Form 10QSB for UNIVERSAL PROPERTY DEVELOPMENT & ACQUISITION CORP
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21-May-2007
Quarterly Report
Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations
Results of Operations - For the Three Months Ended March 31, 2007 and 2006
Natural gas sales. For the three months ended March 31, 2007, natural gas sales revenue was $71,358 compared to $15,031 for the same period during 2006. The revenues were the result of production in the Canyon Creek and Catlin subsidiaries. The increase was primarily due to Catlin production as in 2006 Catlin was not yet acquired.
Oil sales. For the three months ended March 31, 2007, oil sales revenue was $123,726 compared to $70,047 for the same period during 2006. The revenues were the result of our producing wells in the Canyon Creek and Catlin subsidiaries. The increase was primarily due to Catlin production as in 2006 Catlin was not yet acquired.
Condensate sales. For the three months ended March 31, 2007, condensate sales revenue was $1,112,825 compared to none for the same period during 2006. The increase in revenue was the result of the first sale of condensate from the tanks in Brownsville in the Texas Trading subsidiary that were purchased in 2007. There were no revenues in the same period of 2006 because this is a new business line for the Company.
Lease operating expenses. Our lease operating expenses were $210,652 for the three months ended March 31, 2007 compared with $10,778 for the three months ended March 31, 2006. The increase was primarily due to Catlin production as in 2006 Catlin was not yet acquired and increased production in Canyon Creek in 2007 versus the prior period.
Cost of condensate sales. Our cost of condensate sales was $1,119,001 for the three months ended March 31, 2007, compared to none for the three months ended March 31, 2006. The increase was due to the cost related to out first sale of condensate from the tanks in Brownsville in the Texas Trading subsidiary that were purchased in 2007. Our cost of condensate sales exceeded our revenue from condensate sales because of the time it took to accumulate inventory to begin sales. During that time, we lost some of the product through evaporation which resulted in reduced inventory.
Depletion. Our depletion expense was $45,428 for the three months ended March 31, 2007, compared to $4,782 for the three months ended March 31, 2006. The increase was primarily due to Catlin production as in 2006 Catlin was not yet acquired and increased production in Canyon Creek in 2007 versus the prior period.
Consulting Fees and Services. Consulting fees and services increased by $331,775 to $ 606,767 for the three months ended March 31, 2007 compared to same period in 2006. The increase in consulting fees and services was partially due to the increase in consultants who were not on payroll for the acquisition of the US Petroleum Depot subsidiary in March 2007. In addition, there was an increase in consultants on UPDA for business consulting services in 2007 versus the prior period and UPDA-Operators had human resource and engineering consultants in 2007 versus the prior period.
Payroll and related benefits. Payroll and related benefits increased to $493,246 for the three months ended March 31, 2007, compared to $84,419 for the same period in 2006. The increase was primarily related to increases in compensation expense associated with an increase in personnel required to administer our growth and entry into the energy business.
General and administrative expenses. General and administrative expenses increased by $465,038 to $569,152 for the three months ended March 31, 2007, compared to the same period in 2006. The increase was primarily related to rent expense of $68,730, travel and entertainment expenses of $129,565, and legal and accounting expenses of $370,160 for the three months ended March 31, 2007.
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Depreciation. Our depreciation expense was $57,965 for the three months ended March 31, 2007, compared to $262 for the three months ended March 31, 2006. The increase was primarily depreciation on the oil field equipment in the Catlin subsidiary as in 2006 Catlin was not yet acquired.
Other income (expense). Other income and expense increased by $940,000 because of a gain on sales of equity interest in Canyon Creek, Catlin, and Texas Energy Pipeline for the three months ended March 31, 2007 versus the three months ended March 31, 2006. Other income and expense also increased by interest income of $3,339 for the three months ended March 31, 2007 versus the three months ended March 31, 2006. The increase was due to interest earned on the letter of credit outstanding at March 31, 2007. Other income and expense also includes interest expense which increased to $5,283 for the three months ended March 31, 2007 from $670 for the same period in 2006. The increase was due to the interest earned on the $1,000,000 line of credit payable outstanding at March 31, 2007.
Income tax expense. Our effective tax rate is 34% during 2007 and 2006. As we have significant net operating loss carryforwards, income tax expense is comprised of minimum state filing fees only.
Net loss after minority interest. Net loss after minority interest increased by $342,255 to $726,881 for the three months ended March 31, 2007 when compared to the same period in 2006. The reasons for this increase primarily include increased production in 2007 versus 2006 as Catlin was not yet acquired, partially offset by increased costs and operating expenses related to the increased production, increase in consulting fees and payroll and related benefits due to the increase in personnel and an increase in general and administrative expenses.
Revenues Year to Date by Geographic Section
All revenue from sales of crude oil and gas during the three months ended March 31, 2007 were in the State of Texas.
Capital Resources and Liquidity
As shown in the consolidated financial statements, at March 31, 2007, the Company had cash on hand of $744,349, compared to $12,439 at December 31, 2006. Net cash used in operating activities was $2,342,834 for the three months ended March 31, 2007. We had a net loss of $726,881. We had non-cash charges of $236,607 due to consulting fees and services related to the issuance of common shares or options to acquire such shares, and $103,393 related to depreciation and depletion. We had an add back of 940,000 from a gain on the sale of our equity interests in Canyon Creek, Catlin, and Texas Energy Pipeline subsidiaries, and $129,564 of minority interest loss. In addition, changes in operating assets and liabilities totaled $883,050 during the three months ended March 31, 2007.
Net cash used in operating activities was $318,792 for the three months ended March 31, 2006. We had a net loss of $384,626. We had non-cash charges of $297,125 due to consulting fees and services related to the issuance of common shares or options to acquire such shares, $5,043 related to depreciation and depletion and $62,820 of minority interest income. In addition, changes in operating assets and liabilities totaled $299,154 during the three months ended March 31, 2006.
Cash flows used in investing activities was $1,475,256 during the three months ended March 31, 2007, consisted of $187,252 for payment of capitalized oil and gas properties work-over costs, $116,825 for purchases of oil field equipment and other equipment and $1,089,280 for acquisition of the oil storage facility.
Cash flows used in investing activities was $1,312,661 during the three months ended March 31, 2006. Investing activities included $1,309,661 used for payment of capitalized oil and gas properties work-over costs and $3,000 for purchases of oil field equipment and other equipment.
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The cash flows provided by financing activities of $4,550,000 during the three months ended March 31, 2007, consisted of $3,365,000 of proceeds from the sale of our Class B preferred stock, $1,000,000 advances received under line of credit, and a $185,000 increase in notes payable.
The cash flows provided by financing activities of $1,790,000 during the three months ended March 31, 2006, consisted of proceeds from the sale of our Class B preferred stock
We had losses of approximately $727,000 for the three months ended March 31, 2007, and do not currently generate positive cash flows from operations. In order for us to continue during the next twelve months we will need to secure approximately $3.0 million of debt or equity financing.
On April 6, 2007 the Company executed a senior secured promissory note with Sheridan Asset Management, LLC ("Sheridan") for the principal amount of $3,635,000. The note matures on April 6, 2008. The note amount of $3,635,000 includes a principal amount of $2,726,250 and $908,750 of original issue discount based upon a 29.12% yield to maturity. Any overdue accrued and unpaid principal and interest shall accrue a late fee of 18%. The proceeds of the note will be used for acquisitions and working capital.
While we expect to raise the additional financing in the future, there can be no guarantee that we will be successful.
Disclosures About Market Risks
Like other natural resource producers, we face certain unique market risks. The two most salient risk factors are the volatile prices of oil and gas and certain environmental concerns and obligations.
Oil and Gas Prices
Current competitive factors in the domestic oil and gas industry are unique. The actual price range of crude oil is largely established by major international producers. Pricing for natural gas is more regional. Because domestic demand for oil and gas exceeds supply, there is little risk that all current production will not be sold at relatively fixed prices. To this extent we do not see the Company as directly competitive with other producers, nor is there any significant risk that the Company could not sell all production at current prices with a reasonable profit margin. The risk of domestic overproduction at current prices is not deemed significant. The primary competitive risks would come from falling international prices which could render current production uneconomical.
It is also significant that more favorable prices can usually be negotiated for larger quantities of oil and/or gas product, such that the Company views itself as having a price disadvantage to larger producers. Large producers also have a competitive advantage to the extent they can devote substantially more resources to acquiring prime leases and resources to better find and develop prospects.
Environmental
Oil and gas production is a highly regulated activity which is subject to significant environmental and conservation regulations both on a federal and state level. Historically, most of the environmental regulation of oil and gas production has been left to state regulatory boards or agencies in those jurisdictions where there is significant gas and oil production, with limited direct regulation by such federal agencies as the Environmental Protection Agency. However, while the Company believes this generally to be the case for its production activities in Texas, Oklahoma, Kansas and New Mexico, it should be noticed that there are various Environmental Protection Agency regulations which would govern significant spills, blow-outs, or uncontrolled emissions.
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In Oklahoma, Texas, Kansas and New Mexico specific oil and gas regulations exist related to the drilling, completion and operations of wells, as well as disposal of waste oil. There are also procedures incident to the plugging and abandonment of dry holes or other non-operational wells, all as governed by the Oklahoma Corporation Commission, Oil and Gas Division, the Texas Railroad Commission, Oil and Gas Division, the Kansas Corporation Commission, Oil and Gas Division or the New Mexico Oil Conservation Division.
Compliance with these regulations may constitute a significant cost and effort for UPDA. No specific accounting for environmental compliance has been maintained or projected by UPDA to date. UPDA does not presently know of any environmental demands, claims, or adverse actions, litigation or administrative proceedings in which it or the acquired properties are involved or subject to or arising out of its predecessor operations. In the event of a breach of environmental regulations, these environmental regulatory agencies have a broad range of alternative or cumulative remedies to include: ordering a clean up of any spills or waste material and restoration of the soil or water to conditions existing prior to the environmental violation; fines; or enjoining further drilling, completion or production activities. In certain egregious situations the agencies may also pursue criminal remedies against the Company or its principals.
Forward-Looking Information
Certain statements in this Section and elsewhere in this report are forward-looking in nature and relate to trends and events that may affect the Company's future financial position and operating results. Such statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. The terms "expect," "anticipate," "intend," and "project" and similar words or expressions are intended to identify forward-looking statements. These statements speak only as of the date of this report. The statements are based on current expectations, are inherently uncertain, are subject to risks, and should be viewed with caution. Actual results and experience may differ materially from the forward-looking statements as a result of many factors, including changes in economic conditions in the markets served by the company, increasing competition, fluctuations in raw materials and energy prices, and other unanticipated events and conditions. It is not possible to foresee or identify all such factors. The company makes no commitment to update any forward-looking statement or to disclose any facts, events, or circumstances after the date hereof that may affect the accuracy of any forward-looking statement.
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