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XTOG > SEC Filings for XTOG > Form 10-Q on 20-Aug-2012All Recent SEC Filings

Show all filings for XTREME OIL & GAS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for XTREME OIL & GAS, INC.


20-Aug-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q (the "Report") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Discussions containing such forward-looking statements may be found in Part I. Items 2 and 3 hereof, as well as within this Report generally. All statements, other than statements of historical facts, concerning, among other things, planned capital expenditures, potential increases in oil and natural gas production, the number and location of wells to be drilled in the future, future cash flows and borrowings, pursuit of potential acquisition opportunities, our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. These forward-looking statements are identified by their use of terms and phrases such as "may," "expect," "estimate," "project," "plan," "believe," "intend," "achievable," "anticipate," "will," "continue," "potential," "should," "could" and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. One should consider carefully the statements under the "Risk Factors" section of our Annual Report on Form 10-K filed with the SEC (the "Form-10K"), which describe factors that could cause our actual results to differ from those anticipated in the forward-looking statements, including, but not limited to, the following factors:

our ability to successfully develop our undeveloped acreage primarily held in Texas;

volatility in commodity prices for oil and natural gas;

the possibility that the industry may be subject to future regulatory or legislative actions (including any additional taxes and changes in environmental regulation);

the presence or recoverability of estimated oil and natural gas reserves and the actual future production rates and associated costs;

the potential for production decline rates for our wells to be greater than we expect;

our ability to generate sufficient cash flow from operations, borrowings or other sources to enable us to fully develop our undeveloped acreage positions;

our ability to replace oil and natural gas reserves;

environmental risks;

drilling and operating risks;

exploration and development risks;

competition, including competition for acreage in resource-style areas;

management's ability to execute our plans to meet our goals;

our ability to retain key members of senior management and key technical employees;

our ability to obtain goods and services, such as drilling rigs and tubulars, and access to adequate gathering systems and pipeline take-away capacity, necessary to execute our drilling program;

our ability to secure firm transportation for natural gas we produce and to sell natural gas at market prices;

general economic conditions, whether internationally, nationally or in the regional and local market areas in which we do business, may be less favorable than expected, including the possibility that the economic recession and credit crisis in the United States will be prolonged, which could adversely affect demand for oil and natural gas and make it difficult to access financial markets;

continued hostilities in the Middle East and other sustained military campaigns or acts of terrorism or sabotage; and

other economic, competitive, governmental, legislative, regulatory, geopolitical and technological factors that may negatively impact our business, operations or pricing.

Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in the section entitled "Risk Factors" included in the Form 10-Q. All forward-looking statements are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this document. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. - continued

Overview

Xtreme Oil & Gas, Inc. is a growing independent energy company focused on the acquisition, development, ownership, operation and investment in energy-related businesses and assets, including, without limitation, the acquisition, exploration and development of natural gas and crude oil, and other related businesses which management believes have potential for improved production rates and resulting income by application of both conventional and non-conventional improvement and enhancement techniques. As of June 30, 2012 we own working interests in over 10,000 acres of oil and gas leases in Kansas, Texas and Oklahoma that now include 10 gross producing wells and 55 gross non-producing wells. Xtreme plans to pursue an ongoing reworking and drilling program to increase production from its properties.

During the second quarter 2012, the Saltwater Disposal well project was placed into full time operations. We acquired a 10% working interest from the ADA Energy Services and took over operations on May 29, 2012 in exchange for a 5 cent per barrel of water disposed fee payable upon collecting revenue from disposal customers.

Our revenues are derived from the sale of oil and gas products and sale of interests, principally in drilling programs. In 2008 we derived a small amount of revenue from contract drilling on one project, the Oil Creek, but have no plans to engage in contract drilling in the future.

When we sell working interests in our leases, we maintain a deposits payable liability and recognize revenue as the development related to the working interest is completed. After completion, costs incurred to maintain wells and related equipment and lease and well operating costs are charged to expense as incurred.

We have been an operating company since 2006 with the acquisition of Emerald Energy and have had revenues from operations for more than four years.

Results of Operations.

For the Six Months Ended June 30, 2012 compared to 2011

Revenues

For the six months ended June 30, 2012, revenue was $1,079,315 a decrease of approximately $1,192,000 from $2,271,223 for the six months ended June 30, 2011. Decrease in revenue was due primarily to the difference in the income from sale of working interest for the six months ended June 30, 2012. Oil and gas revenues are principally from the Texas Five Star project. Oil and gas revenues were essentially flat due to several equipment failures that required repair.

Expenses

Oil production costs for the six months ended June 30, 2012 totaled $35,886, a decrease of approximately $58,000 from $93,832 for the six months ended June 30, 2011. The decrease is due to reduced production costs on all of our properties. Production costs exceeded oil and gas revenues in 2011 because of higher costs of maintenance and continued additional operations to increase future production on certain wells in Texas. Oil and gas production costs are principally from the Texas Five Star project.

General and administrative expenses totaled $747,108 for the six months ended June 30, 2012, a decrease of approximately $181,000, from $928,162 for the six months ended June 30, 2011. These general and administrative expense differences are largely driven by costs of professional services.

Other Income/(Expenses)

Gain on Settlement relates to the net cost recovery after expenses for litigation and repairs incurred by the Company from the damages to the Lionheart well totaled $927,771 for the six months ended June 30, 2012, an increase of $927,771 from the six months ended June 30, 2011. We expect to use the remaining proceeds of these settlements to redevelop the property and attempt to produce oil from other depths in an undamaged part of the wellbore.


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. - continued

Other income and expense are largely driven by our debt offering in September 2011. Amortization of debt discount and interest expense totaled almost $673,832. Derivative income related to the convertible debt and warrants issued in the offering was $1,425,209 for the period ended June 30, 2012. This income, a non-cash charge, is particularly volatile as we incurred, for example, derivative expense of $32,087 in period ended June 30, 2011 related to another debt offering during that period.

Net Income

For the six months ended June 30, 2012, we had a net income of $1,772,884 compared with net income of $1,149,045 for six months ended June 30, 2011. This increase in net income was due primarily to gain on settlement of litigation and non-cash derivative income related of convertible debt instruments during the period ended June 30, 2012.

For six months ended June 30, 2012 and 2011, our earnings per share, on a basic and diluted basis, was and $0.04 and $0.03, respectively.

For the Three Months Ended June 30, 2012 compared to 2011 Revenues

For the three months ended June 30, 2012, revenue was $187,465, a decrease of approximately $1,066,000 from $1,253,968 for the three months ended June 30, 2011. The decrease was principally due to a reduction in income from working interest sales. Revenue for oil sales for the three months ended June 30, 2012 was $25,710.

Currently, most of our revenues have come from the sale of working interest in our oil and gas properties, such sales reflecting approximately 86% of our revenues in the second quarter of 2012 and approximately 97% of our revenues in the second quarter of 2011.

Expenses

Oil production costs for the three months ended June 30, 2012 totaled $24,203, a decrease of approximately $9,000 from $33,291 for the three months ended June 30, 2011. The decrease is due to reduced maintenance activities on all of our properties. Workover costs of $43,425 incurred in the first quarter, 2012 were reclassified to Work in Process in second quarter.

General and administrative expenses totaled $336,858, for the three months ended June 30, 2012, a decrease of approximately $100,000, from $436,703 for the three months ended June 30, 2011. This decrease in general and administrative expense is largely driven by decrease in expenses for professional services delivered. These expenses, incurred in 2012, included salaries, utilities and rent, consulting fees, and presentation fees.

Other Income/(Expenses)

Other income and expense are largely driven by our debt offering in September 2011. Amortization of debt discount and interest expense totaled approximately $316,000. Derivative income related to the convertible debt and warrants issued in the offering was $2,508,557 for the quarter. This income, a non-cash charge, is particularly volatile as we incurred, for example, derivative expense of approximately $32,000 in the three months ended June 30, 2011 related to another debt offering during that period.

Net Income

For the three months ended June 30, 2012, we had net income of $2,027,846 compared to income of $694,486 for the three months ended June 30, 2011. This change in net income was primarily due to accounting charges taken for derivative instruments during the period ended June 30, 2012. Our income from operations declined in the second quarter of 2012 to a loss of $165,835 from income of $771,814 in the second quarter of 2011. The decline in operating income essentially reflects the decline in working interest revenue and increased general and administrative expenses.

For the three months ended June 30, 2012 and 2011 our earnings per share on a basic and diluted basis was $0.04 and $0.02, respectively.


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. - continued

Liquidity and Capital Resources

Our plan is for our field operations to provide sufficient liquidity for daily operating capital and further development. The most advanced project is the Gotcheye Saltwater Disposal Well which commenced operations in June of this year. For the 15 days in June which the facility was operational, we received an average of 500 barrels of water per day and averaged a recovery of 2% of oil. The well has a capacity of 15,000 barrels of water per day.

Financing Plans

On June 8, three of our executives and one Director sold back working interest in the Saltwater Disposal Well to the Company for $1,050,720 and the Company subsequently resold that interest for $1,212,475. See Note 7 for further detail.

In June we signed an agreement with the RO Financial Group that will give us access to a $20,000,000 line of credit facility. One director and an officer advanced the company $250,000 of the $325,000 placement fee required to commence the loan process. See Note 3. This financing has not yet closed as of the date of this filing.

Cash flow provided by operations was $597,603 for the six months ending June 30, 2012. Cash flow used in investing activities was $847,842 for the six months ended June 30, 2012. Cash flow used by financing activities was $218,896 for the six months ended June 30, 2012..

Deposits payable at June 30, 2012 include $230,000 for the Ellenberger Two well Project in process at June 30, 2012 which will be completed in third quarter of 2012 and $359,000 for the second well in the Smoky Hill Two Well Project to be drilled in the future.

The Saltwater Disposal project, completed in second quarter of 2012, is actively accepting water from customers. Gross charges to customers for the month of June, 2012 were $9,644 and $5,963 for July 1 through August 15, 2012. Revenue from sale of working interests in the Salt Water Disposal Project in second quarter was $1,212,475 with related costs of sale from acquisition of interests from related parties of $1,050,720.

Development is continuing on the first well on the Smoky Hill Project. During second quarter of 2012 frac fluid continued to be pumped off and the well encountered operational problems when a casing pipe developed a leak and contaminated the hole. The wellbore has been cleaned but residual problems continue, problems that we anticipate will abate as we gain production during the third quarter.

Convertible notes payable are presented net of debt discount. Principal balance at June 30, 2012 was $1,787,305. Debt discount at June 30, 2012 was $1,525,516. Refer to Note 5 to the Financial Statements. The Company delayed scheduled payments on the convertible notes for the months of June, July and August 2012. This resulted in a default on the note agreement. Interest is being accrued at a rate of 18% as a result of the default.

Gain on Settlement related to the Lionheart Project includes debt forgiveness from vendors balances related to the project of $432,617 which accounts for a major part of the reduction in accounts payable.

As of June 30, 2012, we are unable to determine whether we will generate sufficient cash from our oil and gas operations to fund our operations for the next twelve months. Although we expect cash flow from operations to rise as our operations improve and the number of projects we successfully develop grows, we believe that we will raise, probably through the private placement of equity securities, additional capital to assure we have the necessary liquidity for 2012.

Our cash requirements, mostly for corporate expenses, are projected to be approximately $80,000 per month or $960,000 for the next 12 months, and our drilling activity has been funded from drilling programs. Revenue from existing oil production is not yet consistent on a monthly basis, and we cannot predict whether our cash flows from the future completion of our current drilling operations and Saltwater Disposal Well will be sufficient to meet our monthly cash requirements.

To continue with our business plan including the funding of operations, we may require additional capital to develop properties and believe that we will continue to raise capital and generate revenue by selling interest in prospects to investors through drilling programs and through future offerings of equities.


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. - continued

If required, our ability to obtain additional financing from other sources also depends on many factors beyond our control, including the state of the capital markets and the prospects for business growth. The necessary additional financing may not be available or may be available only on terms that would result in excessive further dilution to the current owners of our common stock or at unreasonable costs of capital.

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