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XTOG > SEC Filings for XTOG > Form 10-K on 16-Apr-2013All Recent SEC Filings

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

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


16-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This discussion highlights key information as determined by management but may not contain all of the information that is important to you. For a more complete understanding, the following should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto as of December 31, 2012 and 2011 and for each of the years ended December 31, 2012 and 2011 included in Item 8 of this Annual Report on Form 10-K.

Cautionary Information Concerning Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements about the Company's plans and anticipated results of operations and financial condition. These statements include, but are not limited to, our plans, objectives, expectations and intentions and are not statements of historical fact. When used in this report, the words expects, believes, anticipates, could, may, will, should, plan, predicts, projections, continue and other similar expressions constitute forward-looking statements, as do any other statements that expressly or implicitly predict future events, results or performance, and such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain risks and uncertainties and the Company's success in managing such risks and uncertainties could cause actual results to differ materially from those projected, including among others, the risk factors described in Item 1A of this report. These forward-looking statements speak only as of the date of this release. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. Readers should carefully review all disclosures filed by the Company from time to time with the SEC.

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 December 31, 2012 we own working interests in 10,348 acres of oil and gas leases in Texas, Kansas and Oklahoma that now include 12 gross producing wells and 55 gross non-producing wells. Xtreme is reviewing our current approach to pursuing an ongoing reworking and drilling program to increase production from its properties (See Item 1 Business and Properties Recent Events). Our revenues are derived from the sale of oil and gas products and sale of interests, principally in drilling programs.

Results of Operations

For the Year Ended December 31, 2012 compared to 2011

Revenues

For the year ended December 31, 2012, revenues were $1,339,047 compared to revenues of $2,493,873 for year ending December 31, 2011.

Sales of oil and gas in both years came from our Texas fields, the West Thrifty and Quita fields, with revenues of $64,249 in 2011 rising slightly to $68,113 in 2012. The change in revenue in 2012 is attributed to small changes in production across the Texas properties.

We recognized $1,270,934 of revenue in 2012 and $2,429,624 in 2011 from the sale of working interests in our leases. When we sell such working interests, we record cash receipts as deposits payable. As drilling on a project is completed, we decrease the liability and recognize revenue. All of our sales of working interests are sold on a turnkey basis, that is, we agree to be responsible for all costs incurred in drilling that are attributable to the working interest sold, profiting where these expenses are less than the actual expenses attributable to the working interests and absorbing costs where they exceed the amount sold.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued

Expenses

Oil production expenses totaled $137,502 and $194,848 for the years ended December 31, 2012 and 2011, respectively. The decrease in expenses related to reduced maintenance costs on the Texas fields. Loss on disposal of properties totaled $233,266 for the year ended December 31, 2012 and was directly related to our attempts to recover damages on the Lionheart property. We continued to operate the West Thrifty and Quita properties and invest in improving field operations to properly maintain and improve our production efficiency. Production costs exceeded revenues because of higher costs of maintenance and repairs. Expenses related to disposing of property increased significantly in 2012 to $233,266 from $48,356 in 2011, because the we wrote down the Flint Creek/Oil Creek property in September 2012.

General and administrative expenses totaled $1,766,403 for the year ended December 31, 2012, an increase of approximately $239,000 from $1,526,977 for the year ended December 31, 2011.

Nonetheless, we incurred significant litigation expenses in 2012, principally as we defended against the Pan American lawsuit on the Lionheart prospect. We anticipate litigation expenses to decline in 2013.

Other Income (expense)

Other income (expense) increased from $853,577 expense in 2011 to $802,850 income in 2012. Other income (expense) is comprised primarily of derivative income (expense) and amortization of debt discount and deferred finance costs. Almost all of the 2012 expense related to our debt placement in September 2011 with interest expense of $396,071, amortization of debt discount of $2,064,402, and a derivative income of $2,430,514. Offsetting these gains was a loss on extinguishment of debt of $98,163 that occurred when a portion of the proceeds from our September 2011 debt offering was converted into common stock. A portion of this gain is also attributable to payments we made in December 2012 required under the September 2011 debt. Accruals similar to that made in December 2012 will be incurred throughout 2013 as we make monthly payments on that debt.

Our derivative income (expense) is subject to wide variation from the application of the binomial model used to calculate future convertible liabilities. The embedded conversion features associated with our convertible debentures are valued based on the number of shares that are indexed to that liability. Keeping the number of shares constant, the liability associated with the embedded conversion features increases as our share price increases and, likewise, decreases when our share price decreases. Derivative income (expense) displays the inverse relationship. At the end of each quarter and when we make monthly payments on the debt, we will calculate again the Derivative income (expense). We anticipate similar wide variations in this amount with the principal reason for the fourth quarter's fluctuation being the change in the fair value of the company's stock price. An decrease in the stock price resulted in a decreased value of the embedded conversion feature (using the binomial model). See Note 2 - Significant Accounting Policies to the consolidated financial statements.

Net Loss

For the year ending December 31, 2012, we had net loss of $70,437 compared with net loss of $205,088 for 2011. The decrease in net loss in 2012 was primarily due to derivative income related to our debt placement in September 2011.

For the years ending December 31, 2012 and 2011 our loss per share on a diluted basis was $0.00.

Liquidity and Capital Resources

Cash flows provided by operations was $822,458 for the year ending December 31, 2012. We believe that for the next 12 months we will not generate sufficient cash from our oil and gas operations to fund our operations or development of our prospects and acquisitions of additional prospects. (See Item 1 Business and Properties - Recent Events).We believe that we will need to raise funds through the private placement of equity securities and sale of working interests to assure we have the necessary cash for operations and development.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued

Liquidity and Capital Resources - continued

We project that our cash requirements, mostly for corporate expenses, will be approximately $80,000 per month or $960,000 for the next 12 months, and our drilling activity has been funded from drilling programs. Drilling programs generated $1,270,934 in 2012 from the sale of working interest in a project on the West Thrifty Unit, and from a portion of the sale of working interest in the Saltwater Disposal Project. Drilling and completion work on the West Thrifty Unit and the Saltwater Disposal projects has been completed and the cash generated from the sale of these drilling programs is sufficient to complete each of these projects. The sale of working interest of $1,270,934 in 2012 was not sufficient to meet all of our cash needs and our accounts payable and accrued expenses rose from $1,789,482 in 2011 to $1,811,271 in 2012. Revenue from existing oil production is not yet consistent on a monthly basis, but we expect our cash flows from the continued operations of our Saltwater Disposal Well to improve but may not be sufficient to meet our monthly cash requirements for planned day to day operations. In addition, we have not yet contracted to acquire additional properties, and we are unable to determine the consideration required for their purchase, the cash requirements necessary to develop them, or the revenues from them if drilling is successful.

To continue with our business plan including the funding of operations, we will 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 equity or debt securities (See Item 1 Business and Properties - Recent Events).

In need of capital to develop properties and expand, in June 2012 continuing through 2013 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 remained imminent we do not believe this is a viable alternative and we began to pursue various alternatives to that financing. We sent a termination letter to the RO Financial Group in January 2013. 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 oil and gas production business.

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 9 to the consolidated financial statements for further detail.

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.

We have no plans to expand significantly our overhead and we expect that future acquisitions and development of production will be funded through private placement offerings and by selling interest in our current properties. We do not anticipate revenues to be generated in the future from contract drilling as we did on the Oil Creek property, nor do we anticipate selling interest in our current properties except through joint venture of partnership drilling programs with accredited investors.

Our West Thrifty Unit, including the Quita field, were acquired with the issuance of stock, the value of the stock comprising most of the value of our oil and gas properties. Some of our other properties, the Oil Creek, Lionheart and Saltwater disposal properties have been acquired for a relatively modest amount of cash. The rights to the Smoky Hill property were acquired with cash and we anticipate funding additional wells through working interest sales and or equity financings. We anticipate that in the future we will continue to acquire properties principally with cash and stock.

In December 2012 we signed an agreement to acquire 90% of Rick's Transport Services business to complement our saltwater disposal well business for $8,000,000 and 2,000,000 shares of restricted common stock. We engaged an investment bank to raise the funds for the acquisition and if successful it to add positive cash flow and earnings to Xtreme in 2013. We do not yet have a term sheet for financing this transaction and the agreement with Rick's Transport Services expires on April 17, 2013.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued

Significant Accounting Policies

This summary of significant accounting policies of Xtreme Oil & Gas, Inc. (the "Company") is presented to assist in understanding the Company's financial statements. The consolidated financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the consolidated financial statements. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. In response to SEC Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," described below are certain of these policies that are likely to be of particular importance to the portrayal of Xtreme's financial position and results of operations and require the application of significant judgment by management. Xtreme will analyze estimates, including those related to oil and gas revenues, reserves and properties, as well as goodwill and contingencies, and base its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. You should expect the following critical accounting policies will affect management's more significant judgments and estimates used in the preparation of Xtreme's financial statements.

Use of Estimates

Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. The Company evaluates its estimates and assumptions on a regular basis. Actual results may differ from these estimates and assumptions used in preparation of its financial statements and changes in these estimates are recorded when known.

Significant estimates with regard to these financial statements include the estimate of (See Note 14), asset retirement obligations, income taxes and contingency obligations including legal and environmental risks and exposures.

Oil and Natural Gas Properties

The Company uses the successful efforts method of accounting for its oil and natural gas properties. Costs incurred by the Company related to the acquisition of oil and natural gas properties and the cost of drilling successful wells are capitalized. Costs incurred to maintain wells and related equipment and lease and well operating costs are charged to expense as incurred. Gains and losses arising from sales of properties are included in income. Unproved properties are assessed periodically for possible impairment. The Company had $0 of non-producing properties as of December 31, 2012 and 2011.

Capitalized amounts attributable to oil and natural gas properties are depleted by the unit-of-production method. Depletion expense for oil and natural gas producing property was $2,884 and $6,951 for the years ended December 31, 2012 and 2011, respectively.

Capitalized costs are evaluated for impairment based on an analysis of undiscounted future net cash flows. If impairment is indicated, the asset is written down to its estimated fair value based on expected future discounted cash flows. See Note 5 for additional information regarding the oil and gas properties.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued

Asset Retirement Obligations

The asset retirement obligations represent the estimated present value of the amounts expected to be incurred to plug, abandon, and re-mediate the producing properties at the end of their productive lives, in accordance with state laws, as well as the estimated costs associated with the reclamation of the surrounding property. The Company determines the asset retirement obligations by calculating the present value of estimated cash flows related to the liability. The asset retirement obligations are recorded as a liability at the estimated present value as of the asset's inception, with an offsetting increase to producing properties. The Company has recorded a liability of $300,000 as of December 31, 2012 and 2011.

The estimated liability is determined using significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of wells, and a risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligations. Revisions to the asset retirement obligations are recorded with an offsetting change to producing properties, resulting in prospective changes to depletion and depreciation expense and accretion of the discount. Because of the subjectivity of assumptions and the relatively long lives of most of the wells, the costs to ultimately retire the Company's wells may vary significantly from prior estimates.

Accounting for the Impairment of Long-Lived Assets (Non Oil and Gas Properties)

Accounting for the Impairment or Disposal of Long-Lived Assets requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to the undiscounted cash flow that the asset or asset group is expected to generate. If such assets or asset groups are considered to be impaired, the loss recognized is the amount by which the carrying amount of the property, if any, exceeds its fair market value, for non oil and gas properties.

The Company determined that there was no impairment of long-lived (non oil and gas property) assets for the years ended December 31, 2012 and 2011, respectively.

Revenue Recognition

The Company recognizes revenue when it is realized and earned. Specifically, the Company recognizes revenue when services are performed and projects are completed and accepted by the customer.

Revenues from sales of crude oil and natural gas products are recorded when deliveries have occurred and legal ownership of the commodity transfers to the purchaser. Revenues from the production of oil and natural gas properties in which the Company shares an undivided interest with other producers are recognized based on the actual volumes sold by the Company during the period.

The Company recognizes gains or losses from the sales of its interests in oil and natural gas properties as title passes to the buyer. These amounts are recognized as income from asset sales, net.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued

Derivative Instruments

The Company's debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.

The identification of, and accounting for, derivative instruments is complex. Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur. For bifurcated conversion options that are accounted for as derivative instrument liabilities, we determine the fair value of these instruments using binomial option pricing model. That model requires assumptions related to the remaining term of the instrument and risk-free rates of return, our current Common Stock price and expected dividend yield, and the expected volatility of our Common Stock price over the life of the option.

In connection with the issuance of the Notes and Warrants, the conversion features are accounted for as derivative liabilities at the date of issuance and adjusted to fair value through earnings at each reporting date, due to anti-dilution reset features. The fair value was estimated on the date of grant using a binomial option-pricing model using the following weighted-average assumptions: expected dividend yield of 0%; expected volatility of 290%; risk-free interest rate of 0.05% and an expected holding period of 24 months for the Notes and 60 months for the Warrants. The resulting values, at the date of issuance, were allocated to the proceeds received and applied as a discount to the face value of the Notes and Warrants. The Company recorded a derivative expense on the Notes of $649,212 at inception and a further derivative expense on the Warrants of $2,431,437 at inception.

In regards to the September 12, 2011 Note, the Company recognized a derivative liability of $1,484,806 at December 31, 2011 and a change in fair value of $(682,150) for the year ended December 31, 2012, and redemptions of $575,586 for the year ended December 31, 2012 resulting in a derivative liability of $227,070 at December 31, 2012.

In regards to the September 12, 2011 Warrants, the Company recognized a derivative liability of $1,253,018 at December 31, 2011 and a change in fair value of $($1,074,615) for the year ended December 31, 2012, resulting in a derivative liability of $178,403 at December 31, 2012.

The Company delayed scheduled payments on the convertible notes for the months of June, July, August, September, October, November, and December 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.

Stock-Based Compensation

The Company accounts for stock-based compensation using the fair value method which requires the measurement and recognition of compensation expense for all share-based payment awards (including stock options and stock awards) made to employees and directors based on estimated fair value. Compensation expense for equity-classified awards is measured at the grant date based on the fair value of the award and is recognized as an expense in earnings over the requisite service period using a graded vesting method.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued

Recent Accounting Pronouncements

We have adopted recently issued accounting pronouncements and have determined that they have no material effect on our financial position, results of operations, or cash flow. We do not expect any recently issued but not yet adopted accounting pronouncements to have a material effect on our financial position, results of operations or cash flow.

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