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XTOG > SEC Filings for XTOG > Form 10-Q on 14-Nov-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.


14-Nov-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 September 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 Nine Months Ended September 30, 2012 compared to 2011

Revenues

For the nine months ended September 30, 2012, revenue was $1,327,258 a decrease of approximately $1,067,000 from $2,393,989 for the nine months ended September 30, 2011. Decrease in revenue was due primarily to the difference in the gain from sale of working interest for the nine months ended September 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 nine months ended September 30, 2012 totaled $102,828, a decrease of approximately $41,000 from $144,221 for the nine months ended September 30, 2011. The decrease is due to reduced production costs on all of our properties. Production costs exceeded oil and gas revenues in 2012 and 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 $1,212,927 for the nine months ended September 30, 2012, a decrease of approximately $305,000, from $1,518,399 for the nine months ended September 30, 2011. These general and administrative expense differences are largely driven by costs of professional services.

Loss on disposal of properties totaled $233,266 for the nine months ended September 30, 2012, an increase of approximately $195,805, from $37,461 for the nine months ended September 30, 2011 due to the write off of the Oil Creek property.

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 $930,972 for the nine months ended September 30, 2012, an increase of $914,749 from the nine months ended September 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 $1,395,400 for the nine months ended September 30, 2012. Derivative income related to the convertible debt and warrants issued in the offering was $2,276,758 for the period ended September 30, 2012. This income, a non-cash charge, is particularly volatile as we incurred, for example, derivative expense of $3,420,865 in the period ended September 30, 2011 related to another debt offering during that period.

Net Income

For the nine months ended September 30, 2012, we had a net income of $1,308,908 compared with a net loss of $2,933,828 for nine months ended September 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 September 30, 2012.

For the nine months ended September 30, 2012 and 2011, our earnings per share, on a basic and diluted basis, was and $0.03 and $(0.07), respectively.

For the Three Months Ended September 30, 2012 compared to 2011

Revenues

For the three months ended September 30, 2012, revenue was $247,943, an increase of approximately $125,000 from $122,766 for the three months ended September 30, 2011. The increase was principally due to an increase in the gain from working interest sales. Revenue for oil sales for the three months ended September 30, 2012 was $9,489.

Currently, most of our revenues have come from the gains on sales of working interest in our oil and gas properties, such sales reflecting approximately 96% of our revenues in the third quarter of 2012 and approximately 94% of our revenues in the third quarter of 2011.

Expenses

Oil production costs for the three months ended September 30, 2012 totaled $66,942, an increase of approximately $16,000 from $50,389 for the three months ended September 30, 2011. The increase is due to maintenance activities on all of our properties.

General and administrative expenses totaled $465,819, for the three months ended September 30, 2012, a decrease of approximately $124,000, from $590,237 for the three months ended September 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.

Loss on disposal of properties totaled $204,649 for the three months ended September 30, 2012, an increase of approximately $183,406, from $21,603 for the three months ended September 30, 2011 due to the write off of the Oil Creek property.

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 $721,568 for the three months ended September 30, 2012. Derivative income related to the convertible debt and warrants issued in the offering was $851,549 for the quarter. This income, a non-cash charge, is particularly volatile as we incurred, for example, derivative expense of $3,388,778 in the three months ended September 30, 2011 related to another debt offering during that period.

Net Income

For the three months ended September 30, 2012, we had a net loss of $463,976 compared to a loss of $4,082,873 for the three months ended September 30, 2011. This change in net loss was primarily due to accounting charges taken for derivative instruments during the period ended September 30, 2012. Our losses from operations increased in the third quarter of 2012 to a loss of $597,158 from a loss of $542,745 in the third quarter of 2011. The increased operating loss essentially reflects the increase in loss on disposal of properties, depreciation, depletion and amortization expenses, and production costs, partially offset by the increase in working interest revenue and lower general and administrative expenses.

For the three months ended September 30, 2012 and 2011, our loss per share on a basic and diluted basis was $0.01 and $0.09, respectively.


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

Liquidity and Capital Resources

Our first audited financial statements were for fiscal years 2008 and 2009 and had a going concern qualification. The audit for fiscal 2010 and 2011 had the same qualification.

Our plan has been for our field operations to provide sufficient liquidity for daily operating capital and further development. We have also sold working interests in our properties and incurred debt to also provide capital to acquire properties and develop them when the cash flow from those operations would sustain our operations and provide for growth. Though each of our properties indicate significant reserves or potential, currently all of our properties need additional capital to develop, and we have failed to make payments on indebtedness incurred in September 2011, indebtedness in which we are in default.

In need of capital to develop properties and expand, in June 2012 we pursued several funding opportunities based on the belief that the assets owned, if developed, would satisfy our current operating and development needs and provide for our growth. With a $325,000 deposit advanced by affiliates of the company, we obtained a commitment for a $20,000,000 debt instrument with a close indicated in the early summer 2012 from the RO Financial Group. Two other discussions we chose not to pursue would have resulted in significant dilution or debt and warrants that would not be beneficial.

Although we have been assured both verbally and in writing that the funding by the RO Financial Group engaged in June of this year remains imminent, we began to pursue various alternatives to that financing. Our plan is to bring to fruition one or more of these plans as soon as possible to continue to develop our existing properties, and expand our business, probably in the development of the salt water disposal business.

Financing Plans

On June 8 2012, 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 to the consolidated financial statements for further detail.

As discussed above, in June 2012, 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 to the consolidated financial statements. This financing has not yet closed as of the date of this filing.

Cash flow provided by operations was $785,907 for the nine months ending September 30, 2012. Cash flow used in investing activities was $1,095,634 for the nine months ended September 30, 2012. Cash flow used by financing activities was $173,896 for the nine months ended September 30, 2012.

Deposits payable at September 30, 2012 include $335,000 for the Smoky Hill Two well Project in process at September 30, 2012.

The Saltwater Disposal project, completed in the second quarter of 2012, was accepting water from customers for the entire quarter and is now shut in awaiting a larger pump to be installed. Gross charges to customers for the third quarter were approximately $16,500.

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 fourth quarter.

Convertible notes payable are presented net of debt discount. Principal balance at September 30, 2012 was $1,787,305. Unamortized debt discount at September 30, 2012 was $885,038. The Company delayed scheduled payments on the convertible notes for the months of June, July, August, September, October, and November 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.

As of September 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.


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

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.

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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