TIDMRSOX
RNS Number : 4798Y
Resaca Exploitation Inc
23 December 2010
for IMMEDIATE release 23 december 2010
Resaca Exploitation, Inc.
("Resaca" or "the Company")
Results for the fiscal year ended 30 June 2010
Resaca (AIM:RSOX), the oil and natural gas production,
exploitation, and development company focused on the Permian Basin
in the USA, is pleased to announce its results for the fiscal year
ended 30 June 2010.
Highlights
Operational Highlights
-- Achieved waterflood response at Cooper Jal due to increased
water injection
-- Successfully implemented first phase of refrac program at
Cooper Jal
-- Returned wells to production that were shut-in during prior
year due to low oil prices
-- Reduced lease operating expense by $3/boe barrels of oil
equivalent ("boe") versus prior year
-- Produced over 194,000 barrels of oil and over 243,000 MCF of
gas for an average of 643 barrels of oil equivalent per day
-- Proved reserves of 14.4 million barrels of oil equivalents
("MMboe") as of 30 June 2010
-- Proved and probable reserves stand at 29.7 MMboe as of 30
June 2010
Financial Highlights
-- Oil and gas revenues of $15.1 million
-- Unrealized gain from hedging activities of $0.7 million
-- Net loss of $8.2 million
-- EBITDA of $3.0 million
-- EBITDA of $4.8 million excluding onetime transaction
costs
Post Period Update
-- Received commitment for new three year senior revolving
credit facility with $33 million initial borrowing base
-- Closed $20 million four year unsecured credit facility
For further information please contact:
Resaca Exploitation, Inc.
J.P. Bryan, Chairman and Chief Executive
Officer +1 713-753-1300
John J. ("Jay") Lendrum, III, Vice Chairman +1 713-753-1400
Dennis Hammond, President and Chief
Operating Officer +1 713-753-1281
Chris Work, Chief Financial Officer +1 713-753-1406
Buchanan Communications (Investor Relations) +44 (0)20 7466 5000
Tim Thompson
Ben Romney
Katharine Sutton
Seymour Pierce Limited (Nomad and Joint
Broker) +44 (0)20 7107 8000
Jonathan Wright
Richard Redmayne
RBC Capital Markets (Joint Broker) +44 (0)207 653 4667
Martin Eales +44 (0) 20 7029 7881
Brett Jacobs +44 (0) 20 7002 2091
About Resaca
Resaca is an independent oil and gas development and production
company based in Houston, Texas. Resaca is focussed on the
acquisition and exploitation of long-life oil and gas properties,
utilizing a variety of primary, secondary and tertiary recovery
techniques. Resaca's current properties are located in the Permian
Basin of West Texas and Southeast New Mexico. Additional
information is available at www.resacaexploitation.com.
Report and accounts
The report and accounts of Resaca for the year ended 30 June
2010 are being posted to shareholders and will be available on the
company's website www.resacaexploitation.com .
CHIEF EXECUTIVE OFFICER'S STATEMENT
I am pleased to present the Report and Accounts for Resaca
Exploitation for the year ended 30 June 2010.
Year in Review
While the last fiscal year included the disappointment
associated with the outcome of the Cano merger and the negative
impact of the Cano transaction costs on our financial statements,
there were several accomplishments at Resaca worth mentioning.
First of all, the performance at our Cooper Jal property was
very encouraging. We achieved a positive waterflood response from
the increased water injection levels and we realized favorable
results from the first phase of our refrac program. Several months
after completion of the refracs, our production at Cooper Jal
continues to remain solid. Based on our results at Cooper Jal, we
look forward to implementing the next phases of our exploitation
program at that property.
Second, we realized a reduction in our lease operating costs of
approximately $3/boe versus the prior fiscal year due to cost
cutting measures and capital improvements.
Third, despite producing 235,000 boe of our reserves during the
year, our reserves as of 30 June 2010 were slightly higher than our
reserves at 30 June 2009 due to better than projected field
performance.
Finally, an engineering study conducted on one of our largest
acreage holdings established that this property should be an
excellent waterflood candidate. We are actively pursuing this
project and we are evaluating opportunities to aggregate adjacent
properties with our acreage position.
Outlook
Many analysts are predicting $100 - $120 oil over the next two
years. While no one can accurately predict future oil prices, we
share their bullish view on oil prices and look forward to
continued price improvement. Many U.S. companies are currently
engaged in efforts to transform their reserve base to a higher oil
concentration, while also extending their reserve life. We are in
the enviable position of owning the type of reserves these
companies desire. Our reserves are 85% oil with a reserve life of
greater than forty years. Our immediate challenge is to increase
production from these reserves, which we plan to accomplish over
the next six to nine months.
In a separate announcement made today, we discussed our new
financing arrangements. As mentioned in that announcement, we plan
to use the availability under our new senior credit facility to
implement a $10 million capital program to significantly increase
our near term production and cash flows. The focus of our capital
program will primarily be at our Cooper Jal property, but we will
also engage in projects at some of our smaller properties as well.
We believe the $10 million capital program, which will start
immediately upon the funding of our new financing, should increase
our production by 30-40% over six to nine months.
In addition to the exploitation of our existing asset base, as
we have stated on several occasions, we plan to grow our reserve
base by merger and acquisition. We continue to evaluate these types
of opportunities with a goal to increase our overall enterprise.
Regarding acquisitions specifically, our new senior credit facility
will provide available capacity to pursue accretive property
acquisitions.
We are excited about the opportunities we see in our business
and look forward to 2011.
J.P. Bryan Chairman and Chief Executive Officer
12 Greenway Plaza, 12th Floor
Houston, TX 77046
Phone 713-561-6500
Fax 713-968-7128
Web www.uhy-us.com
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Resaca Exploitation, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of
Resaca Exploitation, Inc. (formerly Resaca Exploitation, L.P.) and
subsidiary (the "Company") as of June 30, 2010 and 2009, and the
related consolidated statements of operations, owners' equity
(deficit), and cash flows for each of the three years in the period
ended June 30, 2010. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note B to the consolidated financial statements,
in 2010 the Company adopted SEC Release
33-8995 and the amendments to ASC Topic 932, Extractive
Industries - Oil and Gas, resulting from ASU 2010-03 (collectively,
the "Modernization Rules").
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated
financial position of Resaca Exploitation, Inc. and Subsidiary as
of June 30, 2010 and 2009, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended June 30, 2010 in conformity with accounting principles
generally accepted in the United States of America.
UHY LLP
Houston, Texas
December 8, 2010
Resaca Exploitation, Inc.
Consolidated Balance Sheets
June 30,
--------------------------
2010 2009
----------- -----------
Assets
Current assets
Cash and cash equivalents $ 481,853 $ 330,281
Restricted cash 25,000 367,184
Accounts receivable 1,539,451 1,668,007
Other receivable, net 2,130,227 -
Prepaids and other current assets 663,915 777,518
Deferred tax assets 238,276 128,553
----------- -----------
Total current assets 5,078,722 3,271,543
Property and equipment, at cost
Oil and gas properties - full
cost method 131,463,011 127,079,180
Fixed assets 1,714,900 89,659
----------- -----------
133,177,911 127,168,839
Accumulated, depreciation,
depletion and amortization (13,396,813) (9,580,061)
----------- -----------
119,781,098 117,588,778
Other property 270,783 164,083
----------- -----------
Total property and equipment 120,051,881 117,752,861
Deferred finance costs, net 822,765 975,953
----------- -----------
Total assets $125,953,368 $122,000,357
=========== ===========
Liabilities and Stockholders'
Equity
Current liabilities
Accounts payable and accrued
liabilities $ 5,597,302 $ 3,025,786
Due to affiliates, net - 1,023,205
Liabilities from price risk
management 899,307 266,572
----------- -----------
Total current liabilities 6,496,609 4,315,563
Senior credit facility, net of
current portion 35,000,000 31,846,111
Notes payable, affiliates 1,854,722 -
Deferred tax liabilities 238,276 128,553
Liabilities from price risk
management 744,708 2,019,697
Asset retirement obligations 4,114,974 3,939,246
Commitments and contingencies
Stockholders' equity:
Common stock 193,895 184,517
Additional paid-in capital 95,105,080 89,175,456
Accumulated deficit (17,794,896) (9,608,786)
----------- -----------
Total stockholders' equity 77,504,079 79,751,187
----------- -----------
Total liabilities and
stockholders' equity $125,953,368 $122,000,357
=========== ===========
See accompanying notes to consolidated financial statements
Resaca Exploitation, Inc.
Consolidated Statements of Operations
Years Ended June 30,
--------------------------------------
2010 2009 2008
---------- ---------- -----------
Income
Oil and gas
revenues $15,053,740 $14,154,035 $ 18,559,474
Unrealized gain
(loss) from price
risk
management
activities 642,254 11,468,361 (12,348,851)
Interest and other
income 7,676 51,640 -
---------- ---------- -----------
Total income 15,703,670 25,674,036 6,210,623
Costs and expenses
Lease operating
expenses 6,104,811 6,622,739 7,007,477
Production and ad
valorem taxes 1,110,664 1,250,357 1,663,738
Depreciation,
depletion and
amortization 3,816,752 3,370,759 2,909,577
Accretion expense 173,830 281,290 341,254
General and
administrative
expenses 4,811,823 2,984,286 1,961,655
Share based
compensation
costs 4,345,282 4,102,854 -
Provision for
credit losses 250,000 - -
Inventory write
down - 318,411 -
Interest expense 3,274,160 4,024,708 9,829,539
Other expense - 8,206 -
---------- ---------- -----------
Total costs and
expenses 23,887,322 22,963,610 23,713,240
---------- ---------- -----------
Income (loss) before
taxes (8,183,652) 2,710,426 (17,502,617)
Income tax expense (2,458) - -
---------- ---------- -----------
Net income (loss) $(8,186,110) $ 2,710,426 $(17,502,617)
========== ========== ===========
Earnings (loss) per
share:
Basic earnings
(loss) per share $ (0.42) $ 0.15 n/a
Diluted earnings
(loss) per share $ (0.42) $ 0.15 n/a
Basic
weighted-average
shares
outstanding 19,363,865 18,451,748 n/a
Diluted
weighted-average
shares
outstanding 19,363,865 18,455,907 n/a
See accompanying notes to consolidated financial statements
Resaca Exploitation, Inc.
Consolidated Statements of Owners' Equity (Deficit)
Years Ended June 30, 2010, 2009 and 2008
Additional Total Partners'
Paid-in Accumulated Stockholders' Capital
Common Stock Capital Deficit Equity (Deficit)
-------------------- ---------- ----------- ------------- -----------
Par
Shares value
----------- ------- ---------- ----------- ------------- -----------
Balance at
June 30,
2007 5,579,656
Net loss (17,502,617)
---------- ------- ---------- ----------- ------------- -----------
Balance at
June 30,
2008 - - - - - $(11,922,961)
Conversion
from
partnership
to
corporation 7,925,013 79,250 317,001 (12,319,212) (11,922,961) 11,922,961
Conversion of
debt to
equity 4,064,109 40,641 9,959,359 10,000,000
Initial
public
offering,
net 6,462,583 64,626 74,796,242 74,860,868
Share based
compensation 4,102,854 4,102,854
Net income 2,710,426 2,710,426
---------- ------- ---------- ----------- ------------- -----------
Balance at
June 30,
2009 18,451,705 184,517 89,175,456 (9,608,786) 9,751,187 -
Stock issued
upon vesting
of
restricted
stock 273,701 2,737 (2,737) -
Stock issued
for the
acquisition
of assets 664,050 6,641 1,587,079 1,593,720
Share based
compensation 4,345,282 4,345,282
Net loss (8,186,110) (8,186,110)
---------- ------- ---------- ----------- ------------- -----------
Balance at
June 30,
2010 19,389,456 $193,895 $95,105,080 $(17,794,896) $ 77,504,079 $ -
========== ======= ========== =========== ============= ===========
See accompanying notes to consolidated financial statements
Resaca Exploitation, Inc.
Consolidated Statements of Cash Flows
Years Ended June 30,
----------------------------------------
2010 2009 2008
---------- ----------- -----------
Cash flows from
operating
activities
Net income (loss) $(8,186,110 )$ 2,710,426 $(17,502,617 )
Adjustments to
reconcile net
income (loss) to
net cash provided
by
(used in)
operating
activities
Depreciation,
depletion and
amortization 3,816,752 3,370,759 2,909,577
Accretion expense 173,830 281,290 341,254
Amortization of
deferred finance
costs 327,505 791,515 273,006
Provision for
credit losses 250,000 - -
Unrealized (gain)
loss from price
risk management
activities (642,254 ) (11,468,361 ) 12,348,851
Share based
compensation
costs 4,345,282 4,102,854 -
Settlement of
asset retirement
obligations - (2,389 ) -
Inventory write
down - 318,411 -
Changes in
operating assets
and liabilities:
Accounts
receivable (2,251,671 ) 968,352 (872,530 )
Prepaids and
other current
assets 113,603 2,011,273 (2,583,712 )
Accounts payable
and accrued
liabilities 2,571,517 (1,492,527 ) 963,065
Due to
affiliates,
net 831,517 (5,544,658 ) 5,830,161
---------- ----------- -----------
Net cash
provided by
(used in)
operating
activities 1,349,971 (3,953,055 ) 1,707,055
Cash flows from
investing
activities
Restricted cash 342,184 (367,184 ) -
Investment in oil
and gas
properties (4,381,933 ) (19,987,934 ) (4,442,717 )
Investment in
other property (4,500 ) (84,084 ) (79,999 )
Investment in
fixed assets (133,721 ) (82,684 ) (3,225 )
---------- ----------- -----------
Net cash used
in investing
activities (4,177,970 ) (20,521,886 ) (4,525,941 )
Cash flows from
financing
activities
Proceeds from
senior credit
facility 3,153,889 10,735,000 2,640,000
Payments on
senior credit
facility - (60,188,889 ) -
Proceeds from
initial public
offering, net of
direct expenses - 74,860,868 -
Deferred finance
costs (174,317 ) (790,214 ) (240,000 )
---------- ----------- -----------
Net cash
provided by
financing
activities 2,979,572 24,616,765 2,400,000
---------- ----------- -----------
Net increase
(decrease) in
cash and cash
equivalents 151,573 141,824 (418,886 )
Cash and cash
equivalents,
beginning of
year 330,281 188,457 607,343
---------- ----------- -----------
Cash and cash
equivalents, end
of year $ 481,854 $ 330,281 $ 188,457
========== =========== ===========
Supplemental cash
flow information
Cash paid during
the year for
interest $ 2,938,877 $ 3,233,193 $ 9,556,533
========== =========== ===========
Non cash
investing and
financing
activities:
Establishment of
asset
retirement
obligations $ 1,898 $ 126,768 $ -
========== =========== ===========
Conversion of
debt to equity $ - $ 10,000,000 $ -
========== =========== ===========
Assets acquired
for issuance of
stock $ 1,593,720 $ - $ -
========== =========== ===========
See accompanying notes to consolidated financial statements
Resaca Exploitation, Inc.
Notes to Consolidated Financial Statements
June 30, 2010 and 2009
Note A - Organization and Nature of Business
Resaca Exploitation, L.P. (the "Partnership") was formed on
March 1, 2006 for the purpose of acquiring and exploiting interests
in oil and gas properties located in New Mexico and Texas and to
conduct, directly and indirectly through third parties, operations
on the properties. The Partnership was funded and began operations
on May 1, 2006. Resaca Exploitation, G.P. served as the sole
general partner (.667%) and various limited partners owned the
remaining 99.333%. Under the terms of the Limited Partnership
Agreement, profits and losses were allocated to the general partner
and limited partners based upon their ownership percentages.
On July 10, 2008, the Partnership converted from a Delaware
partnership to a Texas corporation and became Resaca Exploitation,
Inc. ("Resaca"). Following conversion, Resaca became subject to
federal and certain state income taxes and adopted a June 30 year
end for federal income tax and financial reporting purposes. On
July 17, 2008, Resaca completed an initial public offering (the
"Offering") on the Alternative Investment Market of the London
Stock Exchange. In the initial public offering, Resaca raised $83.4
million before expenses (see Note H).
Resaca Operating Company ("ROC"), a wholly-owned subsidiary, was
formed on October 16, 2008 for the purpose of operating Resaca's
oil and gas properties. Resaca Acquisition Sub, Inc. ("Acquisition
Sub"), a wholly-owned subsidiary, was formed on September 25, 2009
for the sole purpose of facilitating Resaca's planned merger with
Cano Petroleum, Inc. ("Cano"). Following the termination of the
Cano merger agreement, Resaca dissolved Acquisition Sub on August
27, 2010. Acquisition Sub never conducted any activities. Resaca,
ROC and Acquisition Sub are referred to collectively as "the
Company". Activities for ROC are consolidated in the Company's
financial statements.
Note B - Summary of Significant Accounting Policies and Basis of
Presentation
Principles of Consolidation: The consolidated financial
statements include the accounts of Resaca and ROC. All significant
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents: Cash in excess of the Company's daily
requirements is generally invested in short-term, highly liquid
investments with original maturities of three months or less. Such
investments are carried at cost, which approximates fair value and,
for the purposes of reporting cash flows, are considered to be cash
equivalents. The Company maintains its cash in bank deposits with
various major financial institutions. These accounts, at times,
exceed federally insured limits. The Company monitors the financial
condition of the financial institutions and has not experienced any
losses on such accounts.
Restricted Cash: The Company collateralizes any open letters of
credit with cash (see Note G). At June 30, 2010 and 2009, the
Company had outstanding open letters of credit collateralized by
cash of $25,000 and $367,184, respectively.
Accounts Receivable: Accounts receivable primarily consists of
accrued revenues for oil and gas sales. The Company routinely
assesses the recoverability of all material receivables to
determine their collectability. The Company accrues a reserve on a
receivable when, based on the judgment of management, it is likely
that a receivable will not be collected and the amount of any
reserve may be reasonably estimated. As of June 30, 2010 and 2009,
the Company had an allowance for doubtful accounts of $250,000 and
$0, respectively.
Inventory: Inventory totaling $607,531 and $732,684 at June 30,
2010 and 2009, respectively, consists of piping and tubulars valued
at the lower of cost or market and is included within prepaids and
other current assets in the accompanying balance sheets.
Oil and Gas Properties: Oil and gas properties are accounted for
using the full-cost method of accounting. Under this method, all
productive and nonproductive costs incurred in connection with the
acquisition, exploration, and development of oil and natural gas
reserves are capitalized. This includes any internal costs that are
directly related to acquisition, exploration and development
activities, including salaries and benefits, but does not include
any costs related to production, general corporate overhead or
similar activities. During the years ended June 30, 2010, 2009 and
2008, the Company capitalized $373 360, $638,942 and $0,
respectively in overhead relating to these internal costs.
No gains or losses are recognized upon the sale or other
disposition of oil and natural gas properties except in
transactions that would significantly alter the relationship
between capitalized costs and proved reserves.
Note B - Summary of Significant Accounting Policies and Basis of
Presentation (Continued)
Under the full cost method, the net book value of oil and
natural gas properties, less related deferred income taxes, may not
exceed the estimated after-tax future net revenues from proved oil
and natural gas properties, discounted at 10% (the "Ceiling
Limitation"). In arriving at estimated future net revenues,
estimated lease operating expenses, development costs, and certain
production-related and ad valorem taxes are deducted. In
calculating future net revenues, prices and costs in effect at the
time of the calculation are held constant indefinitely, except for
changes that are fixed and determinable by existing contracts. The
excess, if any, of the net book value above the Ceiling Limitation
is charged to expense in the period in which it occurs and is not
subsequently reinstated. The Company prepared its ceiling test at
June 30, 2010 and 2009, and no impairment was deemed necessary.
Reserve estimates used in determining estimated future net revenues
have been prepared by an independent petroleum engineer at year
end.
The costs of unevaluated oil and natural gas properties are
excluded from the amortizable base until the time that either
proven reserves are found or it has been determined that such
properties are impaired. The Company currently has no material
capitalized costs related to unevaluated properties. All
capitalized costs are included in the amortization base as of June
30, 2010 and 2009.
Depreciation and Amortization: All capitalized costs of oil and
natural gas properties and equipment, including the estimated
future costs to develop proved reserves, are amortized using the
unit-of-production method based on total proved reserves.
Depreciation of fixed assets is computed on the straight line
method over the estimated useful lives of the assets, typically
three to five years.
General and Administrative Expenses: General and administrative
expenses are reported net of recoveries from owners in properties
operated by the Company.
Revenue Recognition: The Company recognizes oil and gas revenues
from its interests in oil and natural gas producing activities as
the hydrocarbons are produced and sold.
Accounting for Price Risk Management Activities: The Company
periodically enters into certain financial derivative contracts
utilized for non-trading purposes to hedge the impact of market
price fluctuations on its forecasted oil and gas sales. The Company
follows the provisions of ASC 815, Accounting for Derivative
Instruments and Hedging Activities ("ASC 815"), for the accounting
of its hedge transactions. ASC 815 establishes accounting and
reporting standards requiring that all derivative instruments be
recorded in the consolidated balance sheet as either an asset or
liability measured at fair value and requires that the changes in
the fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company has certain
over-the-counter collar contracts to hedge the cash flow of the
forecasted sale of oil and gas sales. The Company did not elect to
document and designate these contracts as hedges. Thus, the changes
in the fair value of these over-the-counter collars are reflected
in earnings for the years ended June 30, 2010, 2009 and 2008.
Income Tax: The Company is subject to federal income tax, Texas
state margin tax, and New Mexico state income tax. The Company
follows the guidance in ASC 740, Accounting for Income Taxes, which
requires the use of the asset and liability method of accounting
for deferred income taxes and provides deferred income taxes for
all significant temporary differences.
The Company follows ASC 740-10, Accounting for Uncertainty in
Income Taxes. The Interpretation prescribes guidance for the
financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. To recognize a tax
position, the enterprise determines whether it is more likely than
not that the tax position will be sustained upon examination,
including resolution of any related appeals or litigation, based
solely on the technical merits of the position. A tax position that
meets the more likely than not threshold is measured to determine
the amount of benefit to be recognized in the financial statements.
The amount of tax benefit recognized with respect to any tax
position is measured as the largest amount of benefit that is
greater than 50 percent likely of being realized upon
settlement.
Deferred Finance Costs: The Company capitalizes all costs
directly related to obtaining financing and such costs are
amortized to interest expense over the life of the related
facility. During the years ended June 30, 2010 and 2009, the
Company incurred and capitalized finance costs of $174,317 and
$790,214, respectively. At June 30, 2010 and 2009, the deferred
finance costs balance is presented net of accumulated amortization
of $1,853,766 and $1,526,261, respectively.
B - Summary of Significant Accounting Policies and Basis of
Presentation (Continued)
Use of Estimates: Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates.
Independent petroleum and geological engineers have prepared
estimates of the Company's oil and natural gas reserves at June 30,
2010 and 2009. Proved reserves, estimated future net revenues and
the present value of our reserves are estimated based upon a
combination of historical data and estimates of future activity. We
have based our present value of proved reserves on spot prices on
the date of the estimate for periods prior to December 31, 2009.
However, in accordance with the current authoritative guidance,
effective December 31, 2009, the Company calculated its estimate of
proved reserves using a twelve month average price, calculated as
the unweighted arithmetic average of the first-day-of-the-month
price for each period within the twelve month period prior to the
end of the reporting period. The reserve estimates are used in
calculating depreciation, depletion and amortization and in the
assessment of the Company's ceiling limitation. Significant
assumptions are required in the valuation of proved oil and natural
gas reserves which, as described herein, may affect the amount at
which oil and natural gas properties are recorded. Actual results
could differ materially from these estimates.
Asset Retirement Obligations: The Company follows ASC 410 ("ASC
410"), Asset Retirement and Environmental Obligations. ASC 410
requires that an asset retirement obligation ("ARO") associated
with the retirement of a tangible long-lived asset be recognized as
a liability in the period in which a legal obligation is incurred
and becomes determinable, with an offsetting increase in the
carrying amount of the associated asset. The cost of the tangible
asset, including the initially recognized ARO, is depreciated such
that the cost of the ARO is recognized over the useful life of the
asset. The ARO is recorded at fair value, and accretion expense
will be recognized over time as the discounted liability is
accreted to its expected settlement value. The fair value of the
ARO is measured using expected future cash outflows discounted at
the company's credit-adjusted risk-free interest rate.
Inherent in the fair value calculation of ARO are numerous
assumptions and judgments, including the ultimate settlement
amounts, inflation factors, credit adjusted discount rates, timing
of settlement, and changes in the legal, regulatory, environmental
and political environments. To the extent future revisions to these
assumptions impact the fair value of the existing ARO liability, a
corresponding adjustment is made to the oil and gas property
balance.
The following table is a reconciliation of the asset retirement
obligation:
Years Ended June 30,
----------------------------------
2010 2009 2008
--------- --------- ---------
Asset retirement obligation,
beginning of the period $3,939,246 $3,533,577 $3,192,323
Liabilities incurred 1,898 13,193 -
Liabilities settled - (2,389) -
Accretion expense 173,830 281,290 341,254
Revisions in estimated
liabilities - 113,575 -
--------- --------- ---------
Asset retirement obligation,
end of the period $4,114,974 $3,939,246 $3,533,577
========= ========= =========
Share-Based Compensation: The Company follows ASC 718 ("ASC
718"), Compensation-Stock Compensation, for all equity awards
granted to employees. ASC 718 requires all companies to expense the
fair value of employee stock options and other forms of share-based
compensation over the requisite service period. The Company's
share-based awards consist of stock options and restricted
stock.
Common Stock: On June 23, 2010, the Board of Directors approved
a one for five reverse stock split effective June 24, 2010.
Accordingly, all common shares, incentive plans and related amounts
for all periods presented reflect the stock reverse split.
Earnings per Share: Basic earnings per share are computed by
dividing net income by the weighted-average number of shares of
common stock outstanding during the period. Diluted earnings per
share are computed by dividing net income by the sum of the
weighted-average number of shares of common stock outstanding
during the period and
Note B - Summary of Significant Accounting Policies and Basis of
Presentation (Continued)
the dilutive effect of restricted stock awards and the assumed
exercise of stock options using the treasury stock method. Earnings
per share information is only presented for the years ended June
30, 2010 and 2009 as the Company was organized as a partnership
during the year ended June 30, 2008.
Subsequent Events: The Company evaluates events and transactions
that occur after the balance sheet date but before the financial
statements are available for issuance. The Company evaluated such
events and transactions through December 8, 2010, the date the
financial statements were available to be issued.
Newly Adopted Accounting Principles:
ASC 805: In December 2007, the FASB issued ASC 805, Business
Combinations ("ASC 805"). Under ASC 805, an entity is required to
recognize the assets acquired, liabilities assumed, contractual
contingencies, and contingent consideration at their fair value on
the acquisition date. It further requires that acquisition-related
costs be recognized separately from the acquisition and expensed as
incurred. ASC 805 is effective for business combinations
consummated in fiscal years beginning on or after December 15,
2008. The Company adopted ASC 805 effective July 1, 2009. This
statement will change our accounting treatment for prospective
business combinations.
ASC 815: In March 2008, the FASB issued ASC 815 (formerly SFAS
No. 161, Disclosures about Derivative Instruments and Hedging
Activities-An Amendment of FASB Statement 133). ASC 815 expands the
required disclosures to discuss the uses of derivative instruments;
the accounting for derivative instruments and related hedged items
under ASC 815, and how derivative instruments and related hedged
items affect the company's financial position, financial
performance and cash flows. We adopted ASC 815 on July 1, 2009. The
adoption of this statement did not have a material impact on our
financial position, results of operations or cash flows.
Modernization of Oil and Gas Reporting: On December 31, 2008,
the SEC issued Release No. 33-8995, "Modernization of Oil and Gas
Reporting," which revises disclosure requirements for oil and gas
companies. In addition to changing the definition and disclosure
requirements for oil and gas reserves, the new rules change the
requirements for determining oil and gas reserve quantities. These
rules permit the use of new technologies to determine proved
reserves under certain criteria and allow companies to disclose
their probable and possible reserves. The new rules also require
companies to report the independence and qualifications of their
reserve preparer or auditor and file reports when a third party is
relied upon to prepare reserve estimates or conducts a reserve
audit. The new rules also require that oil and gas reserves be
reported and the full cost ceiling limitation be calculated using a
twelve-month average price rather than period-end prices. The new
rules are effective for annual reports on for fiscal years ending
on or after December 31, 2009. Additionally, the FASB issued
authoritative guidance on oil and gas reserve estimation and
disclosures, as set forth in ASU No. 2010-03, Extractive
Activities-Oil and Gas (Topic 932), to align with the requirements
of the SEC's revised rules. The Company implemented the new
disclosure requirements for estimating reserves related to the
Company's oil and natural gas operations as of June 30, 2010 as
disclosed in Note P.
ASU 2010-06: In January 2010, the FASB issued ASU 2010-06, Fair
Value Measurements and Disclosures (Topic 820). ASU 2010-06
Subtopic 820-10 and provides new guidance on improving disclosures
about fair value measurements. The new standard requires some new
disclosures and clarifies some existing disclosure requirements
about fair value measurement. Specifically, the new standard will
now require: (a) a reporting entity should disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2
fair value measurements and describe the reasons for transfers and
(b) in the reconciliation for fair value measurements using
significant unoberservable inputs, a reporting entity should
present separately information about purchases, sales, issuances,
and settlements. In addition, the new standard clarifies the
requirements of the following existing disclosures: (a) for
purposes of reporting fair value measurements for each class of
assets and liabilities, a reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities and
(b) a reporting entity should provide disclosures about the
valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements. The new
standard is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15, 2010, and
for interim periods within those fiscal years. Early application is
permitted. The adoption of the requirements of this standard in the
quarter ended March 31, 2010 did not have a material impact on our
financial position or results of operations. We are still in the
process of evaluating the impact, if any, on our consolidated
financial statements, of the standard requirements applicable for
periods beginning on or after December 15, 2010.
Note C - Other Receivable
The Cano merger agreement provided for Resaca and Cano to, among
other things, share equally certain expenses related to the
printing, filing and mailing of the registration statement, the
proxies/prospectuses, and the solicitation of stockholder
approvals. Following the termination of the Cano merger agreement,
Resaca requested that Cano reimburse Resaca for Cano's share of
such expenses. Resaca has recorded a receivable of approximately
$2.1 million, net of a $250,000 provision for credit losses,
related to this reimbursement request. On September 2, 2010, Cano
filed an action against Resaca in the Tarrant County District Court
seeking a declaratory judgment to clarify the scope and determine
the amount of any expenses that are reimbursable by Cano under the
Cano merger agreement. Resaca disputes the allegations by Cano and
management believes the amount recorded on Resaca's balance sheet
will ultimately be collected from Cano.
Note D - Related Party Transactions
The Company receives support services from Torch Energy Advisors
Incorporated ("TEAI") and its subsidiaries, which include office
administration, risk management, corporate secretary, legal
services, corporate and litigation legal services, graphic
services, tax department services, financial planning and analysis,
information management, financial reporting and accounting
services, and engineering and technical services. The Company was
charged by TEAI and a subsidiary of TEAI $1,440,241, $1,998,916 and
2,067,659 during the years ended June 30, 2010, 2009 and 2008,
respectively, for such services. The majority of such fees are
included in general and administrative expenses.
In the ordinary course of business, the Company incurs payable
balances with TEAI resulting from the payment of costs and expenses
of the Company and from the payment of support services fees. Such
amounts had been settled on a regular basis, generally monthly.
However, a Subordinated Unsecured Note was issued on June 30, 2010
for the outstanding balance payable to TEAI of $1,854,722 as of
June 30, 2010 (see Note E).
Note E - Notes Payable
On May 1, 2006, the Company entered into a $10 million Senior
Subordinated Secured Convertible Term Loan Facility ("Convertible
Debt") with third parties. The aggregate loan amount under the
Convertible Debt was $10 million, all of which was funded at
closing. Interest was paid quarterly on the Convertible Debt, at a
rate of 6% per annum for cash dividends and 8% per annum in the
event the Company chose to pay interest in kind ("PIK"). The
lenders could convert their loans, in whole or in part, to
ownership interests in the Company at any time at an 18% premium,
provided that the minimum conversion loan amount is $500 000. PIK
interest was also able to be converted to ownership interests. The
Company had the right to redeem the subordinated debt after May 1,
2009, but was required to pay an early redemption premium. Early
redemption premium amounts varied in years three, four and five and
were designed to ensure the lenders different internal rates of
return at those points in time. To the extent the Convertible Debt
was neither redeemed by the Company nor converted by the lenders,
the full principal amount was to be due on May 1, 2012. The
Convertible Debt contained, among other terms, provisions for the
maintenance of certain financial ratios and restrictions on
additional debt. As of June 30, 2008, the Company was compliant
with all of the covenants, as amended, or had obtained a waiver for
noncompliance. Recourse for the Convertible Debt was limited to the
Company, as borrower, and the note was secured by all of the
Company's oil and gas properties. In July 2008, holders of the
Convertible Debt converted their notes into stock of the
Company.
On May 1, 2006, the Company entered into an $85 million Senior
Secured Loan Facility (the "Facility") with third parties. The
Facility included two tranches, A and B, of differing amounts and
terms. The maximum credit amount under Tranche A was $70 million,
$50 million of which was funded at closing. At June 30, 2009 and
2008, the Company had outstanding borrowings of $0 million and
$66.3 million, under Tranche A and $0 and $15 million under Tranche
B, respectively. The Tranche B maximum credit amount was $15
million. The full amount was funded atclosing and no additional
borrowings were permitted. Prior to the July 2008 amendment
(discussed below), interest accrued on the indebtedness at the one
month LIBOR plus 6% (8.5% at June 30, 2008) for Tranche A and
interest accrued at the one month LIBOR plus 9% (11.5% at June 30,
2008) for Tranche B. Interest payments were due monthly. Scheduled
principal payments under Tranche A began on May 1, 2009 and were
scheduled to occur monthly, in even increments. Tranche A was to
mature on May 1, 2012. On June 11, 2008, the credit agreement was
amended to extend the maturity of Tranche B to August 31, 2008. The
Facility contains, among other terms, provisions for the
maintenance of certain financial ratios and restrictions on
additional debt. On June 26, 2009, the outstanding balance of the
Facility was refinanced as described below.
Note E - Notes Payable (Continued)
In July 2008, with the proceeds received from the Offering, the
Company paid the $15 million outstanding balance on Tranche B which
extinguished that portion of the Facility and also repaid $44.3
million of the $66.3 million outstanding on Tranche A. In
conjunction with the partial repayment of Tranche A, the maximum
credit amount under Tranche A was lowered to $60 million, a 4%
LIBOR floor was added, and certain financial covenants were
modified. The interest rate on outstanding borrowings under the
facility was 10% at December 31, 2008. Recourse for the Facility is
limited to the Company, as borrower, and the note is secured by all
of Company's oil and gas properties.
On June 26, 2009, the Company entered into a $50 million,
three-year Senior Secured Revolving Credit Facility ("CIT
Facility") with CIT Capital USA Inc. ("CIT") that matures on July
1, 2012. The CIT Facility replaced the Facility entered into in
2006 which had converted to a term loan in May 2009 as described
above. The initial borrowing base of the CIT Facility is $35
million and CIT serves as administrative agent. Interest on the CIT
Facility is set at LIBOR plus 5.5% subject to a 2.5% LIBOR floor.
Recourse for the CIT Facility was limited to the Company, as
borrower, and the note is secured by all of the Company's oil and
gas properties. At June 30, 2010, the interest rate in place was
8.0%. As a condition of closing the CIT Facility, the Company
entered into additional natural gas hedges for January 2011 through
June 2012 and additional oil hedges for June 2011 through June
2012. Under the CIT Facility, the lenders may require the Company
to hedge additional future oil and gas production. Additionally,
the Company wrote off $536,579 in deferred financing costs
associated with the Facility entered into in 2006. The CIT Facility
contains, among other terms, provisions for the maintenance of
certain financial ratios and restrictions on additional debt. On
December 22, 2009, the Company executed an amendment to the CIT
Facility which amended some of the financial ratio requirements. As
of June 30, 2010, the Company was not compliant with all of the
covenants and received a waiver from CIT for such
noncompliance.
On May 18, 2010, the Company, TEAI, and CIT entered into an
agreement, which provided that, if the CIT Facility was not repaid
in full by June 30, 2010, the outstanding payable by the Company to
TEAI as of June 30, 2010 would be contractually subordinated to
amounts payable under the CIT Facility. On June 30, 2010, the
Company entered into a Subordinated Unsecured Note ("Torch Note")
with TEAI for $1,854,722. The Torch Note has a maturity date of
October 1, 2012 and bears interest at Amegy Bank N. A.'s prime rate
plus two percent. At June 30, 2010 the interest rate was 7.0%. The
maturity date shall be accelerated in the event the CIT Facility is
repaid in full. Interest shall only be payable in kind as long as
the CIT Facility is outstanding.
Scheduled maturities as of June 30, 2010 are as follows:
Year Ending June 30,
----------------------
2010 -
2011 -
2012 -
2013 36,854,722
----------
$36,854,722
==========
On October 20, 2010, Resaca received a commitment from Chambers
Energy Capital, L.P. for a $20 million four-year unsecured credit
facility (the "Chambers Facility"). Under the terms of the Chambers
Facility, Resaca will draw the full amount available under the
facility in one funding. The Chambers Facility is expected to close
before December 31, 2010 and fund within ten business days of
closing. Resaca will not be allowed to re-borrow any amounts repaid
under the Chambers Facility, which will bear interest at 9.5% per
year. Resaca will have the option to pay interest under the
Chambers Facility in kind for the first two years at an interest
rate of 12% per year. The Chambers Facility will include certain
financial and other customary covenants. Proceeds from the Chambers
Facility will be used to repay Resaca's existing debt, to fund
future acquisitions and for general corporate purposes. In
conjunction with the funding, Resaca will issue warrants to the
lenders under the Chambers Facility to purchase approximately 4.8
million shares of Resaca common stock at 120% of the volume
weighted average closing share price for the 10 trading days
immediately prior to the closing date. The purchase price for the
Resaca common shares under the warrants will be subject to
customary weighted average dilution protections if Resaca issues
stock at a price below the purchase price under the warrants. In
addition, the exercise price and the number of shares the lenders
are able to purchase under the warrants would be adjusted in the
case of certain Company distributions, dilutive equity issuances,
share subdivisions, or share combinations.
NOTE E - Notes Payable (Continued)
On November 17, 2010, the Company received a commitment from
Regions Bank ("Regions") for a new $75 million senior secured
revolving credit facility (the "Regions Facility"). The Regions
Facility will close and fund in conjunction
with the closing and funding of the Chambers Facility. Proceeds
from the Regions Facility will be used to repay and refinance
Resaca's existing debt, to fund future acquisitions and for general
corporate purposes. The Regions Facility will be governed by
semi-annual borrowing base redeterminations assigned to the
Company's proved crude oil and natural gas reserves. An initial
borrowing base of $33 million has been established based on the
Company's reserves.
Note F - Price Risk Management and Financial Instruments
The Company enters into hedging transactions with a major
counterparty to reduce exposure to fluctuations in the price of
crude oil and natural gas. We use financially settled crude oil and
natural gas zero-cost collars. Any gains or losses resulting from
the change in fair value are recorded to unrealized gain (loss)
from price risk management activities whereas gains and losses from
the settlement of hedging contracts are recorded in oil and gas
revenues.
With a zero-cost collar, the counterparty is required to make a
payment to us if the settlement price for any settlement period is
below the floor price of the collar, and we are required to make a
payment to the counterparty if the settlement price for any
settlement period is above the cap price for the collar.
Cash settlements for the years ended June 30, 2010, 2009 and
2008 resulted in a decrease in crude oil and natural gas sales in
the amount of $383,995 and $413,141, and $3,169,912,
respectively.
As of June 30, 2010, we had the following contracts
outstanding:
Crude Oil Natural Gas
--------------------------------- ----------------------------------
Total Total Total
Volume Contract Asset Volume Contract Asset Asset
Price Price
Period (Bbls) (1) (Liability) (MMBtus) (1) (Liability) (Liability)
---------- ------ ----------- ----------- -------- ---------- ----------- -----------
Collars
7/10 -
12/10 10,000 58.00/66.30 (530,082 ) 20,000 6.30/11.50 211,149 (318,933)
1/11 -
5/11 10,000 58.00/66.30 (599,581 ) 10,000 6.30/11.00 71,827 (527,754)
6/11 -
12/11 9,000 60.00/77.00 (521,338 ) 11,000 5.50/6.90 44,929 (476,409)
1/12 -
6/12 6,000 60.00/77.00 (362,683 ) (362,683)
Swaps
1/11 -
5/11 1,000 6.10 5,550 5,550
1/12 -
6/12 7,500 6.30 36,214 36,214
Total $ (2,013,684 ) $ 369,669 $(1,644,015)
(1) The contract price is weighted-averaged by contract
volume.
Note F - Price Risk Management and Financial Instruments
(Continued)
The following table quantifies the fair values, on a gross
basis, of all our derivative contracts and identifies its balance
sheet location as of June 30, 2010:
Total
Asset Derivatives (Liability) Derivatives Asset
------------------------- ------------------------
Balance Balance
Sheet Sheet
Location Fair Value Location Fair Value (Liability)
------------ ---------- ----------- ---------- -----------
Derivatives
not
designated as
hedging
instruments
under ASC
815
Derivative Derivative
Commodity financial financial
Contracts instruments instruments
Current
Current Liability 420,077 Liability (1,319,384) (899,307)
Non-current Non-current
Liability 395,125 Liability (1,139,833) (744,708)
Total
derivatives
not
designated
as hedging
instruments
under ASC
815
815,202 (2,459,217) (1,644,015)
---------- ---------- -----------
Total
derivatives $ 815,202 $(2,459,217) $ (1,644,015)
While notional amounts are used to express the volume of puts
and over-the-counter options, the amounts potentially subject to
credit risk in the event of nonperformance by the third parties,
are substantially smaller. The Company does not anticipate any
material impact to its financial position or results of operations
as a result of nonperformance by third parties on financial
instruments related to its option contracts.
Note G - Commitments and Contingencies
The Company, from time to time, is involved in certain
litigation arising out of the normal course of business, none
currently outstanding of which, in the opinion of management, will
have any material adverse effect on the financial position, results
of operations or cash flows of the Company as a whole.
On September 2, 2010, Cano filed an action against Resaca in the
Tarrant County District Court seeking a declaratory judgment to
clarify the scope and determine the amount of any expenses that are
reimbursable by Cano under the Cano merger agreement. Resaca
disputes the allegations by Cano and management believes the amount
recorded on Resaca's balance sheet will ultimately be collected
from Cano.
The Company has open letters of credit of approximately $25,000
at June 30, 2010 which are fully collateralized by restricted cash
balances.
Note H - Initial Public Offering
On July 17, 2008, the Company completed an initial public
offering on the AIM of the London Stock Exchange. In the initial
public offering, the Company raised $83.4 million before expenses.
Proceeds received were used to repay outstanding borrowings on the
Facility, extinguish the balance outstanding to its affiliates, and
purchase an overriding royalty interest from a third party covering
all of its existing oil and gas properties for $7 million. In
conjunction with the initial public offering, certain officers and
directors were granted restricted stock awards for an aggregate
821,103 shares of our common stock that vest ratably over three
years, and, 341,357 stock options, each option to purchase one
share of our common stock at an exercise price of 6.70 British
pounds per share. The options vest ratably over three years and
will expire on July 17, 2016.
Note I - Share-Based Compensation
The Company has adopted a Share Incentive Plan ("The Plan") to
foster and promote the long-term financial success of the Company
and to increase shareholder value by attracting, motivating and
retaining key personnel. The Plan is considered an important
component of total compensation offered to key employees and
outside directors. The Plan consists of stock option and restricted
stock awards. The Company expenses the fair-value of the
share-based payments over the requisite service period of the
awards. At June 30, 2010, there was $4,669,231 in unrecognized
compensation expense. The stock options and restricted stock both
vest over a 3 year period. At June 30, 2010 there were 460 357
stock options and 547,402 shares of restricted stock outstanding.
Additionally, the Board of Directors has the ability to authorize
the issuance of another 563,714 stock options and restricted stock
to key personnel.
The following summary represents restricted stock awards
outstanding at June 30, 2010 and 2009:
Grant Date
Shares Fair Value
-------- ----------
Awards outstanding at June
30, 2008 - -
Restricted Shares granted 821,103 $11,018,184
Restricted Shares forfeited - -
-------- ----------
Awards outstanding at June
30, 2009 821,103 $11,018,184
Restricted Shares vested (273,701) (3,672,728)
Restricted Shares forfeited - -
-------- ----------
Awards outstanding at June
30, 2010 547,402 $ 7,345,456
======== ==========
For stock options, the Company determines the fair value of each
stock option at the grant date using a Black-Scholes model, with
the following assumptions used for the grants made on the date
indicated:
7/17/2008 1/21/2009 9/25/2009 11/16/2009
---------- ---------- ---------- -----------
Risk-free interest rate 3.35% 3.35% 2.37% 2.18%
Volatility factor 50% 50% 81% 88%
Expected dividend yield
percentage 0% 0% 0% 0%
Weighted average expected
life in years 3.5 3.5 3.5 3.5
All stock option awards have a 3 year vesting period and expire
5 years after the vesting date. A summary of stock options awarded
during the 12 months ended June 30, 2010 and 2009 is as
follows:
Average Grant Date
Exercise
Shares Price Fair Value
------- -------- ----------
Options outstanding at June
30, 2008 - - -
Grants 351,357 $ 9.86 $ 1,829,000
Exercised or
forfeited -
------- ----------
Options outstanding at June
30, 2009 351,357 $ 9.86 $ 1,829,000
Grants 119,000 3.69 276,647
Exercised or
forfeited (10,000) (1.73) (6,463)
------- ----------
Options outstanding at June
30, 2010 460,357 $ 8.44 $ 2,099,184
Note I - Share-Based Compensation (Continued)
A summary of stock options outstanding at June 30, 2010 is as
follows:
Converted Option Awards Remaining Option Awards
Exercise Exercise Option
Grant Date Price Price* Outstanding Life Exercisable
----------- --------- --------- ------------- --------- -------------
07/17/08 GBP 6.70 $ 10.10 341,357 6.05 113,786
09/25/09 GBP 2.50 3.77 79,000 7.24 -
11/16/09 GBP 2.35 3.54 40,000 7.38 -
--------- ------------- --------- -------------
$ 8.44 460,357 6.37 113,786
*Exercise prices are denominated in British pounds and have been
converted at a rate of $1.507 USD/GBP.
Note J - Fair Value Measurements
ASC 820 requires enhanced disclosures regarding the assets and
liabilities carried at fair value. The pronouncement establishes a
fair value hierarchy such that "Level 1" measurements include
unadjusted quoted market prices for identical assets or liabilities
in an active market, "Level 2" measurements include quoted market
prices for identical assets or liabilities in an active market
which have been adjusted for items such as effects of restrictions
for transferability and those that are not quoted but observable
through corroboration with observable market data, including quoted
market prices for similar assets, and "Level 3" measurements
include those that are unobservable and of a highly subjective
measure. The Company utilizes the market approach for recurring
fair value measurements of its oil and gas hedges. The following
table sets forth, by level within the fair value hierarchy, the
Company's financial assets and liabilities that are accounted for
at fair value on a recurring basis as of June 30, 2010. As required
by ASC 820, financial assets and liabilities are classified in
their entirety based on the lowest level of input that is
significant to the fair value measurement:
Significant
Market Prices Other Significant
for Identical Observable Unobservable
Items (Level Inputs (Level Inputs (Level
1) 2) 3) Total
------------- ------------- ------------- ---------
Assets:
Oil and Gas
Hedges - - - $ -
Total Assets - - - $ -
------------- ------------- ------------- ---------
Liabilities:
Oil and Gas
Hedges - 1,644,015 - $1,644,015
Total
Liabilities - 1,644,015 - $1,644,015
------------- ------------- ------------- ---------
Total Net
Liabilities - 1,644,015 - $1,644,015
============= ============= ============= =========
The carrying amounts of the Company's cash and cash equivalents,
receivables and payables approximate the fair value at June 30,
2010 and 2009 because of their short-term maturities. The carrying
amounts of the Company's debt instruments at June 30, 2010 and 2009
approximate their fair values due to the interest rates being at
market.
Note K - Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax provisions. The Company's income tax expense (benefit) is
composed of the following:
Years Ended June 30,
------------------------
2010 2009
---------- --------
Current income tax expense
Federal $ - $ -
State 2,458 -
---------- --------
Total current tax expense 2,458 -
Deferred income tax expense
Federal - -
State - -
---------- --------
Total deferred tax expense - -
---------- --------
Total income tax expense $ 2,458 $ -
========== ========
The significant components of the Company's deferred tax assets
and liabilities at June 30, 2010 June 30, 2009 are as follows:
Years Ended June 30,
------------------------
2010 2009
---------- ----------
Current
Deferred tax
assets:
Unrealized loss on commodity
derivatives $ 332,744 $ 98,632
Allowance for
doubtful
accounts 92,500 -
Inventory
impairment 117,812 117,812
---------- ----------
Total current
deferred tax
assets 543,056 216,444
Less valuation
allowance (304,780) (87,891)
Net current
deferred tax
assets $ 238,276 $ 128,553
========== ==========
Long-Term
Deferred tax
assets:
Deferred
compensation
expense $ 1,477,693 $ 1,518,055
Net operating loss
carryovers 6,782,687 5,774,952
Unrealized loss on commodity
derivatives 275,542 747,288
Amortization of
loan costs - 198,534
---------- ----------
Total long-term
deferred tax
assets 8,535,922 8,238,829
Less valuation
allowance (4,790,636) (3,345,543)
---------- ----------
Net long-term
deferred tax
assets 3,745,286 4,893,286
Deferred tax
liabilities:
Depreciation, depletion and
amortization (3,983,562) (5,021,839)
Total long-term
deferred tax
liabilities (3,983,562) (5,021,839)
---------- ----------
Net long-term
deferred tax
liabilities $ (238,276) $ (128,553)
========== ==========
Note K - Income Taxes (Continued)
The following reconciles our income tax expense to the amount
calculated at the statutory federal income tax rate:
Years Ended June 30,
------------------------
2010 2009
---------- ----------
Income tax expense (benefit) at
statutory rate $(2,864,279) $ 948,649
State taxes, less federal benefit (163,279) 52,868
Deferred tax benefit recorded on
conversion to corporation - (4,411,495)
Income attributable to period as
a partnership - (26,204)
Reversal of benefit recorded on
deferred compensation 1,358,909 -
Change in valuation allowance 1,661,982 3,433,434
Permanent and other 9,125 2,748
Income tax expense $ 2,458 $ -
========== ==========
At June 30, 2010 and June 30, 2009, the Company had net
operating loss ("NOL") carryforwards for federal income tax
purposes of approximately $18.3 million and $7.9 million,
respectively. The NOLs will expire between 2029 and 2030.
A valuation allowance has been established with respect to the
excess of the Company's deferred tax assets over its deferred tax
liabilities at June 30, 2010 and June 30, 2009 because such net
deferred tax assets do not meet the deferred tax asset realization
criteria set forth in ASC 740 that it is more likely than not that
the Company will realize a benefit of these net deferred tax assets
in future periods.
The Company adopted ASC 740-10-25 for the twelve months ended
June 30, 2009 as described in Note B. The adoption did not have an
impact on the financial statements of the Company. There were no
changes in unrecognized tax benefits during the 12 months ended
June 30, 2010 or June 30, 2009. All tax benefits recognized relate
to tax positions for which the ultimate deductibility is highly
certain but for which there is uncertainty about the timing of such
deductions.
The Company files income tax returns in the U.S. (federal and
state jurisdictions). Tax years 2007 to 2009 remain open for all
jurisdictions. However, for the 2007 tax year, and the tax period
from January 1, 2008 to July 10, 2008, the Company was a
partnership for federal and New Mexico income tax purposes.
Therefore, for those tax periods, any adjustments to the Company's
taxable income would flow through to Resaca's partners in those
jurisdictions. The Company's accounting policy is to recognize
interest and penalties, if any, related to unrecognized tax
benefits as income tax expense. The Company does not have an
accrued liability for interest and penalties at June 30 2010.
Note L - Stockholders' Equity
As described in Note A, the Company converted from a partnership
to a corporation on July 10, 2008. As such, partners' capital was
converted to stockholders' equity. At June 30, 2010, stockholders'
equity was composed of the following:
Common Stock ($.01 par
value) $ 193,895
Additional Paid-in Capital 95,105,080
Accumulated Deficit (17,794,896)
-------------
Total Stockholders' Equity $ 77,504,079
=============
On June 23, 2010, the Board of Directors approved a one for five
reverse stock split effective June 24, 2010. At June 30, 2010, the
Company had 46,000,000 common shares authorized and 19,389,456
shares issued and outstanding.
Note M - Employee Benefit Plans
Under the Resaca Exploitation, Inc 401(k) Plan (the "Plan")
established in fiscal year 2009, contributions are made to the Plan
by qualified employees at their election and our matching
contributions to the Plan are made at specified rates. Our
contribution to the Plan for the years ended June 30, 2010 and 2009
was $34,094 and $16,043, respectively.
Note N - Liquidity
As of June 30, 2010, the Company had cash and cash equivalents
of $481 853 and a working capital deficit of $1,417,887. The
Company had fully drawn on the amounts available under the CIT
Facility at June 30, 2010. Subsequent to June 30, 2010, the Company
received financing commitments related to the Chambers Facility and
the Regions Facility (See Note E). Management believes the
financing from these two sources will provide the Company with
working capital and borrowing capacity to fund the Company's
operations and the development of the Company's reserves for the
next twelve months.
Note O - Subsequent Events
On September 2, 2010, Cano filed an action against Resaca in the
Tarrant County District Court seeking a declaratory judgment to
clarify the scope and determine the amount of any expenses that are
reimbursable by Cano under the Cano merger agreement (see Note
C).
See Note E related to the commitment letters received related to
the Chambers Facility and the Regions Facility.
Note P - Supplementary Financial Information for Oil and Gas
Producing Activities (unaudited)
The Company has interests in oil and natural gas properties that
are principally located in Texas and New Mexico. The Company does
not own or lease any oil and natural gas properties outside the
United States.
The Company retains independent engineering firms to provide
year-end estimates of the Company's future net recoverable oil and
natural gas reserves. Estimated proved net recoverable reserves as
shown below include only those quantities that can be expected to
be commercially recoverable. Estimated reserves for the year ended
June 30, 2010 were computed using benchmark prices based on the
unweighted arithmetic average of the first-day-of-the-month prices
for oil and natural during each month of the fiscal year ended June
30, 2010, as required by SEC Release No. 33-8995 "Modernization of
Oil and Gas Reporting" effective for fiscal years ending on or
after December 31, 2009, while estimated reserves for the fiscal
years ended June 30, 2008 and 2009 were based on oil and natural
gas spot prices as of the end of the period presented. Costs were
estimated using costs in effect at the balance sheet dates under
existing regulatory practices and with conventional equipment and
operating methods.
Proved oil and gas reserves are those quantities of oil and 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.
Proved developed reserves represent only those reserves expected
to be recovered through existing wells. Proved undeveloped reserves
include those reserves expected to be recovered from new wells on
undrilled acreage or from existing wells on which a relatively
major expenditure is required for re-completion.
Note P - Supplementary Financial Information for Oil and Gas
Producing Activities (unaudited) (Continued)
Costs Incurred in oil and natural gas producing activities are
as follows:
Years ended June 30,
-----------------------------------
2010 2009 2008
---------- ---------- ---------
Acquisition of proved properties $ - $ 7,000,000 $ -
Acquisition of unproved
properties - - -
Development costs 4,381,933 12,987,934 4,442,717
Exploration costs - - -
Total costs incurred $4,381,933 $19,987,934 $4,442,717
The following reserves data only represent estimates and should
not be construed as being exact.
Natural Total Reserves
Proved Reserves Oil (bbl) Gas (mcf) BOE
---------------------------- ---------- ---------- --------------
June 30, 2007 14,511,330 18,477,360 17,590,890
Revision of prior estimates 432,254 784,432 562,993
Extensions, discoveries and
other additions - - -
Improved recovery - - -
Production (212,004) (320,952) (265,496)
Purchases - - -
Sales - - -
---------- ---------- --------------
June 30, 2008 14,731,580 18,940,840 17,888,387
Revision of prior estimates (2,795,448) (5,639,312) (3,735,333)
Extensions, discoveries and
other additions - - -
Improved recovery - - -
Production (189,276) (286,790) (237,074)
Purchases 220,974 284,113 268,326
Sales - - -
---------- ---------- --------------
June 30, 2009 11,967,830 13,298,851 14,184,305
Revision of prior estimates 556,830 (360,093) 496,815
Extensions, discoveries and
other additions - - -
Improved recovery - - -
Production (194,070) (243,168) (234,598)
Purchases - - -
Sales - - -
---------- ---------- --------------
June 30, 2010 12,330,590 12,695,590 14,446,522
Proved developed reserves,
June 30, 2008 9,211,610 12,825,430 11,349,182
Proved developed reserves,
June 30, 2009 6,722,220 7,501,841 7,972,527
Proved developed reserves,
June 30, 2010 6,978,160 6,855,640 8,120,767
Note P - Supplementary Financial Information for Oil and Gas
Producing Activities (unaudited) (Continued)
Resaca Reserve Explanation:
For the reserves at June 30, 2009, the reduction for revisions
of prior estimates pertain to reductions in estimated recoverable
PDNP reserves at our Cooper Jal Complex Unit of 1,274 MBOE and
other revisions of 2 461 MBOE related to the decline of commodity
prices and forecast changes which reduce the economic life of our
assets, as compared to proved reserves as of June 30, 2009. The
specific field changes are as follows:
-- At the Cooper Jal Complex, PDP reserves decreased 652 MBOE
due to commodity related price effects and production performance
and was offset by a shift of 272 MBOE of reserves from the PUD
category (net reduction of 380 MBOE). PDNP reserves decreased 1,274
MBOE due to a decrease in expected production rate based on
performance. PUD reserves decreased 272 MBOE due to the drilling of
4 wells now contained in the PDP category and commodity related
price effects.
-- At the Penwell Complex, PDP reserves decreased 264 MBOE, PDNP
reserves decreased 880 MBOE, and PUD reserves decreased by 11 MBOE
due to commodity related price effects.
-- At the Grand Clearfork Unit, PDP reserves decreased 110 MBOE,
PDNP reserves decreased by 6 MBOE, and PUD reserves decreased by 12
MBOE due to commodity related price effects.
-- At Resaca's Minor Properties, PDP reserves decreased 416
MBOE, PDNP reserves decreased by 77 MBOE, and PUD reserves
decreased by 33 MBOE due to commodity related price effects.
For the reserves at June 30, 2010, revisions of prior estimates
provided an increase of 496 MBOE to total proved reserves. Forecast
changes provided an overall increase of 383 MBOE, while extended
economic limits provided an increase of 113 MBOE.
The specific field forecast changes are as follows:
-- At the Cooper Jal Complex, total proved reserves increased by
196 MBOE. This was comprised of a PDP increase of 534 MBOE due to
commodity related price effects and production performance. This
was offset by a decrease of 416 MBOE in the PDNP category due to
forecast revisions and well activity, while PUD reserves increased
78 MBOE due to forecast revisions.
-- At the Penwell Complex, total proved reserves increased 117
MBOE due to forecast revisions. PDP reserves decreased 82 MBOE,
PDNP reserves increased 177 MBOE due to the addition of six wells,
and PUD reserves increased 22 MBOE due to forecast revisions.
-- At the McElroy Field, PDP reserves increased 59 MBOE based on
forecast revisions.
-- At the Kermit Field, proved reserves decreased by 26 MBOE.
PDP reserves decreased 42 MBOE based on forecast revisions, while
PDNP reserves increase by 16 MBOE due to wells requiring
workovers.
-- At Resaca's remaining minor fields, proved reserves increased
by 37 MBOE based on forecast revisions.
Note P - Supplementary Financial Information for Oil and Gas
Producing Activities (unaudited) (Continued)
Future Net Cash Flows:
The following table sets forth unaudited information concerning
future net cash flows for oil and gas reserves, net of income tax
expense. Income tax expense has been computed using expected future
tax rates and giving effect to tax deductions and credits
available, under current laws, and which relate to oil and gas
producing activities.
2010 2009 2008
------------ ------------ --------------
Future cash inflows $969,357,000 $861,425,080 $2,241,462,860
Future production costs 248,093,970 240,965,980 439,477,990
Future development costs 97,930,260 97,151,200 115,869,740
Future income tax expenses 193,329,417 154,507,384 578,932,022
Future net cash flows 430,003,353 368,800,516 1,107,183,108
10% annual discount
for estimating
timing of cash flows 262,692,278 232,638,214 661,406,827
Standarized measure
of discounted
future net cash flows $167,311,075 $136,162,302 $ 445,776,281
Transition Impact of Application of New Oil and Gas Rules
In addition to reporting the Company's reserves using the first
day of the month average prices for the fiscal year ended June 30,
2010, as required by SEC regulations, for comparative purposes we
are presenting an alternate price case using June 30, 2010 prices
of $75.63 per barrel and $4.62 per thousand cubic feet, consistent
with SEC guidelines in effect for the years ended June 30, 2009 and
prior years. June 30, 2010 oil prices were below the
first-day-of-the-month average prices of $75.76 per barrel while
June 30, 2010 gas prices were above the first-day-of-the month
average prices of $4.10 per thousand cubic feet.
The table below reflects the Company's June 30, 2010 proved
reserve quantities using June 30, 2010 year end pricing:
Natural Total Reserves
Oil (bbl) Gas (mcf) BOE
----------- ----------- ---------------
Proved developed producing 2,309,570 2,246,180 2,683,933
Proved developed non
producing 4,675,960 4,651,780 5,451,257
Proved undeveloped 5,352,610 5,840,170 6,325,972
----------- ----------- ---------------
Total Proved 12,338,140 12,738,130 14,461,162
Developed 6,985,530 6,897,960 8,135,190
% Developed 57% 54% 56%
Applying the prior fiscal year's methodology of using June 30,
2010 prices, the Company's proved reserves at June 30, 2010 would
have reflected an increase of 2% over June 30, 2009 levels.
Additionally, there was no change in barrels of oil equivalent of
proved undeveloped reserves due to the SEC's new five-year
scheduling rule.
Note P - Supplementary Financial Information for Oil and Gas
Producing Activities (unaudited) (Continued)
Changes in Standardized Measure of Discounted Future Net Cash
Flows:
2010 2009 2008
------------ ------------- ------------
Balance, beginning
of year $136,162,302 $ 445,776,281 $ 186,467,558
Net changes in
prices and
production
costs 31,397,849 (422,942,878) 371,126,029
Net changes in
future development
costs (4,669,565) 1,582,866 (10,217,019)
Sales of oil and
gas produced, net (8,948,939) (7,531,296) (11,551,997)
Purchases of
reserves - 9,746,378 -
Sales of reserves - - -
Extensions and
discoveries - - -
Revisions of
previous quantity
estimates 9,157,783 (65,785,772) 21,998,842
Previously
estimated
development
costs incurred 4,381,934 5,953,630 4,442,717
Net change in
income taxes (17,108,769) 168,296,809 (143,294,423)
Accretion of
discount 19,320,691 67,886,705 27,135,322
Timing differences
and other (2,382,211) (66,820,421) (330,748)
Balance, end of
year $167,311,075 $ 136,162,302 $ 445,776,281
Note Q - Director Compensation
During the year ended June 30, 2010, Resaca directors J.P.
Bryan, Judy Ley Allen, Richard Kelly Plato, and John William Sharp
Bentley each received director's fees in the amount of $50,000. No
equity grants were made and no salaries, bonuses or pension
contributions were paid to or for the benefit of any Resaca
directors during the year ended June 30, 2010.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR KKBDKOBDDDBB
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