Quarterly Report (10-q)

Date : 11/14/2018 @ 9:26PM
Source : Edgar (US Regulatory)
Stock : Samson Oil & Gas Limited (QB) (SSNYY)
Quote : 0.058  -0.00695 (-10.70%) @ 6:30PM

Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-33578

 

Samson Oil & Gas Limited

(Exact Name of Registrant as Specified in its Charter)

 

Australia N/A
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)

 

Level 16, AMP Building,

140 St Georges Terrace

Perth, Western Australia 6000

 
(Address Of Principal Executive Offices) (Zip Code)

 

+61 8 9220 9830

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes     ¨   No

 

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted 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 such files). Yes x      No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ¨   Accelerated filer ¨
     
Non-accelerated filer x   Smaller reporting company x
     
    Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x

 

There were 3,283,000,444 ordinary shares outstanding as of November 12, 2018.

 

 

 

 

 

 

SAMSON OIL & GAS LIMITED

FORM 10-Q

QUARTER ENDED September 30, 2018

 

TABLE OF CONTENTS

 

    Page
     
Part I — Financial Information 4
     
Item 1. Financial Statements (unaudited) 4
     
  Consolidated Balance Sheets, September 30, 2018 and June 30, 2018 4
     
  Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended September 30, 2018 and 2017 5
     
  Consolidated Statements of Changes in Stockholders’ Equity/(Deficit) for the three months ended September 30, 2018 6
     
  Consolidated Statements of Cash Flows for the three months ended September 30, 2018 and 2017 7
     
  Notes to  Consolidated Financial Statements (unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
     
Item 4. Controls and Procedures 22
     
Part II   — Other Information 23
     
Item 1. Legal Proceedings 23
     
Item 1A. Risk Factors 23
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
     
Item 3. Defaults Upon Senior Securities 23
     
Item 4. Mine Safety Disclosures 23
     
Item 5. Other Information 24
     
Item 6. Exhibits 24
     
Signatures   25

 

  2

 

 

FORWARD-LOOKING STATEMENTS

 

Written forward–looking statements may appear in documents filed with the Securities and Exchange Commission (“SEC”), including this quarterly report, documents incorporated by reference, reports to shareholders and other communications.

 

The U.S. Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward–looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as the information is identified as forward looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. Samson relies on this safe harbor in making forward–looking statements.

 

Forward–looking statements appear in a number of places in this quarterly report and include but are not limited to management’s comments regarding business strategy, exploration and development drilling prospects and activities at our Foreman Butte and other properties, oil and gas pipeline availability and capacity, natural gas and oil reserves and production, our intentions and prospects with respect to our credit facility, our potential asset sale and refinancing efforts, meeting our capital raising targets and the use of proceeds, our plans, our ability to and methods by which we may raise additional capital, production and future operating results, and the objectives outlined under the section “Looking Ahead” below.

 

In this quarterly report, the use of words such as “anticipate,” “continue,” “could,” “estimate,” “expect,” “likely,” “may,” “will,” “project,” “should,” “believe” and similar expressions are intended to identify uncertainties. While we believe that the expectations reflected in those forward–looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. Our actual results could differ materially from those anticipated in these forward–looking statements. The differences between actual results and those predicted by the forward–looking statements could be material. Forward-looking statements are based upon our expectations relating to, among other things:

 

our future financial position, including cash flow, debt levels and anticipated liquidity;

 

the timing, effects and success of our exploration and development activities;

 

uncertainties in the estimation of proved reserves and in the projection of future rates of production;

 

timing, amount, and marketability of production;

 

third party operational curtailment, processing plant or pipeline capacity constraints beyond our control;

 

our ability to acquire and dispose of oil and gas properties at favorable prices;

 

our ability to market, develop and produce new properties;

 

declines in the values of our properties that may result in write-downs;

 

effectiveness of management strategies and decisions;

 

oil and natural gas prices and demand;

 

unanticipated recovery or production problems, including cratering, explosions, fires;

 

the strength and financial resources of our competitors;

 

our entrance into transactions in commodity derivative instruments;

 

climatic conditions; and

 

effectiveness of management strategies and decisions

 

Many of these factors are beyond our ability to control or predict. Neither these factors nor those included in the “Risk Factors” section of this quarterly report, if any, represent a complete list of the factors that may affect us.  We do not undertake to update the forward–looking statements made in this report.

 

  3

 

 

Part I — Financial Information

  Item 1.   Financial Statements.

SAMSON OIL & GAS LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

    30-Sep-18     30-Jun-18  
ASSETS                
CURRENT ASSETS                
Cash and cash equivalents   $ 2,492,749     $ 1,376,676  
Accounts receivable     2,581,153       1,759,461  
Prepayments     137,230       137,342  
Oil inventory     219,288       219,288  
Oil and gas properties held for sale     28,707,047       28,675,890  
Total current assets     34,137,467       32,168,657  
PROPERTY, PLANT AND EQUIPMENT, AT COST                
Oil and gas properties, successful efforts method of accounting, less accumulated depreciation, depletion and impairment of $12,622,572 and $12,606,491 at September 30, 2018 and June 30, 2018, respectively     1,735,852       1,744,951  
Other property and equipment, net of accumulated depreciation and amortization of $737,896 and $758,803 at September 30, 2018 and June 30, 2018, respectively     192,908       242,822  
Net property, plant and equipment     1,928,760       1,987,773  
OTHER NON CURRENT ASSETS                
Restricted cash - bonding     450,000       450,000  
Deferred tax asset     732,056       732,056  
Other     133,464       134,644  
TOTAL ASSETS   $ 37,381,747     $ 35,473,130  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                
CURRENT LIABILITIES                
Accounts payable   $ 10,067,842     $ 8,383,570  
Accruals     459,924       1,088,338  
Fair value of derivative instruments     877,310       1,210,795  
Asset retirement obligations associated with assets for sale     2,509,981       2,509,981  
Credit facility     23,834,749       23,867,557  
Provision for annual leave     243,808       250,826  
      37,993,614       37,311,067  
NON CURRENT LIABILITIES                
Asset retirement obligations     829,687       834,131  
TOTAL LIABILITIES     38,823,301       38,145,198  
STOCKHOLDERS’EQUITY (DEFICIT) – nil par value                
3,283,000,444 (equivalent to 16,415,002 ADR’s) and 3,283,000,444 (equivalent to 16,415,002 ADR’s) ordinary shares issued and outstanding at September 30, 2018 and June 30, 2018, respectively     106,743,167       106,743,167  
Accumulated other comprehensive income     876,417       846,556  
Accumulated deficit     (109,061,138 )     (110,261,791 )
Total stockholders’ equity (deficit)     (1,441,554 )     (2,672,068 )
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)   $ 37,381,747     $ 35,473,130  

 

See accompanying Notes to Consolidated Financial Statements.

 

  4

 

 

SAMSON OIL & GAS LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

    Three months ended  
             
    30-Sep-18     30-Sep-17  
REVENUES AND OTHER INCOME:                
Oil sales   $ 275,848     $ 97,617  
Gas sales     8,322       7,846  
Other liquids     47       -  
Interest income     418       58  
Other     -       178,658  
 TOTAL REVENUE AND OTHER INCOME     284,635       284,179  
                 
EXPENSES:                
Lease operating expense     (101,645 )     (24,191 )
Depletion, depreciation and amortization     (28,043 )     (71,709 )
Impairment expense     -       (40,856 )
Exploration and evaluation expenditure     (28,778 )     (3,173 )
Accretion of asset retirement obligations     (8,521 )     (12,026 )
Loss on derivative instruments     (26,980 )     (667,395 )
General and administrative     (836,303 )     (1,359,287 )
TOTAL EXPENSES     (1,030,270 )     (2,178,637 )
                 
Income/(loss) from operations     (745,635 )     (1,894,458 )
Income tax benefit     -       -  
Net (loss) from continuing operations     (745,635 )     (1,894,458 )
                 
Gain from discontinued operations     1,946,288       151,274  
                 
Income/(Loss)     1,200,653       (1,743,184 )
                 
OTHER COMPREHENSIVE INCOME/(LOSS)                
Foreign currency translation gain/(loss)     29,861       (1,228 )
Total comprehensive income/(loss) for the period   $ 1,230,514     $ (1,744,412 )
                 
Net loss per ordinary share from continuing operations:                
Basic – cents per share     (0.02 )     (0.06 )
Diluted – cents per share     (0.02 )     (0.06 )
                 
Net earnings per common share from discontinued operations:                
Basic – cents per share     0.06       0.01  
Diluted – cents per share     0.06       0.01  
                 
Net earnings per common share from operations:                
Basic – cents per share     0.04       (0.05 )
Diluted – cents per share     0.04       (0.05 )
                 
Weighted average ordinary shares outstanding:                
Basic     3,283,000,444       3,283,000,444  
Diluted     3,283,000,444       3,283,000,444  

 

See accompanying Notes to Consolidated Financial Statements.

 

  5

 

 

SAMSON OIL & GAS LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ (DEFICIT)/EQUITY

(Unaudited)

 

                Accumulated Other        
                Other     Total  
    Ordinary           Comprehensive     Stockholders  
    Shares       (Accumulated Deficit)     Income/(Loss)     Equity (Deficit)  
Balance at July 1, 2018   $ 106,743,167     $ (110,261,791 )   $ 846,556     $ (2,672,068 )
Net income     -       1,200,653       -       1,200,653  
Foreign currency translation gain, net of tax of nil     -       -       29,861       29,861  
Total comprehensive income for the period     -       1,200,653       29,861       1,230,514  
Balance at September 30, 2018   $ 106,743,167     $ (109,061,138 )   $ 876,417     $ (1,441,554 )

  

See accompanying Notes to Consolidated Financial Statements.

 

  6

 

 

SAMSON OIL & GAS LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Three months ended  
    30-Sep-18     30-Sep-17  
Cash flows provided by/(used in) operating activities                
Receipts from customers   $ 469,598     $ 445,199  
Payments to suppliers & employees     (883,459 )     (403,174 )
Interest received     11       58  
Payments on derivative instruments     (510,326 )     (125,815 )
Interest paid     -       -  
Net cash flows provided by/(used in) operating activities     (924,176 )     (83,732 )
Cash flows (used in)/provided by investing activities                
Proceeds from sale of oil and gas properties     -       -  
Payments for plant & equipment     -       (4,060 )
Payments for exploration and evaluation     (28,778 )     (2,671 )
Payments for oil and gas properties     (6,389 )     (13,927 )
Net cash flows (used in)/provided by investing activities     (35,167 )     (20,658 )
Cash flows (used in)/provided by financing activities                
Proceeds from the exercise of options     -       -  
Proceeds from borrowings     -       -  
Repayment of borrowings     -       -  
Share issuance costs     -       -  
Net cash flows (used in)/provided by financing activities     -       -  
Net increase/(decrease) in cash and cash equivalents     (959,343 )     (104,390 )
Cash and cash equivalents at the beginning of the quarter period     1,376,676       628,778  
Net cashflows provided by operations - discontinued operations     1,415,774       (84,977 )
Net cashflows provided by/(used) in investing activities - discontinued operations     663,794       (78,921 )
Net cashflows provided by financing operations - discontinued operations     -       450,000  
Effects of exchange rate changes on cash and cash equivalents     (4,152 )     (2,838 )
Cash and cash equivalents at end of quarter period   $ 2,492,749     $ 807,652  

 

See accompanying Notes to Consolidated Financial Statements

 

  7

 

 

SAMSON OIL & GAS LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

 

These Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting. All adjustments which are normal and recurring by nature, in the opinion of management, necessary for fair statement of Samson Oil & Gas Limited’s (the “Company”) Consolidated Financial Statements have been included herein. Interim results are not necessarily indicative of expected annual results because of the impact of fluctuations in prices received for oil and natural gas, as well as other factors. In the course of preparing the Consolidated Financial Statements, management makes various assumptions, judgments and estimates to determine the reported amounts of assets, liabilities, revenues and expenses, and in the disclosures of commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events, and, accordingly, actual results could differ from amounts previously established.

 

The Company’s Consolidated Financial Statements have been prepared on a basis consistent with the accounting principles and policies reflected in the Company’s audited financial statements as of and for the year ended June 30, 2018. The year-end Consolidated Balance Sheet presented herein was derived from audited Consolidated Financial Statements, but does not include all disclosures required by GAAP.

 

It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report (“Form 10-K”).

 

Accruals .   Accrued liabilities at June 30, 2018 and September 30, 2018 consist primarily of estimates for goods and services received but not yet invoiced.

 

Prepayments . Prepayments at June 30, 2018 and September 30, 2018 include tubing and chemicals and other subscription costs paid in advance for the year.

 

Comparatives . Changes have been made to the classification of certain prior period comparatives in order to remain consistent with the current period presentation. These changes have had no material impact on the financial statements, but amounts and disclosures were changed to show the impact of discontinued operations.

 

Liquidity and Going Concern

These financial statements have been prepared on the going concern basis, which contemplates the continuity of normal business activities and the realization of assets and settlement of liabilities in the normal course of business.

 

As disclosed in the financial statements, we incurred a net loss from continuing operations of $0.7 million for the three months ended September 30, 2018, and as at that date, we had $38 million in current liabilities, including $10.1 million in accounts payable, and approximately $5.4 million in current assets, excluding oil and gas assets held for sale. As at September 30, 2018, we had net current liabilities of $3.2 million. Our ability to continue as a going concern is dependent on refinancing our $24 million bank debt or the sale of our oil and gas properties to repay that debt.

 

We are engaged in discussions with a non-bank lender with respect to refinancing our current $24 million credit facility, which expired October 31, 2018, and is now due and payable. We have also engaged PLS Energy Advisory Group to market our assets. Based on our current financial position, in both cases we may be required to accept terms less favorable than would otherwise be available to us. There also can be no assurances that we will be successful in refinancing of our debt or to sell substantially all of our assets. These factors indicate there is substantial doubt about our ability to continue as a going concern.

 

Discontinued Operations

As of September 30, 2018 the majority of our interest in the wells in the Foreman Butte project were held for sale and therefore have been recognized as discontinued operations for the quarter ended September 30, 2018 and 2017. These are expected to be sold within the next 12 months, although we can offer no assurances that such sale efforts will be successful.

 

  8

 

 

 

Discontinued Operations

 

    Quarter ended September 30,  
    2018     2017  
Major line items constituting pretax gain (loss) of discontinued operations                
Oil sales     3,259,393       2,486,904  
Gas sales     28,955       41,411  
Other liquids     3,822       1,579  
Other income*     1,000,000       -  
Lease operating expense     (2,071,472 )     (1,627,486 )
Depletion, depreciation and amortization     -       (406,349 )
Accretion of asset retirement obligations     -       (68,145 )
Amortization of borrowing costs     -       (28,950 )
Interest expense     (274,410 )     (247,690 )
                 
Gain from discontinued operations     1,946,288       151,274  
                 
Cashflows from Discontinued Operations                
Cashflows from Operating Activities     1,415,774       (84,977 )
Cashflows from Investing Activities     663,794       (78,921 )
Cashflows from Financing Activities     -       450,000  

* “Other income” includes $1 million released from escrow in relation to the contracted sale of the Foreman Butte project that did not close.

 

Recent Accounting Standards

 

On July 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606 “Revenue from Contracts with Customers” (“ASC 606”) using the modified retrospective approach, which only applies to contracts that were not completed as of the date of the application. The adoption did not require an adjustment to the opening retained deficit for the cumulative effect adjustment and does not have a material impact on our ongoing consolidated balance sheet, statement of operations, statement of stockholders’ equity or statement of cash flows.

 

We recognize revenues from the sales of oil, natural gas and natural gas liquids (“NGL”) to our customers in accordance with the five-step revenue recognition model prescribed in ASC 606. Specifically, revenue is recognized when our performance obligations under contracts with customers (purchasers) are satisfied, which generally occurs with the transfer of control of the products to the purchasers. Control is generally considered transferred when the following criteria are met: (i) transfer of physical custody, (ii) transfer of title, (iii) transfer of risk of loss and (iv) relinquishment of any repurchase rights or other similar rights. Given the nature of our sales, revenue is recognized at a point in time based on the amount of consideration we expect to receive in accordance with the price specified in the contracts.

 

Consideration under the marketing contracts is typically received from the purchaser one to two months after production and, as a result, the Company is required to estimate the amount of production that was delivered to the purchaser and the price that will be received for the sale of the product. We record the differences between estimates and the actual amounts received for product sales once payment is received from the purchaser. Such differences have historically not been significant as we use knowledge of our properties and their historical performance, spot market prices and other factors as the basis for these estimates. At September 30, 2018, the Company had receivables related to contracts with customers of $1.2 million.

 

There was no impact on previously recognized revenue and no changes to what we would have recognized under the previous revenue recognition standard, ASC Topic 605 Revenue Recognition

 

Leasing

Accounting Standards Codification 842 (“ASC 842”) Leases is effective for fiscal years beginning after December 15, 2018. Although the impacts of the standard are still being reviewed, due to minimal leasing activity undertaken by the us, we expect this statement to have little impact on the Financial Statements.

 

  9

 

 

2. Income Taxes

 

The Company has cumulative net operating losses (“NOLs”) that may be carried forward to reduce taxable income in future years. The Tax Reform Act of 1986 contains provisions that limit the utilization of NOLs if there has been a change in ownership as described in Internal Revenue Code Section 382. The Company’s prior year NOLs are limited by IRC Section 382.

 

ASC Topic 740 requires that a valuation allowance be provided if it is more likely than not that some portion or all deferred tax assets will not be realized. The Company’s ability to realize the benefits of its deferred tax assets will depend on the generation of future taxable income through profitable operations. Due to the Company’s history of losses and the uncertainty of future profitable operations, the Company has recorded a full valuation allowance against its deferred tax assets.

 

3. Earnings Per Share

 

Basic earnings (loss) per share is calculated by dividing net earnings (loss) attributable to ordinary shares by the weighted average number of shares outstanding for the period. Under the treasury stock method, diluted earnings per share is calculated by dividing net earnings (loss) by the weighted average number of shares outstanding including all potentially dilutive ordinary shares (which in Samson’s case consists of unexercised stock options). In the event of a net loss, however no potential ordinary shares are included in the calculation of shares outstanding since the impact would be anti-dilutive.  

 

The following table details the weighted average dilutive and anti-dilutive securities outstanding, which consist of transferable options to purchase ordinary shares which are tradeable on the ASX (“options”), for the periods presented:

 

    Three months ended  
    30-Sep-18     30-Sep-17  
Dilutive     -       -  
Anti–dilutive     314,500,000       314,500,000  

 

The following tables set forth the calculation of basic and diluted loss per share:

 

    Three months ended  
    30-Sep-18     30-Sep-17  
Net income (loss) from continuing operations   $ (745,635 )   $ (1,894,458 )
                 
Basic weighted average ordinary shares outstanding     3,283,000,444       3,282,861,876  
Add: dilutive effect of stock options     -       -  
Diluted weighted average ordinary shares outstanding     3,283,000,444       3,282,861,876  
Basic earnings/(loss) from continuing operation per ordinary share – cents per share     (0.02 )     (0.06 )
Diluted earnings/(loss) from continuing operation per ordinary share – cents per share     (0.02 )     (0.06 )

 

4. Asset Retirement Obligations

 

The Company’s asset retirement obligations primarily represent the estimated present value of the amounts expected to be incurred to plug, abandon and remediate producing and shut–in properties at the end of their productive lives in accordance with applicable state and federal laws. The Company determines the estimated fair value of its asset retirement obligations by calculating the present value of estimated cash flows related to those obligations. The significant inputs used to calculate such liabilities include estimates of costs to be incurred, the Company’s credit adjusted discount rates, inflation rates and estimated dates of abandonment. The asset retirement liability is accreted to its present value each period and the capitalized asset retirement cost is depleted using the units–of–production method.

 

  10

 

 

The value of asset retirement obligation held related to asset held for disposal relates to the retirement obligation associated with certain properties held for sale relating to our Foreman Butte project in North Dakota and Montana.

 

In the prior year, the liabilities settled relate to wells plugged and abandoned in our Sabretooth project in Texas. Disposition of properties relate to the sale of certain wells in Wyoming.

 

The following table summarizes the activities for the Company’s asset retirement obligations for the three months ended September 30, 2018 and 2017:

 

    Three months ended  
    30-Sep-18     30-Sep-17  
Asset retirement obligations at beginning of period   $ 3,344,112     $ 3,456,236  
Liabilities incurred or acquired     -       -  
Liabilities settled     (12,965 )     (12,500 )
Disposition of properties     -       (131,202 )
Accretion expense     8,521       80,171  
Asset retirement obligations at end of period     3,339,668       3,392,705  
Less: current asset retirement obligations (classified with accounts payable and accrued liabilities)     (2,509,981 )     -  
Long-term asset retirement obligations   $ 829,687     $ 3,392,705  

 

5. Fair Value Measurements

 

Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. The FASB has established a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

 

The three levels of the fair value hierarchy are as follows:

 

· Level 1—Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

· Level 2—Pricing inputs are other than quoted prices in active markets included in level 1, but are either directly or indirectly observable as of the reported date and for substantially the full term of the instrument. Inputs may include quoted prices for similar assets and liabilities. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.

 

· Level 3—Pricing inputs include significant inputs that are generally unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of September 30, 2018 and June 30, 2018.

 

  11

 

  

    Carrying value at
September 30, 2018
    Level 1     Level 2     Level 3     Netting (1)     Fair Value at
September 30,
2018
 
Current Assets:                                                
Cash and cash equivalents   $ 2,492,749     $ 2,492,749     $ -     $ -     $ -     $ 2,492,749  
Derivative Instruments     -       -       344       -       (344 )     -  
                                                 
Non Current Assets                                                
Derivative Instruments     -       -       -       -       -       -  
                                                 
Current Liabilities                                                
Derivative instruments     877,310       -       877,654       -       (344 )     877,310  
                                                 
Non Current Liabilities                                                
Derivative Instruments     -       -       -       -       -       -  

 

    Carrying value at
June 30, 2018
    Level 1     Level 2     Level 3     Netting (1)     Fair Value at
June 30, 2018
 
Current Assets:                                                
Cash and cash equivalents   $ 1,376,676     $ 1,376,676     $ -     $ -     $ -     $ 1,376,676  
Derivative Instruments     -       -       4,218       -       (4,218 )     -  
                                                 
Non Current Assets                                                
Derivative Instruments     -       -       -       -       -       -  
                                                 
Current Liabilities                                                
Derivative instruments     1,210,795       -       1,215,013       -       (4,218 )     1,210,795  
                                                 
Non Current Liabilities                                                
Derivative Instruments     -       -       -       -       -       -  

 

(1) Netting In accordance with the Company’s standard practice, its commodity derivatives are subject to counterparty netting under agreements governing such derivatives and therefore the risk of loss is somewhat mitigated.

 

The following methods and assumptions were used to estimate the fair value of the assets and liabilities in the table above:

 

Level 1 Fair value Measurements

Fair Value of Financial Instruments.    The Company’s financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts receivable and payable and derivatives (discussed below). The carrying values of cash equivalents and accounts receivable and payable are representative of their fair values due to their short–term maturities.

 

Level 2 Fair Measurements

Derivative Contracts. The Company’s derivative contracts consist of oil collars and oil call options. The fair value of these contracts are based on inputs that are either readily available in the public market, such as oil future prices or inputs that can be corroborated from active markets. Fair value is determined through the use of a discounted cash model using applicable inputs discussed above.

 

  12

 

 

Other fair value measurements

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis.

The Company also applies fair value accounting guidance to measure non–financial assets and liabilities such as business acquisitions, proved oil and gas properties, and the initial recognition of asset retirement obligations. These assets and liabilities are subject to fair value adjustments only in certain circumstances and are not subject to recurring revaluations. These items are primarily valued using the present value of estimated future cash inflows and/or outflows. Given the unobservable nature of these inputs, they are deemed to be Level 3.

 

6. Commitments and Contingencies

 

The Company has no accrued environmental liabilities for its sites, including sites in which governmental agencies have designated the Company as a potentially responsible party, because it is not probable that a loss will be incurred and the minimum cost and/or amount of loss cannot be reasonably estimated. However, due to uncertainties associated with environmental assessment and remediation activities, future expense to remediate the currently identified sites, and sites identified in the future, if any, could be incurred. Management believes, based upon current site assessments, that the ultimate resolution of any such matters will not materially affect our results of operations or cash flows.

 

From time to time, we are involved in various legal proceedings through the ordinary course of business. While the ultimate outcome is not known, management believes that any resolution will not materially impact the financial statements.

 

7. Capitalized Exploration Expense

 

We use the successful efforts method of accounting for exploration and evaluation expenditure in respect of each area of interest. The application of this policy requires management to make certain estimates and assumptions as to future events and circumstances, in particular the assessment of whether economic quantities of reserves have been found.  Any such estimates and assumptions may change as new information becomes available.

 

Exploration and evaluation assets are assessed for impairment when facts and circumstances indicate that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount.  When assessing for impairment consideration is given to but not limited to the following:

 

§ the period for which Samson has the right to explore;

 

§ planned and budgeted future exploration expenditure;

 

§ activities incurred during the year; and

 

§ activities planned for future periods.

  

If, after having capitalized expenditures under our policy, we conclude that we are unlikely to recover the expenditures through future exploitation, then the relevant capitalized amount will be written off to expense.

 

As of September 30, 2018 we had capitalized exploration expenditures of $nil, having written off the expense previously capitalized associated relating to the Cane Creek project in Utah. Our option to acquire leasehold lands in this project, expired unexercised.  

 

Exploration or divestment activities are continuing in all exploration areas. The outcome of these activities remains uncertain and may result in write offs in future periods if the related efforts prove unsuccessful.

 

8.  Share Capital

 

Issue of Share Capital  

No shares were issued during the three months ended September 30, 2018.

 

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9. Cash Flow Statement

 

Reconciliation of loss after tax to the net cash flows from operations:

 

    Three months ended  
    30-Sep-18     30-Sep-17  
             
Net loss   $ 1,200,653     $ (1,743,184 )
Depletion, depreciation and amortization     28,043       478,058  
Accretion of asset retirement obligation     8,521       80,171  
Impairment expense     -       -  
Exploration and evaluation expenditure     28,778       3,173  
Amortization borrowing costs     -       28,950  
Non cash (gain)/loss on derivative instruments     (333,485 )     541,580  
Net gain from sale of assets     (1,000,000 )     (178,658 )
Share based payments     -       236,717  
                 
Changes in assets and liabilities:                
                 
Increase in receivables     (821,692 )     139,033  
Increase in provision for annual leave     (7,018 )     585  
Increase in payables     1,387,798       244,866  
                 
NET CASH FLOWS PROVIDED BY/(USED IN) OPERATING ACTIVITIES   $ 491,598     $ (168,709 )
                 
This amount reconciles to the Statement of Cashflows as follows:                
Net cash flows used in operating activities from continuing operations     (924,176 )     (83,732 )
Net cashflows provided by/(used in) operating activities from discontinued activities     1,415,774       (84,977 )
    $ 491,598     $ (168,709 )

 

10. Credit Facility

 

    Three months ended  
    30-Sep-18     30-Sep-17  
Credit facility at beginning of period   $ 23,867,557     $ 23,419,719  
Cash advanced under facility     -       450,000  
Cash committed to be advanced under facility     -       -  
Repayments     -       -  
Credit facility at end of period (1)   $ 23,867,557     $ 23,869,719  
                 
Funds available for drawdown under the facility     -       97,443  

 

(1) The credit facility is recognized as a current liability due the Company’s continued breach of the covenants in the facility. The loan is due and payable.

 

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In January 2014, we entered into a $25.0 million credit facility with our primary lender, Mutual of Omaha Bank, with an initial borrowing base of $8.0 million, which was increased to $15.5 million in June 2014. In November 2014, the borrowing base was increased to $19.0 million, which was fully drawn prior to the closing of the Foreman Butte Acquisition (as defined below). In March 2016, our credit facility was amended to increase the borrowing base to $30.5 million to partially fund the Foreman Butte Acquisition. An additional $4 million in financing was also provided by the seller. This promissory note was paid off in May 2017. We were required under the amended credit agreement to repay Mutual of Omaha $10 million by June 30, 2016. This was ultimately increased to $11.5 million and extended to October 31, 2016. The pay down was achieved through the sale of our North Stockyard property for $14.95 million on October 28, 2016 and was made on October 31, 2016.

 

In March 2016, the facility was extended to $30.5 million to partly fund the Foreman Butte Acquisition. In connection with this amendment to the facility agreement, the following covenants, tested on a quarterly basis, were included:

 

· Current ratio greater than 1
· Debt to EBITDAX (annualized) ratio no greater than 4.00 for the quarter ended September 30, 2017 and thereafter
· Senior leverage ratio of no greater than 3.75 for the quarter ending December 31, 2016 and thereafter
· Interest coverage ratio minimum of between 2.5 and 1.0

 

Following multiple covenant breaches, on June 14, 2018 we entered into a forbearance agreement with Mutual of Omaha Bank pursuant to which Mutual of Omaha Bank agreed to forbear on exercising its remedies under the credit facility contingent upon the success of our effort to sell the Foreman Butte asset. This agreement, as amended, terminated in accordance with its terms on October 15, 2018. The $23.9 million outstanding under our credit facility was due for repayment October 31, 2018 but we did not repay it by that deadline. Mutual of Omaha Bank may issue a notice of default and seek repayment of the facility or pursue alternative repayment methods, including the sale of the outstanding loan to a third party, at any time.

 

We incurred $0.6 million in borrowing costs (including legal fees and bank fees) in connection with the establishment of this facility. These costs were written off in total during the year ended June 30, 2018.

 

11. Derivatives

 

The Company has not designated any of its derivative contracts as hedges for accounting purposes. The Company records all derivative contracts at fair value. Changes in derivative contracts are recognized in earnings. Changes in settlements and valuation gains and losses are included in loss/(gain) on derivative instruments in the Statement of Operations. These contracts are settled on a monthly basis. Derivative assets and liabilities arising from the Company’s derivative contracts with the same counterparty that provide for net settlement are reported on a net basis in the Balance Sheet.

 

The Company is exposed to commodity price risk, which impacts the predictability of its cash flows from the sale of oil. The Company seeks to manage this risk through the use of commodity derivative contracts These derivative contracts allow the Company to limit its exposure to commodity price volatility on a portion of its forecasted oil sales. At September 30, 2018 the Company’s commodity derivative contracts consisted of collars which are described below:

 

Collar Collars contain a fixed floor price (put) and fixed ceiling price (call).  If the market price exceeds the call strike price or falls below the put strike price, the Company receives the fixed price and pays the market price.  If the market price is between the call and the put strike price, no payments are due from the either party.

 

All of the Company’s derivative contracts are with the same counterparty (a large multinational oil company) and are shown on a net basis on the Balance Sheet. The Company’s counterparty has entered into an inter-creditor agreement with the Company’s primary lender, and as such, no additional collateral is required by the counterparty.

 

During the three months ended September 30, 2018 we recognized $0.03 million in loss on derivative instruments in the Statement of Operations.

 

At September 30, 2018, the Company’s open derivative contracts consisted of the following:

 

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Collars

 

Product   Start Date   End Date   Volume
(BO/Mmbtu)
    Floor     Ceiling  
WTI   1-Oct-18   31-Dec-18     40,480       45.00       56.00  
Henry Hub   1-Nov-18   31-Dec-18     20,130       2.65       2.90  

 

12. Subsequent Events

 

There are no subsequent events or material contingencies, other than the expiration of our primary credit facility on October 31, 2018, and as such other events as noted in this Quarterly Report on Form 10-Q.

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following is management’s discussion and analysis of certain significant factors that have affected aspects of our financial position and the results of operations during the periods included in the accompanying Condensed Financial Statements. You should read this in conjunction with the discussion under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the audited Financial Statements for the year ended June 30, 2018, included in our Annual Report on Form 10-K and the Consolidated Financial Statements included elsewhere herein.

 

Throughout this report, a barrel of oil or “Bbl” means a stock tank barrel (“STB”) and a thousand cubic feet of gas or “Mcf” means a thousand standard cubic feet of gas (“Mscf”).

 

Overview

 

We are an independent energy company primarily engaged in the acquisition, exploration, exploitation and development of oil and natural gas properties. Our principal business is the exploration and development of oil and natural gas properties in the United States.

 

In June 2018 we signed a purchase and sale agreement for the sale of the majority of our working interest in the Foreman Butte project in Montana and North Dakota for $40 million. This sale was expected to close on October 15, 2018 however the buyer failed to close. A nonrefundable $1 million deposit placed into escrow by the buyer was released to us and as such we have included it in "other income" within discontinued operations. As part of this sale, we would have retained a 15% working interest in the Home Run Field, a smaller field within the greater Foreman Butte area. The proceeds of the sale would have been used to repay our credit facility with Mutual of Omaha Bank in full and bring our other accounts payable current. The interest in these assets, associated liabilities and revenue and expenses are presented as discontinued operations in the Financial Statements as though the transaction occurred on July 1, 2017.

 

We have terminated the purchase and sale agreement with the buyer and have engaged PLS Energy Advisors Group to remarket the asset. As an alternative, we have also engaged a non-bank lender to consider refinancing our current Mutual of Omaha Bank credit facility.

 

Foreman Butte Project

In March 2016 we closed on an acquisition of certain producing and nonproducing oil and gas assets in North Dakota and Montana (the “Foreman Butte Project”) for a purchase price of $16 million (the “Foreman Butte Acquisition”). The acquired assets were comprised of producing oil and gas wells, shut in wells and associated facilities. The wells are located in the Madison and Ratcliffe formations. The majority of these wells are now operated by us; however a number of non-operated wells were also included in this package.

 

We continue to concentrate our efforts on the operations of this field. Due to financial constraints we have not made substantial progress on the development of the PUD drilling program in the Home Run Field. Our development efforts are currently constrained by our lack of access to capital to fund any development activities. We have four current drilling permits for Home Run Field, the most promising non-producing area within the Foreman Butte Project. We would anticipate the drilling of one or more PUD wells if we obtain the necessary funding through a refinance of our credit facility or if we retain an interest in the field as part of any future sale of the Foreman Butte Project. There can be no assurance, however, that either possibility will come to fruition.

 

  16

 

 

Fiscal quarter overview

Excluding the impact of discontinued operations, our net oil production was 4,191 barrels of oil for the quarter ended September 30, 2018, compared to 3,153 barrels of oil for the quarter ended September 30, 2017. Production was slightly higher during the quarter ended September 30, 2018 due to the impact of a number of workovers completed during the current quarter.

 

Our net gas production was 2,275 Mcf for the quarter ended September 30, 2018 compared to 1,120 Mcf for the quarter ended September 30, 2017. The increase in the oil price has meant that some of the more liquid rich gas has been produced rather than flared. This value is immaterial to us.

 

Lease operating expenses (“LOE”) increased to $0.1 million for the quarter ended September 30, 2018, from $0.02 million for the quarter ended September 30, 2017 due to general operating expense increases in the field following an increase in the oil price and an increase in demand for oil field services.

 

For the three months ended September 30, 2018 and September 30, 2017 we reported a net loss of $0.8 million from continuing operations and a net loss of $1.9 million from continuing operations, respectively.

 

Our ability to continue as a going concern is dependent on obtaining the capital necessary to permit additional development of our oil and gas properties or a monetization of some or all of those properties. We are engaged in discussions with a non-bank lender with respect to refinancing our current credit facility. We are also continuing to market our major asset for sale after the buyer failed to close on the sale contemplated by the purchase and sale agreement for the Foreman Butte Project executed in June 2018. Mutual of Omaha Bank currently has the right to issue a notice of default on account of the expiration of the $24 million credit facility, however, to the date of this report, the bank has not exercised that right.

 

In addition to pursuing a refinancing of our debt, we have re-engaged PLS Energy Advisors Group to market the Foreman Butte Project following the failure of the previously contracted buyer to close a $40 million purchase. Based on our current financial position, in both cases, we may now be required to accept terms less favorable than would otherwise be available to us. There also can be no assurance that we will be successful in refinancing our debt or the sale of the Foreman Butte Project, with or without a retained interest. These factors indicate there is substantial doubt about our ability to continue as a going concern.

 

See “Results of Operations” below.

 

Notable Activities and Status of Material Properties during the Quarter Ended September 30, 2018 and Current Activities

 

Producing Properties

Foreman Butte Project, McKenzie County, North Dakota

Mississippian Madison Formation, Williston Basin

Samson 87% Operated Average Working Interest

 

We averaged a gross 833 BOEPD from our operated wells in the Foreman Butte Project this quarter.

 

During the quarter, we commenced our water flood pilot project for the Home Run Field. The waterflood pilot project utilizes an existing wellbore, the Mays 1-20H, which is located on the flank of the field and is non-economic to produce for oil. The water flood is being used to add pressure to the reservoir which is expected to enhance the recovery of oil. The well performance in the offsetting wells will be monitored to establish the viability of the flood. The water being used is produced formation water so that there is no chemical compatibility issue. In essence the water is being returned to the reservoir from which it originated. This water will be trucked to the injector from the existing producing wells. We anticipate this water flood will allow us to resume production at certain wells that have been shut-in for the past 3 years. These shut-in wells were previously uneconomic to produce due to high water disposal costs. We cannot make assurances regarding the success of the water flood operation.

 

The Home Run Field (also known as the Foreman Butte Field) is the largest areal oil field in the Foreman Butte Project. It was developed on a 640-acre spacing pattern and our engineering and geologic analyses have determined that only 3.2% of the original oil in place has been recovered to date. Given that oil fields can recover up to 20% of their oil in place, there would appear to be significant un-developed oil to be recovered from this field. In the event that we do sell the Foreman Butte Project, it remains our intention to retain a portion of the working interest in the Home Run Field.

 

Undeveloped Properties: Exploration Activities

 

Hawk Springs Project, Goshen County, Wyoming

Permo-Penn Project, Northern D-J Basin

Samson 37.5% working interest

 

All wells within this project have been plugged and abandoned with the final work expected to be completed during the next quarter.

 

  17

 

 

Cane Creek Project, Grand & San Juan Counties, Utah

Pennsylvanian Paradox Formation, Paradox Basin

Samson 100% Working Interest

Our option to lease 8,080 net acres with Utah SITLA (Utah School and Institutional Trust Lands Administration) at a cost of $75 per acre expired on November 30, 2017, unexercised. $0.3 million in undeveloped capitalized costs was written off in the three months ended December 31, 2017.

 

Developed Properties: Drilling Activities

 

Rainbow Project, Williams County, North Dakota

Mississippian Bakken Formation, Williston Basin

Samson 23% and 52% working interest

Kraken Operating, LLC, the operator of the Gladys 1-20H well, has been producing this well at an average rate of 74 BOPD and 86 MCFPD during the quarter.

 

Results of Operations

 

For the three months ended September 30, 2018 excluding the impact of discontinued operations, we reported a net loss of $0.7 million compared to a net loss of $1.9 million for the same period in 2017.

 

The following tables set forth selected operating data for the three months ended:

 

    Three months ended  
    30-Sep-18     30-Sep-17  
Production Volume                
Oil (Bbls)     4,191       3,153  
Natural gas (Mcf)     2,775       1,120  
BOE (Barrels of oil equivalent - based on one barrel of oil to six Mcf of natural gas)     4,654       3,340  
                 
Sales Price                
 Realized Oil ($/Bbls)   $ 65.82     $ 47.10  
                 
Expense per BOE:                
Lease operating expenses   $ 22.30     $ 34.64  
Production and property taxes   $ 1.37     $ 5.21  
Depletion, depreciation and amortization   $ 6.03     $ 8.49  
General and administrative expense   $ 179.71     $ 24.14  

 

  18

 

  

The following table sets forth results of operations for the following periods:

 

    Three months ended        
    30-Sep-18     30-Sep-17     1Q19 to 1Q18 change  
Oil sales   $ 275,848     $ 97,617     $ 178,231  
Gas sales     8,322       7,846       476  
Other liquids     47       -       47  
Interest income     418       58       360  
Other     -       178,658       (178,658 )
                         
Lease operating expense     (101,645 )     (24,191 )     77,454  
Depletion, depreciation and amortization     (28,043 )     (71,709 )     (43,666 )
Impairment     -       (40,856 )     (40,856 )
Abandonment     -       -       -  
Exploration and evaluation expenditure     (28,778 )     (3,173 )     25,605  
Accretion of asset retirement obligations     (8,521 )     (12,026 )     (3,505 )
Interest expense     -       -       -  
Loss on derivative instruments     (26,980 )     (667,395 )     (640,415 )
Amortization of borrowing costs     -       -       -  
General and administrative     (836,303 )     (1,359,287 )     (522,984 )
Income tax benefit     -       -       -  
Net income/(loss)   $ (745,635 )   $ (1,894,458 )   $ (1,148,823 )

 

Comparison of Quarter Ended September 30, 2018 to Quarter Ended September 30, 2017

The impact of discontinued operations have been excluded from the discussion below.

 

Oil and gas revenues

 

Oil revenues increased from $0.1 million for the three months ended September 30, 2017 to $0.3 million for the three months ended September 30, 2018, as a result of the slight increase in oil production. Oil production increased from 3,153 barrels for the three months ended September 30, 2017 to 4,191 barrels for the three months ended September 30, 2018.

 

The realized oil price increased from $47.10 per Bbl for the three months ended September 30, 2017 to $65.82 per Bbl (excluding the impact of derivatives) for the three months ended September 30, 2018 following a recovery in the global oil price.

 

Sale of Assets

 

For the quarter ended September 30, 2017 we recognized $0.2 million in profit on the sale of our working interest in a number of non operated wells in Wyoming. The wells were sold for the value of the current accounts payable owed to the operator and the plugging liability. No such sales were recognized in the current quarter.

 

Exploration expense

 

Excluding deferred exploration costs written off, exploration expenditures for the quarter ended September 30, 2018 and September 30, 2017 were less than $30,000 for either quarter.

 

Lease operating expense

 

Lease operating expenses (“LOE”) increased from $0.03 million for the quarter ended September 30, 2017, to $0.1 million for the quarter ended September 30, 2018 due to increased prices following an increase in the demand for oil field services in conjunction with the increase in the oil price. The wells in the Foreman Butte project area, and in the Home Run Field are also older wells than those we have previously owned and require additional fresh water and hot oil cleanouts which may increase operating costs of the wells. We are continuing to review our lease operating expenses and will shut wells in that are not economic to produce in the current oil pricing environment.

 

  19

 

 

Depletion, depreciation and amortization expense

 

Depletion, depreciation and amortization expense decreased from $0.07 million for the quarter ended September 30, 2017 to $0.03 million for the quarter ended September 30, 2018. This is due to depreciation not being charged on the majority of the Foreman Butte field wells as they are held for sale.

 

General and administrative expense

 

General and administrative expense decreased from $1.4 million for the quarter ended September 30, 2017 to $0.8 million for the quarter ended September 30, 2018. We have been actively trying to reduce our general and administrative costs in recent periods. Effective October 1, 2017, all staff and directors took 25% pay cuts in order to reduce salary costs. The cost of a number of consultants have also been reduced.

 

Discontinued Operations

A purchase and sale agreement to sell a substantial interest in the Foreman Butte project area was signed on June 14, 2018. The acquisition price was $40,000,000 with an effective date of January 1, 2018. The transaction did not close as expected on October 15, 2018 and we have engaged PLS Energy Advisors Group to remarket the assets. We are still in discussions with the original buyer as well. If the contracted transaction had closed, we would have retained a 15% working interest in certain wells in the Home Run Field. There can be no assurance that we will be able to sell the assets to another buyer for the same price or that we will be able to retain a working interest in the Home Run Field as we did in the contracted transaction. The impact of the proposed sale has been treated as a discontinued operation and adjustments have been made to the quarter ending June 30, 2018 and 2017 to show the impact of this sale had it occurred on July 1, 2017.

 

Interest charges and amortization of borrowing costs have been included in the discontinued operations as the credit facility is directly related to the assets being sold.

 

Gain from the discontinued operations increased from $0.2 million for the quarter ended September 30, 2017 to $2.1 million for the quarter ended September 30, 2018. Included in the current quarter profit is $1 million released from escrow in relation to the contracted sale of the Foreman Butte project that did not close as contracted in the purchase and sale agreement and subsequent amendments. The deposit was not refundable and was released to us during the quarter ended September 30, 2018.

 

Cash Flows

The table below shows cash flows for the following periods: 

 

    Three months ended  
    30-Sep-18     30-Sep-17  
Cash provided by/(used in) operating activities   $ (924,176 )   $ (83,732 )
Cash (used in)/provided by investing activities     (35,167 )     (20,658 )
Cash provided by/(used in) financing activities     -       -  

 

Cash used in operations decreased from a net outflow of $0.1 million for the three months ended September 30, 2017, to a net outflow of $0.9 million for the three months ended September 30, 2018. Cash receipts from customers remained consistent between the two periods at $0.5 million.

 

Payments to suppliers and employees increased from $0.4 million for the three months ended September 30, 2017 to $0.9 million for the three months ended September 30, 2018. Payments for derivative instruments increased from $0.1 million for the three months ended September 30, 2017 to $0.5 million for the three months ended September 30, 2018.

 

Cash used in investing activities increased from an outflow of $0.02 million for the three months ended September 30, 2017 to an outflow of $0.03 million for the three months ended September 30, 2018.

 

All options outstanding as at September 30, 2018 are currently out of the money.

 

Liquidity, Capital Resources and Capital Expenditures

Our primary use of capital has been acquiring, developing and exploring oil and natural gas properties. While we are planning for this to be our primary use of capital during fiscal year 2018-2019, we cannot conduct any further acquisition, development or exploration activities until we secure additional funding. There can be no guarantee we will be able to secure this funding.  

 

  20

 

 

In January 2014, we entered into a $25.0 million credit facility with our primary lender, Mutual of Omaha Bank, with an initial borrowing base of $8.0 million, which was increased to $15.5 million in June 2014. In November 2014, the borrowing base was increased to $19.0 million, which was fully drawn prior to the closing of the Foreman Butte Acquisition. In March 2016, our credit facility was amended to increase the borrowing base to $30.5 million to partially fund the Foreman Butte Acquisition. An additional $4 million in financing was also provided by the seller. This promissory note was paid off in May 2017. We were required under the amended credit agreement to repay Mutual of Omaha $10 million by June 30, 2016. This was ultimately increased to $11.5 million and extended to October 31, 2016. The pay down was achieved through the sale of our North Stockyard property for $14.95 million on October 28, 2016 and was made on October 31, 2016.

 

In March 2016, the facility was extended to $30.5 million to partly fund the Foreman Butte Acquisition. As a result of this amendment to the facility agreement, the following changes were made to the original facility agreement:

 

· The addition of more restrictive financial covenants (including the debt to EBITDA ratio and the minimum liquidity requirement);
· Increases in the interest rate and unused facility fee;
· The addition of a minimum hedging requirement of 75% of forecasted production;
· A requirement to reduce our general and administrative costs from $6 million per year to $3 million per year;
· A requirement to raise $5 million in equity on or before September 30, 2016, which deadline was extended and the condition was subsequently satisfied;
· A requirement to pay down at least $10 million of the loan by June 30, 2016, which total was increased to $11.5 million and extended to October 31, 2016, and the condition was satisfied on October 31, 2016; and
· The addition of a monthly cash flow sweep whereby 50% of cash operating income will be used to repay outstanding borrowings under the Credit Agreement. To date, $0.1 million in repayments have been made under this covenant.

 

The amended credit facility included the following covenants, tested on a quarterly basis:

 

· Current ratio greater than 1
· Debt to EBITDAX (annualized) ratio no greater than 4.00 for the quarter ended September 30, 2017 and thereafter
· Senior leverage ratio of no greater than 3.75 for the quarter ending December 31, 2016 and thereafter
· Interest coverage ratio minimum of between 2.5 and 1.0

 

In May 2017, Mutual of Omaha Bank agreed to repay our outstanding promissory note to the seller of the Foreman Butte Acquisition through a term note in addition to our current facility. This closed on May 5, 2017. Samson paid $0.45 million in interest from existing cash reserves, while Mutual of Omaha Bank paid $4.0 million in principal.

 

As a result of this amendment to the credit facility the interest changed from being based on LIBOR to the Wall Street Journal published Prime Rate (“Prime”). The interest rate on the term loan became Prime plus 2.5% or approximately 7.75% and the credit facility became Prime plus 1.0% or 6.25%.

 

In June 2017, Samson and Mutual of Omaha Bank agreed to extend both the $4 million term loan and our $19.45 million reserve base facility until October 2018.

 

On February 9, 2018 we entered into an agreement (the “Agreement”) with Mutual of Omaha Bank. Under the Agreement we were required to provide Mutual of Omaha Bank, on or before March 31, 2018, with either (a) an executed purchase and sale agreement evidencing the sale of Samson and its subsidiaries or its respective businesses and assets, or (b) a fully-executed letter of intent or other form of commitment letter from a credible lender or other financing source reflecting a proposed refinance or payment of Samson’s outstanding obligations. Following our breach of the Agreement and multiple breaches of the covenants in the amended credit facility, on June 14, 2018 we entered into a forbearance agreement with Mutual of Omaha Bank pursuant to which the Bank agreed to forbear on exercising its remedies under the credit facility contingent upon the success of our effort to sell the Foreman Butte Project. This agreement, as amended, terminated in accordance with its terms on October 15, 2018. The $23.9 million outstanding under our credit facility was due for repayment October 31, 2018 but we did not repay it by that deadline. As a result, Mutual of Omaha Bank may issue a notice of default and seek repayment of the facility or pursue alternative repayment methods, including the sale of the outstanding loan to a third party, at any time.

 

It was our intention to repay the outstanding credit facility with the proceeds from the contracted sale after closing on October 15, 2018, however this sale failed to close. Mutual of Omaha Bank has the right to issue us with a notice of default in relation to the facility, however they have yet to do so.

 

The current balance due under the facility is $23.9 million and was due for repayment October 31, 2018.

 

On account of our breaches of the Agreement and the loan facility covenants, our credit facility has been recorded as a current liability and is due for repayment October 2018.

 

The uncertainties surrounding our capital resources and requirements are further exacerbated by the variable results of our exploration and drilling program and changes in oil and natural gas prices, either of which could lead us to accelerate or decelerate exploration and drilling activities, as funding permits. The aggregate levels of capital expenditures for our fiscal year ending June 30, 2018, and the allocation of those expenditures, are dependent on a variety of factors, including the availability of capital resources to fund those expenditures and changes in our business assessments as to where our capital can be most profitably employed. Accordingly, the actual levels of capital resources and expenditures and the allocation of those expenditures may vary materially from our estimates.

 

  21

 

 

We are continually monitoring the capital resources available to us to meet our future financial obligations, planned capital expenditure activities and liquidity.  Our future success in growing our proved reserves and production will be highly dependent on capital resources available to us and our success in finding or acquiring such additional productive reserves.

 

Our main source of liquidity during the three months ended September 30, 2018 was cash on hand and the release of escrow funds from the terminated sale of assets.

 

During the prior four fiscal years, our three main sources of liquidity were (i) borrowings under our credit facility, (ii) equity issued to raise $21.4 million and (iii) our tax refund of $5.6 million from the Internal Revenue Service, received in February 2013. During the years prior to the fiscal year ended June 30, 2012, our primary sources of liquidity were the sale of acreage and other oil and gas assets.

 

Our cash position as of September 30, 2018 increased slightly from June 30, 2018 largely due an increase in our accounts payable balance and the release of escrow funds from the termination of the purchase agreement for our Foreman Butte assets.

 

If future production rates are less than anticipated, and/or the oil price deteriorates for an extended period, the value of our position in affected areas will decline, our results of operations, financial condition and liquidity will be adversely impacted and we could incur material write-downs of oil and gas properties. Our ability to continue operations could also be adversely affected. See the risk factors in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. See also Part II, Item 1A of this report below.

 

Off-Balance Sheet Arrangements

 

Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

 

  Looking Ahead

 

We plan to focus on the following objectives in the coming 12 months:

 

· Achieving the sale of our business or assets, or a refinancing of our debt;
· Continued focus on cost savings and efficiency across all aspects of the Company, including lease operating costs and general and administrative costs; and
· Strengthening the balance sheet through diligent capital management.

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4.    Controls and Procedures.

 

Control weakness – Accounts Payable processing

The Company took over operatorship of the Foreman Butte field in May and June of 2016.  This change necessitated a review of our accounts payable procedures.  During this review we noted that the design of one of processes was not sufficient to adequately capture all invoices in a timely fashion.  The impact of this was stated in Note 2 to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2017. At that time, we concluded that this control was not operating effectively for the quarter ended March 31, 2017. We have since revised and redesigned our accounts payable procedures and controls, with particular emphasis on ensuring the accuracy and completeness of our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q. We have implemented these new controls however they have not been in place long enough to fully assess their control design and effectiveness. 

 

As of September 30, 2018, we have carried out an evaluation under the supervision of, and with the participation of, our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

Our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2018, because of the deficiency noted above, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.  

 

  22

 

 

Other than disclosed above, there were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We may make changes in our internal control procedures from time to time in the future.

 

Part II — Other Information

 

Item 1.    Legal Proceedings.

 

In the ordinary course of our business we are named from time to time as a defendant in various legal proceedings.  We maintain liability insurance and believe that our coverage is reasonable in view of the legal risks to which our business ordinarily is subject. There are no material pending legal proceedings to which the Company is a party or of which our property is the subject.

 

Item 1A.   Risk Factors.

We did not repay our debt by its maturity date of October 31, 2018, we are in breach of multiple covenants under our credit agreement, and our lender is no longer under any agreement to forebear from the exercise of its rights under the credit facility.

 

The maturity date for the $23.9 million we have borrowed under our credit facility was October 31, 2018. We did not repay the facility by that date. Additionally, we remain in breach of multiple covenants under our credit agreement with Mutual of Omaha Bank. Our prior agreements with Mutual of Omaha Bank to forebear from exercising its rights under the credit facility have terminated. There is no assurance that the bank will not declare a default and seek immediate repayment of the entire debt borrowed under the facility because of these breaches.

 

In addition to other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.  The risks disclosed herein and in our Annual Report on Form 10-K could materially affect our business, financial condition or future results.  The risks described herein and in our Annual Report on Form 10-K are not the only risks facing us.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or operating results in the future.

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3.    Defaults Upon Senior Securities.

 

The description of our non-compliance with the terms and covenants of our credit facility included in “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity, Capital Resources and Capital Expenditures” is incorporated herein by reference.

 

Item 4.    Mine Safety Disclosures.

 

Not applicable.

 

  23

 

 

Item 5.    Other Information.

 

None 

 

Item 6.    Exhibits.

 

Exhibit No.   Title of Exhibit
     
31.1   Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
     
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
     
    *Furnished herewith

 

  24

 

 

Signatures

 

Pursuant to the requirements 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.

 

  SAMSON OIL & GAS LIMITED
   
Date:  November 14, 2018 By: /s/ Terry Barr
    Terence M. Barr
    Managing Director, President and Chief Executive Officer (Principal Executive Officer)
   
Date: November 14, 2018 By: /s/ Robyn Lamont
    Robyn Lamont
    Chief Financial Officer (Principal Financial Officer)

 

  25

 

 

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