UAPC United American Petroleum Corporation (PK)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.

Critical Accounting Policy and Estimates.

Our Business. We are an exploration company engaged in the acquisition, exploration, development and production of oil and gas properties. Our principal business is the acquisition of leasehold interests in petroleum and natural gas rights, either directly or indirectly, and the exploitation and development of properties subject to these leases. Our primary focus is to develop our properties that have potential for near-term production. We also provide operational expertise for several third-party well owners out of our operation base in Austin, Texas. We currently have proved reserves in the State of Texas.

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements for the period ended March 31, 2014, together with notes thereto, which are included in this Quarterly Report.

Recent Events. On February 26, 2014, the Company sold a 46% working interest in a lease covering 430 acres in Duval County, Texas. The Company received $410,000 for this sale, $10,000 of which was received as a non-refundable deposit in the fourth quarter of 2013.

Results of Operations for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013

Revenues.   We had total revenues of $137,185 for the three months ended March 31, 2014, which were generated from oil and gas sales of $134,260 and well operating revenues of $2,925.  This was a $789 increase from total revenues of $136,396 for the three months ended March 31, 2013, which were generated from oil and gas sales of $130,346 and well operation revenues of $6,050. Barrels of oil per day produced (BOPD) increased to an average of 16.85 BOPD from 16.22 BOPD for the three months ended March 31, 2013.

Our administrative revenue increase was a result of income derived from well administrative/operator fees charged through United Operating, LLC, our wholly-owned subsidiary, to third party well owners for managing and accounting for the development and production of their oil and gas property interests. Administrative revenue was only recognized on wells where the Company did not own an interest. The Company also operates certain wells where the Company also has an ownership interest. For these partially owned wells, no administrative income is recognized. Rather, operating fees received from other well interest owners are recorded as a reduction to the full cost pool per the full cost rules.

The following table sets forth the revenue and production data for the three months ended March 31, 2014 and 2013.

Operating Expenses.   For the three months ended March 31, 2014, our total operating expenses were $429,225, which consisted of lease operating expenses of $139,258, accretion expense of $3,186, depletion expense of $19,887, bad debt expense of $12,660 and general and administrative expenses of $254,234.  By comparison, for the three months ended March 31, 2013, our total operating expenses were $259,330, which consisted of lease operating expenses of $75,461, accretion expense of $1,000, depletion expense of $18,364, and general and administrative expenses of $164,505.

The following table sets forth information relating to our operating expenses for the three months ended March 31, 2014 and 2013.

For the three months ended March 31, 2014 we incurred well operating expenses of $139,258, an increase of $63,797 or 85% compared to the three months ended March 31, 2013, as a result of Company conducting incurring higher extraction costs on their wells during 2014.

During the three months ended March 31, 2014 compared to the three months ended March 31, 2013, our depreciation, depletion, amortization, and accretion expenses increased by $3,709, or 19%. These expenses increased largely due to a higher ARO liability based on revised estimates from December 31, 2013, which drove an increase in accretion for the three months ended March 31, 2014.

The increase in general and administrative expenses of $89,729 or 55% during the three months ended March 31, 2014, compared to the prior period, was largely due to an increase in officer compensation and other general and administrative expenses.

Net Operating Loss. For the three months ended March 31, 2014, our total net operating loss was $292,040 as compared to a net operating loss of $122,934 for the three months ended March 31, 2013, an increase of $169,106 or 138% from the prior period. Our net operating loss increased over the prior period due to higher costs of oil and gas extraction on the Company’s wells, partially offset by decreases to workover expenses.

Other Income (Expense). For the three months ended March 31, 2014, we incurred interest expense of $114,736 associated with the amortization of debt discount related to the conversion features on our convertible notes, compared to interest expense of $17,252 for the three months ended March 31, 2013, relating to our outstanding convertible promissory notes. We recorded a gain on embedded derivatives of $85,736 for the three months ended March 31, 2014 compared to a gain on embedded derivatives of $24,520 for the three months ended March 31, 2013. We also incurred a $102,810 penalty due to default on a convertible note for the three months ended March 31, 2014, compared to no penalties recognized for the three months ended March 31, 2013.

Net Loss. For the three months ended March 31, 2014, our net loss was $423,850 as compared to a net loss of $115,666 for the three months ended March 31, 2013, a deterioration of $308,184 or 266% from the prior period. Net loss for the current quarter was largely due to a net operating loss for the same period. 

Liquidity and Capital Resources. During the three months ended March 31, 2014, we used $517,046 in operations, largely due to our net loss for the period and a decrease in accounts payable and accrued expenses. We received proceeds from investing activities of $400,000 from the sale of a working interest in an oil and gas property, and we had no cash provided by or used in financing activities during the three months ended March 31, 2014. We did not obtain new financing during the first quarter of 2014; however, see a discussion of our outstanding notes payable below.

Credit Facility – January 31, 2013

On January 31, 2013, we entered into a Note Purchase Agreement with an investor pursuant to which the investor agreed to lend the Company up to $400,000 in multiple installments in exchange for a senior secured convertible promissory note with a conversion price equal to 60% of the lowest trading price per share during the previous 25 trading days. The first installment of $55,000 was delivered less a fee of $5,000 on the date of the Purchase Agreement. The second installment of $25,000 was delivered in April 2013. The notes mature on January 31, 2014, or upon default, whichever is earlier and bear interest at an annual rate of 12%. As described in Note 5, the embedded conversion feature qualified for liability classification at fair value. As a result, the Company recorded a full discount of $55,000 to the note payable on issuance of the first installment, and a full discount of $25,000 to the note payable on issuance of the second installment. As of March 31, 2014, there was $20,072 in outstanding principal and $18,333 in outstanding original interest discount (OID) on this note.

On January 7, 2014 the holder of the convertible note exercised a portion of the conversion rights of the note for 2,800,000 shares of common respectively at a stock price of $0.0011 for a total of $6,380 principal converted.

In January 2014, JMJ submitted a conversion request under one of its Convertible Notes; however, the Company was unable to comply with this request due to insufficient authorized shares of common stock. The lack of authorized shares constituted a default pursuant to the Note. The Company promptly notified JMJ of its inability to honor the conversion request. The Company is currently working to increase the number of authorized shares by March 15, 2014. The Company is not currently in compliance with this undertaking; however, we have remained in contact with JMJ. JMJ has not expressed an intention to assert the remedies set forth in the Note at this time.

Convertible Note – February 19, 2013

On February 19, 2013, we entered into a credit facility with an investor unrelated to the investor described above pursuant to which the investor lent $103,500 to us in a single installment (minus fees of $16,500) in exchange for a convertible promissory note with a conversion price equal to the average lowest trading price per share during the previous 10 trading days. The embedded conversion option cannot be exercised until 180 days from the date of the note and as such, was not priced until exercisable. The total number of conversion shares is calculated by dividing the amount of the notes by the conversion price.

On January 2, 2014 the holder of the convertible note exercised a portion of the conversion rights of the note for 2,235,294 shares of common respectively at a stock price of $0.0017, for a total of $3,800 accrued interest converted.

As of December 31, 2013 the principal on this note had been fully converted. Upon conversion of the final accrued interest of $3,800 described above, the obligations relating to the note were fully satisfied.

Convertible Note – April 22, 2013

On April 22, 2013, we entered into a credit facility with an investor unrelated to the investor described above pursuant to which the investor lent $63,000 (minus fees of $3,000) to us in a single installment in exchange for a convertible promissory note with a conversion price equal to 60% of the average lowest trading price per share during 5 of the previous 10 trading days. The embedded conversion option cannot be exercised until 180 days from the date of the note and as such, will not be priced until exercisable. The total number of conversion shares is calculated by dividing the amount of the notes by the conversion price. 

On January 7, 2014 and January 13, 2014 the holder of the convertible note exercised a portion of the conversion rights of the note for 2,757,895 and 2,750,000 shares of common stock respectively at stock prices of $0.0019 and $0.0018 respectively for a total of $10,190 principal converted.

On September 23, 2013 the investor lent an additional $50,000 in a single installment (minus fees of $3,000) under the same terms agreement and terms as the previous installment made April 22, 2013.

As of March 31, 2014, there was $106,593 in outstanding principal and interest on these notes.

In January 2014, Asher submitted a conversion request under one of its Convertible Notes; however, the Company did not have sufficient shares of authorized common stock to honor the conversion request. Asher issued us a notice of default; however, Asher immediately waived the default provided that we began the process to increase our number of authorized shares. We have begun this process; however, the shares are not yet authorized. Consequently, Asher reissued the notice of default to us. Therefore, we have recognized a liability and a loss of $102,810 as of March 31, 2014, which represents the additional amount due under the Notes in the event of default.

Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements as of March 31, 2014.