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Form 10QSB for TERAX ENERGY, INC.
18-Nov-2005
Quarterly Report
ITEM 2. PLAN OF OPERATION
Forward-Looking Statements
This document contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.
Forward-looking statements may include the words "may," "could," "estimate," "intend," "continue," "believe," "expect" or "anticipate" or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to:
º increased competitive pressures from existing competitors and new entrants;
º increases in interest rates or our cost of borrowing or a default under any material debt agreements;
º deterioration in general or regional economic conditions;
º adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
º loss of customers or sales weakness;
º inability to achieve future sales levels or other operating results;
º fluctuations of oil and gas prices;
º the unavailability of funds for capital expenditures; and
º operational inefficiencies in distribution or other systems.
For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see "Factors That May Affect Our Results of Operation" in this document and in our Annual Report on Form 10-KSB for the year ended June 30, 2005.
Overview And Outlook
We are an oil and gas exploration, development and production company. Our properties are located in the Fort Worth Basin. Our corporate strategy is to continue building value in the Company through the development and acquisition of gas and oil assets that exhibit consistent, predictable, and long-lived production. Our current focus is exploring the gas reserves located in the Barrnett Shale formations of the Fort Worth Basin.
We have consolidated mineral lease positions in both Erath and Comanche counties. Our focus now turns to developing and producing those leases so as to realize the value held in them. With approximately 16,350 gross leased acres the task of developing the properties with wells will commence in the second quarter of our fiscal year.
We intend to continue seeking acquisition opportunities, which compliment our current focus. We intend to fund our development activity primarily through proceeds from various private placements sufficient enough to develop a greater portion of our mineral leases.
Our revenue, profitability and future growth rate depend substantially on factors beyond our control, such as economic, political and regulatory developments and competition from other sources of energy. Oil and natural gas prices historically have been volatile and may fluctuate widely in the future. Sustained periods of low prices for oil or natural gas could materially and adversely affect our financial position, our results of operations, the quantities of oil and natural gas reserves that we can economically produce and our access to capital.
Results of Operations
The following overview provides a summary of key information concerning our
financial results for the first quarter of 2006 and 2005.
First Quarter
2006 2005 Increase
Amount Amount (Decrease)
Revenue $ - $ - $ -
Expenses:
General and administrative 243,056 750 242,306
Professional and
consulting fees 237,498 - 237,498
Total expenses 480,554 750 479,804
Loss from operations (480,554 ) (750 ) (479,804 )
Other income (expense):
Other expenses (25,635 ) - (25,635 )
Interest and other income 14,122 - 14,122
Interest expense (1,110 ) - (1,110 )
Net loss $ (493,177 ) $ (750 ) $ (492,427 )
First Quarter of 2006 Compared to First Quarter in 2005
Revenue:
Total revenue for the first quarter of 2006 and 2005 was $-0- and $-0-. Currently, we are in a development stage, acquiring various mineral leases and implementing all necessary capital improvements in order to become efficient in our production efforts.
Expenses:
General and administrative expenses for the first quarter of 2006 and 2005 were $243,056 and $750, respectively, for an increase of $242,306. The increase is attributable to the commencement of acquisition efforts and preparation for exploratory drilling and the additional overhead incurred in connection with the commencement of field operations.
Professional and consulting fees were $237,498 and $-0- for the first quarter of 2006 and 2005, for an increase of $237,498. The increase is a result of our endeavors to obtain the necessary capital and properties required to ultimately increase revenue.
Other Income (Expense):
Interest and other income for the first quarter of 2006 and 2005 was $14,122 and $-0-, respectively, for an increase of $14,122 which was the result of the placement of proceeds from the sale of securities being place in an interest bearing money market account.
Interest Expense for the first quarter of 2006 and 2005 was $1,110 and $-0-, respectively, for an increase of $1,110. During the first quarter of 2006, we entered into a short-term demand note in order to meet our operating cost requirements.
Net Loss: Our net loss for the first quarter of 2006 and 2005 was $493,177 and $750, respectively, for an increase loss in the amount of $492,427. The majority of the increase was attributable to an increase in overhead due to increased field operations.
Operation Plan
During the next twelve months we plan to continue to focus our efforts on the sustained development and production of gas reserves located on our existing properties, pursuing strategic acquisitions of producing properties and creating value by furthering our business plan.
We intend to fund our field operations and development program through our equity financing efforts and from proceeds of anticipated exercise of warrants and options. This strategy may allow us to realize the value in our own financial assets toward the growth of our leased acreage holdings, pursue the acquisition of strategic oil and gas producing properties or companies and generally expand our existing operations.
Our future financial results will depend primarily on: (i) the ability to continue to produce gas and oil from existing wells; (ii) the ability to discover commercial quantities of natural gas and oil; (iii) the market price for oil and gas; and (iv) the ability to fully implement our exploration and development program, which is dependent on the availability of capital resources. In order to be successful in all or any of these respects, the prices of oil and gas prevailing at the time of production must be at a level allowing for profitable production, and we must be able to obtain additional funding to increase our capital resources.
Liquidity and Capital Resources
There is limited historical financial information about our company upon which to base an evaluation of our performance. We are a development stage company and have not generated any revenues from operations.
Our continued existence and plans for future growth depend on our ability to obtain the capital necessary to operate, through the generation of revenue and the issuance of additional debt or equity. We will need to raise additional capital to fund normal operating costs and exploration efforts. If we are not able to generate sufficient revenues and cash flows or obtain additional or alternative funding, we will be unable to continue as a going concern.
At September 30, 2005 we had cash of $4,570,371 and working capital of $4,436,524. We believe that we currently have sufficient working capital to commence our drilling efforts and to pay our administrative and general operating expenses through December 31, 2005. We will need to obtain additional funds (presumably through equity offerings and/or debt borrowing) in order, if warranted, to fund our general and administrative expenses beyond December 31, 2005, and to continue the implementation of planned exploration and development programs on our properties. Furthermore, should we continue the pace of our acquisitions and/or or drilling activities, we will require additional capital sooner. Failure to obtain such additional financing will result in our inability to accelerate the planned exploration programs on our properties or to acquire additional properties.
We have no agreements or understandings with any person for additional financing.
Cash Flows. Since inception, we have financed cash flow requirements through debt financing and the issuance of common stock for cash. As we expand operational activities, we may continue to experience net
negative cash flows from operations, pending receipt of sales or development fees, and will be required to obtain additional financing to fund operations through common stock offerings and debt borrowings to the extent necessary to provide working capital.
Satisfaction of our cash obligations for the next 12 months.
Our oil and gas properties do not have any commercial production. We have no history of earnings or cash flow from our operations. A critical component of our operating plan impacting our continued existence is to efficiently manage the costs associated with exploratory drilling efforts, our ability to obtain additional capital through additional equity and/or debt financing, and JV or WI partnerships could also be important to our expansion plans. In the event we experience any significant problems assimilating acquired assets into our operations or cannot obtain the necessary capital to pursue our strategic plan, we may have to significantly curtail our operations. This would materially impact our ability to continue operations.
We believe that with the funds obtained through our private placement, we are able to proceed with the next phase of our operations, which is field development. However, we anticipate the need for a significant amount of funds in order to fully develop our leased acreage.
Over the next twelve months we believe that existing capital combined with cash flow from operations will be sufficient to sustain operations and planned expansion.
We may incur operating losses over the next twelve months. Our lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development and production, particularly companies in the oil and gas industry. Such risks include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks we must, among other things, implement and successfully execute our business and marketing strategy, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.
Under our current operating plan, we are required to make certain lease payments to maintain our rights to develop and drill for oil and gas. These lease payments are material obligations to us.
As of September 30, 2005, we had assets of $8,255,456, and $133,847 in current liabilities; resulting in a stockholder's equity of $8,121,609.
Summary of product and research and development that we will perform for the term of our plan.
Field Development
Our original plan of operation for field development started with identifying the most promising and cost-effective drill sites on our current leased acres, drilling and testing wells to prove reserves, completing the more promising test wells, extracting the gas, oil and other hydrocarbons that we find, and delivering them to market. We believe that we have leased enough land to move forward with our field development and are proceeding with the next phase of our operations.
In the field development stages of our plan, each new well will be drilled and tested individually. The well, upon a favorable evaluation of its producing capabilities, will be fully completed and connected to gas gathering and water disposal pipelines.
When we have identified a proposed drilling site, we as a licensed operator in the State of Texas, will be engaged in all aspects of well site operations. As the operator we will be responsible for permitting the well, which will include obtaining permission from the Texas Railroad Commission relative to spacing requirements and any other state and federal environmental clearances required at the time that the permitting process commences. In addition to the permitting process, we as the operator will be responsible for hiring the driller, geologist and land men to make final
decisions relative to the zones to be targeted, confirming that we have good title to each leased parcel covered by the spacing permit and to actually drill the well to the target zones. We will be responsible for completing each successful well and connecting it to the most appropriate portion of our gas gathering system.
As the operator we will be the caretaker of the well once production has commenced. As the operator, we will be responsible for paying bills related to the well, billing working interest owners for their proportionate expenses in drilling and completing the well, and selling the production from the well. Prior to the first payment for production on each well, we anticipate that the purchaser thereof will carry out its own research with respect to ownership of that production and will send out a division order to confirm the nature and amount of each interest owned by each interest owner. Once a division order has been established and confirmed by the interest owners, the production purchaser will issue the checks to each interest owner in accordance with its appropriate interest. From that point forward, we as operator will be responsible for maintaining the well and the wellhead site during the entire term of the production or until such time as we have been replaced or the site appropriately abandoned.
Significant changes in the number of employees.
During the three month period ended September 30, 2005 there were no significant changes in the number of employees.
Our proposed personnel structure could be divided into three broad categories:
management and professional, administrative, and project field personnel. As in most small companies, the divisions between these three categories are somewhat indistinct, as employees are engaged in various functions as projects and work loads demand.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
Our discussion of financial condition and results of operations is based upon the information reported in our financial statements. The preparation of these statements requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, weather, politics, global economics, mechanical problems, general business conditions and other factors. Our significant accounting policies are detailed in Note 1 to our financial statements included in this Annual Report. We have outlined below certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management.
Revenue Recognition. It is our policy to recognize revenue when production is sold to a purchaser at a fixed or determinable price.
Successful Efforts Method of Accounting. We account for our oil and natural gas operations using the successful efforts method of accounting. Under this method, all costs associated with property acquisition, exploration and development of oil and gas reserves are capitalized. Costs capitalized include acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and cost of drilling and equipping productive wells. In the event we do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed. All of our properties are located within the continental United States.
Oil and Natural Gas Reserve Quantities. Reserve quantities and the related estimates of future net cash flows affect our periodic calculations of depletion and impairment of our oil and natural gas properties. Proved oil and
natural gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions. Reserve quantities and future cash flows included in the Form 10-KSB are prepared in accordance with guidelines established by the SEC and FASB.
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