UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANCE ACT OF 1934
FOR THE TRANSITION PERIOD From __________ to __________.
Commission File Number 000-32439
ARENA RESOURCES, INC.
---------------------
(Exact name of registrant as specified in its charter)
Nevada 73-1596109
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
4920 South Lewis Street, Suite 107
Tulsa, Oklahoma 74105
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(Address of principal executive officers)
(918) 747-6060
--------------
(Issuer's telephone number)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
As of May 12, 2003, the Company had outstanding 6,382,856 shares of common stock
($0.001 par value).
1
INDEX
Arena Resources, Inc.
For the Quarter Ended March 31, 2003
Part I. Financial Information
Page
----
Item 1. Financial Statements (Unaudited) 3
Condensed Balance Sheets as of March 31, 2003 and
December 31, 2002 (Unaudited) 4
Condensed Statements of Operations for the Three Months
Ended March 31, 2003 and 2002 (Unaudited) 5
Condensed Statements of Cash Flows for the Three Months
Ended March 31, 2003 and 2002 (Unaudited) 6
Notes to Condensed Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Controls and Procedures 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
Part I - Financial Information
Item I. Financial Statements:
The condensed financial statements included herein have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are adequate
to make the information presented not misleading.
In the opinion of the Company, all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial position of the
Company and the results of its operations and its cash flows have been made. The
results of its operations and its cash flows for the three months ended March
31, 2003 are not necessarily indicative of the results to be expected for the
year ending December 31, 2003.
3
ARENA RESOURCES, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2003 2002
--------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $1,216,320 $ 796,915
Account receivable 274,890 269,436
Subscription receivable - 157,500
Prepaid expenses 2,128 1,128
--------------------------------------------------------------------------------------
Total Current Assets 1,493,338 1,224,979
--------------------------------------------------------------------------------------
Property and Equipment, Using Full Cost Accounting
Oil and gas properties subject to amortization 5,259,737 4,884,804
Equipment 21,794 21,794
Office equipment 14,672 14,672
--------------------------------------------------------------------------------------
Total Property and Equipment 5,296,203 4,921,270
Less: Accumulated depreciation and amortization (226,689) (172,258)
--------------------------------------------------------------------------------------
Net Property and Equipment 5,069,514 4,749,012
--------------------------------------------------------------------------------------
Long-Term Deposits 76,502 76,502
--------------------------------------------------------------------------------------
Total Assets $6,639,354 $6,050,493
======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 94,292 $ 173,174
Accrued liabilities 6,098 -
Accrued preferred dividends 68,301 114,685
--------------------------------------------------------------------------------------
Total Current Liabilities 168,691 287,859
--------------------------------------------------------------------------------------
Long-Term Liabilities
Put option 45,828 50,604
Notes payable to officers 400,000 400,000
Asset retirement obligation 241,500 -
Deferred income taxes 294,453 187,193
--------------------------------------------------------------------------------------
Total Long-Term Liabilities 981,781 637,797
--------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock - $0.001 par value; 10,000,000
shares authorized; no shares issued or outstanding - -
Common stock - par value $0.001 per share; 100,000,000
shares authorized; 6,373,856 shares and 6,282,056
shares outstanding, respectively 6,373 6,282
Additional paid-in capital 5,418,902 5,287,189
Options and warrants outstanding 433,975 382,040
Accumulated deficit (370,368) (550,674)
--------------------------------------------------------------------------------------
Total Stockholders' Equity 5,488,882 5,124,837
--------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $6,639,354 $6,050,493
======================================================================================
See accompanying notes to unaudited condensed financial statements.
4
ARENA RESOURCES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended March 31 2003 2002
---------------------------------------------------------------------------------------------
Oil and Gas Revenues $ 807,021 $ 143,332
---------------------------------------------------------------------------------------------
Costs and Operating Expenses
Oil and gas production costs 242,071 46,556
Oil and gas production taxes 53,950 7,229
Depreciation, depletion and amortization 51,091 22,648
General and administrative expense 143,631 46,821
---------------------------------------------------------------------------------------------
Total Costs and Operating Expenses 490,743 123,254
---------------------------------------------------------------------------------------------
Other Income (Expense)
Gain from change in fair value of put options 4,775 -
Accretion expense (4,782) -
Interest expense (9,863) -
---------------------------------------------------------------------------------------------
Net Other Expense (9,870) -
---------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes and Cumulative Effect
of Change in Accounting Principle 306,408 20,078
Provision for Deferred Income Taxes 114,289 -
---------------------------------------------------------------------------------------------
Income Before Cumulative Effect of Change in Accounting Principle 192,119 20,078
Cumulative Effect of Change in Accounting Principle (11,813) -
---------------------------------------------------------------------------------------------
Net Income 180,306 20,078
Preferred Stock Dividends - 39,706
---------------------------------------------------------------------------------------------
Income (Loss) Attributable to Common Shares $ 180,306 $ (19,628)
=============================================================================================
Basic Income (Loss) Per Common Share
Before cumulative effect of change in accounting principle $ 0.03 $ (0.01)
Cumulative effect of change in accounting principle - -
---------------------------------------------------------------------------------------------
Net Income (Loss) Attributable to Common Shares $ 0.03 $ (0.01)
=============================================================================================
Diluted Income (Loss) Per Common Share
Before cumulative effect of change in accounting principle $ 0.03 $ (0.01)
Cumulative effect of change in accounting principle - -
Net Income (Loss) Attributable to Common Shares $ 0.03 $ (0.01)
=============================================================================================
Basic Weighted-Average Common Shares Outstanding 6,327,609 3,604,500
Diluted Weighted-Average Common Shares Outstanding 6,461,091 3,604,500
=============================================================================================
See accompanying notes to unaudited condensed financial statements.
5
ARENA RESOURCES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31 2003 2002
-------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 180,306 $ 20,078
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and depletion 51,091 22,648
Gain from change in fair value of put option (4,776) -
Cumulative effect of change in accounting principle 11,813 -
Changes in assets and liabilities:
Accounts receivable (5,454) (24,822)
Prepaid expenses (1,000) -
Accounts payable and accrued liabilities (72,784) (6,496)
Accretion of discounted liabilities 4,782 -
Deferred income tax payable 114,287 -
-------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 278,265 11,408
-------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of oil and gas properties (153,715) (19,715)
Purchase of office equipment - (300)
Drilling advances - 47,611
-------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (153,715) 27,596
-------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of common stock, net of offering costs 183,739 -
Collection of common stock subscription receivable 157,500 -
Proceeds from issuance of preferred stock, net of offering cost - 91,236
Payment on note payable - (8,000)
Payment of dividends to preferred stockholders (46,384) (36,144)
-------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 294,855 47,092
-------------------------------------------------------------------------------------------
Net Increase in Cash 419,405 86,096
Cash at Beginning of Period 796,915 444,564
-------------------------------------------------------------------------------------------
Cash at End of Period $1,216,320 $530,660
===========================================================================================
Supplemental Cash Flows Information
Cash paid for interest $ 9,866 $ -
===========================================================================================
See accompanying notes to unaudited condensed financial statements.
6
ARENA RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements - The accompanying condensed financial statements
have been prepared by the Company and are unaudited. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments necessary for fair presentation, consisting of normal recurring
adjustments, except as disclosed herein.
The accompanying unaudited interim financial statements have been condensed
pursuant to the rules and regulations of the Securities and Exchange Commission;
therefore, certain information and disclosures generally included in financial
statements have been condensed or omitted. The condensed financial statements
should be read in conjunction with the Company's annual financial statements
included in its annual report on Form 10-KSB as of December 31, 2002. The
financial position and results of operations for the three months ended March
31, 2003 are not necessarily indicative of the results to be expected for the
full year ending December 31, 2003.
Nature of Operations - The Company owns interests in oil and gas properties
located in Oklahoma, Texas and Kansas. The Company is engaged primarily in the
acquisition, exploration and development of oil and gas properties and the
production and sale of oil and gas.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Long-Term Deposits - The Company has complied with a requirement to maintain a
$50,000 certificate of deposit at a federally insured institution in order to do
business in the state of Texas. The maturity date of the investment is July
2003. The Company has also complied with a requirement to maintain a $25,000
certificate of deposit at a federally insured institution in order to do
business in the state of Oklahoma. The maturity date of the investment is
August 2004.
Oil and Gas Properties - The Company uses the full cost method of accounting for
oil and gas properties. Under this method, all costs associated with
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 costs of
drilling and equipping productive and non-productive wells. Drilling costs
include directly related overhead costs. Capitalized costs are categorized
either as being subject to amortization or not subject to amortization.
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves and estimated future costs of site restoration,
are amortized on the unit-of-production method using estimates of proved
reserves as determined by independent engineers. Investments in unproved
properties and major development projects are not amortized until proved
reserves associated with the projects can be determined. The Company evaluates
oil and gas properties for impairment at least quarterly. If the results of an
assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized. Amortization
expense for the three months ended March 31, 2003 was $48,715 based on depletion
at the rate of $1.92 per barrel of oil equivalents compared to $20,909 based on
depletion at the rate of $2.65 per barrel of oil equivalent for the three months
ended March 31, 2002.
7
ARENA RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2003
In addition, capitalized costs are subject to a ceiling test which limits such
costs to the estimated present value of future net revenues from proved
reserves, discounted at a 10-percent interest rate, based on current economic
and operating conditions, plus the lower of cost or fair market value of
unproved properties.
Consideration received from sales or transfers of oil and gas property is
accounted for as a reduction of capitalized costs. Revenue is not recognized in
connection with contractual services performed in connection with properties in
which the Company holds an ownership interest.
Income (Loss) Per Common Share - Basic income (loss) per common share is
computed by dividing net income (loss) available to common stockholders by the
weighted-average number of common shares outstanding during the period. Diluted
income (loss) per share reflects the potential dilution that could occur if all
contracts to issue common stock were converted into common stock.
Concentration of Credit Risk and Major Customer - The Company currently has cash
in excess of federally insured limits at March 31, 2003. During the three
months ended March 31, 2003, sales to one customer represented 61% of total
sales and sales to another customer represented 20% of total sales. At March
31, 2003, these two customers made up 57% and 19% of accounts receivable,
respectively.
Stock-Based Employee Compensation - On April 1, 2003, the Company issued stock
options to directors and employees, which are described more fully in Note 4.
The Company applies the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and related interpretations in accounting for its stock-based compensation
awards. Under APB 25, no compensation expense will be charged to earnings for
employee stock option awards because the options granted had an exercise price
equal to the fair value of the underlying common stock on the grant date.
Alternately, Statements on Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123), allows companies to recognize
compensation expense over the related service period based on the grant date
fair value of the stock option awards. Under both methods, upon issuance of
common stock under the options, proceeds received in excess of par value are
credited to additional paid-in capital. The dilutive effect of outstanding
options is reflected as additional share dilution in the computation of income
per common share. Although there was no effect on net income and income per
share during the three months ended March 31, 2003 because the stock options
were not granted during that period, future periods will include disclosure of
the effect on net income and income per share as if the Company had applied the
fair value recognition provisions of SFAS 123 to stock-based employee
compensation. Under SFAS 123, the pro forma estimated compensation expense,
after tax, for 2003, 2004 and 2005 will be approximately $395,000, $353,000 and
$209,000, respectively.
Restatement of Financial Statements for Cumulative Effect of Change in
Accounting Principle - The Company adopted SFAS No. 143, Accounting for Asset
Retirement Obligations, effectively on January 1, 2003. The accompanying
condensed financial statements as of March 31, 2003 and for the three months
then ended have been restated to present the effects of adopting SFAS No. 143.
In accordance with the transition provisions of SFAS No. 143, the Company
recorded asset retirement liabilities and a cumulative-effect adjustment of
$11,813 as a reduction in earnings, which had no effect on basic and diluted
income per common share.
8
ARENA RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 2 - NOTES PAYABLE
On February 3, 2003, the Company established a $10,000,000 revolving credit
facility with a bank with an initial borrowing base of $2,000,000. The interest
rate is a floating rate equal to the JP Morgan Chase prime rate plus 1% with
interest payable monthly. Annual fees for the facility are 1/2 of one percent of
the unused portion of the borrowing base. Amounts borrowed under the revolving
credit facility will be due in February 2005. The revolving credit facility is
secured by the Company's principal mineral interests. In order to obtain the
revolving credit facility, loans from two officers were subordinated to the
position of the bank and the credit facility was guaranteed by two of the
Company's officers. The Company is required under the terms of the credit
facility to maintain a tangible net worth of $4,000,000, maintain a 5-to-1 ratio
of income before interest, taxes, depreciation, depletion and amortization to
interest expense and maintain a current asset to current liability ratio of
1-to-1. As of March 31, 2003, no amounts had been borrowed under this
credit facility.
NOTE 3 - ASSET RETIREMENT OBLIGATION
Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for
Asset Retirement Obligations, which requires entities to record the fair value
of a liability for an asset retirement obligation when it is incurred, which is
typically for the Company when an oil or gas well is drilled or purchased. The
standard applies to legal obligations associated with the retirement of long-
lived assets that result from the acquisition, construction, development or
normal use of the asset. The Company's asset retirement obligations relate
primarily to the obligation to plug and abandon oil and gas wells and support
wells at the conclusion of their useful lives.
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred, if a reasonable
estimate of fair value can be made. When the liability is initially recorded,
the related cost is capitalized by increasing the carrying amount of the related
oil and gas property. Over time, the liability is accreted upward for the
change in its present value each period until the obligation is settled and the
initial capitalized cost is amortized by the unit-of-production method as
described in Note 1.
At January 1, 2003, the implementation of SFAS No. 143 resulted in a net
increase in property and equipment of $217,878. Liabilities increased by
$236,718, which represents the establishment of an asset retirement obligation
liability. The cumulative effect on prior years of the change in accounting
principle of $11,813, net of $7,027 of related tax effects, was recorded in the
first quarter of 2003 as a reduction in earnings. The effect of adopting this
accounting principle was a $3,543 decrease in net income during the first
quarter of 2003.
The following presents pro forma net income and basic and diluted income (loss)
per common share as if SFAS No. 143 had been applied retroactively for all
periods presented:
For the Three Months Ended March 31 2003 2002
-----------------------------------------------------------------------------
Net Income $ 180,306 $ 16,491
Income (Loss) Per Common Share
Basic $ 0.03 $ (0.01)
Diluted $ 0.03 $ (0.01)
=============================================================================
9
ARENA RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2003
The pro forma amount of the liability for the asset retirement obligation was
$80,140 at December 31, 2001 and $83,395 at March 31, 2002. The asset retirement
obligation is adjusted each quarter for any liabilities incurred or settled
during the period, accretion expense and any revisions made to the estimated
cash flows. The reconciliation of the asset retirement obligation for the three
months ended March 31, 2003 is as follows:
Balance, January 1, 2003 $ 236,718
Accretion 4,782
---------
Balance, March 31, 2003 $ 241,500
=========
NOTE 4 - STOCKHOLDERS' EQUITY
The Company is authorized to issue 100,000,000 common shares, with a par value
of $0.001 per share, and 10,000,000 Class "A" convertible preferred shares, with
a par value of $0.001 per share.
Private Placement Offering of Common Stock and Warrants - On August 22, 2002,
the Company initiated a $3,000,000 private placement offering of the Company's
common stock at $2.50 per share with a detachable warrant exercisable at $5.00
per share through September 30, 2005. During the three months ended March 31,
2003, the Company issued 91,800 shares of common stock and 91,800 warrants for
$183,739 in net cash proceeds (net of cash offering costs of $45,761). In
addition, the placement agents received, for their services, 16,830 warrants
exercisable at $5.00 per share through September 30, 2005. The net proceeds
received were allocated to the common stock and the warrants based upon their
relative fair values, with $147,726 allocated to the common stock and $36,013
allocated to the warrants. The fair value of the warrants issued was $100,706,
or $0.93 per warrant, which was determined using the Black-Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rate of 1.8%, expected dividend yield of 0%, volatility of 35.7% and an
expected life of 2.6 years.
In addition, during the three months ended March 31, 2003, the placement agents
earned 52,433 additional warrants, with the same terms, for their services
relating to the shares of common stock and warrants issued during 2002. During
the three months ended March 31, 2003, $15,922 of the proceeds from the 2002
cash offering proceeds were allocated to the additional warrants, based upon
their relative fair value. Through March 31, 2003, the Company had issued
377,800 units of common stock and warrants to investors under the offering for
$785,875 in net cash proceeds (net of cash offering costs of $158,625) and had
issued 69,263 warrants to the placement agents for their services.
NOTE 5 - EMPLOYEE STOCK OPTIONS
On April 1, 2003, the Company granted options to directors and employees to
purchase 1,000,000 shares of common stock at $3.70 per share through April 1,
2008, subject to shareholder approval. The options vest at the rate of 20% each
year over five years. The exercise price was 85% of the market value of the
Company's common stock on the date issued. In accordance with FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, the 15% discount from the market price of the Company's common
stock used in determining the fair value of the common stock is considered
reasonable and the options are not compensatory. Accordingly, the Company will
not recognize any compensation expense from the grant of these stock options in
future periods.
10
ARENA RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2003
The fair value of the options granted was $1,837,935, or $1.84 per share, and
was estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: dividend yield of 0% percent,
expected volatility of 36.3%, risk-free interest rate of 2.8% and expected lives
of 5.0 years.
NOTE 6 - CONTINGENCIES AND COMMITMENTS
Standby Letters of Credit - A commercial bank has issued standby letters of
credit on behalf of the Company to the states of Texas and Oklahoma totaling
$75,000 to allow the Company to do business in those states. The standby
letters of credit are valid through August 2004 and are collateralized by an
assignment of certificates of deposit totaling $76,502. The Company intends to
renew the standby letters of credit for as long as the Company does business in
those states. No amounts have been drawn under the standby letters of credit.
NOTE 7 - SUBSEQUENT EVENTS
As discussed in Note 4, the Company granted stock options to directors and
employees on April 1, 2003 to purchase 1,000,000 shares of common stock at $3.70
per share through April 1, 2008, subject to shareholder approval.
On April 15, 2003, the common stock of Arena Resources, Inc. began trading on
the American Stock Exchange.
Effective May 1, 2003, Arena Resources, Inc. acquired a 70% working interest,
56% net revenue interest, in oil and gas properties known as the Seven Rivers
Queen Unit in Lea County, New Mexico. Total consideration provided by the
Company was a cash payment of $900,000. These funds were drawn on the Company's
revolving credit facility from the Bank of Oklahoma. The Company also issued
10,000 shares of the Company's common stock valued at $4.50 per share, or
$45,000, as a finder's fee relating to this acquisition.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
For the three months ended March 31, 2003, the Company realized $807,021 in
revenue compared to $143,332 in revenue for the same period in 2002. Income
before accrual for deferred income taxes and cumulative effect of change in
accounting principle for the three months ended March 31, 2003 was $306,408
compared to $20,078 for the same period in 2002. Net income after preferred
stock dividends was $180,306 for the three months ended March 31, 2003 compared
to a loss of $19,628 for the same period in 2002. The Company also had positive
net cash flows from operations of $278,265, compared to $11,408 for the same
period in 2002.
Oil and gas production costs for the three months ended March 31, 2003 were
$242,071, compared to $46,556 for the same period in 2002. Production taxes for
the three months ended March 31, 2003 were $53,950, compared to $7,229 for the
same period in 2002. Depreciation and depletion for the three months ended
March 31, 2003 was $51,091, compared to $22,648 for the same period in 2002.
General and administrative expenses for the three months ended March 31, 2003
were $143,631, consisting primarily of bank line of credit fees, stock exchange
listing fees and payroll salaries and taxes, compared to $46,821 for the same
period in 2002, consisting primarily of payroll salaries and taxes.
Revenues Year to Date by Geographic section
Arena reports its net oil and gas revenues for the year to date as applicable to
the following geographic sectors:
OIL
Net Production Volume Net Revenue
Texas Leases 5,440 BBLS $ 179,157
Oklahoma Leases 18,150 BBLS $ 579,882
GAS
Net Production Volume Net Revenue
Texas Leases 1,296 MCF $ 4,302
Oklahoma Leases 9,616 MCF $ 43,680
Arena is also looking at various other oil and gas opportunities, as generally
outlined in its earlier periodic reports, in Oklahoma and other geographic
areas, but has entered no definitive or binding agreements, except as otherwise
reported in this filing.
Significant Subsequent Events occurring after March 31, 2003:
On April 15, 2003, Arena Resources, Inc. common stock began trading on the
American Stock Exchange, under ticker symbol ARD. The opening price was set at
$4.50 per share.
Effective May 1, 2003, Arena Resources, Inc. acquired a approximately 70%
working interest, 56% net revenue interest, in the Seven Rivers Queen Unit in
Lea County, New Mexico. Total consideration provided by the Company was a cash
payment of $900,000. The Company also issued 10,000 shares of the Company's
restricted common stock valued at $4.50 per share, or $45,000, as a finder's fee
relating to this acquisition.
12
Capital Resources and Liquidity
As shown in the condensed financial statements as of March 31, 2003, the Company
had cash on hand of $1,216,320, compared to $792,915 as of December 31, 2002.
The Company had positive net cash flows from operations for the three months
ended March 31, 2003 of $278,265, compared to $11,408 for the same period 2002.
Other significant sources of cash inflow in 2003 were the ongoing common stock
private placement with net proceeds in 2003 of $183,739 and the collection of a
common stock subscription receivable, in the amount of $157,500. Other
significant sources of cash inflow in 2002 were the Class A preferred stock
private placement (which closed June 30, 2002) with net proceeds of $91,236, and
drilling advances received of $47,611. The most significant cash outflows
during the three months ended March 31, 2003 and 2002 were capital expenditures
of $153,715 in 2003 and $19,715 in 2002 and payment of preferred stock dividends
of $46,384 in 2003 and $36,144 in 2002.
On February 3, 2003, the Company established a $10,000,000 revolving credit
facility with a bank with an initial borrowing base of $2,000,000. The interest
rate is a floating rate equal to the JP Morgan Chase Prime rate plus 1% with
interest payable monthly. Annual fees for the facility are 1/2 of 1% of the
unused portion of the borrowing base. Amounts borrowed under the revolving
credit facility will be due in February 2005. The revolving credit facility is
secured by the Company's principal mineral interests. In order to obtain the
revolving credit facility, loans from two officers were subordinated to the
position of the bank and the credit facility was guaranteed by two of the
Company's officers. The Company is required under the terms of the credit
facility to maintain a tangible net worth of $4,000,000, maintain a 5-to-1
ratio of income before interest, taxes, depreciation, depletion and
amortization to interest expense and maintain a current asset to current
liability ratio of 1-to-1.
On August 22, 2002, the Company initiated a $3,000,000 private placement
offering of the Company's common stock at $2.50 per share with a detachable
warrant exercisable at $5.00 per share through September 30, 2005. During the
three months ended March 31, 2003, the Company issued 91,800 shares of common
stock and 91,800 warrants for $183,739 in net cash proceeds (net of cash
offering costs of $45,761). In addition, the placement agents received, for
their services, 16,830 warrants exercisable at $5.00 per share through September
30, 2005 and, during the three months ended March 31, 2003, the placement agents
earned 52,433 additional warrants, with the same terms, for their services
relating to the shares of common stock and warrants issued during 2002. Through
March 31, 2003, the Company had issued 377,800 units of common stock and
warrants to investors under the offering for $785,875 in net cash proceeds (net
of cash offering costs of $158,625) and had issued 69,263 warrants to the
placement agents for their services.
Management plans to continue to make acquisitions, using net cash flows from
operations and possibly the above referenced credit facility and additional
equity capital.
Disclosures About Market Risks
Like other natural resource producers, Arena faces 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
13
Arena does not see itself 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.
Secondarily, Arena is presently committed to use the services of the existing
gatherers in its present areas of production. This gives to such gatherers
certain short term relative monopolistic powers to set gathering and
transportation costs, because obtaining the services of an alternative gathering
company would require substantial additional costs since an alternative gatherer
would be required to lay new pipeline and/or obtain new rights of way in the
lease.
It is also significant that more favorable prices can usually be negotiated for
larger quantities of oil and/or gas product, such that Arena 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 and Oklahoma, it should be noticed that there
are various Environmental Protection Agency regulations which would govern
significant spills, blow-outs, or uncontrolled emissions.
In Oklahoma, Texas and Kansas 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 or the Kansas Corporation Commission, Oil and Gas Division.
Compliance with these regulations may constitute a significant cost and effort
for Arena. No specific accounting for environmental compliance has been
maintained or projected by Arena to date. Arena 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
14
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.
Item 3. Controls and Procedures
(a) The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
the rules and forms of the Securities and Exchange Commission. Based upon
their evaluation of those controls and procedures performed within 90
days of the filing date of this report, the chief executive officer and
the principal financial officer of the Company concluded that the
Company's disclosure controls and procedures were adequate.
(b) Changes in internal controls. The Company made no significant
changes in its internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation of those controls bY the chief executive officer and principal
financial officer.
15
Part II - Other Information
Item 1. Legal Proceedings
Arena is not presently engaged in any legal proceedings, nor does it know of any
claims for or against the company by any party.
Item 4. Submission of Matters to a Vote of Security Holders
During the present quarter there has been no matter submitted to security
holders for a vote. Arena presently anticipates holding its first annual
shareholders meeting in approximately the first half of 2003 for the election of
directors, approval of its newly proposed stock option plan and the other
routine matters, but has not presently set a definitive date for such meeting.
Shareholders will be independently advised of any such formal annual meeting
date.
Item 5. Other Information
Arena has established a limited trading market on the NASD Electronic Bulletin
Board since approximately March 28, 2001. The shares have traded in the range
of $4.25 to $4.50 during the first quarter, 2003 under the trading symbol, ARRI.
As of April 15, 2003, Arena is trading on the American Stock Exchange under the
trading symbol, ARD.
Arena discloses, as a material subsequent event, that it has rescinded and fully
terminated its prior stock option program as of April 1, 2003. No shares were
subscribed or issued under the terminated program. As of April 1, 2003, the
Board adopted a new qualified stock option incentive plan, subject to
shareholder approval as of the next shareholder meeting.
Management is not aware of any other pertinent or relevant information other
than discussed above in Managements Discussion and Analysis of Financial
Condition and Results of Operations. Shareholders are advised that as the
Company completes future significant drilling and completion activities for oil
and gas acquisitions that it will report such matters through press releases
and/or the filing of 8-K reports where appropriate. Such information will be
further summarized in the next applicable periodic filing with the Securities
and Exchange Commission.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 99 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
Act of 2002
Exhibit 10.1 Seven Rivers Queen Unit Purchase Agreement dated May 1,
2003
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
REGISTRANT: ARENA RESOURCES, INC.
Dated: August 7, 2003 By: /S/ Lloyd Tim Rochford
------------------------------
Lloyd Tim Rochford
President, Chief Executive Officer
Dated: August 7, 2003 By: /s/ Stanley McCabe
------------------------------
Stanley McCabe
Treasurer, Secretary
Dated: August 7, 2003 By: /s/ William R. Broaddrick
------------------------------
William R. Broaddrick
Vice President, Chief Financial Officer
17
Attachment A
Form of Certification for Form 10-Q
CERTIFICATIONS
I, Lloyd Tim Rochford, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Arena Resources, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made,
not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly
report, fairly present in all material respects the
financial condition, results of operations and cash
flows of the registrant as of, and for, the periods
presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I
have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
18
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: August 7, 2003
/s/ Lloyd Tim Rochford
_____________________________________
Lloyd Tim Rochford
President, Chief Executive Officer
19
I, William R. Broaddrick, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Arena Resources, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made,
not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly
report, fairly present in all material respects the
financial condition, results of operations and cash
flows of the registrant as of, and for, the periods
presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I
have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
20
7. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: August 7, 2003
/s/ William R. Broaddrick
_____________________________________
William R. Broaddrick
Vice President, Chief Financial Officer
21