMR OPERATING, LLC, a Texas limited liability company (jointly and severally, the “Borrowers” and individually each a “Borrower”) and INDEPENDENT BANK, a Texas banking corporation (“Lender”).
A. Borrowers have requested that Lender make available to Borrowers a credit facility for the extensions of loans and letters of credit, and Lender has agreed to make such credit facility available subject to the terms and conditions set forth herein.
B. The parties hereto desire to evidence their agreement in writing as provided herein.
NOW, THEREFORE, in consideration of the premises and agreements, provisions and covenants herein contained, the parties hereto do hereby agree as follows:
DEFINITIONS AND ACCOUNTING TERMS
Section 1.01 Certain Defined Terms. As used in this Agreement, the terms defined above shall have the meanings set forth above and the following terms shall have the following meanings (unless otherwise indicated, such meanings to be equally applicable to both the singular and plural forms of the terms defined):
“Acceptable Hydrocarbon Hedge Agreement” means:
(a) a Hydrocarbon Hedge Agreement meeting each of the following criteria unless a variation therefrom is consented to in writing by the Lender, such consent not to be unreasonably withheld or delayed:
(i) The quantity of gaseous and liquid hydrocarbons owned by the Borrowers subject to the Hydrocarbon Hedge Agreement (other than floors covered by clause (b) below) at the time of entering into the Hydrocarbon Hedge Agreement shall not, without the prior written approval of the Lender (such approval not to be unreasonably withheld or delayed), be greater than (aa) for natural gas, 75% of the monthly Projected Production of natural gas from the Oil and Gas Properties of the Borrowers used in determining the Borrowing Base and not the subject of Hydrocarbon Hedge Agreements under clause (b) below, (bb) for oil, 75% of the monthly Projected Production of oil from the Oil and Gas Properties of the Borrowers used in determining the Borrowing Base and not the subject of Hydrocarbon Hedge Agreements under clause (b) below and (cc) for condensate and natural gas liquids, including gas processing plant products, 75% of the monthly Projected Production of such liquids from the Oil and Gas Properties of the Borrowers used in determining the Borrowing Base and not the subject of Hydrocarbon Hedge Agreements under clause (b) below; in any case, as forecast in the most recent engineering review prepared by Lender;
Senior First Lien Secured Credit Agreement – Page 1
(ii) The “strike prices” under the Hydrocarbon Hedge Agreement, at the time of entering into the Hydrocarbon Hedge Agreement, shall not be less than the lowest prices utilized in the most recent base case evaluation of the Oil and Gas Properties of the Borrowers used by the Lender in determining the Borrowing Base as of the time the relevant agreements are entered into, except that under certain downside conditions such lower strike price as the Lender may approve in writing following a written request by the Borrowers may be used;
(iii) Lender must have given its prior written consent to the counterparty (such consent not to be unreasonably withheld or delayed) under the Hydrocarbon Hedge Agreement, except that such consent shall not be necessary for a Hydrocarbon Hedge Agreement entered into with a Swap Counterparty that is a Non-Lender Swap Counterparty so long as such Non-Lender Swap Counterparty has a long-term unsecured senior, non-credit enhanced debt rating by Standard & Poor’s Rating Group or Moody’s Investor Service Inc. of not less than A or A2, respectively;
(iv) Such Hydrocarbon Hedge Agreement has a term of not less than three (3) years in duration;
(v) The Hydrocarbon Hedge Agreement is a Hedge Agreement entered into in the ordinary course of business for the principal purpose of protecting against fluctuations in commodity prices or commodity basis risk and not for purpose of speculation;
(vi) The Hydrocarbon Hedge Agreement does not involve the sale of any calls other than calls sold in order to complete a permitted collar being executed; provided that, (aa) such call shall cover only Projected Production reflected at the time such call is sold, (bb) both such call and the corresponding put purchase to complete the collar shall cover the same period and the same volume of Projected Production, and (cc) such call is otherwise permitted under the terms of this definition;
(vii) The Hydrocarbon Hedge Agreement does not involve the purchase of any calls except calls purchased at the time a collar is put in place to serve as a so-called “blowout preventer”, which purchased calls shall cover the same period and the same volume of Projected Production as covered by such collar;
(viii) The Hydrocarbon Hedge Agreement is unsecured unless subject to an Intercreditor Agreement;
(ix) The Hydrocarbon Hedge Agreement does not involve the sale of any puts; and
(x) The Hydrocarbon Hedge Agreement does not involve “put spreads” or “call spreads” as such terms are commonly understood by swap dealers.
As used in this definition, the term “Projected Production” means the projected production of oil or gas (measured by volume unit or BTU equivalent, not sales price), as applicable, for the term of the contracts or a particular month, as applicable, from properties and interests owned by the Borrowers which are Collateral and which have attributable to them oil or gas proven reserves which are categorized as “Proved Reserves” as reflected in the engineering review prepared by the Lender in connection with the most recent determination of the Borrowing Base hereunder, after deducting projected production from any properties or interests sold or under contract for sale that had been included in such report; and
Senior First Lien Secured Credit Agreement – Page 2
(b) a Hydrocarbon Hedge Agreement in the form of minimum price guarantees or “floors”, limited to 100% of the monthly Projected Production for each of oil, natural gas and natural gas liquids from the Borrowers’ Oil and Gas Properties used in determining the Borrowing Base and not subject to Hydrocarbon Hedge Agreements under clause (a) above and otherwise satisfying the requirements of subclauses (ii) through (x) of clause (a) of this definition.
“Acceptable Security Interest” means, with respect to any Property, a Lien which (a) exists in favor of the Collateral Agent for the benefit of the Secured Creditors, (b) is superior to all Liens or rights of any other Person in the Property encumbered thereby, other than Permitted Liens, (c) secures the Total Obligations, and (d) is perfected and enforceable.
“Advance” means an advance by Lender to Borrowers pursuant to Section 2.01(a) as part of a Borrowing.
“Affiliate” means, as to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person or any Subsidiary of such Person. The term “control” (including the terms “controlled by” or “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of a Control Percentage, by contract, or otherwise; provided that, in any event (i) any Person who owns directly or indirectly ten percent (10%) or more of the Equity Interests having ordinary voting power for the election of the Governing Body of a Business Entity or ten percent (10%) or more of the Equity Interests of any other Business Entity (other than as a limited partner (or member in a limited liability company in the nature of a limited partner) of such other Person) will be deemed to control such Business Entity, and (ii) any Subsidiary of a Borrower shall be deemed to be an Affiliate of such Borrower.
“Aggregate Outstanding Exposure” means the sum of the aggregate outstanding principal amount of the Advances plus the Letter of Credit Exposure at any time.
“Agreement” means this Senior First Lien Secured Credit Agreement, as the same may be amended, restated, supplemented, or otherwise modified from time to time.
“Applicable Law” means, as to any Person, any law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or official interpretation of any of the foregoing), and the terms of any Permit, including, but not limited to, Regulations D, T, U, and X, that is applicable to such Person.
“Black Rock” means Black Rock Capital, Inc., an Arkansas corporation.
“Borrowers” and “Borrower” has the meaning set forth in the preamble hereof.
“Borrowing” means a borrowing consisting of Advances made on the same day by Lender pursuant to Section 2.01(a).
“Borrowing Base” means, at any particular time, the Dollar amount determined by Lender to be the Borrowing Base in accordance with Section 2.02.
“Borrowing Base Deficiency” means the occurrence at any time in which the Aggregate Outstanding Exposure exceeds the lesser of (a) the Borrowing Base and (b) the Commitment.
Senior First Lien Secured Credit Agreement – Page 3
“Borrowing Base Oil and Gas Properties” means those Oil and Gas Properties of Borrowers that are described in any Engineering Report submitted to Lender by Borrowers, together with (a) those Oil and Gas Properties of Borrowers that are described in Exhibit A attached hereto and made a part hereof, as such Exhibit A may be amended and supplemented from time to time, and (b) any other Oil and Gas Properties of any Borrower that are described in and covered by (or purported to be covered by) any of the Security Documents, whether or not such Oil and Gas Properties are described in Exhibit A attached hereto.
“Borrowing Base Utilization Percentage” means the ratio, expressed as a percentage, of (a) the Aggregate Outstanding Exposure to (b) the Borrowing Base.
“Business Day” means a day of the year other than (i) a Saturday or a Sunday or (ii) a legal holiday on which banks are required or authorized to close in Dallas, Texas.
“Business Entity” means any Person described in clause (b) of the definition of Person.
“Capital Expenditures” means, for Borrowers and the Subsidiaries for any period, the aggregate of all expenditures that are for items which should be capitalized in accordance with GAAP plus any intangible drilling and development expenditures deemed under GAAP to have been incurred in such period.
“Capital Leases” means, as applied to any Person, any lease of any Property by such Person as lessee that would, in accordance with GAAP, be required to be classified and accounted for as a capital lease on the balance sheet of such Person.
“Cash Collateral Account” means a special interest bearing cash collateral account pledged by one or more Borrowers to Lender and maintained with Lender in accordance with Section 2.07(g).
“CERCLA” means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, state and local analogs, and all rules and regulations and requirements thereunder in each case as now or hereafter in effect.
“Change in Control” means any event or circumstance that results in (a) the acquisition of ownership, directly or indirectly, beneficially or of records, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the SEC thereunder as in effect on the date hereof) of Equity Interests representing more than 51% of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of Red Mountain, (b) Red Mountain ceasing to own at least 51% of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of Cross Border, or (c) any Borrower ceasing to own 100% of the Equity Interest in any of its Relevant Subsidiaries.
“Change in Law” means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation or application thereof by any Governmental Authority or (c) the making or issuance of any request, guideline or directive (whether or not having the force of law) by any Governmental Authority.
“Closing Date” means the date set forth in the preamble of this Agreement.
“Code” means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute and all regulations thereunder.
Senior First Lien Secured Credit Agreement – Page 4
“Collateral” means (a) all “Collateral” and “Mortgaged Property” (as defined in each of the Mortgages and the Security Agreements, as applicable) or similar terms used in the Security Documents, and (b) all amounts contained in each Borrower’s Cash Collateral Accounts.
“Collateral Agent” means Lender in its capacity as collateral agent for the Secured Creditors under the Security Documents and the Intercreditor Agreement.
“Commitment” means the obligation of Lender to make Advances pursuant to Section 2.1(a) in an aggregate principal amount of Twenty Million and No/100 Dollars ($20,000,000.00), subject, however, to termination pursuant to Article VII.
“Commitment Termination Date” means the earlier of (a) the Maturity Date and (b) the earlier termination in whole of the Commitment pursuant to Article VII.
“Compliance Certificate” means a compliance certificate in the form of the attached Exhibit C.
“Consolidated Net Income” means, with respect to Borrowers and their consolidated Subsidiaries, for any period, the net income (or loss) for such period after taxes, as determined in accordance with GAAP, excluding, however (without duplication), (a) extraordinary items, including (i) any net non-cash gain or loss during such period arising from the sale, exchange, retirement, impairment or other disposition of capital assets other than in the ordinary course of business and (ii) any write-up or write-down of assets, (b) the cumulative effect of any change in GAAP and (c) income or loss of any Person accrued prior to the date it becomes a Subsidiary of a Borrower or is merged into or consolidated with a Borrower or any of its Subsidiaries or the date that such Person’s assets are acquired by a Borrower or any of its Subsidiaries, provided further that nothing herein shall be construed to permit any Borrower to enter any transactions not permitted under this Agreement.
“Control Percentage” means, with respect to any Business Entity, the percentage of the outstanding Equity Interest (including any options, warrants or similar rights to purchase such Equity Interest) of such Business Entity having ordinary voting power which gives the direct or indirect holder of such Equity Interest the power to elect a majority of the applicable Governing Body of such Business Entity.
“Controlled Group” means all members of a controlled group of corporations and all other Business Entities under common control which, together with Borrowers, are treated as a single employer under Section 414 of the Code.
“Credit Extension” means (a) an Advance made by Lender and (b) the issuance, increase, or extension of any Letter of Credit by Lender.
“Cross Border” means Cross Border Resources, Inc., a Nevada corporation.
“Current Assets” means all assets which would, in accordance with GAAP, be included as current assets on a consolidated balance sheet of the Borrowers and their consolidated Subsidiaries as of the date of calculation, after deducting adequate reserves in each case in which a reserve is proper in accordance with GAAP, plus the then current Unused Commitment, but excluding non-cash derivative current assets arising from Hydrocarbon Hedge Agreements.
“Current Liabilities” means all liabilities which would, in accordance with GAAP, be included as current liabilities on a consolidated balance sheet of the Borrowers and their consolidated Subsidiaries, but excluding current maturities in respect of the Obligations, both principal and interest, and non-cash derivative current liabilities arising from Hydrocarbon Hedge Agreements.
Senior First Lien Secured Credit Agreement – Page 5
“Debt” means as to any Person, without duplication (whether contingent or otherwise):
(a) all obligations of such Person for borrowed money, including, without limitation, obligations under letters of credit and agreements relating to the issuance of letters of credit or acceptance financing;
(b) obligations of such Person evidenced by bonds, debentures, notes or other similar instruments;
(c) obligations of such Person to pay the deferred purchase price of Property or services (including, without limitation, obligations that are non-recourse to the credit of such Person but are secured by the assets of such Person, but excluding trade accounts payable);
(d) obligations of such Person as lessee under Capital Leases and obligations of such Person in respect of synthetic leases;
(e) all liabilities which in accordance with applicable accounting principles would be included in determining total liabilities of such Person on the liability side of a balance sheet;
(f) net obligations of such Person under any Hedge Agreement;
(g) obligations of such Person under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) of such Person to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (a) through (e) above; and
(h) indebtedness or obligations of others of the kinds referred to in clauses (a) through (f) secured by any Lien on or in respect of any Property of such Person.
“Debt Instruments” means all instruments and agreements providing for, evidencing, securing or otherwise relating to any Debt of each Borrower and each of its Subsidiaries, in each case, involving Debt in excess of $200,000.
“Debtor Relief Laws” means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.
“Default” means (a) an Event of Default or (b) any event or condition which with notice or lapse of time or both would become an Event of Default.
“Default Rate” means a rate per annum at all times equal to the sum of (a) the greater of (i) the Reference Rate in effect from time to time and (ii) four percent (4.0%), plus (b) three percent (3%), but in no event in excess of the Maximum Rate.
“Deposit Account Control Agreement” means, with regard to any bank account of any Borrower maintained with a bank other than Lender, a deposit account control agreement among such Borrower, Lender, and such bank in form and content satisfactory to Lender.
Senior First Lien Secured Credit Agreement – Page 6
“Disposition” means, whether voluntary or involuntary, any sale, lease, transfer, assignment, farm-out, conveyance, forfeiture or other disposition, whether voluntary or involuntary, of any Property (including, without limitation, any working interest, overriding royalty interest, production payments, net profits interest, royalty interest, or mineral fee interest or the right to receive any income or revenue attributable thereto).
“Dollars” and “$” mean lawful money of the United States of America.
“EBITDAX” means, without duplication, for Borrowers and their consolidated Subsidiaries for any period, (a) Consolidated Net Income for such period plus (b) to the extent deducted in determining Consolidated Net Income: (i) Interest Expense, (ii) income taxes, (iii) depreciation, (iv) depletion, and amortization expenses, (v) dry hole and exploration expenses, (vi) any non-cash losses or charges on any Hedge Agreements with a Swap Counterparty resulting from the requirements of FASB Statement 133 for that period, (vii) extraordinary or non-recurring losses, (viii) expenses that could be capitalized under GAAP, but by election of Borrowers are being expensed for such period in accordance with GAAP, (ix) costs associated with intangible drilling costs, (x) other non-cash charges for such period, (xi) one-time expenses associated with transactions associated with (b) (i) through (iv) minus (c) (i) any non-cash income on any Hedge Agreements with a Swap Counterparty resulting from the requirements of FASB Statement 133 for that period, (ii) extraordinary or non-recurring income, and (iii) other non-cash income for such period.
“EHS Regulations” means all applicable federal, state or local laws with respect to any environmental, pollution, toxic or hazardous waste or human health and safety law, including those promulgated by the United States Environmental Protection Agency, the Federal Energy Regulatory Commission, the Department of Energy, the Occupational Safety and Health Administration, the Department of the Interior, or any other Governmental Authority, or any of their predecessor or successor agencies.
“Engineering Report” means a report, in form and content reasonably satisfactory to Lender prepared by Borrowers’ staff engineers or an Independent Engineer, as specified herein, addressed to Lender with respect to the Proved Reserves attributable to the Borrowing Base Oil and Gas Properties that are or are to be included in the Borrowing Base, which report shall (a) specify the location, quantity, and type of the estimated Proved Reserves attributable to such Oil and Gas Properties, (b) contain a projection of the rate of production of such Oil and Gas Properties, (c) contain an estimate of the net operating revenues to be derived from the production and sale of Hydrocarbons from such Proved Reserves based on product price and cost escalation assumptions provided by Lender to Borrowers, which product prices and cost escalation assumptions shall be substantially the same as used by Lender for its other loans for similarly situated properties and (d) contain such other information as is customarily obtained from and provided in such reports or is otherwise requested by Lender.
“Environment” or “Environmental” have the meanings set forth in 43 U.S.C. 9601(8) (1988).
“Environmental Claim” means any third party (including governmental agencies and employees) action, lawsuit, written claim, written demand, regulatory action or proceeding, order, decree, consent agreement or notice of potential or actual responsibility or violation (including claims or proceedings under the Occupational Safety and Health Acts or similar laws or requirements relating to health or safety of employees) that seeks to impose liability under any Environmental Law.
Senior First Lien Secured Credit Agreement – Page 7
“Environmental Law” means, as to Borrowers or their Relevant Subsidiaries, all Applicable Laws or common law theories applicable to Borrowers or Relevant Subsidiaries arising from, relating to, or in connection with the Environment, human health, or environmental safety, including without limitation CERCLA and EHS Regulations, relating to (a) pollution, contamination, injury, destruction, loss, protection, cleanup, reclamation or restoration of the air, surface water, groundwater, land surface or subsurface strata, or other natural resources; (b) solid, gaseous or liquid waste generation, treatment, processing, recycling, reclamation, cleanup, storage, disposal or transportation; (c) exposure to pollutants, contaminants, hazardous substances, medical infections, or toxic substances, materials or wastes; (d) the safety or health of employees; or (e) the manufacture, processing, handling, transportation, distribution in commerce, use, storage or disposal of hazardous substances, medical infections, or toxic substances, materials or wastes.
“Environmental Permit” means any Permit under any Environmental Law.
“Equity Interest” means with respect to any Business Entity, any shares, interests, participation, or other equivalents (however designated) of corporate stock, membership interests or partnership interests or any other ownership interests in such Business Entity, including any options, warrants or similar rights to purchase such Equity Interest.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated thereunder.
“Event of Default” has the meaning specified in Section 7.01.
“Excluded Subsidiary” means (i) any Subsidiary of a Borrower other than a Relevant Subsidiary, (ii) any Subsidiary of an Excluded Subsidiary, or (iii) subject to the written approval of Lender, any Subsidiary which a Borrower has designated in writing to Lender to be an Excluded Subsidiary, including the Subsidiaries of Borrowers set forth on Schedule 1.01.
“Expiration Date” means, with respect to any Letter of Credit, the date on which such Letter of Credit will expire or terminate in accordance with its terms.
“Federal Reserve Board” means the Board of Governors of the Federal Reserve System or any of its successors.
“Final Payment Date” means the date on which (i) the Commitment has expired or been terminated, (ii) the Total Obligations have been paid in full (other than contingent obligations that survive the termination of this Agreement for which no claim has been made), (iii) either all Letters of Credit have expired or terminated or the Borrowers have granted to Lender a perfected security interest in cash collateral equal to the Letter of Credit Exposure relating to each outstanding Letter of Credit and (iv) this Agreement and the Intercreditor Agreement have terminated.
“Financial Statements” means, with regard to any period, the balance sheet of Borrowers and their consolidated Subsidiaries as of the last day of such period and the related statements of income, cash flow, and retained earnings of Borrowers and their consolidated Subsidiaries for the period then ended (with attached auditor’s report for all year-end Financial Statements).
“Funded Debt” means, as of any date of determination, the sum of all Debt for borrowed money (whether as a direct obligor on a promissory note, a bond, debenture, loan agreement or other similar instruments or a reimbursement obligor on a letter of credit, a guarantor, or otherwise), including under this Agreement and other Debt for borrowed money permitted under Section 6.02.
Senior First Lien Secured Credit Agreement – Page 8
“GAAP” means generally accepted accounting principles, applied on a consistent basis, as set forth in opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a “consistent basis” when the accounting principles observed in a current period are comparable in all material respects to those accounting principles applied in a preceding period.
“Governing Agreements” means with respect to any Person (a) the articles or certificate of incorporation, certificate of formation or partnership, articles of organization (or the equivalent organizational documents) of such Person and (b) the by-laws, limited liability company agreement, partnership agreement or agreement of limited partnership (or the equivalent governing document) of such Person.
“Governing Body” means, (i) in the case of a corporation, its board of directors, (ii) in the case of a limited liability company, its members or its managers, depending on how the management of such Business Entity is allocated in its governing documents, (iii) in the case of a general partnership or joint venture, the partners or the joint venturers thereof, respectively, (iv) in the case of a limited partnership, the applicable governing body of the general partner thereof, if such general partner is a Business Entity, and (v) in the case of any other business entity not specified herein, the designees thereof that, pursuant to the governing documents of such business entity, fulfill the responsibilities typically discharged by a board of directors of a corporation.
“Governmental Authority” means, as to any Person in connection with any subject, any foreign, national, state or provincial governmental authority or tribal authority, or any political subdivision of any state thereof, or any agency, department, commission, board, authority or instrumentality, bureau or court, in each case having jurisdiction over such Person or such Person’s Property in connection with such subject.
“Green Shoe / Little Bay Debt” means the Debt owed by Cross Border to Red Mountain under and pursuant to (a) the Promissory Note dated April 15, 2011, in the stated principal amount of $552,041.69 executed by Cross Border and payable to the order of Green Shoe Investments Ltd. and (b) the Promissory Note dated April 15, 2011, in the stated principal amount of $596,618.54 executed by Cross Border and payable to the order of Little Bay Consulting SA, subsequently acquired by Red Mountain.
“Guarantor” means each Person who is a party as a “Guarantor” to a Guaranty.
“Guaranty” means a Guaranty, in form and content satisfactory to Lender, executed by a Guarantor whereby the guarantors named therein guarantee the Obligations, and “Guaranties” shall mean all such guaranties collectively, as the same may be amended, restated or supplemented from time to time.
“Hazardous Substance” means the substances identified as such pursuant to CERCLA and those regulated under any other Environmental Law, including, without limitation, pollutants, contaminants, petroleum, petroleum products, radionuclides, radioactive materials, and medical and infectious waste.
“Hazardous Waste” means the substances regulated as such pursuant to any Environmental Law.
“Hedge Agreement” means (a) any and all interest rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, deferred premium commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions,
Senior First Lien Secured Credit Agreement – Page 9
currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “Master Agreement”).
“Hydrocarbon Hedge Agreement” means a Hedge Agreement between Borrowers or any one of them and a Swap Counterparty that is intended to reduce or eliminate the risk of fluctuations in the price of Hydrocarbons.
“Hydrocarbons” means oil, gas, coal seam gas, coalbed methane, casinghead gas, drip gasoline, natural gasoline, condensate, distillate, and all other liquid and gaseous hydrocarbons produced or to be produced in conjunction therewith from a well bore and all products, by-products, and other substances derived therefrom or the processing thereof, and all other minerals and substances produced in conjunction with such substances, including, but not limited to, sulfur, geothermal steam, water, carbon dioxide, helium, and any and all minerals, ores, or substances of value and the products and proceeds therefrom.
“Independent Engineer” means Russell K. Hall & Associates or any other independent, third-party engineering firm acceptable to Lender.
“Initial Engineering Report” means the Engineering Report delivered by Borrowers to Lender prior to the Closing Date.
“Intercreditor Agreement” means an intercreditor agreement, among a Non-Lender Swap Counterparty, the Collateral Agent, Borrowers and Lender, in form and content satisfactory to the Collateral Agent, Lender and Borrowers.
“Interest Expense” means, for Borrowers and their consolidated Subsidiaries for any period, total interest, letter of credit fees, and other fees and expenses which are classified as interest in conformity with GAAP, incurred in connection with any Funded Debt for such period, whether paid or accrued, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers’ acceptance financing and net costs under Interest Hedge Agreements, all as determined in conformity with GAAP.
“Interest Hedge Agreement” means a Hedge Agreement between a Borrower and a Swap Counterparty that provides for the exchange of notional interest obligations between such Borrower and such Swap Counterparty or the cap of the interest rate on any Debt of a Borrower
“Leases” means all oil and gas leases, oil, gas and mineral leases, oil, gas and casinghead gas leases or any other instruments, agreements, or conveyances under and pursuant to which the lessee thereof has or obtains the right to enter upon lands and explore for, drill, and develop such lands for the production of Hydrocarbons.
“Letter of Credit” means, individually, any standby letter of credit issued or deemed issued by Lender for the account of Borrowers in connection with the Commitment that is subject to this Agreement and “Letters of Credit” means all such letters of credit collectively.
Senior First Lien Secured Credit Agreement – Page 10
“Letter of Credit Application” means Lender’s standard form letter of credit application for standby letters of credit that has been executed by Borrowers and accepted by Lender in connection with the issuance of a Letter of Credit.
“Letter of Credit Documents” means all Letters of Credit, Letter of Credit Applications, and agreements, documents, and instruments entered into in connection therewith or relating thereto.
“Letter of Credit Exposure” means, at any time, the sum of (a) the aggregate undrawn maximum face amount of each Letter of Credit at such time, plus (b) the aggregate unpaid amount of all Reimbursement Obligations at such time.
“Letter of Credit Obligations” means any obligations of Borrowers under this Agreement in connection with the Letters of Credit, including the Reimbursement Obligations.
“Lien” means any mortgage, lien, pledge, assignment, charge, deed of trust, security interest, hypothecation, preference, deposit arrangement or encumbrance (or other type of arrangement having the practical effect of the foregoing) to secure or provide for the payment of any obligation of any Person, whether arising by contract, operation of law, or otherwise (including, without limitation, the interest of a vendor or lessor under any conditional sale agreement, synthetic lease, Capital Lease, or other title retention agreement).
“Liquid Investments” means:
(a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States maturing within 180 days from the date of any acquisition thereof;
(b) negotiable or nonnegotiable certificates of deposit, time deposits, or other similar banking arrangements maturing within 365 days from the date of acquisition thereof issued by any bank or trust company which has primary capital of not less than $150,000,000;
(c) commercial paper issued by any Person, if at the time of purchase, such commercial paper is rated not less than “AA” (or the then equivalent) by the rating service of Standard & Poor’s Ratings Group or not less than “P-1” (or the then equivalent) by the rating service of Moody’s Investors Service, Inc., or upon the discontinuance of both of such services, such other nationally recognized rating service or services, as the case may be, as shall be selected by Borrowers with the consent of Lender; and
(d) deposits in money market funds investing exclusively in investments described in clauses (a), (b) and (c) above.
“Loan Documents” means this Agreement, the Note, the Letter of Credit Documents, the Security Documents, each Guaranty, the Subordination Agreements any Intercreditor Agreement, the Post Closing Agreement, and each other agreement, instrument, or document executed by any Loan Party in connection with this Agreement.
“Loan Party” means each Borrower and each Relevant Subsidiary that is or hereafter becomes a party to a Loan Document. “Loan Parties” means all such parties.
“Marketable Title” means good and defensible title and ownership, free and clear of all mortgages, liens and encumbrances, except for Permitted Liens.
Senior First Lien Secured Credit Agreement – Page 11
“Material Adverse Effect” means a material adverse effect on (a) the business, assets (including the Borrowing Base Oil and Gas Properties), liabilities (actual or contingent), financial condition or results of operations of the Borrowers and their respective Relevant Subsidiaries taken as a whole, (b) the ability of any Borrower to perform any of its obligations under this Agreement or any other Loan Document, or any Hedge Agreement with a Swap Counterparty to which it is a party, or (c) the ability of any Relevant Subsidiary to perform its obligations under any Loan Document to which it is a party.
“Material Agreements” means all Operating Agreements; Hydrocarbon purchase, sales, exchange, processing, gathering, treatment, compression and transportation agreements; farmout or farmin agreements; exploration agreements; unitization agreements; joint venture, limited or general partnership, dry hole, bottom hole, acreage contribution, purchase and acquisition agreements; area of mutual interest agreements; salt water disposal agreements, servicing contracts; easements; pooling agreements; surface leases, Permits, rights-of-way, servitudes, or other agreements, the non-compliance with which by a Borrower would cause a Material Adverse Effect. Notwithstanding the foregoing, Material Agreements do not include the Loan Documents, Hedge Agreements with a Swap Counterparty, and Leases of the Loan Parties.
“Maturity Date” means February 5, 2016.
“Maximum Rate” means the maximum nonusurious interest rate under applicable law (determined under such laws after giving effect to any items which are required by such laws to be construed as interest in making such determination, including without limitation if required by such laws, certain fees and other costs).
“Mortgage” means any mortgage or deed of trust, in form and content reasonably satisfactory to Lender, executed by a Borrower in favor of the Collateral Agent or Lender for the ratable benefit of the Secured Creditors, as the same may be amended, restated, supplemented or otherwise modified from time-to-time.
“Monthly Commitment Reduction” means the amount by which the Commitment shall be reduced as of the first day of each calendar month pursuant to Section 2.02.
“Multiemployer Plan” means a “multiemployer plan” as defined in Section 4001(a)(3) of ERISA.
“Net Proceeds” means (a) with respect to any Disposition of any Property by any Person, the aggregate amount of cash and non-cash proceeds from such transaction received by, or paid to or for the account of, such Person, net of customary and reasonable out-of-pocket costs, fees, and expenses. Non-cash proceeds include any proceeds received by way of deferred payment of principal calculated on a combined basis as of such time pursuant to a note, installment receivable, purchase price adjustment receivable, or otherwise.
“Non-Lender Swap Counterparty” means BP Energy Company and/or any of its Affiliates, subject to the provisos hereinafter, and (ii) any other swap counterparty, other than Lender, that is a counterparty to any Hedge Agreement with any Borrower, provided that (x) such Hedge Agreement satisfies the requirements under Section 6.15 and (y) such swap counterparty enters into an Intercreditor Agreement.
“Non-Lender Swap Counterparty Obligations” means the obligations owed by Borrowers to any Non-Lender Swap Counterparty pursuant to a Hedge Agreement that satisfies the requirements under Section 6.15.
Senior First Lien Secured Credit Agreement – Page 12
“Note” means a promissory note of Borrowers payable to the order of Lender, in substantially the form of the attached Exhibit D, evidencing indebtedness of Borrowers to Lender resulting from Advances and extensions of credit under Letters of Credit.
“Notice of Borrowing” means a notice of borrowing in the form of the attached Exhibit E signed by a Responsible Officer of each Borrower.
“Obligations” means (a) all principal, interest, fees, reimbursements, indemnifications, Letter of Credit Obligations and other amounts payable by Borrowers or any other Loan Parties to Lender under the Loan Documents and (b) all financial obligations of Borrowers owing to any Swap Counterparty (other than any Non-Lender Swap Counterparty) under any Hedge Agreement.
“Oil and Gas Properties” means fee mineral interests, term mineral interests, Leases, subleases, farm-outs, royalties, overriding royalties, net profit interests, carried interests, production payments and similar mineral interests, together with all contracts executed in connection therewith, and all unsevered and unextracted Hydrocarbons in, under, or attributable to such oil and gas properties and interests, or any interest therein, and all proceeds thereof.
“Operating Agreement” means (a) any (joint) operating agreements covering or relating to any one or more of the Borrowing Base Oil and Gas Properties and (b) any subsequently executed (joint) operating agreement covering or relating to any one or more of the Borrowing Base Oil and Gas Properties that is executed after the date hereof by any Borrower or any other Loan Party in the ordinary course of business.
“PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.
“Permit” means any approval, certificate of occupancy, consent, waiver, exemption, registration, variance, franchise, order, permit, authorization, right or license of or from any Governmental Authority, including without limitation, an Environmental Permit.
“Permitted Debt” means the Debt permitted to exist pursuant to Section 6.02.
“Permitted Liens” means the Liens permitted to exist pursuant to Section 6.01.
“Person” means (a) an individual and (b) a partnership, corporation (including a business trust), joint stock company, limited liability corporation or company, limited liability partnership, trust, unincorporated association, joint venture or other entity formed under the laws of any particular state for the purpose of conducting business, or any government or any political subdivision or agency thereof.
“Plan” (whether or not capitalized) means an employee benefit plan (other than a Multiemployer Plan) maintained for employees of Borrower or any member of the Controlled Group and covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code.
“Post-Closing Agreement” means Agreement Regarding Post Closing Items dated of even date herewith among Borrowers and Lender.
“Primary Accounts” has the meaning assigned to such term in Section 4.27.
“Primary Lending Office” means 3090 Craig Drive, McKinney, Texas 75070.
Senior First Lien Secured Credit Agreement – Page 13
“Property” means any property or assets (whether real, personal, or mixed, tangible or intangible) of any Person.
“Proved Reserves” or “Proven Reserves” has the meaning given that term in the definitions promulgated by the Society of Petroleum Evaluation Engineers and the World Petroleum Congress as in effect at the time in question; “Proved Developed Producing Reserves” or “PDP Reserves” means Proved Reserves which are categorized as both “Developed” and “Producing” in such definitions.
“PV9” means the present value of future net income, discounted to present value at the simple interest rate of nine percent (9%) per year.
“Red Mountain” means Red Mountain Resources, Inc., a Florida corporation.
“Reference Rate” means the U.S. prime rate as published in The Wall Street Journal’s “Money Rates” table for such day. If multiple prime rates are quoted in such table, then the highest U.S. prime rate quoted therein shall be the prime rate. In the event that a U.S. prime rate is not published in The Wall Street Journal’s “Money Rates” table for any reason or The Wall Street Journal is not published that day in the United States of America for general distribution, Lender will choose a substitute U.S. prime rate, for purposes of calculating the interest rate applicable hereunder, which is based on comparable information, until such time as a prime rate is published in The Wall Street Journal’s “Money Rates” table. Each change in the prime rate shall become effective without notice to the Borrower on the effective date of each such change.
“Regulations U and X” mean Regulations U and X of the Federal Reserve Board, as the same are from time to time in effect, and all official rulings and interpretations thereunder or thereof.
“Reimbursement Obligations” means all of the obligations of Borrowers to reimburse Lender for amounts paid by Lender under Letters of Credit as established by the Letter of Credit Applications and Section 2.07(d).
“Release” has the meaning set forth in CERCLA or under any other Environmental Law.
“Relevant Subsidiary” means any Subsidiary Guarantor.
“Response” has the meaning set forth in CERCLA or under any other Environmental Law.
“Responsible Officer” means (a) with respect to any Person that is a corporation, such Person’s Chief Executive Officer, President, Chief Financial Officer, Chief Accounting Officer, Chief Operating Officer, or Executive Vice President, (b) with respect to any Person that is a limited liability company, a manager or the Responsible Officer of such Person’s managing member or manager, or such Person’s Chief Executive Officer, President, Chief Financial Officer, Chief Accounting Officer, Chief Operating Officer, or Executive Vice President and (c) with respect to any Person that is a general partnership or a limited liability partnership, the Responsible Officer of such Person’s general partner or partners.
“Restricted Payment” means, with respect to any Person, (a) any direct or indirect dividend or distribution (whether in cash, securities or other Property) in respect of the Equity Interest of such Person or any direct or indirect payment of any kind or character (whether in cash, securities or other Property) in consideration for or otherwise in connection with any retirement, purchase, redemption or other acquisition of any Equity Interest in such Person, or any options, warrants or rights to purchase or acquire any such Equity Interest in such Person or (b) principal or interest payments (in cash, Property or otherwise) on, or redemptions of, subordinated debt of such Person.
Senior First Lien Secured Credit Agreement – Page 14
“SEC” means the United States Securities and Exchange Commission and any successor thereto.
“Secured Creditors” means the Collateral Agent, Lender, and the Swap Counterparties.
“Security Agreements” means the Security Agreements, each in form and content reasonably satisfactory to Lender, executed by Borrowers from time to time in favor of the Collateral Agent or Lender for the ratable benefit of the Secured Creditors, as the same may be amended, restated or otherwise modified from time to time.
“Security Documents” means, collectively, (a) the Mortgages, (b) the Transfer Letters, (c) the Security Agreements, (d) the Notices of Assignment, (e) each Deposit Account Control Agreement, (f) each other agreement, instrument or document executed at any time in connection with the Mortgages or Security Agreements in order to perfect the Liens thereof, (g) each agreement, instrument or document executed in connection with the Cash Collateral Account, and (h) each other agreement, instrument or document executed at any time in connection with securing the Obligations or the Total Obligations.
“Solvent” means, with respect to any Person as of the date of any determination, that on such date (a) the fair value of the Property of such Person (both at fair valuation and at present fair saleable value) is greater than the total liabilities, including contingent liabilities, of such Person, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations, and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person’s Property would constitute unreasonably small capital after giving due consideration to current and anticipated future capital requirements and current and anticipated future business conduct and the prevailing practice in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, such liabilities shall be computed at the amount which, in light of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability.
“Subordinated Debt” means all Debt of one or more Borrowers owing to any Person that has been subordinated to the Obligations by a Subordination Agreement including, without limitation, (a) Debt owing by Red Mountain to Hyman Belzberg, William Belzberg, and Caddo Management, Inc., (b) Debt owing by Red Mountain to SST Advisors, (c) the Swiss Debt, and (d) the Green Shoe / Little Bay Debt.
“Subordination Agreement” means a written agreement, in form and substance satisfactory to Lender, under which the Debt of one or more Borrowers to any other Person is subordinated to the Obligations.
“Subsidiary” of a Person means any Business Entity of which more than 50% of the outstanding Equity Interests having ordinary voting power under ordinary circumstances to elect a majority of the Governing Body of such Business Entity (irrespective of whether at such time Equity Interests of any other class or classes of such corporation or other entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned or controlled (i) by such Person, (ii) by such Person and one or more Subsidiaries of such Person or (iii) by one or more Subsidiaries of such Person. Unless otherwise indicated herein, each reference to the term “Subsidiary” shall mean a Subsidiary of Borrower (other than a Subsidiary that is a Borrower).
Senior First Lien Secured Credit Agreement – Page 15
“Subsidiary Guarantor” means each Subsidiary (other than a Borrower that is a Subsidiary) of a Borrower that is a Guarantor.
“Super Fund Sites” means those sites listed on the Environmental Protection Agency National Priority List and eligible for remedial action or any comparable state registries or list in any state of the United States.
“Swap Counterparty” means, with respect to any Hedge Agreement, (i) Lender or Affiliate of Lender, and (ii) any Non-Lender Swap Counterparty, in each case, that is a counterparty to any Hedge Agreement with a Borrower.
“Swiss Debt” means the Debt owed by Red Mountain to (a) Hohenplan Privatstiftung evidenced by a promissory note dated November 25, 2011, in the stated principal amount of $1,000,000.00 and a promissory note dated July 30, 2012, in the stated principal amount of $1,000,000.00, in each case executed by Red Mountain and payable to the order of Hohenplan Privatstiftung and (b) Personalvorsorge Der Autogrill Schweiz AG evidenced by a promissory note dated November 25, 2011, in the stated principal amount of $1,500,000.00 executed by Red Mountain and payable to the order of Personalvorsorge Der Autogrill Schweiz AG.
“Termination Event” means (a) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC under such regulations), (b) the withdrawal of Borrower or any of its controlled Affiliates from a Plan during a plan year in which it was a “substantial employer” as defined in Section 4001 (a)(2) of ERISA, (c) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, or (e) any other event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan.
“Total Obligations” means, collectively, the Obligations and the Non-Lender Swap Counterparty Obligations.
“Transfer Letters” means, collectively, the letters in lieu of transfer orders in form and content reasonably satisfactory to Lender, executed by Borrowers executing a Mortgage, as each of the same may be amended, restated or otherwise modified from time-to-time.
“Unused Commitment Amount” means at any time, (a) the lesser of (i) the Commitment at such time or (ii) the Borrowing Base in effect at such time minus, in each case, (b) the sum of the Aggregate Outstanding Exposure at such time.
Section 1.02 Computation of Time Periods. In this Agreement, with respect to the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including” and the words “to” and “until” each means “to but excluding.”
Section 1.03 Accounting Terms; Changes in GAAP. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all Financial Statements and certificates and reports as to financial matters required to be delivered to Lender hereunder shall (unless otherwise disclosed to Lender in writing at the time of delivery thereof) be prepared, in accordance with GAAP. All calculations made for the purposes of determining compliance with this Agreement shall (except as otherwise expressly provided herein) be made by application of GAAP applied on a basis consistent with those used in the preparation of the annual or quarterly Financial Statements furnished to Lender pursuant to Section 5.06 hereof most recently delivered prior to or concurrently with such calculations.
Senior First Lien Secured Credit Agreement – Page 16
If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth herein, and either Borrowers or Lender shall so request, Lender and Borrowers shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to the approval of Lender, such approval not to be unreasonably withheld or delayed); provided that, until so amended, (a) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein, and (b) Borrowers shall provide to Lender Financial Statements and other documents required under this Agreement or as requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP. In addition, all calculations and defined accounting terms used herein shall, unless expressly provided otherwise, when referring to any Person, refer to such Person on a consolidated basis and mean such Person and its consolidated Subsidiaries.
Section 1.04 Miscellaneous. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” The word “will” shall be construed to have the same meaning and effect as the word “shall.” Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth in the Loan Documents), (b) any reference herein to any law shall be construed as referring to such law as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time, (c) any reference herein to any Person shall be construed to include such Person’s successors and assigns (subject to the restrictions contained in the Loan Documents), (d) the words “herein,” “hereof” and “hereunder,” and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, and (e) any reference herein to Articles, Sections, Annexes, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Annexes, Exhibits and Schedules to, this Agreement. No provision of this Agreement or any other Loan Document shall be interpreted or construed against any Person solely because such Person or its legal representative drafted such provision.
CREDIT FACILITIES
(a) Advances. Lender agrees, on the terms and conditions set forth in this Agreement, to make Advances to Borrowers from time to time on any Business Day during the period from the date of this Agreement until the Commitment Termination Date in an amount not to exceed the Unused Commitment Amount. Each Borrowing shall be in an amount not less than the lesser of (i) $100,000, and in integral multiples of $100,000 in excess thereof, and (ii) the Unused Commitment Amount. Within the limits of the Commitment and the Borrowing Base, and subject to the terms of this Agreement, Borrowers may from time to time borrow, prepay, and reborrow Advances.
(b) Note. The indebtedness of Borrowers to Lender resulting from the Advances owing to Lender shall be evidenced by the Note of Borrowers payable to the order of Lender.
Senior First Lien Secured Credit Agreement – Page 17
Section 2.02 Borrowing Base and Monthly Commitment Reduction.
(a) Borrowing Base. The initial Borrowing Base in effect as of the date of this Agreement is $20,000,000 and the initial Monthly Commitment Reduction is $0.00. The Monthly Commitment Reduction shall apply on February 1, 2013 and on the first date of each calendar month thereafter until redetermined as set forth in this Section 2.02. Such initial Borrowing Base and the Monthly Commitment Reduction shall remain in effect until the next redetermination made pursuant to this Section 2.02. The Borrowing Base and Monthly Commitment Reduction shall be determined in accordance with the standards set forth in Section 2.02(d) and is subject to periodic redetermination pursuant to Sections 2.02(b) and 2.02(c).
(b) Calculation of Borrowing Base and Monthly Commitment Reduction.
(i) Borrowers shall deliver to Lender an Engineering Report on the semi-annual dates specified in Section 5.06(d) and such other information as may be reasonably requested by Lender with respect to the Borrowing Base Oil and Gas Properties.
(ii) Within thirty (30) days after receipt of an Engineering Report and such other information as may be requested by Lender pursuant to this Agreement, Lender shall make a determination of the new Borrowing Base and the Monthly Commitment Reduction and shall, by written notice to Borrowers, designate the new Borrowing Base available to Borrowers and the Monthly Commitment Reduction. Such designation shall be effective as of the Business Day specified in such written notice (or, if no effective date is specified in such written notice, the next Business Day following delivery of such written notice to any Borrower) and such new Borrowing Base and the Monthly Commitment Reduction shall remain in effect until the next redetermination of the Borrowing Base and the Monthly Commitment Reduction in accordance with this Agreement.
(iii) In the event that Borrowers do not furnish to Lender the Engineering Report or other information specified in clauses (i) and (ii) above by the date specified therein, Lender may nonetheless redetermine the Borrowing Base and the Monthly Commitment Reduction and redetermine the Borrowing Base and Monthly Commitment Reduction from time to time thereafter in its sole discretion until Lender receives the relevant Engineering Report or other information, as applicable, whereupon Lender shall redetermine the Borrowing Base and Monthly Commitment Reduction as otherwise specified in this Section 2.02.
(iv) Each delivery of an Engineering Report by Borrowers to Lender shall constitute a representation and warranty by Borrowers to Lender that (A) Borrowers own the Borrowing Base Oil and Gas Properties specified therein (including the Oil and Gas Properties listed on Schedule 4.22 if the Borrowing Base thereto is requested by Borrowers) subject to an Acceptable Security Interest free and clear of any Liens (except Permitted Liens); (B) on and as of the date of such Engineering Report, the PDP Reserves identified therein were developed for Hydrocarbons, and the wells pertaining to such Borrowing Base Oil and Gas Properties that are described therein as producing wells, were each producing Hydrocarbons in paying quantities, except for Wells that were utilized as water or gas injection wells or as water disposal wells, (C) the descriptions of quantum and nature of the record title interests of Borrowers set forth in such Engineering Report include the entire record title interests of Borrowers in such Borrowing Base Oil and Gas Properties, are materially complete and accurate in all respects, and take into account all Permitted Liens,
Senior First Lien Secured Credit Agreement – Page 18
(D) there are no “back-in” or “reversionary” interests held by third parties which could reduce the interests of Borrowers in such Borrowing Base Oil and Gas Properties as set forth in Engineering Report, and (E) no Operating Agreement or other agreement (including any Material Agreement) to which any Borrower is a party or by which any Borrower is bound affecting any part of such Borrowing Base Oil and Gas Properties requires any Borrower to bear any of the costs relating to such Borrowing Base Oil and Gas Properties greater than the record title interest of each Borrower in such portion of the such Borrowing Base Oil and Gas Properties as set forth in such Engineering Report, except in the event such Borrower is obligated under an Operating Agreement to assume a portion of a defaulting party’s share of costs.
(c) Interim Redetermination. In addition to the Borrowing Base and the Monthly Commitment Reduction redeterminations provided for in Section 2.02(b), Lender may, in its sole discretion and based on such information as Lender deems relevant (but in accordance with Section 2.02(d)), make two additional redeterminations of the Borrowing Base and the Monthly Commitment Reduction for the first year following the Closing Date and one additional redetermination of the Borrowing Base and the Monthly Commitment Reduction during each subsequent year. Furthermore, Lender shall, at the request of Borrowers, and based on such information as Lender deems relevant (but in accordance with Section 2.02(d)), make one additional unscheduled redetermination of the Borrowing Base and the Monthly Commitment Reduction during each period between scheduled redeterminations, and, at the further request of Borrowers, Lender may (but is not obligated to) make additional unscheduled redeterminations of the Borrowing Base and the Monthly Commitment Reduction during each period between scheduled redeterminations. The party requesting the redetermination shall give the other party at least 10 days’ prior written notice that a redetermination of the Borrowing Base and the Monthly Commitment Reduction pursuant to this Section 2.02(c) is to be performed. In connection with any redetermination of the Borrowing Base and the Monthly Commitment Reduction under this Section 2.02(c), Borrowers shall provide Lender with such information regarding each Borrower’s business (including, without limitation, its Borrowing Base Oil and Gas Properties, the Proved Reserves, and production relating thereto) as Lender may reasonably request, including an updated Engineering Report. Lender shall as soon as reasonably practical notify Borrowers in writing of each redetermination of the Borrowing Base and the Monthly Commitment Reduction pursuant to this Section 2.02(c) and the amount of the Borrowing Base and the Monthly Commitment Reduction as so redetermined.
(d) Standards for Redetermination. Each redetermination of the Borrowing Base and the Monthly Commitment Reduction by Lender pursuant to this Section 2.02 shall be made (i) in the sole discretion of Lender (but in accordance with the other provisions of this Section 2.02(d)), (ii) in accordance with Lender’s customary internal standards and practices for valuing and redetermining the value of Borrowing Base Oil and Gas Properties in connection with reserve based oil and gas loan transactions, (iii) in conjunction with the most recent Engineering Report or other information received by Lender relating to the Proved Reserves attributable to the Borrowing Base Oil and Gas Properties, and (iv) based upon the estimated value of the Proved Reserves attributable to the Borrowing Base Oil and Gas Properties as determined by Lender. In valuing and redetermining the Borrowing Base and the Monthly Commitment Reduction, Lender may also consider the business, financial condition, and Debt obligations of Borrowers and such other factors as Lender customarily deems appropriate, including, without limitation, commodity price projections and assumptions, projections of production, discount factors, operating expenses, operating cost escalators, general and administrative expenses, capital costs, working capital requirements, liquidity evaluations, dividend payments, environmental costs and legal costs. In that regard, each Borrower acknowledges that the determination of the Borrowing Base contains a value cushion (market value in excess of loan value), which is essential for the adequate protection of Lender.
Senior First Lien Secured Credit Agreement – Page 19
(e) At all times after Lender has given Borrowers notification of a redetermination of the Borrowing Base under this Section 2.02, the Borrowing Base shall be equal (i) to the redetermined amount or (ii) such lesser amount designated by Borrowers and disclosed in writing to Lender; provided, that Borrowers shall not request that the Borrowing Base be reduced to a level that would result in a Borrowing Base Deficiency, until the Borrowing Base is subsequently redetermined in accordance with this Section 2.02.
Section 2.03 Method of Borrowing. Each Borrowing shall be made pursuant to a Notice of Borrowing (or by telephone notice promptly confirmed in writing by a Notice of Borrowing), given not later than 12:00 p.m. (noon) (Dallas, Texas time) on the Business Day of the proposed Borrowing by Borrowers to Lender. Each Notice of a Borrowing shall be given in writing, including by facsimile, specifying the information required therein. Upon fulfillment of the applicable conditions set forth in Article III, Lender shall make such funds available to Borrowers at its account with Lender.
(a) Optional. Borrowers may prepay any Borrowing without penalty or premium, after giving by 10:00 a.m. (Dallas, Texas time) at least one Business Day’s irrevocable prior written notice (or irrevocable telephone notice promptly confirmed in writing) to Lender stating the proposed date, the Borrowing to be prepaid, and the aggregate principal amount of such prepayment. If any such notice is given, Borrowers shall prepay the Borrowing in whole in part in an aggregate principal amount equal to the amount specified in such notice, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that each partial prepayment shall be made in a minimum amount of $100,000 and in integral multiples of $10,000 in excess thereof.
(b) Borrowing Base Deficiency.
(i) If any scheduled Monthly Commitment Reductions will result in a Borrowing Base Deficiency, the Borrowers shall, concurrently with the effective date of such Monthly Commitment Reduction, prepay the Advances in the amount of such deficiency.
(ii) Contemporaneously with (A) the sale of any Oil and Gas Property of any Borrower pursuant to Section 6.05 or (B) a termination of a Hedge Agreement to which a Borrower is a party, principal prepayments will be required, in each case, if such event results in a Borrowing Base Deficiency, in the amount of such deficiency; provided that if an Event of Default is then in existence, principal prepayments will be required, in each case, in the amount of one hundred percent (100%) of Net Proceeds thereof.
Senior First Lien Secured Credit Agreement – Page 20
(iii) Except as provided in clauses (i) and (ii) of this Section 2.05(b), upon the occurrence of a Borrowing Base Deficiency, Borrowers shall, at the option of Borrowers communicated to Lender within ten (10) days of receipt of notice from Lender regarding such deficiency (A) prepay the Advances in the amount of the Borrowing Base Deficiency within ninety (90) days after the date such deficiency notice is received by Borrowers from Lender or, if the Advances have been repaid in full, make deposits into the Cash Collateral Account to provide cash collateral for the Letter of Credit Exposure, (B) provide, within thirty (30) days of such election by Borrowers, additional Collateral of a character and value satisfactory to Lender in its sole discretion, and/or cash as Collateral to secure the Obligations, by way of the execution and delivery to Lender of Security Documents in form and substance reasonably satisfactory to Lender, or (C) affect any combination of the alternatives described in clauses (A) or (B) of this sentence and acceptable to Lender in its sole discretion. If such additional Collateral is provided by a Subsidiary of any Borrower, such Subsidiary shall become a Borrower for all purposes of this Agreement by execution of appropriate documents requested by Lender, all in form and substance reasonably satisfactory to Lender.
(iv) Each prepayment pursuant to this Section 2.05(b) shall be accompanied by accrued interest on the amount prepaid to the date of such prepayment.
(c) No Additional Right; Ratable Prepayment. Borrowers shall have no right to prepay any principal amount of any Advance except as provided in this Section 2.05, and all notices given pursuant to this Section 2.05 shall be irrevocable and binding upon Borrowers.
Section 2.06 Repayment of Advances. Borrowers shall repay to Lender the outstanding principal amount of each Advance, together with any accrued interest on the Commitment Termination Date.
(a) Commitment. From time to time after the date of this Agreement until 30 days prior to the Commitment Termination Date, at the request of Borrowers, Lender shall, on the terms and conditions hereinafter set forth, issue, increase, or extend the Expiration Date of, Letters of Credit for the account of Borrowers on any Business Day. No Letter of Credit will be issued, increased, or extended:
(i) if such issuance, increase, or extension would cause the Letter of Credit Exposure to exceed the lesser of (A) $2,000,000 and (B) the lesser of (1) the Commitment at such time and (2) the Borrowing Base in effect at such time minus, in each case under this clause (B), the sum of the aggregate outstanding principal amount of all Advances at such time;
(ii) if such Letter of Credit has an Expiration Date later than the earlier of (A) one year after the date of issuance thereof (or, in the case of any extension thereof, one year after the date of such extension) and (B) the Commitment Termination Date;
(iii) unless the Letter of Credit Documents are in form and content satisfactory to Lender in its reasonable discretion;
(iv) unless such Letter of Credit is a standby letter of credit not supporting the repayment of indebtedness for borrowed money of any Person;
(v) unless Borrowers have delivered to Lender a completed and executed Letter of Credit Application; provided, that if the terms of any such Letter of Credit Application conflicts with the terms of this Agreement, the terms of this Agreement shall control;
Senior First Lien Secured Credit Agreement – Page 21
(vi) unless such Letter of Credit is governed by (A) the Uniform Customs and Practice for Documentary Credits (2007 Revision), International Chamber of Commerce Publication No. 600, or (B) the International Standby Practices (ISP98), International Chamber of Commerce Publication No. 590, in either case, including any subsequent revisions thereof approved by a Congress of the International Chamber of Commerce and adhered to by Lender;
(vii) if any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain Lender from issuing such Letter of Credit, or any Applicable Law applicable to Lender or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over Lender shall prohibit, or request that Lender refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon Lender with respect to such Letter of Credit any restriction, reserve or capital requirement (for which Lender is not otherwise compensated hereunder) not in effect on the Closing Date, or shall impose upon Lender any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which Lender in good faith deems material to it;
(viii) if the issuance of such Letter of Credit would violate one or more policies of Lender applicable to letters of credit generally; or
(ix) except as otherwise agreed by Lender, if the Letter of Credit is to be denominated in a currency other than Dollars.
(b) Intentionally Omitted.
(c) Issuing. Each Letter of Credit shall be issued, increased, or extended pursuant to a Letter of Credit Application (or by telephone notice promptly confirmed in writing by a Letter of Credit Application), given not later than 10:00 a.m. (Dallas, Texas time) on the third Business Day before the date of the proposed issuance, increase, or extension of the Letter of Credit. Each Letter of Credit Application shall be delivered by facsimile or by mail specifying the information required therein; provided, that if such Letter of Credit Application is delivered by facsimile, Borrowers shall follow such facsimile with an original by mail. After Lender’s receipt of such Letter of Credit Application (by facsimile or by mail) and upon fulfillment of the applicable conditions set forth in Article III, Lender shall issue, increase, or extend such Letter of Credit for the account of Borrowers. Each Letter of Credit Application shall be irrevocable and binding on Borrowers.
(d) Reimbursement. Each payment by Lender pursuant to a drawing under a Letter of Credit is required to be reimbursed by Borrowers to Lender and payable immediately upon such drawing and, at the sole option of Lender, can be charged by Lender as (and in such event will be deemed to be) an Advance by Lender to Borrowers under this Agreement as of the day and time such payment is made by Lender and in the amount of such payment.
(e) Obligations Unconditional. The obligations of Borrowers under this Agreement in respect of each Letter of Credit shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances:
Senior First Lien Secured Credit Agreement – Page 22
(i) any lack of validity or enforceability of any Letter of Credit Documents;
(ii) any amendment or waiver of, or any consent to or departure from, any Letter of Credit Documents;
(iii) the existence of any claim, set-off, defense, or other right which Borrowers may have at any time against any beneficiary or transferee of such Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), Lender, or any other person or entity, whether in connection with this Agreement, the transactions contemplated in this Agreement or in any Letter of Credit Documents, or any unrelated transaction;
(iv) any statement or any other document presented under such Letter of Credit proving to be forged, fraudulent, invalid, or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;
(v) payment by Lender under such Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit; or
(vi) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing.
(f) Liability of Lender. Borrowers assume all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. Neither Lender nor any of its officers or directors shall be liable or responsible for:
(i) the use which may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith;
(ii) the validity, sufficiency, or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent, or forged;
(iii) payment by Lender against presentation of documents which do not comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the relevant Letter of Credit; or
(iv) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit (INCLUDING LENDER’S OWN NEGLIGENCE).
(g) Cash Collateral Account.
(i) If Borrowers are required to deposit funds in the Cash Collateral Account pursuant to Sections 7.02(b) or 7.03(b), then Borrowers and Lender shall establish the Cash Collateral Account and Borrowers shall execute any documents and agreements, including Lender’s standard form assignment of deposit accounts, that Lender reasonably requests in connection therewith to establish the Cash Collateral Account and grant Lender a first priority security interest in such account and the funds therein. Each Borrower hereby pledges to Lender and grants Lender a security interest in the Cash Collateral Account, whenever established, all funds held in the Cash Collateral Account from time to time, and all proceeds thereof as security for the payment of the Total Obligations.
Senior First Lien Secured Credit Agreement – Page 23
(ii) So long as no Default or Event of Default exists, (A) Lender may apply the funds held in the Cash Collateral Account only to the reimbursement of any Letter of Credit Obligations, and (B) Lender shall release to Borrowers at Borrowers’ written request any funds held in the Cash Collateral Account in an amount up to but not exceeding the excess, if any (immediately prior to the release of any such funds), of the total amount of funds held in the Cash Collateral Account over the Letter of Credit Exposure. During the existence of any Default or Event of Default, Lender may apply any funds held in the Cash Collateral Account to the Obligations in any order determined by Lender, regardless of any Letter of Credit Exposure that may remain outstanding. Lender may in its sole discretion at any time release to Borrowers any funds held in the Cash Collateral Account.
(iii) Lender shall exercise reasonable care in the custody and preservation of any funds held in the Cash Collateral Account which shall bear interest or be invested in Lender’s reasonable discretion and Lender shall be deemed to have exercised such care if such funds are accorded treatment substantially equivalent to that which Lender accords its own Property, it being understood that Lender shall not have any responsibility for taking any necessary steps to preserve rights against any parties with respect to any such funds.
(a) Unused Facility Fees. Borrowers shall pay to Lender an unused facility fee equal to one-half of one percent (0.50%) multiplied by the average daily Unused Commitment Amount, from the date of this Agreement until the Commitment Termination Date. The unused facility fees shall be due and payable quarterly in arrears on the last day of each March, June, September, and December commencing on March 31, 2013 and continuing thereafter through and including the Commitment Termination Date.
(b) Letter of Credit Fees.
(i) Letter of Credit Fees. Borrowers shall pay to Lender a fronting fee payable on the date of issuance for each Letter of Credit equal to the greater of (A) two percent (2.0%) per annum times the face amount of such Letter of Credit or (B) $1,000.00. The fronting fee shall be payable annually in advance on the date of the issuance of the Letter of Credit, and, in the case of an increase or extension only, on the date of such increase or such extension.
(ii) Customary Fees. Borrower also shall pay to Lender such other usual and customary fees associated with any transfers, amendments, drawings, negotiations or reissuances of any Letters of Credit.
(c) Origination Fee. Borrowers shall pay to Lender (i) on the Closing Date, a origination fee equal to one percent (1.0%) of the Commitment as of the Closing Date and (ii) on any date the Commitment is increased, an additional facility fee equal to one percent (1.0%) multiplied by any increase of the Commitment above the highest previously determined or redetermined Commitment (i.e., the origination fee shall not be subject to “double-counting” should a future Commitment be reduced, then subsequently increased to an amount below the highest previously determined or redetermined Commitment).
Senior First Lien Secured Credit Agreement – Page 24
(d) Engineering Fees. On the Closing Date and on the date of each Borrowing Base redetermination, Borrowers shall pay to and reimburse Lender for all reasonable and customary fees and expenses in connection with the Engineering Reports.
(a) Applicable Interest Rates. Borrowers shall pay interest on the unpaid principal amount of each Advance made by Lender from the date of such Advance until such principal amount shall be paid in full at a rate per annum equal at all times to the lesser of (A) the Maximum Rate and (B) the greater of (aa) the Reference Rate in effect from time to time and (bb) four percent (4.0%), payable monthly in arrears on the last day of each calendar month, commencing February 28, 2013, and on the date such Advance shall be paid in full.
(b) Usury Savings/Recapture.
(i) If the effective rate of interest contracted for under the Loan Documents, including the stated rates of interest and fees contracted for hereunder and any other amounts contracted for under the Loan Documents that are deemed to be interest, at any time exceeds the Maximum Rate, then the outstanding principal amount of the Advances made by Lender hereunder shall bear interest at a rate which would make the effective rate of interest for Lender under the Loan Documents equal the Maximum Rate until the difference between the amounts which would have been due at the stated rates and the amounts that were due at the Maximum Rate (the “Lost Interest”) has been recaptured by Lender.
(ii) If, when the Advances made hereunder are repaid in full, the Lost Interest has not been fully recaptured by Lender pursuant to the preceding clause (i), then, to the extent permitted by law, for the Advances made hereunder by Lender the interest rates charged under Section 2.09 hereunder shall be retroactively increased such that the effective rate of interest under the Loan Documents was at the Maximum Rate since the effectiveness of this Agreement to the extent necessary to recapture the Lost Interest not recaptured pursuant to the preceding sentence and, to the extent allowed by law, Borrowers shall pay to Lender the amount of the Lost Interest remaining to be recaptured by Lender.
(iii) NOTWITHSTANDING THE FOREGOING OR ANY OTHER TERM IN THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO THE CONTRARY, IT IS THE INTENTION OF LENDER AND BORROWERS TO CONFORM STRICTLY TO ANY APPLICABLE USURY LAWS. ACCORDINGLY, IF LENDER CONTRACTS FOR, CHARGES, OR RECEIVES ANY CONSIDERATION THAT CONSTITUTES INTEREST IN EXCESS OF THE MAXIMUM RATE, THEN ANY SUCH EXCESS SHALL BE CANCELED AUTOMATICALLY AND, IF PREVIOUSLY PAID, SHALL AT LENDER’S OPTION BE APPLIED TO THE OUTSTANDING AMOUNT OF THE ADVANCES MADE HEREUNDER BY LENDER OR BE REFUNDED TO BORROWERS.
Senior First Lien Secured Credit Agreement – Page 25
(a) Payment Procedures. Borrowers shall make each payment under this Agreement and under the Note not later than 12:00 p.m. (noon) (Dallas, Texas time) on the day when due in Dollars to Lender at the Primary Lending Office (or such other location as Lender shall designate in writing to Borrowers) in same day funds without deduction, setoff, or counterclaim of any kind.
(b) Computations. All computations of interest based on the Reference Rate and of fees (other than Letter of Credit fees) shall be made by Lender on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on Letter of Credit fees shall be made by Lender, on the basis of a year of 360 days, in each case for the actual number of days (including the first day, but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by Lender of an interest rate or fee shall be conclusive and binding for all purposes, absent manifest error.
(c) Non-Business Day Payments. Whenever any payment shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be.
(a) Capital Adequacy. If Lender determines in good faith that a Change in Law affects or would affect the amount of capital required or expected to be maintained by Lender or any Business Entity controlling Lender by an amount that the Lender considers material and that the amount of such capital is increased by or based upon the existence of Lender’s commitment to lend or commitment to issue the Letters of Credit and other commitments of this type, then, upon 30 days’ prior written notice by Lender, Borrowers shall immediately pay to Lender, from time to time as specified by Lender, additional amounts sufficient to compensate Lender, in light of such circumstances, to the extent that Lender determines such increase in capital to be allocable to the existence of Lender’s commitment to lend under this Agreement or to the issuance or maintenance of the Letters of Credit. In any such case, Lender shall deliver to the Borrowers a certificate as to the amount of such increased cost and detailing the calculation of such cost.
(b) Letters of Credit. If any Change in Law shall either (i) impose, modify, or deem applicable any reserve, special deposit, or similar requirement against letters of credit issued by, or assets held by, or deposits in or for the account of, Lender by an amount deemed material by Lender or (ii) impose on Lender any other condition regarding the provisions of this Agreement relating to the Letters of Credit or any Letter of Credit Obligations, and the result of any event referred to in the preceding clause (i) or (ii) shall be to increase the cost to Lender of issuing or maintaining any Letter of Credit, then, upon demand by Lender, Borrowers shall pay to Lender, from time to time as specified by Lender, additional amounts which shall be sufficient to compensate Lender for such increased cost. Lender shall deliver to the Borrowers a certificate as to the amount of such increased cost incurred by Lender, as a result of any event mentioned in clause (i) or (ii) above, and detailing the calculation of such cost.
Senior First Lien Secured Credit Agreement – Page 26
(a) Each Borrower is accepting joint and several liability under the Note, this Agreement and the other Loan Documents in consideration of the financial accommodations to be provided by Lender under this Agreement, for the mutual benefit, directly and indirectly, of each Borrower and in consideration of the undertakings of the other Borrowers to accept joint and several liability for the Total Obligations.
(b) Each Borrower, jointly and severally, hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Borrowers, with respect to the payment and performance of all of the Total Obligations (including, without limitation, any Obligations arising under this Section 2.14), it being the intention of the parties hereto that all the Total Obligations shall be the joint and several obligations of each Borrower without preferences or distinction among them.
(c) If and to the extent that any Borrower shall fail to make any payment with respect to any of the Total Obligations as and when due or to perform any of the Total Obligations in accordance with the terms thereof, then in each such event the other Borrowers will make such payment with respect to, or perform, such Total Obligation.
(d) The Total Obligations constitute the absolute and unconditional, full recourse Total Obligations of each Borrower enforceable against each Borrower to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Agreement, the Note, the other Loan Documents, or any other circumstances whatsoever.
(e) Except as otherwise expressly provided in this Agreement, each Borrower hereby waives notice of acceptance of its joint and several liability, notice of any Advances or Letters of Credit issued under or pursuant to this Agreement, notice of the occurrence of any Default, Event of Default, or of any demand for any payment under this Agreement, or the Note, or any of the other Loan Documents, notice of any action at any time taken or omitted by Lender under or in respect of any of the Total Obligations, any requirement of diligence or to mitigate damages and, generally, to the extent permitted by applicable law, all demands, notices and other formalities of every kind in connection with this Agreement, the Note, and the other Loan Documents (except as otherwise provided in this Agreement). Each Borrower hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Total Obligations, the acceptance of any payment of any of the Total Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by Lender at any time or times in respect of any default by any Borrower in the performance or satisfaction of any term, covenant, condition or provision of this Agreement, the Note, and the other Loan Documents, any and all other indulgences whatsoever by Lender in respect of any of the Total Obligations, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Total Obligations or the addition, substitution or release, in whole or in part, of any Borrower. Without limiting the generality of the foregoing, each Borrower assents to any other action or delay in acting or failure to act on the part of Lender with respect to the failure by any Borrower to comply with any of its respective Total Obligations, including, without limitation, any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations thereunder, which might, but for the provisions of the Note and this Section 2.11 afford grounds for terminating, discharging or relieving any Borrower, in whole or in part, from any of the Total Obligations, it being the intention of each Borrower that, so long as any of the Total Obligations hereunder remain unsatisfied, the Total Obligations of each Borrower shall not be discharged except by payment and performance and then only to the extent of such payment or performance. The Total Obligations of each Borrower shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any Borrower or Lender.
Senior First Lien Secured Credit Agreement – Page 27
(f) Each Borrower represents and warrants to Lender that such Borrower is currently informed of the financial condition of Borrowers and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the Obligations. Each Borrower further represents and warrants to Lender that such Borrower has read and understands the terms and conditions of the Loan Documents. Each Borrower hereby covenants that such Borrower will continue to keep informed of Borrowers’ financial condition, and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Total Obligations.
Section 2.13 Lender’s Actions. Each Borrower acknowledges that its obligations and liabilities hereunder or under any other Loan Document may derive from value provided directly to another party and, in full recognition of that fact, each Borrower consents and agrees that Lender may, at any time and from time to time, without notice to, demand on, or the agreement of, such party, and without affecting the enforceability or security of the Loan Documents: (a) accept new or additional instruments, documents or agreements in exchange for, or relative to, any of the Loan Documents or the Total Obligations or any part thereof; (b) accept partial payments on the Total Obligations; (c) receive and hold additional security or guaranties for the Total Obligations or any part thereof; (d) release, reconvey, terminate, waive, abandon, subordinate, exchange, substitute, transfer and enforce any security or guaranties, and apply any security and direct the order or manner of sale thereof as Lender in its sole and reasonable discretion may determine; (e) release any party or any guarantor from any personal liability with respect to the Total Obligations or any part thereof; (f) settle, release on terms satisfactory to Lender, or by operation of applicable laws or otherwise liquidate or enforce any of the Total Obligations and any security or guaranty in any manner, consent to the transfer of any security, and bid and purchase at any sale; and/or (g) consent to the merger, change or any other restructuring or termination of the existence of any Borrower or any other person or entity, and correspondingly restructure the Total Obligations, continuing existence of any lien under any other Loan Document to which a Borrower is a party or the enforceability hereof or thereof with respect to all or part of the Total Obligations.
Section 2.14 Additional Waivers. Each Borrower expressly waives any right to require Lender to marshal assets in favor of any Borrower or any other person or entity or to proceed against any other Borrower or any other person or entity or any collateral provided by any other Borrower or any other person or entity, and agrees that Lender may proceed against Borrowers and/or the collateral in such order as Lender shall determine in its sole and reasonable discretion. Lender may file a separate action or actions against a Borrower, whether such action is brought or prosecuted with respect to any other security or against any other person, or whether any other person is joined in any such action or actions. Notwithstanding anything to the contrary elsewhere contained herein or in any other Loan Document to which any Borrower is a party, each Borrower hereby subordinates to the rights of Lender hereunder and under the other Loan Documents with respect to each other Borrower and their respective successors and assigns (including any surety), and any other party, any and all rights at law or in equity, to subrogation, to reimbursement, to exoneration, to contribution, to setoff or to any other rights that could accrue to a surety against a principal, to a guarantor against a maker, to an accommodation party against the party accommodated, or to a lender or transferee against a maker and which any Borrower may have or hereafter acquire against each other Borrower or any other party in connection with or as a result of the execution, delivery and/or performance of the Loan Document to which any Borrower is a party. So long as the Obligations remain outstanding, each Borrower agrees that it shall not have or assert any such rights against one another or their respective successors and assigns or any other party (including any surety) either directly or as an attempted setoff to any action commenced against any Borrower by another Borrower (in any capacity) or any other party. Each Borrower hereby acknowledges and agrees that this waiver is intended to benefit Lender and shall not limit or otherwise affect the liability of such party hereunder or under any other Loan Document to which a Borrower is a party, or the enforceability hereof or thereof.
Senior First Lien Secured Credit Agreement – Page 28
Section 2.15 Defenses. Each Borrower expressly waives any and all defenses now or hereafter arising or asserted by reason of (a) any disability or other defense of any other Borrower or any other person or entity with respect to any Total Obligations, (b) the unenforceability or invalidity as to any other Borrower or any other person or entity of the Total Obligations, (c) the unenforceability or invalidity of any security or guaranty for the Total Obligations or the lack of perfection or continuing perfection or failure of priority of any security for the Total Obligations, (d) the cessation for any cause whatsoever of the liability of any Borrower or any other person or entity (other than by reason of the full payment and performance of all Total Obligations), (e) to the extent permitted by law, any failure of Lender to give notice of sale or other disposition to any Borrower, (f) any act or omission of Lender or others that directly or indirectly results in or aids the discharge or release of any Borrower or any other person or entity or the Total Obligations or any other security or guaranty therefor by operation of law or otherwise, (g) any failure of Lender to file or enforce a claim in any bankruptcy or other proceeding with respect to any other Borrower, (h) the election by Lender, in any bankruptcy proceeding of any other Borrower, of the application or non-application of Section 1111(b)(2) of the United States Bankruptcy Code, (i) any extension of credit or the grant of any lien under Section 364 of the United States Bankruptcy Code in connection with the bankruptcy of any other Borrower, (j) any use of cash collateral under Section 363 of the United States Bankruptcy Code, or (k) any agreement or stipulation with any other Borrower with respect to the provision of adequate protection in any bankruptcy proceeding of any person or entity. Each Borrower waives all rights and defenses arising out of an election of remedies by Lender. Each Borrower authorizes Lender, upon the occurrence of and during the continuance of any Event of Default, at its sole option, without notice or demand and without affecting any Total Obligations or the validity or enforceability of any liens of Lender on any collateral, to foreclose any or all of the Security Documents securing the Total Obligations by judicial or nonjudicial sale.
CONDITIONS OF LENDING
Section 3.01 Conditions Precedent to Effectiveness. The effectiveness of this Agreement is subject to the following conditions precedent:
(a) Documentation. Lender shall have received the following duly executed by all the parties thereto, in form and content satisfactory to Lender, and where applicable, in sufficient counterparts:
(i) this Agreement, the Note, the Security Documents and the other Loan Documents;
(ii) favorable opinions of counsel to Borrowers and each of their respective Relevant Subsidiaries, dated as of the Closing Date, in form and content satisfactory to Lender and its counsel. Borrowers request such counsel to deliver its opinions to Lender;
(iii) copies, certified as of the Closing Date by Responsible Officers of each Loan Party, of (A) the resolutions of the Governing Body of such Loan Party approving the Loan Documents to which such Loan Party is a party, (B) the Governing Agreements of such Loan Party, and (C) all other documents evidencing other necessary company action and governmental approvals, if any, with respect to this Agreement and the other Loan Documents;
(iv) certificates of Responsible Officer(s) of each Loan Party certifying on behalf of such Loan Party the names and true signatures of the officers authorized to sign this Agreement and the other Loan Documents to which such Loan Party is a party and, in the case of each Borrower, Hedge Agreements with Swap Counterparties to which such Borrower is a party;
Senior First Lien Secured Credit Agreement – Page 29
(v) certificates of good standing for each Loan Party in each state in which such Loan Party is organized or qualified to do business, in each case as of a recent date;
(vi) appropriate UCC-1 Financing Statements covering the Collateral for filing with the appropriate authorities and any other documents, agreements or instruments necessary to create an Acceptable Security Interest in such Collateral;
(vii) insurance certificates naming Lender loss payee or additional insured, as applicable, and evidencing insurance that meets the requirements of this Agreement and the Security Documents, and that are otherwise satisfactory to Lender;
(viii) the Initial Engineering Report dated effective a date acceptable to Lender; and
(ix) such other documents, governmental certificates, agreements and lien searches as Lender may request, reflecting the absence of other liens and security interests other than Permitted Liens.
(b) Payment of Fees. On or prior to the Closing Date, Borrowers shall have paid the fees required by Sections 2.08(c) and (d) and all costs and expenses that have been invoiced prior to the Closing Date and are payable pursuant to Section 10.04.
(c) Delivery of Financial Statements. Lender shall have received true and correct copies of (i) Financial Statements of Red Mountain and its consolidated Subsidiaries for the year ended May 31, 2012 and the quarter ending August 31, 2012, (ii) Financial Statements of Cross Border for the year ended December 31, 2011, and the quarter ended September 30, 2012, and (iii) such other financial information as the Lender may request.
(d) Security Documents. Lender shall have received all appropriate evidence required by Lender in its sole discretion necessary to determine that Collateral Agent (for its benefit and the benefit of the Secured Creditors) shall have an Acceptable Security Interest in the Collateral which shall include at least 90% of the PV9 of the PDP Reserves of the Borrowing Base Oil and Gas Properties and 90% of the PV9 of the Proved Reserves of the Borrowing Base Oil and Gas Properties (as set forth in the Initial Engineering Report).
(e) Title. Lender shall be satisfied, in its sole discretion, with the title to the Borrowing Base Oil and Gas Properties of Borrowers and that such Borrowing Base Oil and Gas Properties constitute at least 80% of the PV9 of the PDP Reserves and at least 80% of the PV9 of the Proved Reserves of the Borrowing Base Oil and Gas Properties (as set forth in the Initial Engineering Report) as determined by Lender in its sole discretion.
(f) Environmental. Lender shall have received such environmental assessments or other reports as it may require and shall be reasonably satisfied with the condition of the Borrowing Base Oil and Gas Properties with respect to Borrowers’ and any other Loan Party’s compliance with Environmental Laws.
(g) Material Adverse Effect. No event or circumstance that could have a Material Adverse Effect shall have occurred.
Senior First Lien Secured Credit Agreement – Page 30
(h) No Proceeding or Litigation; No Injunctive Relief. No action, suit, investigation or other proceeding (including, without limitation, the enactment or promulgation of a statute or rule) by or before any arbitrator or any Governmental Authority shall be threatened or pending and no preliminary or permanent injunction or order by a state or federal court shall have been entered (i) in connection with (A) any of the Borrowing Base Oil and Gas Properties, any other Collateral or other Properties of any Borrower or any of its Relevant Subsidiaries or (B) this Agreement or any transaction contemplated hereby or (ii) which, in any case, in the reasonable judgment of Lender, could have a Material Adverse Effect.
(i) Consents, Licenses, Approvals, etc. Lender shall have received true copies (certified to be such by each Borrower or other appropriate party) of all Permits required in accordance with Applicable Laws, or in accordance with any document, agreement, instrument or arrangement to which each Borrower or any of its Relevant Subsidiaries is a party, in connection with the execution, delivery, performance, validity and enforceability of this Agreement and the other Loan Documents. In addition, Borrowers shall have all such Permits required in connection with the continued operation of Borrowers and their respective Relevant Subsidiaries, and such approvals shall be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on this Agreement and the actions contemplated hereby.
(j) Material Agreements. Borrowers shall have delivered to Lender copies of all Material Agreements and Debt Instruments listed on Schedule 4.19.
(k) Releases of Liens and UCC-3 Termination Statements. Lender shall have received release of Liens and UCC-3 Termination Statements executed by such Persons as Lender may deem necessary to insure Lender’s first priority security interest in and to the Collateral.
(l) Additional Equity. Borrowers shall have provided evidence reasonably satisfactory to Lender that additional equity has been contributed to Red Mountain in an amount of not less than $5,000,000.00, in form and upon terms reasonably acceptable to Lender.
(m) Acceptable Hydrocarbon Hedge Agreement. One or more Borrowers shall have entered into an Acceptable Hydrocarbon Hedge Agreement with a Non-Lender Swap Counterparty upon terms acceptable to Lender effectively hedging at least fifty percent of the oil volumes of the Borrowers for a period of at least 18 months from the Closing Date and shall have delivered to the Lender the Acceptable Hydrocarbon Hedge Agreement relating thereto.
(n) Letters of Acknowledgment. Lender shall have received letters of acknowledgment executed by holders of the Swiss Debt acknowledging, among other things, that the Swiss Debt is unsecured and is subordinate in right of payment to the payment of the Obligations.
(o) Completion of Due Diligence. Lender shall be satisfied, in its reasonable discretion, with the results of all business, financial, legal, title, engineering and Environmental due diligence with respect to each Borrower and its Properties.
Senior First Lien Secured Credit Agreement – Page 31
Section 3.02 Conditions Precedent to All Borrowings. The obligation of Lender to make an Advance on the occasion of each Borrowing and to issue, increase, or extend any Letter of Credit shall be subject to the further conditions precedent that on the date of such Borrowing or the date of the issuance, increase, or extension of such Letter of Credit:
(a) the representations and warranties contained in Article IV of this Agreement and the representations and warranties contained in the other Loan Documents are true and correct in all material respects on and as of the date of such Credit Extension, before and after giving effect to such Credit Extension and to the application of the proceeds from such Credit Extension, as though made on and as of such date (except in the case of representations and warranties which are made solely as of an earlier date or time, which representations and warranties shall be true and correct in all material respects as of such earlier date or time);
(b) no Default has occurred and is continuing or would result from such Credit Extension or from the application of the proceeds therefrom; and
(c) Lender shall have received a Notice of Borrowing from Borrowers, with appropriate insertions and executed by a duly authorized Responsible Officer of each Borrower.
Each of the giving of the applicable Notice of Borrowing or Letter of Credit Application and the acceptance by Borrowers of the Credit Extension shall constitute a representation and warranty by Borrowers that on the date of such Credit Extension, such conditions have been satisfied.
REPRESENTATIONS AND WARRANTIES
Each Borrower represents and warrants to Lender as follows:
Section 4.01 Existence; Subsidiaries. Such Borrower and each of its Relevant Subsidiaries is (a) duly organized and validly existing under the laws of the jurisdiction of its incorporation, organization or formation, as applicable and (b) in good standing and qualified to do business as a foreign Business Entity in each jurisdiction where the conduct of its business requires such qualification, except where the failure to do so would not have a Material Adverse Effect. As of the date of this Agreement, such Borrower does not have any Subsidiary other than listed on Schedule 4.01 and such Borrower does not own any Equity Interests in any Person except in such Subsidiaries and otherwise as set forth in Schedule 4.01.
Section 4.02 Power. The execution, delivery, and performance by such Borrower and each of its Relevant Subsidiaries of this Agreement and the other Loan Documents to which it is a party and the consummation of the transactions contemplated hereby and thereby (a) are within the corporate or other governing power of such Borrower and each of its Relevant Subsidiaries, (b) have been duly authorized by all necessary corporate or other appropriate governing action of such Borrower and each of its Relevant Subsidiaries, (c) do not contravene the Governing Agreements of such Borrower or any of its Relevant Subsidiaries, (d) do not contravene in any material respect (i) any law binding on or affecting such Borrower or any of its Relevant Subsidiaries, or (ii) any provision under any Material Agreement or Debt Instrument or any other material contractual restriction to which such Borrower or any of its Relevant Subsidiaries is a party, and (e) will not result in or require the creation or imposition of any Lien prohibited by this Agreement. At the time of each Credit Extension, such Credit Extension and the use of the proceeds thereof, will be within such Borrower’s governing powers, will have been duly authorized by all necessary corporate action, will not contravene the Governing Agreements of such Borrower, will not contravene in any material respect (i) any law binding on such Borrower or (ii) any provision under any Material Agreement or Debt Instrument to which such Borrower is a party, and will not result in or require the creation or imposition of any Lien prohibited by this Agreement.
Senior First Lien Secured Credit Agreement – Page 32
Section 4.03 Authorization and Approvals. No Permit and no notice to or filing with any Governmental Authority or any other Person is required for the due execution, delivery, and performance by such Borrower or any of its Relevant Subsidiaries of this Agreement or the other Loan Documents to which it is a party or the consummation of the transactions contemplated hereby and thereby, except for (a) filings necessary to obtain and maintain perfection of liens; and (b) routine filings related to such Borrower and its Relevant Subsidiaries and the operations of their business.
Section 4.04 Enforceable Obligations. This Agreement and the other Loan Documents to which such Borrower or any of its Relevant Subsidiaries is a party have been duly executed and delivered by such Borrower or Relevant Subsidiary. Each Loan Document to which it is a party is the legal, valid, and binding obligation of such Borrower and its Relevant Subsidiaries, enforceable against such Borrower and Relevant Subsidiary in accordance with its terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar law affecting creditors’ rights generally and by general principles of equity.
(a) Such Borrower has delivered to Lender copies of the most current Financial Statements described in Section 3.01(c) required to be delivered by such Borrower, and such Financial Statements are accurate and complete in all material respects and present fairly in all material respects the consolidated financial condition of such Borrowers and its Subsidiaries as of their respective dates and for their respective periods in accordance with GAAP (other than, in the case of quarterly Financial Statements, the absence of footnotes and year-end audit adjustments).
(b) Except as disclosed on Schedule 4.05, since May 31, 2012, with respect to Red Mountain and its Subsidiaries or December 31, 2011, with respect to Cross Border and its Subsidiaries, no event or circumstance that could have a Material Adverse Effect has occurred.
(c) As of the Closing Date and after giving effect to the making of the initial Borrowing or the issuance of the initial Letters of Credit, neither such Borrower nor any of its Relevant Subsidiaries has any Debt and neither such Borrower nor any of its Relevant Subsidiaries has granted any Liens other than the Debt and Liens listed on Schedule 4.19 or in favor of the Lender pursuant to this Agreement, and Permitted Debt and Permitted Liens.
Section 4.06 True and Complete Disclosure. All factual information (excluding estimates) heretofore or contemporaneously furnished by or on behalf of such Borrower in writing to Lender for purposes of or in connection with this Agreement, any other Loan Document or any transaction contemplated hereby or thereby is, and all other such factual information hereafter furnished by or on behalf of such Borrower in writing to Lender shall be, to its knowledge, true, complete and accurate in all material respects on the date as of which such information is dated or certified and did not or will not, as the case may be, contain any untrue statement of a material fact or omit to state, as of the date delivered, any material fact or liability necessary to make the statements contained therein not misleading at such time. All projections, estimates, and pro forma financial information furnished by such Borrower, whether pursuant to the most current Financial Statements or in connection with other information delivered to Lender, were prepared on the basis of assumptions, data, information, tests, or conditions believed to be reasonable at the time such projections, estimates, and pro forma financial information were made in good faith (it being understood that projections are based upon opinions and estimates and no Borrower represents or warrants that such projections, estimates, or information will ultimately prove to have been accurate).
Senior First Lien Secured Credit Agreement – Page 33
(a) Except as disclosed in Schedule 4.07 attached hereto, there is no pending or, to the best knowledge of such Borrower, threatened action or proceeding affecting such Borrower or its Relevant Subsidiaries or any of their respective Properties before any Governmental Authority or arbitrator which, if adversely determined, could have a Material Adverse Effect or which purports to affect the legality, validity, binding effect or enforceability of this Agreement or any other Loan Document. Additionally, there is no pending or, to the best knowledge of such Borrower, threatened action or proceeding instituted against such Borrower or any of its Relevant Subsidiaries which seeks to adjudicate such Borrower or any of its Relevant Subsidiaries as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any Debtor Relief Law, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its Property.
(b) Such Borrower and each of its Relevant Subsidiaries has complied, with (i) all Applicable Laws, including, without limitation, Environmental Laws, statutes, rules, regulations, orders, and restrictions of any Governmental Authority having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property and (ii) all of their obligations under the Material Agreements and Debt Instruments, in each case, except where the failure to do so would not have a Material Adverse Effect.
Section 4.08 Use of Proceeds. The proceeds of the Credit Extensions will be used by such Borrower for the purposes described in Section 5.09. Such Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U). No proceeds of any Credit Extension will be used by such Borrower to purchase or carry any margin stock in violation of Regulations T, U or X.
Section 4.09 Investment Company Act. Neither such Borrower nor any of its Relevant Subsidiaries is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended.
(a) Reports and Payments. All Returns (as defined below in Section 4.10(c)) required to be filed by or on behalf of such Borrower, its Relevant Subsidiaries, or any member of the Controlled Group of such Borrower (hereafter collectively called the “Tax Group”) have been duly filed on a timely basis or appropriate extensions have been obtained, and such Returns are and will be true, complete, and correct in all material respects except, in each case, to the extent that any failure to comply could not be expected to have a Material Adverse Effect; and all Taxes shown to be payable on the Returns or on subsequent assessments with respect thereto will have been paid in full on a timely basis, and no other Taxes will be payable by the Tax Group with respect to items or periods covered by such Returns, except in each case to the extent of Taxes that are being contested in good faith.
(b) Taxes Definition. “Taxes” in this Section 4.10 shall mean all taxes, charges, fees, levies, or other assessments imposed by any federal, state, local, or foreign taxing authority, including, without limitation, income, gross receipts, excise, real or personal property, sales, occupation, use, service, leasing, environmental, value added, transfer, payroll, and franchise taxes (and including any interest, penalties, or additions to tax attributable to or imposed on with respect to any such assessment).
Senior First Lien Secured Credit Agreement – Page 34
(c) Returns Definition. “Returns” in this Section 4.10 shall mean any federal, state, local, or foreign report, estimate, declaration of estimated Tax, information statement or return relating to, or required to be filed in connection with, any Taxes, including any information return or report with respect to backup withholding or other payments of third parties.
(a) All Plans are in compliance in all material respects with all applicable provisions of ERISA.
(b) No Termination Event has occurred with respect to any Plan, and each Plan has complied with and been administered in all material respects in accordance with applicable provisions of ERISA and the Code.
(c) No unpaid minimum required contribution (as defined in Section 4971 of the Code) has occurred and there has been no excise tax imposed under Section 4971 of the Code.
(d) No Reportable Event (as defined in ERISA) has occurred with respect to any Multiemployer Plan, and each Multiemployer Plan has complied with and been administered in all material respects with applicable provisions of ERISA and the Code.
(e) The present value of all benefits vested under each Plan (based on the assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed the value of the assets of such Plan allocable to such vested benefits.
(f) Neither such Borrower nor any member of the Controlled Group has had a complete or partial withdrawal from any Multiemployer Plan for which there is any withdrawal liability.
(g) As of the most recent valuation date applicable thereto, neither such Borrower nor any member of the Controlled Group would become subject to any liability under ERISA if any Borrower or any member of the Controlled Group has received notice that any Multiemployer Plan is insolvent or in reorganization.
(h) Based upon GAAP, existing as of the date of this Agreement and current factual circumstances, such Borrower has no reason to believe that the annual cost during the term of this Agreement to such Borrower or any member of the Controlled Group for post-retirement benefits to be provided to the current and former employees of such Borrower or any member of the Controlled Group under Plans that are welfare benefit plans (as defined in Section 3(1) of ERISA) could, in the aggregate, be expected to have a Material Adverse Effect.
(a) Borrowers have Marketable Title to, or a valid leasehold interest in, or have the right to use pursuant to valid licenses, all the Borrowing Base Oil and Gas Properties as is customary in the oil and gas industry in all material respects, free and clear of all Liens, except for Permitted Liens. Subject to Permitted Liens, the Security Documents have or will have first ranking priority and none is subject to any prior ranking or pari passu ranking Lien. The Properties owned or leased by Borrowers or any of their Relevant Subsidiaries that are reasonably necessary to the material operation of their business are in good repair, working order and operating condition, subject to normal wear and tear.
Senior First Lien Secured Credit Agreement – Page 35
(b) Except as set forth on Schedule 4.12, neither the businesses nor the Properties of Borrowers or any of their Relevant Subsidiaries have been affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of Property or cancellation of contracts, Permits, or concessions by a Governmental Authority, riot, activities of armed forces, or acts of God or of any public enemy in any manner that could have a Material Adverse Effect.
(c) All producing wells from which Hydrocarbons will be produced from the Borrowing Base Oil and Gas Properties have been, to the knowledge of such Borrower, drilled, operated and produced in conformity in all material respects with all Applicable Laws, are subject to no material penalties on account of past production, and are bottomed under and are producing from, and the well bores are wholly within the Borrowing Base Oil and Gas Properties or on Oil and Gas Properties which have been pooled, unitized or communitized therewith.
Section 4.13 No Burdensome Restrictions; No Defaults. Except as set forth on Schedule 4.13,
(a) Neither such Borrower nor any of its Relevant Subsidiaries is in default in any material respect under or with respect to any Material Agreement or Debt Instrument. Neither such Borrower nor any of its Relevant Subsidiaries has received any written notice of default under any Material Agreement or Debt Instrument.
(b) No Default has occurred and is continuing, or will result from the making of any Advance, extension of credit under any Letter of Credit or the entry into, or the performance of, any transaction contemplated by, the Loan Documents.
(c) There are no outstanding preferential rights or consents to assign under any Material Agreement or otherwise affecting the Borrowing Base Oil and Gas Properties of such Borrower or any of its Relevant Subsidiaries that have not otherwise been satisfied in full by such Borrower or any of its Relevant Subsidiaries, except where the failure to so satisfy would not have a Material Adverse Effect.
Section 4.14 Environmental Condition. Except as could not reasonably be expected to have a Material Adverse Effect,
(a) Permits, Etc. To such Borrower’s knowledge, Borrowers and their Relevant Subsidiaries (i) have obtained all Environmental Permits required under Environmental Law for the ownership and operation of their respective Properties and the conduct of their respective businesses; (ii) have at all times been and are in material compliance with all terms and conditions of such Environmental Permits and with all other requirements of applicable Environmental Laws; (iii) have not received notice of any outstanding violation or alleged violation of any Environmental Law or Environmental Permit; and (iv) are not subject to any actual, pending or, to such Borrower’s knowledge, threatened Environmental Claim.
(b) Certain Liabilities. None of the present or previously owned, leased or operated Property of Borrowers or any of their Relevant Subsidiaries, wherever located, to such Borrower’s knowledge (i) has been placed on or proposed to be placed on any federal or state list of Superfund Sites, or has been otherwise investigated, designated, listed, or identified as a potential site for removal, remediation, cleanup, closure, restoration, reclamation, or other response activity under any Environmental Laws; (ii) is subject to a Lien, arising under or in connection with any Environmental Laws, that attaches to any revenues or to any Property owned, leased or operated by Borrowers or any other Loan Party, wherever located; or (iii) has been the site of any Release of Hazardous Substances or Hazardous Wastes from present or past operations that has caused at the site or at any third-party site any condition that has resulted in or could be expected to result in the need for Response.
Senior First Lien Secured Credit Agreement – Page 36
(c) Certain Actions. Without limiting the foregoing, (i) all necessary notices have been properly filed, and no further action is required under current Environmental Law as to each Response or other restoration or remedial project undertaken by Borrowers or any of their Relevant Subsidiaries on any of their presently or formerly owned, leased or operated Property and (ii) to such Borrower’s knowledge there are no facts, circumstances, conditions or occurrences with respect to any Property owned, leased or operated by Borrowers or any of their Relevant Subsidiaries that could reasonably be expected to form the basis of an Environmental Claim under Environmental Laws.
Section 4.15 Permits, Licenses, Etc. Such Borrower and each of its Relevant Subsidiaries (i) possess all Permits, patents, patent rights or licenses, trademarks, trademark rights, trade names rights and copyrights which are material to the conduct of their businesses and (ii) manage and operate their businesses in all material respects in accordance with all Applicable Laws and standard industry practices.
Section 4.16 Oil and Gas Contracts. Such Borrower and its Relevant Subsidiaries, as of the date hereof, are not obligated in any material respect by virtue of any prepayment made under any contract containing a “take-or-pay” or “prepayment” provision or under any similar agreement, including, without limitation, “gas balancing agreements”, to deliver Hydrocarbons produced from or allocated to any of the Borrowing Base Oil and Gas Properties at some future date without receiving full payment therefor at the time of delivery, nor are any of the Borrowing Base Oil and Gas Properties subject to any such contract entered into by such Borrower’s predecessors in title. Except as set forth on Schedule 4.16, the Borrowing Base Oil and Gas Properties are not subject to any contractual or other arrangement for the sale of crude oil which cannot be canceled on ninety (90) days’ (or less) notice, unless the price provided for therein is equal to or greater than the prevailing market price in the vicinity. Except as set forth on Schedule 4.16, the Borrowing Base Oil and Gas Properties are not subject to any gas sales contract that contains any material terms which are not customary in the industry within the region in which the Borrowing Base Oil and Gas Properties affected thereby are located. To such Borrower’s knowledge, the Borrowing Base Oil and Gas Properties are not subject to any regulatory refund obligation and no facts exist which might cause the same to be imposed which could cause a Material Adverse Effect.
Section 4.17 Liens; Material Agreements, Etc. None of the Property of such Borrower or any of its Relevant Subsidiaries is subject to any Lien other than Permitted Liens. To such Borrower’s knowledge, on the Closing Date, all material governmental actions and all other material filings, recordings, registrations, third party consents and other actions which are necessary to create and perfect the Liens provided for in the Security Documents will have been made, obtained and taken in all relevant jurisdictions, except for the filing of UCC-1 Financing Statements and the Mortgages in the state, county, and parish filing offices. Neither such Borrower nor any of its Relevant Subsidiaries is a party to any Material Agreement or agreement or arrangement (other than this Agreement and the Security Documents), or subject to any order, judgment, writ or decree, that either restricts or purports to restrict its ability to grant Liens to secure the Total Obligations against their respective Properties.
Section 4.18 Solvency and Insurance. Before and after giving effect to the making of the initial Advance, such Borrower and each of its Relevant Subsidiaries is Solvent. Furthermore, such Borrower and each of its Relevant Subsidiaries carry the insurance required under Section 5.02 of this Agreement.
Senior First Lien Secured Credit Agreement – Page 37
(a) Schedule 4.19 sets forth a complete and correct list of all Debt Instruments and all Material Agreements that, in each case, as of the date of this Agreement, require or could in the future require any Disposition of any interest in any Borrowing Base Oil and Gas Property. Except for industry standard provisions in Operating Agreements and Leases, no Borrower is party to any Material Agreement which, upon the breach or default of any of its obligations thereunder, would (i) subject such Borrower’s Oil and Gas Properties to foreclosure (whether judicial or non-judicial) or forfeiture, or (ii) result in or create an encumbrance or Lien (except for Permitted Liens) upon such Borrower’s Oil and Gas Properties, except for any such breach or default which would not have a Material Adverse Effect.
(b) Such Borrower has heretofore delivered to Lender complete and correct copies of all Material Agreements described in the first sentence of Section 4.19 and Debt Instruments, including any amendments, restatements or modifications thereto, as in effect on the Closing Date. With respect to the Material Agreements, they (a) all are in full force and effect in all material respects in accordance with their terms and constitute valid and binding obligations, except as limited by applicable Debtor Relief Laws and by general equitable principles, (b) to such Borrower’s knowledge no other party thereto (or any successor in interest to that party) is in breach or default with respect to any of its obligations thereunder, and (c) no party thereto has given written notice or, to such Borrower’s knowledge, has threatened to give notice of any action to terminate, cancel, rescind or procure a judicial reformation thereunder that could have a Material Adverse Effect.
(c) With respect to the Debt Instruments and all Material Agreements, the execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement will not result in a breach or a default under any provision thereunder.
Section 4.20 Hedging Agreements. Schedule 4.20 sets forth, as of the date of this Agreement, a true and complete list of all Hedge Agreements of such Borrower and each of its Relevant Subsidiaries, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the net mark-to-market value thereof, all credit support agreements relating thereto (including any margin required or supplied), and the counterparty to each such agreement.
Section 4.21 Suspension and Offsets. Schedule 4.21 (as such schedule may be updated from time to time by Borrowers) sets forth a complete and correct list of all of the Borrowing Base Oil and Gas Properties and wells located thereon or pooled therewith that are subject to any suspension of payments or offsets and Person’s names exercising or asserting any such actions and, if applicable, the agreement or contract that such Person is relying on.
Section 4.22 Title to Borrowing Base Oil and Gas Properties.
(a) Borrowers have Marketable Title to the working and net revenue interests in the Borrowing Base Oil and Gas Properties as set out on Exhibit A and Borrowers have provided Lender satisfactory title opinions or other title information, in Lender’s sole discretion, covering at least 80% of the PV9 of the Proved Reserves and at least 80% of the PV9 of the PDP Reserves of such Borrowing Base Oil and Gas Properties as determined by Lender. All such shares of production which Borrowers are entitled to receive, and shares of expenses which Borrowers are obligated to bear, are not subject to change, except for (i) changes attributable to future elections by Borrowers not to participate in operations proposed pursuant to customary forms of applicable Operating Agreements, and except for changes attributable to changes in participating areas under any state or federal units wherein participating areas may be formed, enlarged or contracted in accordance with the rules and regulations of the applicable Governmental Authority, or (ii) where Borrowers are obligated under an Operating Agreement to assume a portion of a defaulting party’s share of costs.
Senior First Lien Secured Credit Agreement – Page 38
(b) At all times prior to the delivery of the first Engineering Report after the Closing Date, at least 90% of the PV9 of the PDP Reserves of the Borrowing Base Oil and Gas Properties are pledged under the Mortgages as Collateral and subject to an Acceptable Security Interest. At all times after the delivery of such Engineering Report, at least 90% of the PV9 of the Proved Reserves and at least 90% of the PV9 of the PDP Reserves of the Borrowing Base Oil and Gas Properties are pledged under the Mortgages as Collateral and subject to an Acceptable Security Interest.
(c) As of the date of this Agreement, except for the Oil and Gas Properties described on Exhibit A and Schedule 4.22, no Borrower owns any other Oil and Gas Properties with PDP Reserves.
Section 4.23 USA PATRIOT Act. Neither such Borrower nor any of its Relevant Subsidiaries is a country, individual or entity named on the Specifically Designated National and Blocked Persons list issued by the Office of Foreign Asset Control of the Department of the Treasury of the United States of America.
Section 4.25 Purchasers of Hydrocarbons. Schedule 4.25 sets forth a complete and correct list of all of the Persons that are purchasers of production of Hydrocarbons from the Borrowing Base Oil and Gas Properties (or otherwise receiving such Borrower’s share of proceeds of such Hydrocarbons), as of the date of this Agreement, together with their addresses and telephone numbers.
Section 4.26 Intellectual Property. Such Borrower and each of its Relevant Subsidiaries possess or will possess all trademarks, trade names, trade styles, copyrights and patents or licenses necessary to conduct their business as it is presently conducted or as such Borrower and each of its Relevant Subsidiaries intend to conduct it in the future without any infringement or conflict with the rights of any other Person with respect to trademarks, trade names, trade styles, copyrights or patents, except where the failure to do so would not have a Material Adverse Effect.
Section 4.27 Accounts. Such Borrower and each of its Relevant Subsidiaries maintain all of their primary operating accounts and deposit accounts (“Primary Accounts”), with Lender and do not maintain any other such accounts or deposits with any other bank or financial institution except, with Lender’s consent, incidental accounts to the extent such Borrower or Relevant Subsidiary and such bank or financial institution have executed and delivered a Deposit Account Control Agreement with respect to such incidental accounts, naming Lender as secured party; provided that such Borrower and its Relevant Subsidiaries will have ninety (90) days after the Closing Date to close such Primary Accounts with other institutions and to establish such accounts and services with Lender and otherwise comply with the requirements of Section 5.15.
Senior First Lien Secured Credit Agreement – Page 39
AFFIRMATIVE COVENANTS
Until the Final Payment Date, each Borrower shall comply with the following covenants.
Section 5.01 Compliance with Laws, Etc. Each Borrower shall comply, and cause each of its Relevant Subsidiaries to comply, in all material respects with all Applicable Laws. Without limitation of the foregoing, each Borrower shall, and shall cause each of its Relevant Subsidiaries to, (a) maintain and possess all material Permits, trademarks, trade names, rights and copyrights which are necessary to the conduct of its business and (b) obtain, as soon as practicable, all consents or approvals required from any states of the United States (or other Governmental Authorities) necessary to grant Collateral Agent an Acceptable Security Interest in the Borrowing Base Oil and Gas Properties and the other Collateral.
(a) Each Borrower shall, and shall cause each of its Relevant Subsidiaries to, procure and maintain or shall cause to be procured and maintained continuously in effect policies of insurance in form and amounts, covering such casualties, risks, perils, liabilities and other hazards as are customarily carried by businesses similarly situated, all such insurance to be in amounts and from insurers reasonably acceptable to Lender. In addition, each Borrower shall, and shall cause each of its Relevant Subsidiaries to, comply with all requirements regarding insurance contained in the Security Documents.
(b) All policies of insurance shall either have a lender’s loss payable endorsement (which may be a blanket endorsement) for the benefit of Lender, as loss payee in form reasonably satisfactory to Lender or shall provide by endorsement (including by blanket endorsement) that Lender is an additional insured (except with respect to workers compensation insurance and employer’s liability insurance), as applicable Borrowers shall deliver copies of all such policies to Lender with a satisfactory lender’s loss payable endorsement naming Lender as sole loss payee or additional insured, as appropriate. All policies of insurance shall set forth the coverage, the limits of liability, the name of the carrier, the policy number, and the period of coverage and shall contain an agreement of the insurer waiving all rights of setoff, counterclaim or deductions and a waiver of subrogation against each Borrower and its Relevant Subsidiaries. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Lender in the event of cancellation of the policy for any reason whatsoever. In the event that, notwithstanding the “lender’s loss payable endorsement” requirement of this Section 5.02, the proceeds of any insurance policy described above are paid to any Borrower or a Relevant Subsidiary, except as permitted under Section 5.02(c) below, Borrowers shall deliver such proceeds to Lender immediately upon receipt.
(c) Borrowers shall give Lender prompt notice of any loss covered by such insurance in excess of $1,000,000 and any loss not covered by insurance in excess of $200,000. Any monies received as payment for any loss under any insurance policy mentioned above (other than liability insurance policies), shall be paid over to Lender to be applied at the option of Lender either to the prepayment of the Obligations or shall be disbursed to Borrowers under staged payment terms reasonably satisfactory to Lender for application to the cost of repairs, replacements, or restorations. Any such repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items or property destroyed prior to such damage or destruction.
Senior First Lien Secured Credit Agreement – Page 40
(d) After the occurrence and during the continuance of an Event of Default, all proceeds of insurance, including any casualty insurance proceeds, property insurance proceeds, proceeds from actions, and any other proceeds, shall be paid directly to Lender and, if necessary, assigned to Lender to be applied in accordance with Section 7.06 of this Agreement, whether or not the Obligations are then due and payable, or as Lender may otherwise direct.
(e) In the event that any insurance proceeds are paid to Borrowers or any of their Relevant Subsidiaries in violation of Sections 5.02(c) or (d), Borrowers or such Relevant Subsidiary shall hold the proceeds in trust for Lender and promptly pay the proceeds to Lender with any necessary endorsement. Upon the request of Lender, Borrowers and each of its Relevant Subsidiaries shall execute and deliver to Lender any additional assignments and other documents as may be necessary to enable Lender to directly collect the proceeds as set forth herein.
Section 5.03 Preservation of Company Existence, Etc. Each Borrower shall (a) preserve and maintain, and cause each of its Relevant Subsidiaries to preserve and maintain, its limited partnership, corporate or limited liability company, as applicable, existence (except as otherwise permitted pursuant to Section 6.04), rights, franchises, and privileges in the jurisdiction of its incorporation or organization, as applicable, and (b) qualify and remain qualified, and cause each of its Relevant Subsidiaries to qualify and remain qualified, as a foreign corporation or such other foreign Business Entity in each jurisdiction in which qualification is necessary or desirable in view of its business and operations or the ownership of its Properties, except where the failure to perform such obligation would not have a Material Adverse Effect.
Section 5.04 Payment of Taxes, Etc. Each Borrower shall pay and discharge, and cause each of its Relevant Subsidiaries to pay and discharge, before the same shall become delinquent, (a) all taxes, assessments, and governmental charges or levies imposed upon it or upon its income or profits or Property prior to the date on which penalties attach thereto and (b) all lawful claims that, if unpaid, might by law become a Lien upon its Property; provided that neither Borrower nor any such Subsidiary shall be required to pay or discharge any such tax, assessment, charge, levy, or claim which is being contested in good faith and by appropriate proceedings, and with respect to which reserves in conformity with GAAP have been provided.
Section 5.05 Books and Records and Visitation Rights. Borrowers shall keep and maintain in all material respects proper, complete and consistent books and records regarding each Borrower’s operations, affairs and financial condition. At any reasonable time and from time to time, upon reasonable notice, Borrowers shall, and shall cause their respective Subsidiaries to, permit Lender or any agents or representatives thereof, to (a) examine and make copies of and abstracts from the records and books of account of, and visit and inspect at its reasonable discretion the Properties of, each Borrower and any of its Subsidiaries and (b) discuss the affairs, finances and accounts of each Borrower and any of its Subsidiaries with any of their respective officers, directors or employees, and third-party consultants including, without limitation, accountants, engineers and operators, provided that so long as no Event of Default exists the obligations of Borrowers and their Subsidiaries to pay the costs of such visitations and inspections shall be limited to one time per year.
Section 5.06 Reporting Requirements. Borrowers shall furnish to Lender:
(a) Annual Financials. For each fiscal year of Red Mountain and its Subsidiaries (including Cross Border) ending on or after May 31, 2013, as soon as available but in any event within 120 days after the end of such fiscal year, (aa) a copy of the annual audit report for such year for Red Mountain and its Subsidiaries, as of the end of such fiscal year, in each case certified by independent certified public accountants of recognized standing acceptable to Lender, and including a copy of an unqualified opinion confirming that such financial statements are prepared in accordance with GAAP and present fairly the financial condition of Red Mountain and its Subsidiaries and any management letters delivered by such accountants to Red Mountain or any of its Subsidiaries in connection with such audit, and (bb) a Compliance Certificate executed by a Responsible Officer of Red Mountain;
Senior First Lien Secured Credit Agreement – Page 41
(b) Quarterly Financials. As soon as available and in any event within 60 days after the end of each of the first three fiscal quarters of each fiscal year of Borrowers, commencing with the fiscal quarter ended February 28, 2013, (i) the unaudited Financial Statements of Borrowers and their Subsidiaries as of the end of such fiscal quarter and for the portion of the fiscal year then ended setting forth in comparative form the figures for the corresponding period of the preceding fiscal year, all in reasonable detail and duly certified by a Responsible Officer of Borrowers as having been prepared in accordance with GAAP (subject to year-end audit adjustments and the absence of footnotes) and (ii) a Compliance Certificate executed by the Responsible Officer of Borrowers;
(c) Capital Expenditures. Within 60 days after the end of each fiscal year of Red Mountain, a budget detailing the projected Capital Expenditures of Borrowers and each of their respective Relevant Subsidiaries for the fiscal year in which such report is provided.
(d) Oil and Gas Engineering Reports.
(i) Engineering Reports, as soon as available but in any event on or before each (A) August 31 of each year, dated effective as of the immediately preceding June 1 for such year and (B) February 28 of each year, dated effective as of the immediately preceding December 1. Each Engineering Report delivered on or before each such February 28 shall be prepared by an Independent Engineer and each Engineering Report delivered on or before each such August 31 may be prepared by Borrower’s staff engineers.
(ii) Such other information as may be reasonably requested by Lender with respect to the Borrowing Base Oil and Gas Properties; and
(iii) With the delivery of each Engineering Report, a certificate from a Responsible Officer of Borrowers, in his or her capacity as such, certifying that, to his best knowledge and in all material respects: (a) the information contained in the Engineering Report and any other information delivered in connection therewith is true and correct in all material respects, (b) Borrowers own Marketable Title to the Borrowing Base Oil and Gas Properties evaluated in such Engineering Report and classified as Proved Reserves, (c) at least 90% of the PV9 of the Proved Reserves and at least 90% of the PV9 of the PDP Reserves of the Borrowing Base Oil and Gas Properties are pledged as Collateral for the Total Obligations and subject to an Acceptable Security Interest and free of all Liens except for Permitted Liens, (d) on a net basis there are no gas imbalances, take or pay or other prepayments with respect to the Borrowing Base Oil and Gas Properties evaluated in such Engineering Report that would require any Borrower to deliver Hydrocarbons produced from such Borrowing Base Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor, (e) none of the Borrowing Base Oil and Gas Properties have been sold since the date of the last Borrowing Base determination except as permitted by this Agreement, and (f) attached to the certificate is a list of the Borrowing Base Oil and Gas Properties added to and deleted from the immediately prior Engineering Report and a list showing any material change in working interest or net revenue interest in the Borrowing Base Oil and Gas Properties occurring and the reason for such change;
Senior First Lien Secured Credit Agreement – Page 42
(e) Production Reports. As soon as available and in any event within 60 days after the end of each fiscal quarter commencing with the fiscal quarter ending February 28, 2013, (A) a report certified by a Responsible Officer of Borrowers, in form and content reasonably satisfactory to Lender prepared by Borrowers covering each of the Borrowing Base Oil and Gas Properties and detailing on a quarterly basis (i) the production volumes and sales and associated lease operating statements for the Borrowing Base Oil and Gas Properties containing Proved Reserves, together with a certificate signed by a Responsible Officer of Borrowers as to the truth and accuracy of such analyses in all material respects; (ii) to Borrowers’ knowledge, any adverse material changes to any producing reservoir, production equipment, or producing well from the report delivered for the preceding fiscal quarter; and (iii) any sales of the Borrowing Base Oil and Gas Properties since the delivery of the report for the preceding fiscal quarter and (B) copies of any title opinions or reports obtained by Borrowers during such fiscal quarter, with respect to any Borrowing Base Oil and Gas Properties;
(f) Defaults. Promptly and in any event within five Business Days after the occurrence of any default under any Debt Instrument having an aggregate principal amount in excess $200,000, a statement of a Responsible Officer of Borrowers setting forth the details of such default and the actions which Borrowers have taken and propose to take with respect thereto;
(g) Quarterly Report on Hedging. As soon as available and in any event not later than 60 days after the end of each fiscal quarter commencing with the fiscal quarter ending February 28, 2013, a statement prepared by Borrowers and certified as being true and correct in all material respects by a Responsible Officer of Borrowers, in his or her capacity as such, setting forth in reasonable detail all Hydrocarbon Hedge Agreements to which any production of Hydrocarbons from the Borrowing Base Oil and Gas Properties is then subject, together with a statement of Borrowers’ changed position with respect to each such Hydrocarbon Hedge Agreements (other than the first such statement delivered hereunder which shall detail Borrowers’ original positions); provided that, if the price of any of the Hydrocarbons produced from such Borrowing Base Oil and Gas Properties is subject to Hydrocarbon Hedge Agreements, then Borrowers shall promptly notify Lender if any such Hydrocarbon Hedge Agreement is terminated, liquidated, amended or otherwise modified prior to the end of its contractual term, or if there is an amendment, adjustment or modification of the price of any of the Hydrocarbons produced from such Borrowing Base Oil and Gas Properties that is subject to or established by a Hydrocarbon Hedge Agreement;
(h) Termination Events. Promptly and in any event within five Business Days after any Borrower or any member of the Controlled Group knows that any Termination Event described in clause (a) of the definition of Termination Event with respect to any Plan has occurred, and (ii) within ten days after any Borrower or any member of the Controlled Group knows that any other Termination Event with respect to any Plan has occurred, a statement of a Responsible Officer of such Borrower describing such Termination Event and the action, if any, which such Borrower or such Controlled Group member proposes to take with respect thereto;
(i) Termination of Plans. Promptly and in any event within five Business Days after receipt thereof by any Borrower or any member of the Controlled Group from the PBGC, copies of each notice received by such Borrower or any such member of the Controlled Group of the PBGC’s intention to terminate any Plan or to have a trustee appointed to administer any Plan;
Senior First Lien Secured Credit Agreement – Page 43
(j) Other ERISA Notices. Promptly and in any event within five Business Days after receipt thereof by any Borrower or any member of the Controlled Group from a Multiemployer Plan sponsor, a copy of each notice received by such Borrower or any member of the Controlled Group concerning the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA;
(k) Environmental Notices. Promptly and in any event within five Business Days upon the written receipt thereof by any Borrower or any of its Relevant Subsidiaries, a copy of any written form of request, notice, summons or citation received from the Environmental Protection Agency, or any other Governmental Authority, concerning (i) violations or alleged violations of Environmental Laws, which seeks to impose liability therefor in excess of $200,000, (ii) any action or omission on the part of any Borrower or any of its Relevant Subsidiaries in connection with Hazardous Waste or Hazardous Substances that could result in the imposition of liability therefor, including without limitation any information request related to, or notice of, potential responsibility under CERCLA, or (iii) the filing of a Lien upon, against or in connection with any Borrower or any of its Relevant Subsidiaries, or any of their leased or owned Property, wherever located;
(l) Other Governmental Notices. Promptly and in any event within five Business Days upon receipt thereof by any Borrower or any of its Relevant Subsidiaries, a copy of any written notice, summons, citation, or proceeding seeking to modify in any material respect, revoke, or suspend any Permit with any Governmental Authority;
(m) Material Changes. Prompt written notice of any material breach or default under a Material Agreement or Debt Instrument by any Borrower or any of its Relevant Subsidiaries;
(n) Disputes, Etc. Prompt written notice of (i) any claims, legal or arbitration proceedings, proceedings before any Governmental Authority, or disputes, or to the best knowledge of each Borrower threatened, against any Borrower or any of its Relevant Subsidiaries which could have a Material Adverse Effect, or any material labor controversy of which any Borrower or any of its Relevant Subsidiaries has knowledge resulting in or considered to be likely to result in a strike against such Borrower or any of its Relevant Subsidiaries, (ii) any claim, judgment, Lien or other encumbrance (other than a Permitted Lien) affecting any Property of any Borrower or any of its Relevant Subsidiaries if the value of the claim, judgment, Lien, or other encumbrance affecting such Property shall exceed $200,000 and (iii) any claim or action that would cause a disclosure under Section 4.07;
(o) Borrowing Base Oil and Gas Properties. Promptly, notice of any material destruction or loss not covered by insurance of any Borrowing Base Oil and Gas Properties having a PV9 of $200,000.00 or greater;
(p) SEC Filings. If and when filed by Red Mountain or Cross Border,
(i) 10-Q quarterly reports, Form 10-K annual reports, and form 8-K current reports,
(ii) Any other filings made by Red Mountain or Cross Border with the SEC,
(iii) Any amendments, restatements, or other modifications to its Governing Agreements,
Senior First Lien Secured Credit Agreement – Page 44
(iv) Copies of each Borrower’s federal income tax returns, and any amendments thereto, filed with the Internal Revenue Service, and
provided, that the documents required to be furnished pursuant to Sections 5.06(p)(i), (p)(ii) or (p)(iii) may be delivered electronically and if so furnished shall be deemed furnished on the date on which such documents are posted on the applicable Borrower’s website or are posted on EDGAR.
(q) Governing Agreements. (i) Promptly after the filing thereof, any amendments, restatements or modifications to the Governing Agreements of any of the Relevant Subsidiaries (other than the Governing Agreements set forth in 5.06(p)(iii)); and (ii) at least 30 days prior to such change, any change in name, jurisdiction of incorporation, organization or formation of any Borrower or any of its Relevant Subsidiaries.
(r) Other Information. Promptly, such other information respecting the business or Properties, or the condition or operations, financial or otherwise, of Borrowers and the other Loan Parties, as Lender may from time to time reasonably request.
Section 5.07 Maintenance of Property. Each Borrower shall, and shall cause each of its Related Subsidiaries to, maintain (or to the extent the right or obligation to do so rests with another Person, exercise reasonable efforts to cause such Person to maintain) its owned, leased, or operated Property in good condition and repair, normal wear and tear excepted, in all material respects.
Section 5.08 Purchasers of Production. Borrowers shall, and shall cause each of their Relevant Subsidiaries to, deliver to Lender, contemporaneously with the delivery of the Engineering Reports as provided in Section 5.06(d), an updated list of all purchasers of production of Hydrocarbons from the Borrowing Base Oil and Gas Properties, together with their addresses and phone numbers.
Section 5.09 Use of Proceeds. Borrowers shall use the proceeds of any Credit Extension (a) to refinance existing indebtedness secured by the Borrowing Base Oil and Gas Properties, (b) for the exploration, development, and acquisition of Oil and Gas Properties to be included as Borrowing Base Oil and Gas Properties, (c) for the payment of fees and expenses, including legal expenses, associated with the closing of this Agreement, (d) to support the issuance of any Letter of Credit, and (e) for working capital and other general corporate purposes that are of customary, recurring types in the oil and gas exploration and production business.
Section 5.10 Title Information. Borrowers shall from time to time upon the reasonable request of Lender, take such actions and execute and deliver such documents and instruments as Lender shall require to ensure that Lender shall, at all times, have received reasonably satisfactory title information (which information shall not be limited to title opinions) that (a) shall collectively cover at least 80% of the PV9 of the Proved Reserves and at least 80% of the PV9 of the PDP Reserves of the Borrowing Base Oil and Gas Properties, (b) shall be in form and content reasonably satisfactory to Lender, and (c) shall include opinions or other title information regarding the before payout and after payout ownership interests (where such distinction is applicable) held by Borrowers and any of their Relevant Subsidiaries for all wells located on the Borrowing Base Oil and Gas Properties.
Senior First Lien Secured Credit Agreement – Page 45
Section 5.11 Further Assurances; Cure of Title Defects; Acceptable Security Interest. Each Borrower shall, and shall cause each of its Relevant Subsidiaries to, cure promptly any defects in the creation and issuance of the Note and the execution and delivery of this Agreement and the other Loan Documents. Borrowers hereby authorize Lender to file any financing statements without the signature of any Borrower or any of its Relevant Subsidiaries to the extent permitted by applicable law in order to perfect or maintain the perfection of any security interest granted under any of the Loan Documents. Each Borrower, at its expense will, and will cause each of its Relevant Subsidiaries to, promptly execute and deliver to Lender upon its reasonable request all such other documents, agreements and instruments to comply with or accomplish the covenants and agreements of Borrowers and each of their respective Relevant Subsidiaries, as the case may be, in the Security Documents and this Agreement, or to further evidence and more fully describe the collateral intended as security for the Note, or to correct any omissions in the Security Documents, or to state more fully the security obligations set out herein or in any of the Security Documents, or to perfect, protect or preserve any Liens created pursuant to any of the Security Documents, or to make any recordings, to file any notices or obtain any consents, all as may be necessary or appropriate in connection therewith or to enable Lender to exercise and enforce its rights and remedies with respect to any Collateral. Within 90 days after receipt of (a) a written request by Lender to cure any title defects or exceptions that are not Permitted Liens raised by such information or (b) a written notice by Lender that Borrowers have failed to comply with Section 5.10 above, Borrowers shall (i) cure such title defects or exceptions that are not Permitted Liens or substitute acceptable Oil and Gas Properties as Borrowing Base Oil and Gas Properties with no title defects or exceptions except for Permitted Liens covering Collateral of an equivalent value and (ii) deliver to Lender satisfactory title evidence (including supplemental or new title opinions meeting the foregoing requirements) in form and content satisfactory to Lender in its reasonable discretion as to the ownership of such Borrowing Base Oil and Gas Properties and Lender’s Liens and security interests therein as are required to maintain compliance with Section 5.10. Any Borrower’s failure to cure such title defects or exceptions shall result in Lender’s right to disregard the affected Borrowing Base Oil and Gas Properties from the Borrowing Base and, if so disregarded, the Borrowers shall cure any applicable Borrowing Base Deficiency in accordance with Section 2.05(b)(i) (including, the pledging of additional Oil and Gas Properties. In addition, Borrowers shall cause Lender to have an Acceptable Security Interest in all of the Borrowing Base Oil and Gas Properties free and clear of any Liens (except Permitted Liens) at all times.
Section 5.12 Material Agreements. Borrowers shall, and shall cause each other Loan Party to, comply in all material respects with all terms, conditions, or covenants of any Material Agreement in accordance with prudent industry practices.
Section 5.13 Leases; Development and Maintenance. Each Borrower shall, and shall cause each of its Relevant Subsidiaries to: (a) pay and discharge promptly, or cause to be paid and discharged promptly, all rentals, delay rentals, royalties, overriding royalties, payments out of production and other indebtedness or obligations accruing under, and perform or cause to be performed each and every act, matter or thing required by each and all of, the oil and gas leases and all other agreements and contracts constituting or affecting the Borrowing Base Oil and Gas Properties, (b) do all other things necessary to keep unimpaired its rights thereunder and prevent any forfeiture thereof (except termination of an Oil and Gas Property as a result of cessation of production or failure to conduct operations in the ordinary course of business according to prudent operator standards) or default thereunder, and operate or cause to be operated such Borrowing Base Oil and Gas Properties as a prudent operator would in accordance with industry standard practices and in compliance with all applicable proration and conservation Applicable Laws and any other Applicable Laws of every applicable Governmental Authority, whether state, federal, municipal or other jurisdiction, from time to time constituted to regulate the development and operations of Oil and Gas Properties and the production and sale of oil, gas and other Hydrocarbons therefrom, and (c) maintain (or cause to be maintained) the Leases, wells, units and acreage to which the Borrowing Base Oil and Gas Properties pertain in a prudent manner consistent with industry standard practices.
Senior First Lien Secured Credit Agreement – Page 46
Section 5.15 Accounts. Borrowers and the Relevant Subsidiaries shall maintain all their Primary Accounts with Lender and will not maintain any other such accounts or deposits with any other bank or financial institution except, with Lender’s written consent, incidental accounts to the extent Borrowers or the Relevant Subsidiaries and such bank or financial institution have executed and delivered a Deposit Account Control Agreement with respect to such incidental accounts naming Lender as secured party; provided that Borrowers and their Relevant Subsidiaries will have ninety (90) days after the Closing Date to close such Primary Accounts with other institutions and to establish such accounts and services with Lender and otherwise comply with the requirements of this Section 5.15.
Section 5.16 Payment of Operators. Borrowers shall pay the operators (including any contract operators) of the Borrowing Base Oil and Gas Properties all joint interest billings and other amounts owing under applicable Operating Agreements on a monthly basis, prior to the time that such joint interest billings and other monies owing become overdue, and in any event within ninety (90) days after the date of each applicable invoice therefore.
Section 5.17 Operation of Borrowing Base Oil and Gas Properties. Borrowers shall operate or, to the extent that the right of operation is vested in others, exercise all reasonable efforts to require the operator to operate the Borrowing Base Oil and Gas Properties and all wells drilled thereon and that may hereafter be drilled thereon, continuously and in a prudent and workmanlike manner and in all material respects in accordance with all Applicable Laws of the respective state in which the Borrowing Base Oil and Gas Property is situated and the United States of America, as well as all Applicable Laws of any Governmental Authority having jurisdiction to regulate the manner in which the operation of the Borrowing Base Oil and Gas Properties shall be carried on, and comply in all material respects with all terms and conditions of the Leases comprising part of the of the Borrowing Base Oil and Gas Properties, and any assignment or contract obligating Borrowers or any other Loan Party in any way with respect to the Borrowing Base Oil and Gas Properties; but nothing herein shall be construed to empower Borrowers or any other Loan Party to bind Lender to any contract obligation, or render Lender in any way responsible or liable for bills or obligations incurred by Borrowers or any other Loan Party.
Section 5.18 Removal as Operator. Until the Final Payment Date, and notwithstanding anything in any other document to the contrary, each Borrower shall immediately resign and remove itself as the operator of the Borrowing Base Oil and Gas Properties upon the written request of Lender if an Event of Default has occurred and is continuing under this Agreement or any other Loan Document. If any Borrower is removed as operator pursuant to this Section 5.18, such Borrower will (i) immediately take any and all actions reasonably requested by Lender or its designee to facilitate a smooth transition of operatorship from such Borrower to a successor operator approved by Lender, (ii) refrain from taking any action to oppose, delay or otherwise hinder the efforts of that successor operator to assume operatorship of the Borrowing Base Oil and Gas Properties, and (iii) fully cooperate in good faith with all such efforts by Lender to pursue foreclosure and/or other rights and remedies available to Lender by law, equity or otherwise.
Section 5.20 Subordination Agreements. Borrowers shall, and shall cause each other Loan Party and any other Person designated by Lender to, execute a Subordination Agreement covering any Debt owed by such Borrower other than Debt owing to Lender under the Loan Documents and the Green Shoe / Little Bay Debt.
Section 5.21 Transfer Letters. Promptly upon request by Lender at any time and from time to time, each Borrower shall execute such letters in lieu of transfer or division orders as are necessary or appropriate to transfer and deliver to Lender proceeds from or attributable to any Borrowing Base Oil and Gas Properties.
Senior First Lien Secured Credit Agreement – Page 47
Section 5.22 Hydrocarbon Hedging. One or more Borrowers shall have Acceptable Hydrocarbon Hedge Agreements in place at all times effectively hedging at least 50% of the oil volumes of Borrowers. Borrowers will comply with all Acceptable Hydrocarbon Hedge Agreements existing or created on the Closing Date or entered into thereafter by any Borrower and not in violation of Section 6.15.
NEGATIVE COVENANTS
Until the Final Payment Date, Borrowers shall comply with the following covenants.
Section 6.01 Liens, Etc. Unless consented to in writing by Lender, no Borrower shall, and no Borrower shall permit any of its Relevant Subsidiaries to, create, assume, incur, or suffer to exist any Lien on or in respect of any of its Property, whether now owned or hereafter acquired, or assign any right to receive proceeds therefrom, except that Borrowers and each of their respective Relevant Subsidiaries may create, incur, assume, or suffer to exist:
(a) Liens granted under a Loan Document and securing the Total Obligations;
(b) Liens securing Capital Leases; provided, that the Debt secured by such Liens (i) does not exceed $500,000 in the aggregate for the Borrowers and their respective Relevant Subsidiaries at any one time outstanding, (ii) is secured only by the Property leased under such Capital Leases and not any other Property of any Borrower or any of its Relevant Subsidiaries, and (iii) the principal amount of such Debt is not increased.
(c) Liens securing equipment leases in the ordinary course of business; provided that the Debt secured by such Liens does not exceed $500,000 in the aggregate for the Borrowers and their respective Relevant Subsidiaries at any one time outstanding and is secured only by the equipment leased under such leases and not any other Property of any Borrower or any of its Relevant Subsidiaries;
(d) Liens for Taxes, assessments, or other governmental charges or levies not yet due or that (provided foreclosure, sale, or other similar proceedings shall not have been initiated) are being contested in good faith by appropriate proceedings; provided that such reserve as may be required by GAAP shall have been made therefor;
(e) Liens or preferential purchase rights, rights of first refusal and similar rights in favor of vendors, carriers, warehousemen, repairmen, mechanics, workmen, materialmen, contractors, laborers, employees, operators, landlords, construction, or similar Liens arising by operation of law in the ordinary course of business in respect of obligations that are not yet due or that are being contested in good faith by appropriate proceedings if such reserve as may be required by GAAP shall have been made therefor;
(f) Liens to operators and non-operators under joint operating agreements, unitization and pooling agreements arising in the ordinary course of the business of any Borrower or any of its Relevant Subsidiaries to secure amounts owing, which amounts are not yet due or are being contested in good faith by appropriate proceedings; if such reserve as may be required by GAAP shall have been made therefor;
(g) Liens or trusts arising in the ordinary course of business out of pledges or deposits under workers’ compensation laws, unemployment insurance, old age pensions or other social security or retirement benefits, or similar legislation or to secure public or statutory obligations of Borrowers;
Senior First Lien Secured Credit Agreement – Page 48
(h) easements, rights-of-way, covenants, liens, servitudes, rights, surface leases, restrictions, and other similar encumbrances, and minor defects in the chain of title that are customarily accepted in the oil and gas financing industry, including in respect of surface operations or for pipelines or power lines, none of which materially interfere with the ordinary conduct of the business of any Borrower or any of its Relevant Subsidiaries or materially detract from the value or use of the Property to which they apply;
(i) rights reserved to or vested in any Governmental Authority to control or regulate any Property of any Borrower or any of its Relevant Subsidiaries, or to use such Property;
(j) Liens under production sales agreements, division orders, operating agreements and other agreements customary in the oil and gas business for processing, producing, and selling Hydrocarbons securing obligations not constituting Debt and provided that such Liens do not secure obligations to deliver Hydrocarbons at some future date without receiving full payment therefor within ninety (90) days of delivery;
provided, that Liens described in clauses (b) through (j) above shall not constitute Permitted Liens upon the initiation of any foreclosure proceedings with regard to the Property encumbered by such Liens and; provided further, no intention to subordinate the first priority Lien granted in favor of Lender is hereby implied or expressed or is to be inferred by the permitted existence of such Permitted Liens;
(k) Liens securing the purchase price of Property, including vehicles and equipment, acquired by any Borrower or any of its Relevant Subsidiaries in the ordinary course of business (including Liens existing under conditional sale or title retention contracts), provided that such Liens cover only the acquired Property and the aggregate unpaid purchase price as to the Borrowers and their respective Relevant Subsidiaries secured by such Liens does not exceed $500,000;
(l) Liens that are permitted by an Intercreditor Agreement that secure the payment of obligations relating to Acceptable Hydrocarbon Hedge Agreements meeting the requirements of Section 6.15;
(m) royalties and any overriding royalties, net profit interests, free gas arrangements, production payments, reversionary interests and other similar burdens on production applicable to any Property of any Borrower provided, such items do not increase the working interest of any Borrower or reduce the net revenue interest of any Borrower in the Borrowing Base Oil and Gas Properties from those reflected on Exhibit A attached hereto;
(n) all unit agreements, pooling agreements, operating agreements, farmout agreements, hydrocarbon production sales contracts, division orders and other contracts, agreements and instruments applicable to any Property of any Borrower provided, such items do not increase the working interest of any Borrower or reduce the net revenue interest of any Borrower in the Borrowing Base Oil and Gas Properties from those reflected on Exhibit A attached hereto;
(o) conventional rights of reassignment arising upon final intention to abandon or release any Property of any Borrower;
Senior First Lien Secured Credit Agreement – Page 49
(p) calls on production under existing contracts that provide that the holder of such call on production must pay an index-based or current market price for any production purchased by virtue of such call on production;
(q) limitations (including drilling and operating limitations) imposed on any Oil and Gas Property of any Borrower or any of its Relevant Subsidiaries by reason of the rights of subsurface owners or operators in a common property;
(r) Liens set forth on Schedule 6.01;
(s) Liens securing insurance premium financing arrangements to the extent permitted by Section 6.02, provided that such Liens are limited to the applicable insurance contracts; and
(t) any other Liens, defects or irregularities which do not, individually or in the aggregate, materially detract from the value of or materially interfere with the ordinary course of the business of any Borrower or any of its Relevant Subsidiaries or the use or ownership of any such Property subject thereto or affected thereby (as currently used or owned).
Section 6.02 Debts, Guaranties, and Other Obligations. No Borrower shall, and no Borrower shall permit any of its Relevant Subsidiaries to, create, assume, suffer to exist, or in any manner become or be liable in respect of, any Debt, except:
(a) Debt of Borrowers and their respective Relevant Subsidiaries under the Loan Documents;
(b) unsecured Debt of Borrowers and their respective Relevant Subsidiaries in an aggregate amount not to exceed $500,000 at any one time outstanding;
(c) Debt of Borrowers under Hedge Agreements with Swap Counterparties that are expressly permitted by the terms of Section 6.15; provided that such Debt shall be secured only by the Security Documents;
(d) Debt of Borrowers and their respective Relevant Subsidiaries consisting of sureties or bonds provided to any Governmental Authority or other Person and assuring payment of contingent liabilities of Borrowers or any of their respective Relevant Subsidiaries in connection with the operation of their Oil and Gas Properties, including with respect to plugging, facility removal and abandonment of respective Oil and Gas Properties;
(e) the Subordinated Debt of Red Mountain existing on the date of this Agreement fully subordinated to the Obligations pursuant to the terms of a Subordination Agreement;
(f) current liabilities for taxes, assessments or other governmental charges or levies, before the same shall become delinquent, incurred in the ordinary course of any Borrower’s or any of its Relevant Subsidiaries’ business;
(g) Debt of Borrowers or any of their respective Relevant Subsidiaries incurred with respect to all or a portion of the purchase price of Property acquired in the ordinary course of business to the extent permitted by Section 6.01(j);
Senior First Lien Secured Credit Agreement – Page 50
(h) Debt of Borrowers and their respective Relevant Subsidiaries incurred in connection with Sections 6.01(b) and 6.01(c) to the extent permitted therein;
(i) Debt from time to time owing by a Borrower or any of its Relevant Subsidiaries to a Borrower or any other Relevant Subsidiary;
(j) Debt associated with worker’s compensation claims, bonds or surety obligations required by Applicable Law or third parties in connection with the operation of Oil and Gas Properties;
(k) endorsements of negotiable instruments for collection in the ordinary course of business;
(l) cash management obligations and other Debt of Borrowers and their respective Relevant Subsidiaries in respect of netting services, overdraft protections and similar arrangements in connection with deposit accounts;
(m) Debt representing deferred compensation to employees of any Borrower or any of its Relevant Subsidiaries in the ordinary course of business;
(n) customary indemnification obligations or customary obligations in respect of purchase price or similar adjustments in connection with dispositions of Property permitted hereby or any investment permitted hereby;
(o) Debt of Borrowers and their respective Relevant Subsidiaries consisting of the financing of insurance premiums in the ordinary course of business not exceeding in the aggregate $500,000 at any one time outstanding; and
(p) Debt set forth on Schedule 6.02.
Section 6.03 Agreements Restricting Liens and Distributions. No Borrower shall, and no Borrower shall permit any of its Subsidiaries to, create, incur, assume or permit to exist any contract, agreement or understanding (other than this Agreement and the other Loan Documents) that in any way prohibits or restricts the granting, conveying, creation or imposition of any Lien on any of its Property that serves as Collateral for this Agreement, whether now owned or hereafter acquired, to secure the Total Obligations or that requires the consent of or notice to other Persons in connection therewith; provided that, the foregoing shall not apply to restrictions and conditions imposed by Applicable Laws. No Borrower shall, and no Borrower shall permit any of its Relevant Subsidiaries, to discount any of its accounts receivable, other than to minimize losses on bona fide debts previously contracted or the settlement of accounts and discounts granted in the ordinary course of business with respect to any of its Property other than the Collateral.
Section 6.04 Merger or Consolidation, Etc. No Borrower shall, and no Borrower shall permit any of its Subsidiaries to, merge or consolidate with or into any other Person except (a) the merger of a Relevant Subsidiary into a Borrower or another Relevant Subsidiary, (b) the merger of a Borrower into another Borrower, or (c) the merger of Red Mountain into a wholly owned Subsidiary incorporated in Delaware for the purpose of changing Red Mountain’s domicile to Delaware; provided that, in each case, (i) at the time of such merger and immediately after giving effect thereto no Default exists, (ii) Borrowers shall have taken such actions and executed and filed such agreements and financing statements as are required so that Collateral Agent shall continue to have an Acceptable Security Interest in the Collateral and (iii) Borrowers provide at least thirty (30) days prior written notice of such proposed merger to Lender.
Senior First Lien Secured Credit Agreement – Page 51
Section 6.05 Disposition of Property. No Borrower shall, and no Borrower shall permit any of its Relevant Subsidiaries to, make any Disposition other than:
(a) the sale of Hydrocarbons or Liquid Investments in the ordinary course of business;
(b) the Disposition of equipment that is (i) obsolete, worn out, depleted or uneconomic and disposed of in the ordinary course of business, (ii) no longer necessary for the business of such Person, or (iii) contemporaneously replaced by equipment of at least comparable value and use;
(c) the Disposition of Property by a Relevant Subsidiary to a Borrower or to a Relevant Subsidiary;
(d) the Disposition of Equity Interests in Excluded Subsidiaries; and
(e) so long as no Default or Event of Default exists, the Disposition of any Oil and Gas Property or of any interest therein or any Subsidiary owning Oil and Gas Properties between redeterminations of the Borrowing Base pursuant to Section 2.02, the aggregate loan value of which, as assigned thereto by Lender in the most recent setting of the Borrowing Base in accordance with the provisions of Section 2.02 equals ten percent (10%) or less of the amount of the then existing Borrowing Base; provided, however, in connection with any such transaction, the then existing Borrowing Base shall be automatically reduced by an amount equal to the loan value attributable to the relevant Borrowing Base Oil and Gas Properties subject to such Disposition and further provided, however, that, upon consummation of any such Disposition, if a Borrowing Base Deficiency exists, Borrowers shall proceed to cure such Borrowing Base Deficiency in accordance with the provisions of Section 2.05(b)(ii).
Section 6.06 Restricted Payments. No Borrower shall, and no Borrower shall permit any of its Subsidiaries to, make any Restricted Payments.
Section 6.07 Investments. No Borrower shall, and no Borrower shall permit any of its Subsidiaries to, (i) make or permit to exist any loans, advances, or capital contributions to, (ii) or make any investment in, or (iii) purchase or commit to purchase the Equity Interest of, evidences of indebtedness of or any other interests in, any Person, except:
(a) Liquid Investments;
(b) trade and customer accounts receivable which are for goods furnished or services rendered in the ordinary course of business and are payable in accordance with customary trade terms;
(c) subject to the terms of Section 6.15, investments in Hedge Agreements by a Borrower;
(d) investments (including debt obligations and capital stock) received in connection with the bankruptcy or reorganization, or in settlement of delinquent obligations, of, and other disputes with, customers, suppliers and other Persons obligated to any Borrower or any Subsidiary;
Senior First Lien Secured Credit Agreement – Page 52
(e) Oil and Gas Properties and gathering systems or other Property related thereto or related to farm-out, farm-in, joint operating, joint venture or area of mutual interest agreements, gathering systems, pipelines or other similar arrangements which are usual and customary in the oil and gas exploration and production business located within the geographic boundaries of the United States of America (including, the federal Outer Continental Shelf);
(f) evidences of loans or advances not prohibited by the provisions of Section 6.02;
(g) loans or advances to employees and officers of the Borrowers and their respective Subsidiaries made in the ordinary course of business for bona fide business purposes not to exceed $500,000 in the aggregate at any one time outstanding;
(h) investments by Borrowers in their respective Relevant Subsidiaries or Persons that simultaneously with such investment become a Relevant Subsidiary, not exceeding $500,000 in the aggregate at any one time outstanding;
(i) investments reflected in the Financial Statements referred to in Section 5.06 or which are disclosed on Schedule 6.07;
(j) non-cash investments that do not adversely affect the ability of Borrowers to make payment of the Obligations, when due, or to comply with the terms of the Loan Documents; and
(k) other investments not exceeding $500,000 in the aggregate at any one time outstanding for the Borrowers and their respective Relevant Subsidiaries.
Section 6.08 Affiliate Transactions. No Borrower shall, and no Borrower shall permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction or series of transactions (including, but not limited to, the purchase, sale, lease or exchange of Property, the making of any investment, the giving of any guaranty, the assumption of any obligation or the rendering of any service) with any of its Affiliates, unless such transaction or series of transactions is on terms no less favorable to such Borrower or Subsidiary, as applicable, than those that could be obtained in a comparable arm’s length transaction with a Person that is not an Affiliate.
Section 6.09 Compliance with ERISA. No Borrower shall, and no Borrower shall permit any of its Subsidiaries to, directly or indirectly, in any material respect;
(a) engage in, or permit any Subsidiary to engage in, any transaction in connection with which any Borrower or any Controlled Group member could be subjected to either a civil penalty assessed pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed by Chapter 43 of Subtitle D of the Code;
(b) terminate, or permit any Subsidiary to terminate, any Plan in a manner, or take any other action with respect to any Plan, which could result in any liability to Borrower or any Controlled Group member to the PBGC;
Senior First Lien Secured Credit Agreement – Page 53
(c) fail to make, or permit any Subsidiary to fail to make, full payment when due of all amounts which, under the provisions of any Plan, agreement relating thereto or applicable law, Borrower or any Controlled Group member is required to pay as contributions thereto;
(d) permit to exist, or allow any Subsidiary to permit to exist, any unpaid minimum required contributions within the meaning of Section 4971 of the Code, whether or not waived, with respect to any Plan;
(e) permit, or allow any Subsidiary to permit, the actuarial present value of the benefit liabilities (as “actuarial present value of the benefit liabilities” shall have the meaning specified in section 4041 of ERISA) under any Plan maintained by Borrower or any Controlled Group member which is regulated under Title IV of ERISA to exceed the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities;
(f) assume an obligation to contribute to, or permit any Subsidiary to assume an obligation to contribute to, any Multiemployer Plan;
(g) subject to Section 6.07, acquire, or permit any Subsidiary to acquire, an interest in any Person if such Person sponsors, maintains or contributes to, or at any time in the six-year period preceding such acquisition has sponsored, maintained, or contributed to, (1) any Multiemployer Plan, or (2) any other Plan that is subject to Title IV of ERISA, and in either case, the actuarial present value of the benefit liabilities under such Plan exceeds the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities, and the withdrawal liability, if assessed, could be expected to result in a Material Adverse Change;
(h) incur, or permit any Subsidiary to incur, a liability to or on account of a Plan under sections 515, 4062, 4063, 4064, 4201 or 4204 of ERISA;
(i) assume an obligation to contribute to, or permit any Subsidiary to assume an obligation to contribute to, any employee welfare benefit plan, as defined in section 3(1) of ERISA, including, without limitation, any such plan maintained to provide benefits to former employees of such entities, that may not be terminated by such entities in their sole discretion without any material liability;
(j) amend or permit any Subsidiary to amend, a Plan resulting in an increase in current liability such that Borrower or any Controlled Group member is required to provide security to such Plan under section 401(a)(29) of the Code; or
(k) permit to exist any occurrence of any Reportable Event (as defined in Title IV of ERISA), or any other event or condition, which presents a material (in the opinion of the Required Lenders) risk of such a termination by the PBGC of any Plan.
Section 6.10 Sale-and-Leaseback. No Borrower shall, and no Borrower shall permit any of its Subsidiaries to, sell or transfer to a Person any Property, whether now owned or hereafter acquired, if at the time or thereafter such Borrower or any Subsidiary shall lease as lessee such Property or any part thereof or other Property that such Borrower or a Subsidiary intends to use for substantially the same purpose as the Property sold or transferred.
Senior First Lien Secured Credit Agreement – Page 54
Section 6.11 Change of Business. No Borrower shall, and no Borrower shall permit any of its Subsidiaries to, make any material change in the character of its business as an independent oil and gas exploration and production company and operations incidental thereto, nor will any Borrower or any of its Subsidiaries operate or carry on business in any jurisdiction other than the United States.
Section 6.12 Organizational Documents, Material Agreements. Without the prior written consent of Lender, no Borrower shall, and no Borrower shall permit any of its Subsidiaries to, (a) amend, restate or otherwise modify its Governing Agreements except for amendments thereof that do not have any adverse effect on the Secured Creditors’ rights and remedies under the Loan Documents, or (b) amend or otherwise modify any Debt Instrument or Material Agreements in a manner that could have a Material Adverse Effect.
Section 6.13 Use of Proceeds; Letters of Credit. Borrowers shall not permit the proceeds of any Advance or Letters of Credit to be used for any purpose other than those permitted by Section 5.09. Borrowers shall not engage in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U). Neither Borrowers nor any Person acting on behalf of Borrowers shall take, nor permit any of the Subsidiaries to take any action which might cause any of the Loan Documents to violate Regulations T, U or X or any other regulation of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect, including without limitation, the use of the proceeds of any Advance or Letters of Credit to purchase or carry any margin stock in violation of Regulations T, U or X.
Section 6.14 Gas Imbalances, Take-or-Pay or Other Prepayments. Borrowers shall not allow gas imbalances, take-or-pay or other prepayments with respect to the Borrowing Base Oil and Gas Properties that would require Borrowers to deliver Hydrocarbons produced on a monthly basis from such Borrowing Base Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor other than that which do not result in Borrowers having net aggregate liability in excess of $50,000 for any calendar month.
(a) Speculative Purposes. No Borrower shall, and no Borrower shall permit any of its Subsidiaries to, be a party to or otherwise enter into or hold a speculative position in any commodities market or futures market or enter into any Hedge Agreement for speculative purposes.
(b) Risk Management; Term. No Borrower shall, and no Borrower shall permit any of its Subsidiaries to, be party to or otherwise enter into any (i) Interest Hedge Agreement without the prior written consent of Lender, or (ii) Hydrocarbon Hedge Agreement unless (aa) such Hydrocarbon Hedge Agreement is an Acceptable Hydrocarbon Hedge Agreement, (bb) such Hydrocarbon Hedge Agreement does not contain any anti-assignment provisions restricting any Borrower or if such agreement contains anti-assignment provisions which cannot be removed, such provisions shall be modified to read substantially as follows: “The interest and obligations arising under this agreement are non-transferrable and non-assignable, except that [company name] may assign and grant a security interest in its rights and interests hereunder to [Independent Bank] and its assigns (the “Lender”) as security for [company’s name] present and future obligations to Lender. Until [hedge provider] is notified in writing by the Lender to pay to the Lender amounts due [company name] hereunder, [hedge provider] may continue to make such payments to [company name],” and (cc) such Hydrocarbon Hedge Agreement otherwise complies with the terms of this Agreement.
Senior First Lien Secured Credit Agreement – Page 55
Section 6.16 Maintain Hedge Agreements. No Borrower shall, amend, modify, liquidate, unwind or otherwise terminate any Hedge Agreements or transactions thereunder now or hereafter in effect, except with the written consent of Lender, which consent may be conditioned on, among other things, such then-existing Hedge Agreements and transactions thereunder being replaced with Hedge Agreements and transactions thereunder with terms satisfactory to Lender.
Section 6.17 Additional Subsidiaries. No Borrower shall, and no Borrower shall permit any of its Relevant Subsidiaries to create or acquire any Subsidiaries unless any such new Subsidiary at the time of its creation or acquisition becomes a Subsidiary Guarantor by the execution of a Guaranty.
Section 6.18 Current Ratio. Borrowers shall not permit the ratio of, as of the last day of each fiscal quarter of Red Mountain beginning with the fiscal quarter ending February 28, 2013, Borrowers’ and their consolidated Subsidiaries’ (a) consolidated current assets to (b) consolidated current liabilities, to be less than 1.00 to 1.00. For purposes of this calculation (i) “current assets” shall include, as of the date of calculation, the Unused Commitment Amount of Lender, and (ii) “current liabilities” shall exclude, as of the date of calculation, the current portion of long–term Debt existing under this Agreement.
Section 6.19 Funded Debt to EBITDAX Ratio. Borrowers shall not permit, as of the last day of each fiscal quarter of Red Mountain commencing with the quarter ending February 28, 2013, the ratio of (a) consolidated Funded Debt of the Borrowers and their Subsidiaries, including Debt under this Agreement, as of such day to (b) the consolidated EBITDAX of the Borrowers and their Subsidiaries for the four-fiscal quarter period then ended, to be greater than 3.50 to 1.00; provided, however, for the period from and after the date of this Agreement through November 30, 2014, EBITDAX shall be calculated based upon actual from November 30, 2012, through the current fiscal quarter, annualized.
Section 6.20 Interest Coverage Ratio. Borrowers shall not permit, as of the end of each fiscal quarter of Red Mountain commencing February 28, 2013, the ratio of (a) the consolidated EBITDAX of the Borrowers and their Subsidiaries to (b) the Interest Expense of the Borrowers and their Subsidiaries, in each case for the four-fiscal quarter period then ended, to be less than 3.00 to 1.00; provided, for the period from and after the date of this Agreement through November 14, 2014, EBITDAX and Interest Expense shall be calculated based upon actual from November 30, 2012, through the current fiscal quarter, annualized.
Section 6.21 Account Payables. On and from the date of the first Compliance Certificate delivered pursuant to Section 5.06(b)(ii), no Borrower shall, and no Borrower shall permit any of its Subsidiaries to, allow any of their trade payables or other accounts payable to be past due for more than 90 days (except (a) in cases where any such trade payable is being disputed in good faith and adequate reserves under GAAP have been established, provided that such Borrower remains in compliance with Section 6.01 hereof, (b) for such payables, which in the aggregate, do not exceed $50,000 and (c) for such payables that are not timely received by Borrowers).
Section 6.22 Excluded Subsidiaries. No Borrower shall permit any of its Excluded Subsidiaries to take any action prohibited under Article VI of this Agreement which could cause a Material Adverse Effect.
Senior First Lien Secured Credit Agreement – Page 56
Section 6.23 Green Shoe / Little Bay Debt. Red Mountain hereby waives any and all defaults by Cross Border, in respect of the Green Shoe / Little Bay Debt, whether occurring before or after the date hereof. Until the Final Payment Date, (a) Red Mountain shall not demand or accept from Cross Border, a Lien on any of Cross Border’s Properties, to secure or satisfy all or any part of the Green Shoe / Little Bay Debt; (b) Red Mountain shall not transfer or assign any of the Green Shoe / Little Bay Debt to any Person, except upon terms and conditions acceptable to Lender; (c) Red Mountain agrees not to commence, undertake, initiate or prosecute any enforcement action against Cross Border, including the exercise of any rights of setoff or recoupment, the exercise of any rights or remedies of a secured creditor under the Uniform Commercial Code of any applicable jurisdiction or under any Debtor Relief Law, the seeking of relief from the automatic stay or from any other stay in any insolvency proceeding, and (d) Red Mountain agrees not to commence, undertake, initiate or prosecute against Cross Border any proceeding under any provision of any Debtor Relief Law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other similar relief.
EVENTS OF DEFAULT; REMEDIES
Section 7.01 Events of Default. The occurrence of any of the following events shall constitute an “Event of Default”:
(a) Payment. Borrowers default in the payment when due of (i) any principal under the Note, (ii) any installment of interest under the Note and such default shall remain unremedied in excess of three (3) days, (iii) any reimbursements, indemnifications, fees, or other amounts due and payable under this Agreement or any other Loan Documents and such default shall remain unremedied for five (5) days, or (iv) Debt of any Borrower under any Acceptable Hydrocarbon Hedge Agreement or Interest Hedge Agreement permitted or required under applicable provisions of this Agreement and such default shall remain unremedied in excess of the period of grace, if any, with respect thereto;
(b) Representation and Warranties. Any representation or warranty made or deemed to be made (i) by any Borrower (or any of its officers) in this Agreement or in any other Loan Document or (ii) by any Relevant Subsidiary (or any of its officers) in connection with any Loan Document to which it is a party shall prove to have been incorrect in any material respect when made or deemed to be made;
(c) Covenant Breaches. Any Borrower, (i) fails to perform or observe any term or covenant set forth in Section 5.03(a) (with respect to the existence of such Borrower or any of its Subsidiaries), Section 5.09, or Article VI of this Agreement, or (ii) fails to perform or observe any other term or covenant set forth in this Agreement or in any other Loan Document that is not covered in clause (i) above and such failure remains unremedied for a period of thirty (30) days after written notice specifying such default has been given to Borrowers by Lender;
(d) Cross-Defaults. (i) any Borrower or any of its Relevant Subsidiaries fails to pay any principal of or premium or interest on its Debt that is outstanding in a principal amount of at least $200,000 individually or when aggregated with all such Debt of such Borrower and any of its Relevant Subsidiaries so in default (but excluding Debt evidenced by the Note) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in any Debt Instrument; (ii) any other event shall occur or condition shall exist under any Debt Instrument that is outstanding in a principal amount (or termination payment amount or similar amount) of at least $200,000 individually or when aggregated with all such Debt of such Borrower or any of its Relevant Subsidiaries so in default, and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or (iii) any such Debt in a principal amount of at least $200,000 individually or when aggregated with all such Debt of such Borrower or any of its Relevant Subsidiaries shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof.
Senior First Lien Secured Credit Agreement – Page 57
(e) Insolvency; Bankruptcy. (i) Any Borrower or any of its Relevant Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; (ii) any proceeding shall be instituted by or against any Borrower or any of its Relevant Subsidiaries seeking to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any Debtor Relief Law, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its Property and, in the case of any such proceeding instituted against any Borrower or any of its Relevant Subsidiaries either such proceeding shall remain undismissed or unstayed for a period of 60 days or any of the actions sought in such proceeding shall occur; or (iii) any Borrower or any of its Relevant Subsidiaries, shall take any action to authorize any of the actions set forth above in this Section 7.01(e);
(f) Judgments. There is entered against (i) any Borrower or any of its Relevant Subsidiaries one or more final judgments or orders for the payment of money in an aggregate amount (as to all such judgments and orders) exceeding $1,000,000 (to the extent not covered by independent third-party insurance), or (ii) any Borrower or any of its Relevant Subsidiaries one or more monetary or non-monetary final judgments that could have, individually or in the aggregate, a Material Adverse Effect;
(g) Termination Events. Any Termination Event with respect to a Plan occurs, and, 30 days after the occurrence of such Termination Event, regardless of whether notice thereof has been given to Lender, such Termination Event is not corrected;
(h) Plan Withdrawals. Any Borrower or any member of the Controlled Group as employer under a Multiemployer Plan makes a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan notifies such withdrawing employer that such employer has incurred a withdrawal liability in a material annual amount;
(i) Change in Control. A Change in Control occurs;
(j) Loan Documents. Any material provision of any Loan Document shall for any reason cease to be valid and binding on any Borrower or any of its Relevant Subsidiaries by reason of any act or omission of any Borrower or any of its Relevant Subsidiaries, or any such Person contests the full force and effect or validity thereof, or any such Person shall so state in writing;
(k) Security Documents. (i) Lender fails to have an Acceptable Security Interest in any portion of the Collateral having a value greater than $500,000 or (ii) any Security Document shall at any time and for any reason cease to create the Lien on the Property purported to be subject to such instrument in accordance with the terms of such instrument, or cease to be in full force and effect, or shall be contested by any Borrowers or any other Loan Party;
Senior First Lien Secured Credit Agreement – Page 58
(l) Potential Failure of Title. The title to any of the Borrowing Base Oil and Gas Properties, or any material part thereof, shall become the subject matter of litigation before any Person, Governmental Authority or arbitrator that could have a Material Adverse Effect with respect to any Borrower’s or other Loan Party’s title to such Borrowing Base Oil and Gas Properties or right to receive the production of Hydrocarbons or proceeds of production of Hydrocarbons thereof and, if the portion of such Borrowing Base Oil and Gas Property that is the subject of such litigation is disregarded for purposes of calculating the Borrowing Base, a Borrowing Base Deficiency would result solely for purposes under this Section 7.01(l); or
(m) Management. Alan Barksdale shall cease to be the Chief Executive Officer of Red Mountain or the Chairman of Cross Border and is not replaced with a responsible officer acceptable to Lender within thirty (30) days.
Section 7.02 Optional Acceleration of Maturity. If any Event of Default (other than an Event of Default pursuant to Section 7.01(e)) shall have occurred and be continuing, then, and in any such event,
(a) Lender (i) may by notice to Borrowers, declare the obligation of Lender to make extensions of credit hereunder, including making Advances and issuing, increasing, or extending Letters of Credit, to be terminated, whereupon the same shall forthwith terminate, and (ii) may by notice to Borrowers, declare all principal, interest, fees, reimbursements, indemnifications, and all other amounts payable under this Agreement and the other Loan Documents to be forthwith due and payable, whereupon all such amounts shall become and be forthwith due and payable in full, without notice of intent to demand, demand, presentment for payment, notice of nonpayment, protest, notice of protest, grace, notice of dishonor, notice of intent to accelerate, notice of acceleration, and all other notices, all of which are hereby expressly waived by Borrowers;
(b) Borrowers shall, on demand of Lender, deposit with Lender into the Cash Collateral Account an amount of cash equal to the Letter of Credit Exposure as security for the Total Obligations; and
(c) Lender may proceed to enforce its rights and remedies hereunder and under any other Loan Document by appropriate proceedings.
Section 7.03 Automatic Acceleration of Maturity. If any Event of Default pursuant to Section 7.01(e) shall occur,
(a) (i) the obligation of Lender to make extensions of credit hereunder, including making Advances and issuing, increasing, or extending Letters of Credit, shall terminate, and (ii) all principal, interest, fees, reimbursements, indemnifications, and all other amounts payable under this Agreement and the other Loan Documents shall become and be forthwith due and payable in full, without notice of intent to demand, demand, presentment for payment, notice of nonpayment, protest, notice of protest, grace, notice of dishonor, notice of intent to accelerate, notice of acceleration, and all other notices, all of which are hereby expressly waived by Borrowers;
(b) Borrowers shall deposit with Lender into the Cash Collateral Account an amount of cash equal to the outstanding Letter of Credit Exposure as security for the Total Obligations; and
(c) Lender may proceed to enforce its rights and remedies hereunder and under any other Loan Document by appropriate proceedings.
Senior First Lien Secured Credit Agreement – Page 59
Section 7.04 Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Lender to or for the credit or the account of Borrowers against any and all of the Obligations of Borrowers now or hereafter existing under this Agreement and the other Loan Documents, irrespective of whether or not Lender shall have made any demand under this Agreement or such other Loan Documents. Lender agrees to notify Borrowers after any such set-off and application made by Lender; provided, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of Lender under this Section 7.04 are in addition to any other rights and remedies (including, without limitation, other rights of set-off) which Lender may have.
Section 7.05 Non-exclusivity of Remedies. No remedy conferred upon Lender is intended to be exclusive of any other remedy, and each remedy shall be cumulative of all other remedies existing by contract, at law, in equity, by statute or otherwise.
Section 7.06 Application of Proceeds. From and during the continuance of any Event of Default, and subject to the terms of any Intercreditor Agreement, any monies or Property actually received by Lender pursuant to this Agreement or any other Loan Document, the exercise of any rights or remedies under any Security Document, or any other Loan Document with Borrowers or any other Loan Party that secures any of the Total Obligations, shall be applied in the following order:
(a) First, to the payment of all amounts, including without limitation costs and expenses incurred in connection with the collection of such proceeds and the payment of any part of the Obligations, due to Lender under any of the expense reimbursement or indemnity provisions of this Agreement or any other Loan Document, and any applicable law;
(b) Second, ratably, according to the then unpaid amounts thereof, without preference or priority of any kind among them, (i) to the payment of the Obligations then due and payable, in the following order: (1) fees and expenses not covered in (a) above, (2) accrued and unpaid interest hereunder, then (3) to outstanding Obligations with respect to Letters of Credit, outstanding principal under the Advances and (ii) to the payment of any Non-Lender Swap Counterparty Obligations under any Hedge Agreement; and
(c) Third, the remainder, if any, to Borrowers, its respective successors or assigns, or such other Person as may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct.
RESERVED
SECURITY FOR THE TOTAL OBLIGATIONS
Section 9.01 Grant of Liens and Security Interests. As security for the Total Obligations owed to the Secured Creditors under this Agreement, the other Loan Documents and any Hedge Agreement, each Borrower grants, assigns, transfers and conveys to Lender, for the ratable benefit of the Secured Creditors, an Acceptable Security Interest in the Collateral subject only to the Permitted Liens.
Senior First Lien Secured Credit Agreement – Page 60
Section 9.02 Release of Liens; Financing Statements; Release. Following the Final Payment Date, (a) Lender will deliver to the Borrowers at the Borrowers’ expense, releases of all Liens arising under the Security Documents with an acknowledgment that the same have been terminated, and (b) Lender, on one hand, and Borrowers, on the other hand, shall deliver to each other a general release of all liabilities and obligations of each of them under this Agreement, the other Loan Documents and any Hedge Agreements.
Section 9.03 All Obligations are Pari Passu. The Total Obligations owed to the Secured Creditors under the Loan Documents and any Hedge Agreement shall be pari passu, pursuant to the terms of any Intercreditor Agreement, and the Total Obligations shall be secured ratably, for the benefit of the Secured Creditors, by the Liens granted pursuant to the Security Documents.
Section 9.04 Power of Attorney. Borrowers hereby grant to Lender a power of attorney and irrevocably constitutes and appoints Lender, and any officer or agent thereof, with full power of substitution, as Borrowers’ and each other Loan Party’s true and lawful attorney-in-fact, with full irrevocable power and authority in the place and stead of Borrowers and each other Loan Party, for the purpose of, whenever an Event of Default has occurred and is continuing, (i) taking any and all appropriate action to preserve, protect, perfect or enforce any Liens in favor of Collateral Agent for the benefit of the Secured Creditors and (ii) executing, on behalf of Borrowers and each other Loan Party, documents related to the enforcement of Collateral Agent’s rights and remedies under the Loan Documents, including the execution of any document to be filed with or approved by any Governmental Authority in connection with a foreclosure on any of the Collateral and the completing of letters in lieu of transfer orders. This power of attorney is a right coupled with an interest and will be irrevocable for as long as any of the Total Obligations remain outstanding.
MISCELLANEOUS
Section 10.01 Amendments, Etc. No amendment or waiver of any provision of this Agreement or any other Loan Document, nor consent to any departure by Borrowers or any other Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed by Lender and Borrowers, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
Section 10.02 Notices, Etc. All notices and other communications shall be in writing (including, without limitation, facsimile) and mailed by certified mail, return receipt requested, transmitted by facsimile, hand delivered, or delivered by a nationally recognized overnight courier, at the address for the appropriate party specified in Schedule 1 or at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when so mailed, transmitted by facsimile, or hand delivered or delivered by a nationally recognized overnight courier, be effective when received if mailed, when facsimile transmission is completed or when delivered by such messenger or courier, respectively, except that notices and communications to Lender pursuant to Article II shall not be effective until received by Lender.
Section 10.03 No Waiver; Remedies. No failure on the part of Lender to exercise, and no delay in exercising, any right hereunder or under the Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.
Senior First Lien Secured Credit Agreement – Page 61
Section 10.04 Costs and Expenses. Borrowers shall pay on demand (a) all reasonable out-of-pocket costs and expenses of Lender in connection with the preparation, execution, waiver, delivery, administration, modification, and amendment of this Agreement and the other Loan Documents including, without limitation, the reasonable fees and reasonable out-of-pocket expenses of counsel for Lender with respect to advising Lender as to its rights and responsibilities under this Agreement, and (b) all reasonable out-of-pocket costs and expenses, if any, of Lender (including, without limitation, reasonable counsel fees and expenses of Lender) in connection with the enforcement (whether through negotiations, legal proceedings, or otherwise) of this Agreement and the other Loan Documents following the occurrence and during the continuance of an Event of Default.
Section 10.05 Binding Effect. This Agreement shall become effective as provided in Section 3.01 and thereafter shall be binding upon and inure to the benefit of Borrowers, each Secured Creditor and their respective permitted successors and assigns, except that Borrowers shall not have the right to assign their rights or delegate their duties under this Agreement or any interest in this Agreement without the prior written consent of Lender.
Section 10.06 Participations; Etc. Lender shall have the right at any time and from time to time to grant participations in, and sell and transfer, the Obligations and any Loan Documents; provided, that Lender shall not make any sale or transfer of any Obligations or any Loan Document to a Person who is not a U.S. Person as defined in Section 7701(a)(30) of the Code without the prior written consent of the Borrowers. Each actual or proposed participant or assignee, as the case may be, shall be entitled to receive all information received by Lender regarding Borrowers and the other Loan Parties, including, without limitation, information required to be disclosed to a participant or assignee pursuant to Banking Circular 181 (Rev., August 2, 1984), issued by the Comptroller of the Currency (whether the actual or proposed participant or assignee is subject to the circular or not). Lender agrees to deliver to Borrowers copies of all U.S. Internal Revenue forms or certificates requested by Borrowers in connection with the Loan Documents.
Section 10.07 Indemnification. BORROWERS AND EACH OTHER LOAN PARTY SHALL JOINTLY AND SEVERALLY INDEMNIFY, PROTECT AND HOLD HARMLESS LENDER, AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND REPRESENTATIVES AND ADVISORS (INCLUDING ATTORNEYS, ACCOUNTANTS AND EXPERTS) FROM, AND DISCHARGE, RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER (INCLUDING THE REASONABLE FEES, CHARGES AND DISBURSEMENTS OF ANY COUNSEL) THAT MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THEM IN ANY WAY ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED BY THEM UNDER THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT (A) INCLUDING ANY SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS INCURRED BY REASON OF THE PERSON BEING INDEMNIFIED’S OWN NEGLIGENCE OR STRICT LIABILITY, (B) INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL CLAIMS AND ANY LIABILITIES ARISING UNDER ENVIRONMENTAL LAW, AND (C) INCLUDING, WITHOUT LIMITATION, ANY SUCH OTHER LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING FROM ANY LITIGATION, LEGAL PROCEEDING OR OTHER TYPE OF ACTION, REGARDLESS OF WHETHER ANY PARTY BEING INDEMNIFIED IS PARTY TO SUCH LITIGATION, LEGAL PROCEEDING OR OTHER ACTION, BUT EXCLUDING ANY SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS DETERMINED BY A COURT OF COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PERSON TO BE INDEMNIFIED.
Senior First Lien Secured Credit Agreement – Page 62
Section 10.08 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.
Section 10.09 Survival of Representations, Etc. All representations and warranties contained in this Agreement or made in writing by or on behalf of Borrowers in connection herewith shall survive at all times, including, without limitation, the execution and delivery of this Agreement and the Loan Documents, the making of the Advances and any investigation made by or on behalf of Lender, none of which investigations shall diminish Lender’s right to rely on such representations and warranties. All obligations of Borrower provided for in Sections 2.13, 10.04, and 10.07 shall survive at all times, including, without limitation, (i) any termination of this Agreement and repayment in full of the Obligations, and (ii) termination of the Hedge Agreement(s) with any Non-Lender Swap Counterparty and repayment in full of any Non-Lender Swap Counterparty Obligations pursuant thereto.
Section 10.10 Severability. In case one or more provisions of this Agreement or the other Loan Documents shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality, and enforceability of the remaining provisions contained herein or therein shall not be affected or impaired thereby.
Section 10.11 Business Loans. Each Borrower warrants and represents that the Credit Extensions evidenced by the Note are and shall be for commercial purposes as provided in Section 306 of the Texas Finance Code. At all such times, if any, as the Texas Finance Code shall establish a Maximum Rate, the Maximum Rate shall be the indicated rate ceiling for the weekly ceiling, as provided in Section 303.003 of the Texas Finance Code, from time to time in effect.
Section 10.12 Governing Law; Submission to Jurisdiction. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. Without limiting the intent of the parties set forth above, (a) Chapter 346 of the Texas Finance Code, as amended (relating to revolving loans and revolving tri-party accounts), shall not apply to this Agreement, the Note, or the transactions contemplated hereby and (b) to the extent that Lender may be subject to Texas law limiting the amount of interest payable for its account, Lender shall utilize the indicated (weekly) rate ceiling from time to time in effect. Each Letter of Credit shall be governed by either the Uniform Customs and Practice for Documentary Credits (2007 Revision), International Chamber of Commerce Publication No. 600, or the International Standby Practices (ISP98), International Chamber of Commerce Publication No. 590 (and any subsequent revisions thereof approved by a Congress of the International Chamber of Commerce and adhered to by Lender). Each Borrower hereby irrevocably submits to the jurisdiction of any Texas state or federal court sitting in Dallas, Texas in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, and each Borrower hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such court. Each Borrower hereby unconditionally and irrevocably waives, to the fullest extent it may effectively do so, any right it may have to the defense of an inconvenient forum to the maintenance of such action or proceeding. Each Borrower hereby agrees that service of copies of the summons and complaint and any other process which may be served in any such action or proceeding may be made by mailing or delivering a copy of such process to Borrowers at their address set forth in this Agreement. Each Borrower agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this section shall affect the rights of Lender to serve legal process in any other manner permitted by the law or affect the right of Lender to bring any action or proceeding against any Borrower or its property in the courts of any other jurisdiction.
Senior First Lien Secured Credit Agreement – Page 63
Section 10.13 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWERS HEREBY IRREVOCABLY AND EXPRESSLY WAIVE ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF LENDER IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF.
Section 10.14 USA Patriot Act. Lender hereby notifies Borrowers that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies each Borrower, which information includes the name and address of each Borrower and other information that will allow Lender to identify each Borrower in accordance with the Act.
Section 10.15 NO PRIOR OR ORAL AGREEMENTS. THIS WRITTEN AGREEMENT AND THE LOAN DOCUMENTS, AS DEFINED IN THIS AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND SUPERSEDE ALL PRIOR UNDERSTANDINGS AND AGREEMENTS, WHETHER WRITTEN OR ORAL, RELATING TO THE TRANSACTIONS PROVIDED FOR HEREIN AND THEREIN. ADDITIONALLY, THIS AGREEMENT AND THE LOAN DOCUMENTS MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
IN EXECUTING THIS AGREEMENT, EACH BORROWER HEREBY WARRANTS AND REPRESENTS IT IS NOT RELYING ON ANY STATEMENT OR REPRESENTATION OTHER THAN THOSE IN THIS AGREEMENT AND IS RELYING UPON ITS OWN JUDGMENT AND ADVICE OF ITS ATTORNEYS.
THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS SUPERSEDE IN ALL RESPECTS THE TERMS CONTAINED IN ANY TERM SHEET RELATING TO THE TRANSACTIONS HEREUNDER EXECUTED PRIOR TO THE CLOSING DATE.
Section 10.16 Confidentiality. Each of Lender and Collateral Agent agree to keep confidential all non-public information provided to it by any Borrower or any of its Subsidiaries pursuant to this Agreement that is designated by such Borrower or Subsidiary as confidential; provided that nothing herein shall prevent Lender or Collateral Agent from disclosing any such information (a) to any participant or assignee (each, a “Transferee”) or prospective Transferee that agrees to comply with the provisions of this Section or substantially equivalent provisions, (b) to any of its employees, directors, agents, attorneys, accountants and other professional advisors, (c) to any financial institution that is a direct or indirect contractual counterparty in swap agreements or such contractual counterparty’s professional advisor (so long as such contractual counterparty or professional advisor to such contractual counterparty agrees to be bound by the provisions of this Section), (d) upon the request or demand of any Governmental Authority having jurisdiction over it, (e) in response to any order of any court or other Governmental Authority or as may otherwise be required pursuant to any Applicable Law, (f) if requested or required to do so in connection with any litigation or similar proceeding, (g) that has been publicly disclosed other than in breach of this Section,
Senior First Lien Secured Credit Agreement – Page 64
(h) to the National Association of Insurance Commissioners or any similar organization or any nationally recognized rating agency that requires access to information about Lender’s investment portfolio in connection with ratings issued with respect to Lender or (i) in connection with the exercise of any remedy hereunder or under any other Loan Document. Notwithstanding anything to the contrary in the foregoing sentence or any other express or implied agreement, arrangement or understanding, the parties hereto hereby agree that, from the commencement of discussions with respect to the financing provided hereunder, any party hereto (and each of its employees, representatives, or agents) is permitted to disclose to any and all persons, without limitation of any kind, the tax structure and tax aspects of the transactions contemplated hereby, and all materials of any kind (including opinions or other tax analyses) related to such tax structure and tax aspects.
(Signature pages follow.)
Senior First Lien Secured Credit Agreement – Page 65
EFFECTIVE as of the date first above written.
| |
RED MOUNTAIN RESOURCES, INC.,
|
| |
a Florida corporation
|
| |
|
| |
By:
|
/s/ Alan W. Barksdale
|
| |
|
Alan W. Barksdale
|
| |
|
President & Chief Executive Officer
|
| |
|
|
| |
CROSS BORDER RESOURCES, INC.,
|
| |
a Nevada corporation
|
| |
|
|
| |
By:
|
/s/ Kenneth Lamb
|
| |
|
Kenneth Lamb
|
| |
|
Chief Accounting Officer
|
| |
|
|
| |
BLACK ROCK CAPITAL, INC.,
|
| |
an Arkansas corporation
|
| |
|
|
| |
By:
|
/s/ Alan W. Barksdale
|
| |
|
Alan W. Barksdale
|
| |
|
President
|
| |
|
|
| |
RMR OPERATING, LLC,
|
| |
a Texas limited liability company
|
| |
|
|
| |
By:
|
/s/ Alan W. Barksdale
|
| |
|
Alan W. Barksdale
|
| |
|
President
|
Senior First Lien Secured Credit Agreement – Signature Page
| |
LENDER/COLLATERAL AGENT:
|
| |
|
|
| |
INDEPENDENT BANK, a Texas banking corporation
|
| |
|
|
| |
|
|
| |
By:
|
/s/ John Davis
|
| |
|
John Davis
|
| |
|
Executive Vice President
|
Senior First Lien Secured Credit Agreement – Signature Page
EXHIBIT A
BORROWING BASE OIL AND GAS PROPERTIES
EXHIBIT B
NOT APPLICABLE
EXHIBIT C
FORM OF COMPLIANCE CERTIFICATE
[Date]
Independent Bank
3090 Craig Drive
McKinney, Texas 75070
Attention: _________________
Ladies and Gentlemen:
Pursuant to applicable requirements of the Senior First Lien Secured Credit Agreement, the undersigned individual, as a Responsible Officer of _____________________ hereby certifies to you the following information as true and correct as of the date hereof or for the period indicated, as the case may be:
1. To the best of the knowledge of the undersigned, no Default or Event of Default exists as of the date hereof or has occurred since the date of our previous certification to you, if any.
2. To the best of the knowledge of the undersigned, the following Defaults or Events of Default exist as of the date hereof or have occurred since the date of our previous certification to you, if any, and the actions set forth below are being taken to remedy such circumstances:
The compliance of the Borrowers, on a combined consolidating basis, with the financial covenants of the Credit Agreement, as of the close of business on ___________, is evidenced by the following:
Section 6.18: Current Ratio
|
Required
|
Actual
|
|
Not less than 1.00 to 1.00
|
________ to 1.00
|
Section 6.19: Funded Debt to EBITDAX Ratio
|
Required
|
Actual
|
|
Not greater than 3.50 to 1.00
|
________ to 1.00
|
Section 6.20: Interest Coverage Ratio
|
Required
|
Actual
|
|
Not less than 3.00 to 1.00
|
________ to 1.00
|
Each capitalized term used but not defined herein shall have the meaning assigned to such term in the Senior First Lien Secured Credit Agreement.
Senior First Lien Secured Credit Agreement – Signature Page
EXHIBIT D
FORM OF NOTE
PROMISSORY NOTE
(this “Note”)
|
$100,000,000.00
|
Dallas, Texas
|
February __, 2013
|
FOR VALUE RECEIVED and WITHOUT GRACE (except to the extent, if any, provided in the Credit Agreement (referred to hereinafter), the undersigned (“Maker”, whether one or more, and if more than one, with liability hereunder being joint and several) promises to pay to the order of INDEPENDENT BANK, a Texas banking corporation (“Payee”), at the Primary Lending Office (as such term is defined in the Credit Agreement referred to hereinafter) the principal sum of ONE HUNDRED MILLION AND NO/100 DOLLARS ($100,000,000.00) or such lesser amount thereof as may be advanced against this Note and remains unpaid pursuant to the Senior First Lien Secured Credit Agreement dated as of February ___, 2013 by and among Maker and Payee (as amended, supplemented, restated or otherwise modified from time to time, the “Credit Agreement”), together with interest at the rates and calculated as provided in the Credit Agreement.
Reference is hereby made to the Credit Agreement for matters governed thereby, including, without limitation, certain events which will entitle the holder hereof to accelerate the maturity of all amounts due hereunder. Capitalized terms used but not defined in this Note shall have the respective meanings assigned to such terms in the Credit Agreement.
This Note is issued pursuant to, is the “Note” under, and is payable as provided in the Credit Agreement. Subject to compliance with applicable provisions of the Credit Agreement, Maker may at any time pay the full amount or any part of this Note without the payment of any premium or fee, but such payment shall not, until this Note is fully paid and satisfied, excuse the payment as it becomes due of any payment on this Note provided for in the Credit Agreement.
Without being limited thereto or thereby, this Note is secured by the Security Documents.
THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW. Without limiting the intent of the parties set forth above, (a) Chapter 346 of the Texas Finance Code, as amended (relating to revolving loans and revolving tri-party accounts), shall not apply to this Note, or the transactions contemplated hereby and (b) to the extent that Lender may be subject to Texas law limiting the amount of interest payable for its account, Lender shall utilize the indicated (weekly) rate ceiling from time to time in effect.
| |
MAKERS:
|
| |
|
|
| |
RED MOUNTAIN RESOURCES, INC.,
|
| |
a Florida corporation
|
| |
|
|
| |
By:
|
|
| |
|
Alan W. Barksdale
|
| |
|
President & Chief Executive Officer
|
| |
|
|
| |
CROSS BORDER RESOURCES, INC.,
|
| |
a Nevada corporation
|
| |
|
|
| |
By:
|
|
| |
|
Kenneth Lamb
|
| |
|
Chief Accounting Officer
|
| |
|
|
| |
BLACK ROCK CAPITAL, INC.,
|
| |
an Arkansas corporation
|
| |
|
|
| |
By:
|
|
| |
|
Alan W. Barksdale
|
| |
|
President
|
| |
|
|
| |
RMR OPERATING, LLC,
|
| |
a Texas limited liability company
|
| |
|
|
| |
By:
|
|
| |
|
Alan W. Barksdale
|
| |
|
President
|
EXHIBIT E
FORM OF NOTICE OF BORROWING
[FORM OF BORROWING REQUEST]
[Date]
Independent Bank
3090 Craig Drive
McKinney, Texas 75070
Attention: _________________
Ladies and Gentlemen:
Pursuant to the Senior First Lien Secured Credit Agreement, the undersigned hereby make the request indicated below:
|
|
b.
|
Requested funding date: ________ , 20__
|
|
CERTIFICATION
The undersigned individual certifies that [s]he is the _______________ of ______________________, has obtained all consents necessary, and as such [s]he is authorized to execute this request on behalf of __________________________. The undersigned individual further certifies, represents and warrants on behalf of _______________________, that ________________________ is entitled to receive the requested borrowing under the terms and conditions of the Credit Agreement and that, to the best knowledge of such undersigned individual, there exists as of the date hereof neither a Default nor an Event of Default under the Credit Agreement.
Each capitalized term used but not defined herein shall have the meaning assigned to such term in the Credit Agreement.
EXHIBIT F
NOT APPLICABLE
SCHEDULE 1
BORROWERS AND LENDER INFORMATION
Each of the commitments to lend set forth herein is governed by the terms of the Senior First Lien Secured Credit Agreement, which provides for, among other things, Borrowing Base limitations which may restrict Borrower’s ability to request (and the Lenders’ obligation to provide) Credit Extensions to a maximum amount which is less than the commitments set forth in this Schedule 1.
Lender:
INDEPENDENT BANK
3090 Craig Drive
McKinney, Texas 75070
Attention: John Davis
Telephone: 214.720.1208
Facsimile: 214.740.9400
Email: jdavis@independent-bank.com
Borrowers:
RED MOUNTAIN RESOURCES, INC.,
a Florida corporation
2515 McKinney Avenue, Suite 900
Dallas, Texas 75201
Telephone: 214.871.0400
Facsimile: 214.871.0406
Attn: Alan W. Barksdale, President & CEO
Email: alan@redmountainresources.com
Attn: Hilda Kouvelis, CAO
Email: Hilda@redmountainresources.com
Attn: Michael Uffman, CFO
Email: Michael@redmountainresources.com
CROSS BORDER RESOURCES, INC.,
a Nevada corporation
2515 McKinney Avenue, Suite 900
Dallas, Texas 75201
Telephone: 214.871.0400
Facsimile: 214.871.0406
Attn: Kenneth Lamb, CAO
Tel: 214.871.0400; Fax: 214.871.0406
Email: Kenneth@redmountainresources.com
Attn: Earl Sebring, Interim President
Tel: 432.684.6044; Fax: 214.871.0406
Email: earl@sebringexploration.com
BLACK ROCK CAPITAL, INC.
an Arkansas corporation
2515 McKinney Avenue, Suite 900
Dallas, Texas 75201
Telephone: 214.871.0400
Facsimile: 214.871.0406
Attn: Alan W. Barksdale, President
Email: alan@redmountainresources.com
Attn: Hilda Kouvelis, CAO
Email: Hilda@redmountainresources.com
Attn: Michael Uffman, CFO
Email: Michael@redmountainresources.com
2515 McKinney Avenue, Suite 900
Tel: 214.871.0400; Fax: 214.871.0406
Attn: Alan W. Barksdale, President
Email: alan@redmountainresources.com
Attn: Hilda Kouvelis, CAO
Email: Hilda@redmountainresources.com
Attn: Michael Uffman, CFO
Email: Michael@redmountainresources.com
Attn: Tommy Folsom, EVP – Director of E&P
Email: tommy@redmountainresources.com
|
Lender:
|
|
|
Independent Bank
Commitment:
$20,000,000.00
|
Primary Lending Office
3090 Craig Drive
McKinney, Texas 75070
Attn: John Davis
Email: jdavis@independent-bank.com
|
Exhibit 10.32
AMENDMENT AND WAIVER
BY AND AMONG
INDEPENDENT BANK,
as Lender
AND
RED MOUNTAIN RESOURCES, INC.
CROSS BORDER RESOURCES, INC.
BLACK ROCK CAPITAL, INC.
RMR OPERATING, LLC,
as Borrowers
Effective
SEPTEMBER 12, 2013
AMENDMENT AND WAIVER
This AMENDMENT AND WAIVER (this “Agreement”) is made and entered into effective the 12th day of September, 2013 (the “Effective Date”), by and among INDEPENDENT BANK, a Texas banking association, as lender under the Senior First Lien Secured Credit Agreement (the “Lender”), and RED MOUNTAIN RESOURCES, INC., a Florida corporation (“Red Mountain”), CROSS BORDER RESOURCES, INC., a Nevada corporation, BLACK ROCK CAPITAL, INC., an Arkansas corporation, and RMR OPERATING, LLC, a Texas limited liability company (collectively, the “Borrowers”).
W I T N E S S E T H:
WHEREAS, the Borrowers and the Lender are parties to that certain Senior First Lien Secured Credit Agreement, dated February 5, 2013, among the Borrowers and the Lender (as amended to date, the “Loan Agreement”); and
WHEREAS, the Borrowers have requested that the Lender waive any default or right to exercise any remedy as a result of the Borrowers having failed to be in compliance with the requirements of Section 6.18 of the Loan Agreement, and the Lender has agreed to do so as provided in this Agreement; and
WHEREAS, Red Mountain has changed its fiscal year end from May 31 to June 30; and
WHEREAS, the Borrowers and Lender desire to amend and/or clarify the provisions of the Loan Agreement with respect to the change in fiscal year end; and
WHEREAS, the Lender and Borrowers desire to increase the Borrowing Base to $30.0 million effective immediately;
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
1.1 Terms Defined Above. As used in this Agreement, each of the terms “Agreement,” “Borrowers,” “Lender” and “Loan Agreement” shall have the meaning assigned to such term hereinabove.
1.2 Terms Defined in Agreement. Each term defined in the Loan Agreement and used herein without definition shall have the meaning assigned to such term in the Loan Agreement, unless expressly provided to the contrary.
1.3 References. References in this Agreement to Schedule, Exhibit, Article, or Section numbers shall be to Schedules, Exhibits, Articles, or Sections of this Agreement, unless expressly stated to the contrary. References in this Agreement to “hereby,” “herein,” “hereinafter,” “hereinabove,” “hereinbelow,” “hereof,” “hereunder” and words of similar import shall be to this Agreement in its entirety and not only to the particular Schedule, Exhibit, Article, or Section in which such reference appears. Specific enumeration herein shall not exclude the general and, in such regard, the terms “includes” and “including” used herein shall mean “includes, without limitation,” or “including, without limitation,” as the case may be, where appropriate. Except as otherwise indicated, references in this Agreement to statutes, sections, or regulations are to be construed as including all statutory or regulatory provisions consolidating, amending, replacing, succeeding, or supplementing the statute, section, or regulation referred to. References in this Agreement to “writing” include printing, typing, lithography, facsimile reproduction, and other means of reproducing words in a tangible visible form. References in this Agreement to amendments and other contractual instruments shall be deemed to include all exhibits and appendices attached thereto and all subsequent amendments and other modifications to such instruments, but only to the extent such amendments and other modifications are not prohibited by the terms of this Agreement. References in this Agreement to Persons include their respective successors and permitted assigns.
1.4 Articles and Sections. This Agreement, for convenience only, has been divided into Articles and Sections; and it is understood that the rights and other legal relations of the parties hereto shall be determined from this instrument as an entirety and without regard to the aforesaid division into Articles and Sections and without regard to headings prefixed to such Articles or Sections.
1.5 Number and Gender. Whenever the context requires, reference herein made to the single number shall be understood to include the plural; and likewise, the plural shall be understood to include the singular. Definitions of terms defined in the singular or plural shall be equally applicable to the plural or singular, as the case may be, unless otherwise indicated. Words denoting sex shall be construed to include the masculine, feminine and neuter, when such construction is appropriate; and specific enumeration shall not exclude the general but shall be construed as cumulative.
ARTICLE II
WAIVER
2.1 Agreement. The Lender waives any Default, Event of Default or right to exercise any remedy as a result of the failure by the Borrowers to be in compliance with the requirements of Section 6.18 of the Agreement with respect to the permitted ratio of consolidated current assets to consolidated current liabilities of Borrowers for the fiscal quarter ended May 31, 2013.
2.2 Limitation on Agreement. Except for the waiver set forth above in this Article II, nothing contained herein shall otherwise be deemed a consent to any violation of, or a waiver of compliance with, any term, provision or condition set forth in any of the Loan Documents or a consent to or waiver of any other or future violations, breaches, Defaults or Events of Default.
ARTICLE III
CHANGE IN FISCAL YEAR END
3.1 Clarification of Reporting Dates.
(a) For purposes of Sections 5.06(a) and (c) of the Loan Agreement regarding the delivery of annual financial statements and a proposed annual capital expenditure budget of Red Mountain within a defined period of time after the end of each fiscal year of Red Mountain, the fiscal years of Red Mountain shall be deemed to be (i) the twelve months ended May 31, 2013, (ii) the thirteen months ending June 30, 2014 and (iii) each subsequent twelve month period ending on June 30th, starting June 30, 2015.
(b) For purposes of Sections 5.06(b), (e) and (q) of the Loan Agreement regarding the delivery of quarterly financial statements of Borrowers, quarterly production reports of Borrowers and quarterly reports on hedging, the quarterly periods of Borrowers shall be deemed to be (i) the three months ended May 31, 2013, (ii) the four months ending September 30, 2013 and (iii) each subsequent three month quarterly period ending after September 30, 2013, starting with the three months ending December 31, 2013.
3.2 Amendments. The Lender and the Borrowers hereby agree to amend the following provisions of the Loan Agreement:
|
|
(a)
|
Section 5.06(d)(i) of the Loan Agreement is amended and restated in its entirety as follows:
|
“Engineering Reports, as soon as available but in any event on or before each (A) September 30 of each year (starting September 30, 2014), dated effective as of the immediately preceding July 1 for such year and (B) March 31 of each year, dated effective as of the immediately preceding January 1. Each Engineering Report delivered on or before each such September 30 (starting September 30, 2014) shall be prepared by an Independent Engineer and each Engineering Report delivered on or before each such March 31 may be prepared by Borrower’s staff engineers.”
|
|
(b)
|
Section 6.18 of the Loan Agreement shall be amended and restated in its entirety as follows:
|
|
|
“Section 6.18 Current Ratio. Borrowers shall not permit the ratio of, as of the last day of each fiscal quarter of Red Mountain beginning with the fiscal quarter ending May 31, 2013 (but excluding the fiscal quarter ending June 30, 2013), Borrowers’ and their consolidated Subsidiaries’ (a) consolidated current assets to (b) consolidated current liabilities, to be less than 1.00 to 1.00. For purposes of this calculation (i) “current assets” shall include, as of the date of calculation, the Unused Commitment Amount of Lender, and (ii) “current liabilities” shall exclude, as of the date of calculation, the current portion of long–term Debt existing under this Agreement.”
|
|
|
(c)
|
Section 6.19 of the Loan Agreement shall be amended and restated in its entirety as follows:
|
|
|
“Section 6.19 Funded Debt to EBITDAX Ratio. Borrowers shall not permit, as of the last day of each fiscal quarter of Red Mountain commencing with the quarter ending May 31, 2013 (but excluding the fiscal quarter ending June 30, 2013), the ratio of (a) consolidated Funded Debt of the Borrowers and their Subsidiaries, including Debt under this Agreement, as of such day to (b) the consolidated EBITDAX of the Borrowers and their Subsidiaries for the four-fiscal quarter period then ended, to be greater than 3.50 to 1.00; provided, however, for the period from and after the date of this Agreement through March 31, 2014, EBITDAX shall be calculated based upon actual from March 1, 2013, through the current fiscal quarter, annualized.”
|
|
|
(d)
|
Section 6.20 of the Loan Agreement shall be amended and restated in its entirety as follows:
|
|
|
“Section 6.20 Interest Coverage Ratio. Borrowers shall not permit, as of the end of each fiscal quarter of Red Mountain commencing May 31, 2013 (but excluding the fiscal quarter ending June 30, 2013), the ratio of (a) the consolidated EBITDAX of the Borrowers and their Subsidiaries to (b) the Interest Expense of the Borrowers and their Subsidiaries, in each case for the four-fiscal quarter period then ended, to be less than 3.00 to 1.00; provided, for the period from and after the date of this Agreement through March 31, 2014, EBITDAX and Interest Expense shall be calculated based upon actual from March 1, 2013, through the current fiscal quarter, annualized.”
|
ARTICLE IV
INCREASE TO BORROWING BASE AND COMMITMENT AMOUNT
4.1 Borrowing Base. Effective immediately, the Borrowing Base shall be $30.0 million until changed by the Lender in accordance with the terms of the Loan Agreement.
4.2 Commitment Amount. Effective upon the payment of an additional facility fee equal to one percent (1.0%) of $10.0 million pursuant to Section 2.08(c) of the Loan Agreement, the Commitment shall be increased to $30.0 million, subject to change in accordance with the terms of the Loan Agreement.
ARTICLE V
RATIFICATION AND ACKNOWLEDGMENT
5.1 Ratifications. The terms and provisions set forth in this Agreement shall modify and supersede all inconsistent terms and provisions set forth in the Loan Agreement and, except as expressly modified and superseded by this Agreement, the terms and provisions of the Loan Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and effect. Borrowers agree that the Loan Agreement, as amended hereby, and the other Loan Documents continue to be legal, valid, binding obligations of Borrowers enforceable against Borrowers in accordance with their respective terms.
5.2 Renewal and Extension of Security Interests and Liens. Borrowers hereby renew and affirm the liens and security interests created and granted in the Loan Documents. Borrowers agree that this Agreement shall in no manner affect or impair the liens and security interests securing the Obligations, and that such liens and security interests shall not in any manner be waived, the purposes of this Agreement being to modify the Loan Agreement as herein provided, and to carry forward all liens and security interests securing same, which are acknowledged by Borrowers to be valid and subsisting.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions. The effectiveness of this Agreement is subject to the satisfaction of the following conditions precedent, unless specifically waived in writing by Lender:
(a) Lender shall have received the following documents, each in form and substance satisfactory to Lender:
(i) this Agreement, duly executed by Borrowers; and
(ii) Resolutions of the Board of Directors (or other governing body) of each Borrower certified by the Secretary or an Assistant Secretary (or other custodian of records of each Borrower) which authorize the execution, delivery, and performance by each Borrower of this Agreement and the other Loan Documents to be executed in connection herewith.
(b) The representations and warranties contained in the Loan Agreement, as amended hereby, and in each other Loan Document shall be true and correct in all material respects as of the date hereof, as if made on the date hereof, except to the extent such representation and warranties relate to an earlier date;
(c) No Event of Default shall have occurred and be continuing and no Default shall exist, unless such Event of Default or Default has been specifically waived in writing by Lender;
(d) Lender shall have received, in good and immediately available funds, a fee in the amount of $7,500; and
(e) All corporate proceedings taken in connection with the transactions contemplated by this Agreement and all documents, instruments and other legal matters incident thereto, shall be satisfactory to Lender and its legal counsel.
ARTICLE VII
MISCELLANEOUS
7.1 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted pursuant to the Agreement.
7.2 Rights of Third Parties. Except as provided in Section 5.1, all provisions herein are imposed solely and exclusively for the benefit of the parties hereto.
7.3 Counterparts. This Agreement may be executed by one or more of the parties hereto in any number of separate counterparts, and all of such counterparts taken together shall be deemed to constitute one and the same instrument and shall be enforceable upon the execution of one or more counterparts hereof by each of the parties hereto. In this regard, each of the parties hereto acknowledges that a counterpart of this Agreement containing a set of counterpart execution pages reflecting the execution of each party hereto shall be sufficient to reflect the execution of this Agreement by each necessary party hereto and shall constitute one instrument.
7.4 Integration. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject hereof. All prior understandings, statements and agreements, whether written or oral, relating to the subject hereof are superseded by this Agreement.
7.5 Invalidity. In the event that any one or more of the provisions contained in this Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement.
7.6 Governing Law. This Agreement shall be deemed to be a contract made under and shall be governed by and construed in accordance with the laws of the State of Texas, without regard to principles of such laws relating to conflict of laws.
7.7 RELEASE. BORROWERS ACKNOWLEDGE THAT THEY HAVE NO DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF THEIR LIABILITY TO REPAY THE OBLIGATIONS OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM THE LENDER. BORROWERS VOLUNTARILY AND KNOWINGLY RELEASE AND FOREVER DISCHARGE THE LENDER, ITS PREDECESSORS, AGENTS, DIRECTORS, OFFICERS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH THE BORROWERS MAY NOW OR HEREAFTER HAVE AGAINST THE LENDER, ITS PREDECESSORS, AGENTS, DIRECTORS, OFFICERS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY OF THE OBLIGATIONS, INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE AGREEMENT OR OTHER LOAN DOCUMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT.
(Signatures appear on following pages)
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers effective as of the Effective Date.
| |
|
|
|
| |
|
|
|
| |
|
INDEPENDENT BANK, a Texas banking corporation
|
|
| |
|
|
|
| |
|
By:
|
/s/ John Davis |
|
| |
|
|
John Davis |
|
| |
|
|
Executive Vice President
|
|
| |
|
|
|
| |
|
|
|
| |
|
RED MOUNTAIN RESOURCES, INC.,
|
|
| |
|
a Florida corporation
|
|
| |
|
|
|
| |
|
|
|
| |
|
By:
|
/s/ Alan W. Barksdale |
|
| |
|
|
Alan W. Barksdale |
|
| |
|
|
President & Chief Executive Officer
|
|
| |
|
CROSS BORDER RESOURCES, INC.,
|
|
| |
|
a Nevada corporation |
|
| |
|
|
|
| |
|
|
|
| |
|
By:
|
/s/ Kenneth Lamb |
|
| |
|
|
Kenneth Lamb
|
|
| |
|
|
Chief Accounting Officer
|
|
| |
|
BLACK ROCK CAPITAL, INC.,
|
|
| |
|
an Arkansas corporation |
|
| |
|
|
|
| |
|
|
|
| |
|
By:
|
/s/Alan W. Barksdale |
|
| |
|
|
Alan W. Barksdale |
|
| |
|
|
President & Chief Executive Officer |
|
| |
|
|
|
| |
|
a Texas limited liability company |
|
| |
|
|
|
| |
|
|
|
| |
|
By:
|
/s/Alan W. Barksdale |
|
| |
|
|
Alan W. Barksdale |
|
| |
|
|
President
|
|
Signature Page to Amendment and Waiver (September 2013)
Exhibit 10.33
THIRD AMENDMENT TO SENIOR FIRST LIEN
SECURED CREDIT AGREEMENT AND WAIVER
BY AND AMONG
INDEPENDENT BANK,
as Lender
AND
RED MOUNTAIN RESOURCES, INC.
CROSS BORDER RESOURCES, INC.
BLACK ROCK CAPITAL, INC.
RMR OPERATING, LLC,
as Borrowers
Effective
MARCH 1, 2015
THIRD AMENDMENT TO SENIOR FIRST LIEN SECURED CREDIT
AGREEMENT AND WAIVER
This THIRD AMENDMENT
TO SENIOR FIRST LIEN SECURED CREDIT AGREEMENT AND WAIVER (this “Agreement”) is made effective, but not necessarily
executed on, the 1st day of March, 2015 (the “Effective Date”), by and among INDEPENDENT BANK, a
Texas banking association, as lender under the Senior First Lien Secured Credit Agreement (the “Lender”), and
RED MOUNTAIN RESOURCES, INC., a Texas corporation (“Red Mountain”), CROSS BORDER RESOURCES, INC., a Nevada corporation,
BLACK ROCK CAPITAL, INC., an Arkansas corporation, and RMR OPERATING, LLC, a Texas limited liability company (collectively, the
“Borrowers”).
WHEREAS, the Borrowers
and the Lender are parties to that certain Senior First Lien Secured Credit Agreement, dated February 5, 2013, among the Borrowers
and the Lender (as amended by that certain Amendment and Consent dated July 19, 2013 and that certain Amendment and Waiver dated
September 12, 2013, the “Credit Agreement”); and
WHEREAS, the parties
desire to decrease the amount of the Borrowing Base and the Commitment and increase the amount of the Monthly Commitment Reduction,
and the Borrowers have requested that the Lender waive any default or right to exercise any remedy as a result of the Borrowers
having failed to be in compliance with the requirements of Section 6.18 of the Credit Agreement, and Lender has agreed to do so
as provided in this Agreement; and
NOW, THEREFORE,
in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows:
Article
I
DEFINITIONS AND INTERPRETATION
1.1
Terms Defined Above. As used in this Agreement, each of the terms “Agreement,”
“Borrowers,” “Lender” and “Credit Agreement” shall have the meaning assigned
to such term hereinabove.
1.2
Terms Defined in Agreement. Each term defined in the Credit Agreement and used herein
without definition shall have the meaning assigned to such term in the Credit Agreement, unless expressly provided to the contrary.
1.3
References. References in this Agreement to Schedule, Exhibit, Article, or Section
numbers shall be to Schedules, Exhibits, Articles, or Sections of this Agreement, unless expressly stated to the contrary. References
in this Agreement to “hereby,” “herein,” “hereinafter,” “hereinabove,'' “hereinbelow,”
“hereof,” “hereunder” and words of similar import shall be to this Agreement in its entirety and not only
to the particular Schedule, Exhibit, Article, or Section in which such reference appears. Specific enumeration herein shall not
exclude the general and, in such regard, the terms “includes” and 'including” used herein shall mean “includes,
without limitation,” or “including, without limitation,” as the case may be, where appropriate. Except as otherwise
indicated, references in this Agreement to statutes, sections, or regulations are to be construed as including all statutory or
regulatory provisions consolidating, amending, replacing, succeeding, or supplementing the statute, section, or regulation referred
to. References in this Agreement to “writing” include printing, typing, lithography, facsimile reproduction, and other
means of reproducing words in a tangible visible form. References in this Agreement to amendments and other contractual instruments
shall be deemed to include all exhibits and appendices attached thereto and all subsequent amendments and other modifications to
such instruments, but only to the extent such amendments and other modifications are not prohibited by the terms of this Agreement.
References in this Agreement to Persons include their respective successors and permitted assigns.
1.4
Articles and Sections. This Agreement, for convenience only, has been divided into
Articles and Sections; and it is understood that the rights and other legal relations of the parties hereto shall be determined
from this instrument as an entirety and without regard to the aforesaid division into Articles and Sections and without regard
to headings prefixed to such Articles or Sections.
1.5
Number and Gender. Whenever the context requires, reference herein made to the single
number shall be understood to include the plural; and likewise, the plural shall be understood to include the singular. Definitions
of terms defined in the singular or plural shall be equally applicable to the plural or singular, as the case may be, unless otherwise
indicated. Words denoting sex shall be construed to include the masculine, feminine and neuter, when such construction is appropriate;
and specific enumeration shall not exclude the general but shall be construed as cumulative.
Article
II
AMENDMENTS
2.1
Amendments to Article I.
(a)
The term “Commitment” in Section 1.01 of the Credit Agreement is
amended and restated in its entirety to hereafter read as follows:
“'Commitment”
means the obligation of Lender to make Advances pursuant to Section 2.1(a) in an aggregate principal amount of Twenty-Seven
Million Eight Hundred Thousand and Noll 00 Dollars ($27,800,000.00), subject, however, to Monthly Commitment Reductions and to
termination pursuant to Article VII.”
(b)
The term “Third Amendment” is added to and made a part of Section 1.1
of the Credit Agreement and shall read as follows:
“Third
Amendment” means that certain Third Amendment to Senior First Lien Secured Credit Agreement and Waiver dated effective
as of March 1, 2015, between Borrowers and Lender.”
2.2
Amendment to Section 2.02 of the Credit Agreement. Section 2.02(a) of the Credit
Agreement is hereby amended and restated in its entirety to read as follows:
“(a)
Borrowing Base. The Borrowing Base in effect as of the date of the Third Amendment is $27,800,000 and the initial Monthly
Commitment Reduction is $350,000. The Monthly Commitment Reduction shall apply on March 1, 2015, and on the first date of each
calendar month thereafter until redetermined as set forth in this Section 2.02. Such Borrowing Base and the Monthly Commitment
Reduction shall remain in effect until the next redetermination made pursuant to this Section 2.02. The Borrowing Base and
Monthly Commitment Reduction shall be determined in accordance with the standards set forth in Section 2.02(d) and is subject
to periodic redetermination pursuant to Sections 2.02(b) and 2.02(c).
2.3
Amendment to Section 5.22 of the Credit Agreement. Section 5.22 of the Credit Agreement
is hereby amended and restated in its entirety to read as follows:
“Section
5.22 Hydrocarbon Hedging. One or more Borrowers shall have Acceptable Hydrocarbon Hedge Agreements in place effectively
hedging at least 50% of the oil volumes of Borrowers, derived from the most recent third party engineering report received by Lender,
covering the following periods: (a) within thirty (30) days of the effective date of the Third Amendment and at all times thereafter,
covering the months of May through December of the 2015 calendar year and the months of January through October of the 20 16 calendar
year; and (b) on or before May 31, 2015 and at all times thereafter, covering a period of not less than eighteen (18) consecutive
months. Borrowers will comply with all Acceptable Hydrocarbon Hedge Agreements existing or created on the Closing Date or entered
into thereafter by any Borrower and not in violation of Section 6.15.”
Article
III
WAIVER
3.1
Agreement. The Lender waives any Default, Event of Default or right to exercise any
remedy as a result of the failure by the Borrowers to be in compliance with the requirements of Section 6.18 of the Agreement with
respect to the permitted ratio of consolidated current assets to consolidated current liabilities of Borrowers for the fiscal quarter
ended September 30, 2014.
3.2
Limitation on Agreement. Except for the waiver set forth above in this Article III,
nothing contained herein shall otherwise be deemed a consent to any violation of, or a waiver of compliance with, any term, provision
or condition set forth in any of the Loan Documents or a consent to or waiver of any other or future violations, breaches, Defaults
or Events of Default. The waiver set forth above in this Article III is made only with respect to the fiscal quarter ending
September 30, 2014 and shall not apply to any other periods.
Article
IV
RATIFICATION, REPRESENTATION, AND ACKNOWLEDGMENT
4.1
Ratifications. The terms and provisions set forth in this Agreement shall modify and
supersede all inconsistent terms and provisions set forth in the Credit Agreement and, except as expressly modified and superseded
by this Agreement, the terms and provisions of the Credit Agreement and the other Loan Documents are ratified and confirmed and
shall continue in full force and effect. Borrowers agree that the Credit Agreement, as amended hereby, and the other Loan Documents
continue to be legal, valid, binding obligations of Borrowers enforceable against Borrowers in accordance with their respective
terns.
4.2
Renewal and Extension of Security Interests and Liens. Borrowers hereby renew and affirm
the liens and security interests created and granted in the Loan Documents. Borrowers agree that this Agreement shall in no manner
affect or impair the liens and security interests securing the Obligations, and that such liens and security interests shall not
in any manner be waived, the purposes of this Agreement being to modify the Credit Agreement as herein provided, and to carry forward
all liens and security interests securing same, which are acknowledged by Borrowers to be valid and subsisting.
4.3
Representations and Warranties. Borrowers hereby represent and warrant to Lender as
follows:
(a)
the execution, delivery and performance of this Agreement and any and all other Loan Documents
executed and delivered in connection herewith have been authorized by all requisite corporate and limited liability company action
on the part of Borrowers, as applicable, and do not and will not conflict with or violate any provision of any applicable laws,
rules, regulations or decrees, the Governing Agreements of any Borrower, or any agreement, document, judgment, license, order or
permit applicable to or binding upon any Borrower or its assets. No consent, approval, authorization or order of, and no notice
to or filing with, any court or governmental authority or third person is required in connection with the execution, delivery or
performance of this Agreement or to consummate the transactions contemplated hereby;
(b)
the representations and warranties contained in the Credit Agreement, as amended hereby, and
the other Loan Documents are true and correct in all material respects on and as of the date hereof as though made on and as of
the date hereof, except to the extent such representations and warranties relate to an earlier date;
(c)
Each Borrower is in compliance in all material respects with all covenants and agreements
contained in the Credit Agreement, as amended hereby, and the other Loan Documents to which it is a party;
(d)
as of the date of this Agreement the unpaid principal balance of the Note is $27,800,000.00,
and such amount is unconditionally owed by Borrowers to Lender without offset, defense or counterclaim of any kind or nature whatsoever;
(e)
as of the date of this Agreement, the Letter of Credit Exposure is $0; and
(f)
notwithstanding any provision in this Agreement, the Credit Agreement, or any Mortgage to
the contrary, in no event is any Building (as defined in the applicable Flood Insurance Regulation) or Manufactured (Mobile) Home
(as defined in the applicable Flood Insurance Regulation) included in the definition of “Mortgaged Property,” (as defined
in the Mortgages) and no Building or Manufactured (Mobile) Home is encumbered by any Mortgage. As used herein, “Flood Insurance
Regulations” shall mean (a) the National Flood Insurance Act of 1968 as now or hereafter in effect or any successor statute
thereto, (b) the Flood Disaster Protection Act of 1973 as now or hereafter in effect or any successor statutes thereto, (c) the
National Flood Insurance Reform Act of 1994 (amending 42 USC 4001 et seq.), as the same may be amended or recodified from time
to time, and (d) the Flood Insurance Reform Act of 2004 and any regulations promulgated thereunder.
Article
V
CONDITIONS PRECEDENT
5.1
Conditions. The effectiveness of this Agreement is subject to the satisfaction of the
following conditions precedent, unless specifically waived in writing by Lender:
(a)
Lender shall have received the following documents, each in form and substance satisfactory
to Lender:
(i)
this Agreement, duly executed by Borrowers; and
(ii)
Resolutions of the Board of Directors (or other governing body) of each Borrower certified
by the Secretary or an Assistant Secretary (or other custodian of records of each Borrower) which authorize the execution, delivery,
and performance by each Borrower of this Agreement and the other Loan Documents to be executed in connection herewith.
(b)
The representations and warranties contained in the Credit Agreement, as amended hereby, and
in each other Loan Document shall be true and correct as of the date hereof, as if made on the date hereof, except to the extent
such representation and warranties relate to an earlier date;
(c)
No Event of Default shall have occurred and be continuing and no Default shall exist, unless
such Event of Default or Default has been specifically waived in writing by Lender; and
(d)
All corporate proceedings taken in connection with the transactions contemplated by this Agreement
and all documents, instruments and other legal matters incident thereto, shall be satisfactory to Lender and its legal counsel.
Article
VI
MISCELLANEOUS
6.1
Successors and Assigns. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns permitted pursuant to the Agreement.
6.2
Rights of Third Parties. Except as provided in Section 4.1, all provisions herein
are imposed solely and exclusively for the benefit of the parties hereto.
6.3
Counterparts. This Agreement may be executed by one or more of the parties hereto in
any number of separate counterparts, and all of such counterparts taken together shall be deemed to constitute one and the same
instrument and shall be enforceable upon the execution of one or more counterparts hereof by each of the parties hereto. In this
regard, each of the parties hereto acknowledges that a counterpart of this Agreement containing a set of counterpart execution
pages reflecting the execution of each party hereto shall be sufficient to reflect the execution of this Agreement by each necessary
party hereto and shall constitute one instrument.
6.4
Integration. THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT AMONG THE PARTIES HERETO
WITH RESPECT TO THE SUBJECT HEREOF. ALL PRIOR UNDERSTANDINGS, STATEMENTS AND AGREEMENTS, WHETHER WRITTEN OR ORAL, RELATING TO THE
SUBJECT HEREOF ARE SUPERSEDED BY THIS AGREEMENT.
6.5
Invalidity. IN THE EVENT THAT ANY ONE OR MORE OF THE PROVISIONS CONTAINED IN THIS
AGREEMENT SHALL FOR ANY REASON BE HELD INVALID, ILLEGAL OR UNENFORCEABLE IN ANY RESPECT, SUCH INVALIDITY, ILLEGALITY OR UNENFORCEABILITY
SHALL NOT AFFECT ANY OTHER PROVISION OF THIS AGREEMENT.
6.6
Governing Law. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO PRINCIPLES OF SUCH LAWS RELATING
TO CONFLICT OF LAWS.
6.7
RELEASE. BORROWERS ACKNOWLEDGE THAT THEY HAVE NO DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT,
CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF THEIR LIABILITY
TO REPAY THE OBLIGATIONS OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM THE LENDER. BORROWERS VOLUNTARILY
AND KNOWINGLY RELEASE AND FOREVER DISCHARGE THE LENDER, ITS PREDECESSORS, AGENTS, DIRECTORS, OFFICERS, EMPLOYEES, SUCCESSORS AND
ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN
OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING
IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AGREEMENT IS EXECUTED, WHICH THE BORROWERS MAY NOW OR HEREAFTER HAVE AGAINST THE
LENDER, ITS PREDECESSORS, AGENTS, DIRECTORS, OFFICERS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY
SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY OF THE OBLIGATIONS,
INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF
THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE AGREEMENT OR OTHER LOAN DOCUMENTS, AND NEGOTIATION
FOR AND EXECUTION OF THIS AGREEMENT.
(Signatures appear
on following pages)
IN WITNESS WHEREOF, the parties hereto
have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers on March 11, 2015, to
be effective as of the Effective Date.
| |
LENDER: |
| |
|
| |
INDEPENDENT BANK, |
| |
a Texas banking corporation |
| |
|
| |
By: |
/s/ John Davis |
| |
|
John Davis |
| |
|
Executive Vice President |
| |
|
|
| |
|
|
| |
BORROWER: |
| |
|
|
| |
RED MOUNTAIN RESOURCES, INC., |
| |
a Texas corporation |
| |
|
| |
By: |
/s/ Alan W. Barksdale |
| |
|
Alan W. Barksdale |
| |
|
President & Chief Executive Officer |
| |
|
|
| |
|
|
| |
CROSS BORDER RESOURCES, INC., |
| |
a Nevada corporation |
| |
|
| |
By: |
/s/ Kenneth Lamb |
| |
|
Kenneth Lamb |
| |
|
Chief Accounting Officer |
| |
|
|
| |
|
|
| |
BLACK ROCK CAPITAL, INC., |
| |
an Arkansas corporation |
| |
|
| |
By: |
/s/ Alan W. Barksdale |
| |
|
Alan W. Barksdale |
| |
|
President |
| |
|
|
| |
|
|
| |
RMR OPERATING, LLC, |
| |
a Texas limited liability company |
| |
|
| |
By: |
/s/ Alan W. Barksdale |
| |
|
Alan W. Barksdale |
| |
|
President |
Exhibit 10.34
FOURTH AMENDMENT TO SENIOR FIRST LIEN SECURED CREDIT AGREEMENT
BY AND AMONG
INDEPENDENT BANK,
as Lender
AND
RED MOUNTAIN RESOURCES, INC.
CROSS
BORDER RESOURCES, INC.
BLACK
ROCK CAPITAL, INC.
RMR
OPERATING, LLC,
as
Borrowers
Effective April 21, 2015
Fourth Amendment to Senior First Lien Secured Credit Agreement
| Page 1
|
FOURTH
AMENDMENT TO SENIOR FIRST LIEN SECURED CREDIT AGREEMENT
This
FOURTH AMENDMENT TO SENIOR FIRST LIEN SECURED CREDIT AGREEMENT (this “Agreement”) is made effective, but not
necessarily executed on, April 21, 2015 (the “Effective Date”), by and among INDEPENDENT BANK, a Texas
banking association, as lender under the Senior First Lien Secured Credit Agreement (the “Lender”), and RED
MOUNTAIN RESOURCES, INC., a Texas corporation (“Red Mountain”), CROSS BORDER RESOURCES, INC., a Nevada corporation,
BLACK ROCK CAPITAL, INC., an Arkansas corporation, and RMR OPERATING, LLC, a Texas limited liability company (collectively, the
“Borrowers”).
W
I T N E S S E T H:
WHEREAS,
the Borrowers and the Lender are parties to that certain Senior First Lien Secured Credit Agreement, dated February 5, 2013, among
the Borrowers and the Lender (as amended by (a) Amendment and Consent dated July 19, 2013, (b) Amendment and Waiver
dated September 12, 2013, (c) Third Amendment to First Lien Secured Credit Agreement and Waiver dated effective as of March 1,
2015 (the “Credit Agreement”); and
WHEREAS,
Cross Border Resources, Inc., Black Rock Capital, Inc., RMR Operating, LLC, and RMR KS Holdings, LLC, as sellers (the “Sellers”)
and Black Shale Minerals, LLC, a Texas limited liability company, as buyer (“Buyer”) have entered into a Purchase
and Sale Agreement dated April 21, 2015 (the “Purchase and Sale Agreement”) pursuant to which the Buyer
will purchase fifty percent (50%) of Sellers’ right, title, and interest in and to certain oil and gas properties more specifically
described on Exhibit “A” attached to certain Assignments, Bills of Sale and Conveyances dated as of April 21,
2015 (the “Assignments”) (such oil and gas properties are herein called the “Assigned Properties”)
for cash consideration paid to Sellers of $25,000,000.00;
WHEREAS,
the Borrowers have requested Lender to consent to the sale by Sellers of Sellers’ right, title and interest in the Assigned
Properties for the consideration set forth in the Purchase and Sale Agreement and to partially release the liens held by Lender
in that portion of the Assigned Properties which constitute Mortgaged Property (as defined in the Mortgages) to the extent so
conveyed to Buyer pursuant to the Assignments, and Lender has agreed to the same upon the terms and conditions hereafter set forth;
NOW,
THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereto hereby
agree as follows:
Article
I
DEFINITIONS AND INTERPRETATION
1.1
Terms Defined Above. As used in this Agreement, each of the terms “Agreement,” “Lender,”
“Borrowers,” “Credit Agreement,” “Sellers,” “Buyer,”
“Purchase and Sale Agreement,” “Assignments” and “Assigned Properties’
shall have the meaning assigned to such term hereinabove.
1.2
Terms Defined in Agreement. Each term defined in the Credit Agreement and used herein without definition shall have the
meaning assigned to such term in the Credit Agreement, unless expressly provided to the contrary.
1.3
References. References in this Agreement to Schedule, Exhibit, Article, or Section numbers shall be to Schedules, Exhibits,
Articles, or Sections of this Agreement, unless expressly stated to the contrary. References in this Agreement to “hereby,”
“herein,” “hereinafter,” “hereinabove,” “hereinbelow,” “hereof,” “hereunder”
and words of similar import shall be to this Agreement in its entirety and not only to the particular Schedule, Exhibit, Article,
or Section in which such reference appears. Specific enumeration herein shall not exclude the general and, in such regard, the
terms “includes” and “including” used herein shall mean “includes, without limitation,” or
“including, without limitation,” as the case may be, where appropriate. Except as otherwise indicated, references
in this Agreement to statutes, sections, or regulations are to be construed as including all statutory or regulatory provisions
consolidating, amending, replacing, succeeding, or supplementing the statute, section, or regulation referred to. References in
this Agreement to “writing” include printing, typing, lithography, facsimile reproduction, and other means of reproducing
words in a tangible visible form. References in this Agreement to amendments and other contractual instruments shall be deemed
to include all exhibits and appendices attached thereto and all subsequent amendments and other modifications to such instruments,
but only to the extent such amendments and other modifications are not prohibited by the terms of this Agreement. References in
this Agreement to Persons include their respective successors and permitted assigns.
Fourth Amendment to Senior First Lien Secured Credit Agreement
| Page 2
|
1.4
Articles and Sections. This Agreement, for convenience only, has been divided into Articles and Sections; and it is understood
that the rights and other legal relations of the parties hereto shall be determined from this instrument as an entirety and without
regard to the aforesaid division into Articles and Sections and without regard to headings prefixed to such Articles or Sections.
1.5
Number and Gender. Whenever the context requires, reference herein made to the single number shall be understood to include
the plural; and likewise, the plural shall be understood to include the singular. Definitions of terms defined in the singular
or plural shall be equally applicable to the plural or singular, as the case may be, unless otherwise indicated. Words denoting
sex shall be construed to include the masculine, feminine and neuter, when such construction is appropriate; and specific enumeration
shall not exclude the general but shall be construed as cumulative.
Article
II
AMENDMENTS
2.1
Amendments to Article I.
(a) The term “Commitment” in Section 1.01 of the Credit Agreement is amended and restated in its entirety
to hereafter read as follows:
“‘Commitment’
means the obligation of Lender to make Advances pursuant to Section 2.1(a) in an aggregate principal amount of Twelve Million
Four Hundred Thousand and No/100 Dollars ($12,400,000.00), subject, however, to Monthly Commitment Reductions and to termination
pursuant to Article VII.”
(a) The term “Fourth Amendment” is added to and made a part of Section 1.1 of the Credit Agreement and shall
read as follows:
“‘Fourth
Amendment’ means that certain Fourth Amendment to Senior First Lien Secured Credit Agreement dated effective as of April 21,
2015, between Borrowers and Lender.”
2.2
Amendment to Section 2.02 of the Credit Agreement. Section 2.02(a) of the Credit Agreement is hereby amended and restated
in its entirety to read as follows:
Fourth Amendment to Senior First Lien Secured Credit Agreement
| Page 3
|
“(a) Borrowing
Base. The Borrowing Base in effect as of the date of the Fourth Amendment is $12,400,000.00 and the initial Monthly Commitment
Reduction is $0.00. The Monthly Commitment Reduction shall apply on April 1, 2015, and on the first date of each calendar
month thereafter until redetermined as set forth in this Section 2.02. Such Borrowing Base and the Monthly Commitment Reduction
shall remain in effect until the next redetermination made pursuant to this Section 2.02. The Borrowing Base and Monthly
Commitment Reduction shall be determined in accordance with the standards set forth in Section 2.02(d) and is subject
to periodic redetermination pursuant to Sections 2.02(b) and 2.02(c).
Article
III
RATIFICATION, REPRESENTATION, AND ACKNOWLEDGMENT
3.1
Ratifications. The terms and provisions set forth in this Agreement shall modify and supersede all inconsistent terms and
provisions set forth in the Credit Agreement and, except as expressly modified and superseded by this Agreement, the terms and
provisions of the Credit Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and
effect. Borrowers agree that the Credit Agreement, as amended hereby, and the other Loan Documents continue to be legal, valid,
binding obligations of Borrowers enforceable against Borrowers in accordance with their respective terms.
3.2
Renewal and Extension of Security Interests and Liens. Borrowers hereby renew and affirm the liens and security interests
created and granted in the Loan Documents. Borrowers agree that this Agreement shall in no manner affect or impair the liens and
security interests securing the Obligations, and that such liens and security interests shall not in any manner be waived, the
purposes of this Agreement being to modify the Credit Agreement as herein provided, and to carry forward all liens and security
interests securing same, which are acknowledged by Borrowers to be valid and subsisting.
3.3
Representations and Warranties. Borrowers hereby represent and warrant to Lender as follows:
(a) the execution, delivery and performance of this Agreement and any and all other Loan Documents executed and delivered in connection
herewith have been authorized by all requisite corporate and limited liability company action on the part of Borrowers, as applicable,
and do not and will not conflict with or violate any provision of any applicable laws, rules, regulations or decrees, the Governing
Agreements of any Borrower, or any agreement, document, judgment, license, order or permit applicable to or binding upon any Borrower
or its assets. No consent, approval, authorization or order of, and no notice to or filing with, any court or governmental authority
or third person is required in connection with the execution, delivery or performance of this Agreement or to consummate the transactions
contemplated hereby;
(b) the representations and warranties contained in the Credit Agreement, as amended hereby, and the other Loan Documents are true
and correct in all material respects on and as of the date hereof as though made on and as of the date hereof, except to the extent
such representations and warranties relate to an earlier date;
Fourth Amendment to Senior First Lien Secured Credit Agreement
| Page 4
|
(c) Each Borrower is in compliance in all material respects with all covenants and agreements contained in the Credit Agreement, as
amended hereby, and the other Loan Documents to which it is a party;
(d) as of the date of this Agreement the unpaid principal balance of the Note is $12,400,000.00, and such amount is unconditionally
owed by Borrowers to Lender without offset, defense or counterclaim of any kind or nature whatsoever; and
(e) as of the date of this Agreement, the Letter of Credit Exposure is $0.
Article
IV
Conditions Precedent
4.1
Conditions. The effectiveness of this Agreement is subject to the satisfaction of the following conditions precedent, unless
specifically waived in writing by Lender:
(a) Lender shall have received the following documents, each in form and substance satisfactory to Lender:
(i)
this Agreement, duly executed by Borrowers; and
(ii)
Resolutions of the Board of Directors (or other governing body) of each Borrower certified by the Secretary or an Assistant Secretary
(or other custodian of records of each Borrower) which authorize the execution, delivery, and performance by each Borrower of
this Agreement and the other Loan Documents to be executed in connection herewith.
(b) The representations and warranties contained in the Credit Agreement, as amended hereby, and in each other Loan Document shall
be true and correct as of the date hereof, as if made on the date hereof, except to the extent such representation and warranties
relate to an earlier date;
(c) No Event of Default shall have occurred and be continuing and no Default shall exist, unless such Event of Default or Default
has been specifically waived in writing by Lender; and
(d) All corporate proceedings taken in connection with the transactions contemplated by this Agreement and all documents, instruments
and other legal matters incident thereto, shall be satisfactory to Lender and its legal counsel.
Article
V
MISCELLANEOUS
5.1
Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns permitted pursuant to the Agreement.
5.2
Rights of Third Parties. Except as provided in Section 4.1, all provisions herein are imposed solely and exclusively
for the benefit of the parties hereto.
5.3
Counterparts. This Agreement may be executed by one or more of the parties hereto in any number of separate counterparts,
and all of such counterparts taken together shall be deemed to constitute one and the same instrument and shall be enforceable
upon the execution of one or more counterparts hereof by each of the parties hereto. In this regard, each of the parties hereto
acknowledges that a counterpart of this Agreement containing a set of counterpart execution pages reflecting the execution of
each party hereto shall be sufficient to reflect the execution of this Agreement by each necessary party hereto and shall constitute
one instrument.
Fourth Amendment to Senior First Lien Secured Credit Agreement
| Page 5
|
5.4
Integration. This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject hereof. All prior understandings, statements and agreements, whether written or oral, relating
to the subject hereof are superseded by this Agreement.
5.5
Invalidity. In the event that any one or more of the provisions contained in
this Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement.
5.6
Governing Law. This
Agreement shall be deemed to be a contract made under and shall be governed by and construed in accordance with the laws of the
State of Texas, without regard to principles of such laws relating to conflict of laws.
5.7
RELEASE. BORROWERS ACKNOWLEDGE THAT THEY HAVE NO DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY
KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF THEIR LIABILITY TO REPAY THE OBLIGATIONS
OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM THE LENDER. BORROWERS VOLUNTARILY AND KNOWINGLY RELEASE AND
FOREVER DISCHARGE THE LENDER, ITS PREDECESSORS, AGENTS, DIRECTORS, OFFICERS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE
CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED
OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN
PART ON OR BEFORE THE DATE THIS AGREEMENT IS EXECUTED, WHICH THE BORROWERS MAY NOW OR HEREAFTER HAVE AGAINST THE LENDER, ITS PREDECESSORS,
AGENTS, DIRECTORS, OFFICERS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT
OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY OF THE OBLIGATIONS, INCLUDING, WITHOUT
LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL
RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE AGREEMENT OR OTHER LOAN DOCUMENTS, AND NEGOTIATION FOR AND
EXECUTION OF THIS AGREEMENT.
5.8
Consent and Partial Release. Lender hereby consents to the sale, transfer, and conveyance of the Assigned Properties by
Sellers to Buyer pursuant to the Assignment and, upon receipt of a written request from Borrowers, agrees to partially release
the Mortgaged Property (as defined in the Mortgages) from the lien of Mortgages to the extent and only to the extent they are
Assigned Properties covered by the Mortgages (the “Release Property”), with each Seller retaining ownership
of the remaining interests in the Mortgaged Property which will remain subject to the first and prior liens of the Mortgages all
upon satisfaction of the following conditions:
Fourth Amendment to Senior First Lien Secured Credit Agreement
| Page 6
|
(a)
Lender shall have received a fully executed copy of the Assignment and all other instruments of transfer and conveyance executed
in connection with the sale, transfer and conveyance of the Assigned Properties;
(b)
Lender shall have received in good and immediately funds the amount of $14,700,000, which will be applied to the payment of the
outstanding Obligations owing to Lender;
(c)
After the conveyance of the Assigned Properties to Buyer and the application of $14,700,000.00 to the outstanding Obligations
owing to Lender, no Borrowing Base Deficiency exists;
(d)
Lender shall have received a written certification executed by BP Energy Company (the “Swap Counterparty”)
certifying to Borrowers and Lender that no “Triggering Event” (as defined in the Hydrocarbon Hedge Agreements) has
occurred or exists under any Hydrocarbon Hedge Agreement among Borrowers, Lender and the Swap Counterparty and that all current
Hydrocarbon Hedging Agreements shall remain in full force and effect;
(e)
Lender shall have received a written consent executed by the Swap Counterparty wherein the Swap Counterparty consents to the transactions
contemplated by this Agreement including, without limitation, the partial release of liens with respect to the Release Property
and the application of $14,700,000.00 to the outstanding Obligations owing to Lender; and
(f)
No Default or Event of Default shall exist.
It
is expressly agreed by Borrowers that the partial releases executed by Lender are partial releases only and that the same shall
in no way release, affect or impair any rights, titles, liens or security interests held by Lender under the Mortgages or any
other Loan Document against any of the Mortgaged Property (as defined in the Mortgages) other than the Release Property.
(Signatures
appear on following pages)
Fourth Amendment to Senior First Lien Secured Credit Agreement
| Page 7
|
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized
officers on March 11, 2015, to be effective as of the Effective Date.
| |
LENDER: |
| |
|
| |
INDEPENDENT
BANK, |
| |
a
Texas banking corporation |
| |
|
| |
|
| |
By: |
/s/ John Davis |
| |
|
John
Davis
Executive
Vice President |
| |
BORROWER: |
| |
|
| |
RED
MOUNTAIN RESOURCES, INC., |
| |
a Texas corporation |
| |
|
| |
|
| |
By: |
/s/ Alan W. Barksdale |
| |
|
Alan
W. Barksdale
President
& Chief Executive Officer |
| |
CROSS
BORDER RESOURCES, INC., |
| |
a
Nevada corporation |
| |
|
| |
|
| |
By: |
/s/ Kenneth Lamb |
| |
|
Kenneth
Lamb
Chief
Accounting Officer |
| |
BLACK
ROCK CAPITAL, INC., |
| |
an
Arkansas corporation |
| |
|
| |
|
| |
By: |
/s/ Alan W. Barksdale |
| |
|
Alan
W. Barksdale
President |
| |
RMR
OPERATING, LLC, |
| |
a
Texas limited liability company |
| |
|
| |
|
| |
By: |
/s/ Alan W. Barksdale |
| |
|
Alan
W. Barksdale
President |
Fourth Amendment to Senior First Lien Secured Credit Agreement
| Page 8
|
CROSS BORDER RESOURCES, INC. 10-K
Exhibit 23.1
CROSS BORDER RESOURCES, INC. 10-K
Exhibit 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the references to our firm in the form
and context in which they appear in the Annual Report on Form 10-K for the year ended December 31, 2014, of Cross Border Resources
Inc. (the “Report”). We hereby further consent to the inclusion in the Report of estimates of oil and gas
reserves contained in our report dated April 13, 2015 as an exhibit to the Report.
| |
 |
| |
|
| |
CAWLEY, GILLESPIE & ASSOCIATES, INC. |
Fort Worth, Texas
May 12, 2015
CROSS BORDER RESOURCES, INC. 10-K
Exhibit 31.1
CERTIFICATIONS
I, Earl M. Sebring, certify that:
1. I have reviewed this Annual Report
on Form 10-K of Cross Border Resources, Inc.;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal
control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness
of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report
any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or
not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
| Date: May 19, 2015 |
|
|
| |
/s/ Earl M. Sebring |
| |
Name: |
Earl M. Sebring |
| |
Title: |
Interim President |
| |
|
(Principal Executive Officer) |
CROSS BORDER RESOURCES, INC. 10-K
Exhibit 31.2
CERTIFICATIONS
I, Kenneth S. Lamb, certify that:
1. I have reviewed this Annual Report
on Form 10-K of Cross Border Resources, Inc.;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal
control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness
of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report
any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or
not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
| Date: May 19, 2015 |
|
|
| |
/s/ Kenneth S. Lamb |
| |
Name: |
Kenneth S. Lamb |
| |
Title: |
Chief Accounting Officer, Secretary, and Treasurer |
| |
|
(Principal Financial and Accounting Officer) |
CROSS BORDER RESOURCES, INC. 10-K
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Annual Report on
Form 10-K of Cross Border Resources, Inc. (the “Company”) for the year ended December 31, 2014 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers does hereby certify pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to such officer’s knowledge:
1. The Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the
Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: May 19, 2015 |
|
|
| |
/s/ Earl M. Sebring |
| |
Name: |
Earl M. Sebring |
| |
Title: |
Interim President |
| |
|
(Principal Executive Officer) |
| Date: May 19, 2015 |
|
|
| |
/s/ Kenneth S. Lamb |
| |
Name: |
Kenneth S. Lamb |
| |
Title: |
Chief Accounting Officer, Secretary, and Treasurer |
| |
|
(Principal Financial and Accounting Officer) |
The foregoing certification is being furnished
as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections
(a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Report
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing
of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
CROSS BORDER RESOURCES, INC. 10-K
Exhibit 99.1
April 13, 2015
Mr. Alan W. Barksdale
Chairman
Cross Border Resources,
Inc.
2515 McKinney
Avenue, Suite 900
Dallas, TX 75201
| |
Re: |
Evaluation
Summary – SEC Pricing |
| |
|
Cross
Border Resources, Inc. Interests |
| |
|
Proved
Reserves |
| |
|
New
Mexico |
| |
|
As
of January 1, 2015 |
Dear Mr. Barksdale:
As requested,
we are submitting our estimates of proved reserves and our forecasts of the resulting economics attributable to the captioned
interests. This report has been prepared for use in filings with the Securities and Exchange Commission by Cross Border Resources,
Inc. (“Cross Border”). We completed this report on April 13, 2015. It is our understanding that the proved reserves
estimates in this report constitute 100 percent of all proved reserves owned by Cross Border and its subsidiaries.
Composite reserve estimates and economic forecasts for the proved reserves are presented in the attached tables and are summarized
below:
| | |
| | | |
| | | |
| Proved | | |
| | | |
| | |
| | |
| | | |
| Proved | | |
| Developed | | |
| | | |
| | |
| | |
| | | |
| Developed | | |
| Non- | | |
| Proved | | |
| Total | |
| | |
| | | |
| Producing | | |
| Producing | | |
| Undeveloped | | |
| Proved | |
| Net Reserves | |
| | | |
| | | |
| | | |
| | | |
| | |
| Oil/Condensate | |
| - Mbbl | | |
| 761.4 | | |
| 154.1 | | |
| 780.0 | | |
| 1,695.5 | |
| Gas | |
| - MMcf | | |
| 1,969.4 | | |
| 230.3 | | |
| 1,049.5 | | |
| 3,249.2 | |
| NGL | |
| - Mbbl | | |
| 81.7 | | |
| 0.1 | | |
| 0.0 | | |
| 81.8 | |
| Revenue | |
| | | |
| | | |
| | | |
| | | |
| | |
| Oil/Condensate | |
| - M$ | | |
| 68,001.3 | | |
| 13,433.8 | | |
| 68,769.0 | | |
| 150,204.1 | |
| Gas | |
| - M$ | | |
| 11,087.5 | | |
| 1,557.0 | | |
| 7,220.0 | | |
| 19,864.5 | |
| NGL | |
| - Mbbl | | |
| 2,490.8 | | |
| 2.6 | | |
| 0.0 | | |
| 2,493.4 | |
| Severance and | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ad Valorem Taxes | |
| - M$ | | |
| 6,256.1 | | |
| 1,175.2 | | |
| 5,952.8 | | |
| 13,384.0 | |
| Operating Expenses | |
| - M$ | | |
| 18,819.7 | | |
| 3,645.2 | | |
| 12,969.9 | | |
| 35,434.7 | |
| Investments | |
| - M$ | | |
| 0.0 | | |
| 1,369.3 | | |
| 16,710.8 | | |
| 18,080.1 | |
| Operating Income (BFIT) | |
| - M$ | | |
| 56,503.8 | | |
| 8,803.8 | | |
| 40,355.6 | | |
| 105,663.2 | |
| Discounted at 10.0% | |
| - M$ | | |
| 33,816.1 | | |
| 4,690.7 | | |
| 17,519.6 | | |
| 56,026.5 | |
The discounted
value shown above should not be construed to represent an estimate of the fair market value by Cawley, Gillespie & Associates,
Inc.
Cross Border Resources, Inc. Interests – SEC Pricing
April 13, 2015
Page 2 of 3
Annual average
hydrocarbon prices for past 12 months were utilized for the evaluation. The averages were calculated using the first-day-of-the-month
prices for each month. The resulting hydrocarbon pricing of $4.350 per MMBtu of gas and $94.99 per barrel of oil/condensate was
applied without escalation. Adjustments to these prices for basis differentials, hydrocarbon quality, and transportation/processing/gathering
fees were supplied by Cross Border and reviewed by Cawley, Gillespie & Associates, Inc. Deductions were applied to the net
gas volumes for fuel and shrinkage. The adjusted volume-weighted average product prices over the life of the properties are $88.59
per barrel of oil, $30.47 per barrel of NGL, and $6.11 per Mcf of gas.
Operating expenses
and capital costs were supplied by Cross Border and were reviewed for reasonableness. The expenses were based on historical costs
over the past six months to one year. Severance and ad valorem rates were specified by state/county. Neither expenses nor investments
were escalated. The cost of plugging and the salvage value of equipment have not been considered.
The
proved reserve classifications conform to criteria of the Securities and Exchange Commission. The estimates of reserves
have been prepared in accordance with the definitions and disclosure guidelines set forth in the U.S. Securities and Exchange
Commission Title 17, Code of Federal Regulations, Modernization of Oil and Gas Reporting, Final Rule released January 14, 2009
in the Federal Register. A combination of methods, including production
performance analysis, analogy and volumetric analysis, were employed in estimating the reserves. The reserves and economics are
predicated on the regulatory agency classifications, rules, policies, laws, taxes and royalties in effect on the effective date
except as noted herein. The possible effects of changes in legislation or other Federal or State restrictive actions have not
been considered. All reserve estimates represent our best judgment based on data available at the time of preparation and assumptions
as to future economic and regulatory conditions. It should be realized that the reserves actually recovered, the revenue derived
therefrom and the actual cost incurred could be more or less than the estimated amounts.
The reserve estimates
were based on interpretations of factual data furnished by Cross Border. We have used all methods and procedures as we considered
necessary under the circumstances to prepare the report. Ownership interests were supplied by Cross Border and were accepted as
furnished. To some extent, information from public records has been used to check and/or supplement these data. The basic engineering
and geological data were utilized subject to third party reservations and qualifications. Nothing has come to our attention, however,
that would cause us to believe that we are not justified in relying on such data. An on-site inspection of these properties has
not been made nor have the wells been tested by Cawley, Gillespie & Associates, Inc.
Our work-papers
and related data are available for inspection and review by authorized parties. The professional qualifications of the undersigned,
the technical person primarily responsible for the preparation of this report, are included as an attachment to this letter.
| |
Respectfully submitted, |
| |
|
| |
 |
| |
|
| |
J.
Zane Meekins, P.E.
Executive
Vice President
Cawley,
Gillespie & Associates
|
Cross Border Resources, Inc. Interests – SEC Pricing
April 13, 2015
Page 3 of 3
Professional Qualifications of J.
Zane Meekins, P.E.:
Mr. Meekins has been practicing
consulting petroleum engineering at CGA since 1989. Mr. Meekins is a Registered Professional Engineer in the State of Texas and
has over 26 years of practical experience in petroleum engineering, with over 24 years experience in the estimation
and evaluation of reserves. He graduated from Texas A&M University in 1987 with a BS in Petroleum Engineering. Mr. Meekins
meets or exceeds the education, training, and experience requirements set forth in the Standards Pertaining to the Estimating
and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers; he is proficient in judiciously
applying industry standard practices to engineering and geoscience evaluations as well as applying SEC and other industry reserves
definitions and guidelines.
Cross Border Resources (CE) (USOTC:XBOR)
Historical Stock Chart
From May 2024 to Jun 2024
Cross Border Resources (CE) (USOTC:XBOR)
Historical Stock Chart
From Jun 2023 to Jun 2024
