SPND 10-Q Quarter ended June 30, 2019

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2019

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-18774

SPINDLETOP OIL & GAS CO.

(Exact name of registrant as specified in its charter)

(972-644-2581)

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes [ X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the

Exchange Act. Yes [ ] No [ X ]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common, as of the latest practicable date.

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SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES

FORM 10-Q

For the quarter ended June 30, 2019

Index to Consolidated Financial Statements and Schedules

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Part I - Financial Information

Item 1. - Financial Statements

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SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION AND ORGANIZATION

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by generally accepted accounting principles or those normally made in the Company's annual Form 10-K filing. Accordingly, the reader of this Form 10-Q may wish to refer to the Company's Form 10-K for the year ended December 31, 2018 for further information.

The consolidated financial statements presented herein include the accounts of Spindletop Oil & Gas Co., a Texas corporation ("the Company") and its wholly owned subsidiaries, Prairie Pipeline Co., a Texas corporation and Spindletop Drilling Company, a Texas corporation. All significant inter-company transactions and accounts have been eliminated.

In the opinion of management, the accompanying unaudited interim financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, the results of operations and changes in cash flows of the Company and its consolidated subsidiaries for the interim periods presented. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with generally accepted accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations.

Subsequent Events

Management has evaluated subsequent events through August 14, 2019, the date on which the financial statements were available to be issued.

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Item 2. - Management's Discussion and Analysis of Financial Condition and

Results of Operations

WARNING CONCERNING FORWARD LOOKING STATEMENTS

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

This Report on Form 10-Q may contain forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors, that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you that while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

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Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the factors listed and described at Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K, which investors should review. There have been no changes from the risk factors previously described in the Company’s Form 10-K for the fiscal year ended December 31, 2018 (the “Form 10-K”).

Uncertainties regarding the global economic and financial environment could lead to an extended national or global economic recession. A slowdown in economic activity caused by a recession would likely reduce national and worldwide demand for oil and natural gas and result in lower commodity prices for long periods of time. Costs of exploration, development and production have not yet adjusted to current economic conditions, or in proportion to the significant reduction in product prices. Prolonged, substantial decreases in oil and natural gas prices would likely have a material adverse effect on the Company’s business, financial condition, and results of operations, and could further limit the Company's access to liquidity and credit, and could hinder its ability to satisfy its capital requirements.

In the past several years, capital and credit markets have experienced volatility and disruption. Given the levels of market volatility and disruption, the availability of funds from those markets may diminish substantially. Further, arising from concerns about the stability of financial markets generally and the solvency of borrowers specifically, the cost of accessing the credit markets has increased as many lenders have raised interest rates, enacted tighter lending standards, or altogether ceased to provide funding to borrowers.

Due to these potential capital and credit market conditions, the Company cannot be certain that funding will be available in amounts or on terms acceptable to the Company. The Company is evaluating whether current cash balances and cash flow from operations alone would be sufficient to provide working capital to fully fund the Company's operations. Accordingly, the Company is evaluating alternatives, such as joint ventures with third parties , or sales of interest in one or more of its properties. Such transactions, if undertaken, could result in a reduction in the Company's operating interests or require the Company to relinquish the right to operate the property. There can be no assurance that any such transactions can be completed or that such transactions will satisfy the Company's operating capital requirements. If the Company is not successful in obtaining sufficient funding or completing an alternative transaction on a timely basis on terms acceptable to the Company, the Company would be required to curtail its expenditures or restructure its operations, and the Company would be unable to continue its exploration, drilling, and recompletion program, any of which would have a material adverse effect on its business, financial condition, and results of operations.

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There could be adverse legislation which if passed, would significantly curtail our ability to attract investors and raise capital. Proposed changes in the Federal income tax laws which would eliminate or reduce the percentage depletion deduction and the deduction for intangible drilling and development costs for small independent producers, will significantly reduce the investment capital available to those in the industry as well as our Company. Lengthening the time to expense seismic costs will also have an adverse effect on our ability to explore and find new reserves.

Other sections of this report may also include suggested factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks may emerge from time to time and it is not possible for management to predict all such matters; nor can we assess the impact of all such matters on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise.

Results of Operations

Six months ended June 30, 2019 compared to six months ended June 30, 2018

Oil and gas revenues for the first six months of 2019 were $2,375,000, as compared to $3,270,000 for the same period in 2018, a decrease of approximately $895,000 or 27.4%

Oil sales for the first six months of 2019 were approximately $1,350,000 compared to approximately $1,961,000 for the first six months of 2018, a decrease of approximately $611,000 or 31.2%. Oil sales volumes for the first six months of 2019 were approximately 20,400, compared to approximately 23,200 bbls during the same period in 2018, a decrease of approximately 2,800 bbls, or 12.1%.

Average oil prices received were $54.67 per bbl in the first half of 2019 compared to $63.22 per bbl in the first half of 2018, a decrease of approximately $8.55 per bbl or 13.5%.

Natural gas revenue for the first six months of 2019 was $1,025,000 compared to $1,309,000 for the same period in 2018, a decrease of approximately $284,000, or 21.7%. Natural gas sales volumes for the first six months of 2019 were approximately 445,000 mcf compared to approximately 433,000 mcf during the first six months of 2018, an increase of approximately 12,000 mcf or 2.8%.

Average natural gas prices received were $2.30 per mcf in the first six months of 2019 as compared to $2.79 per mcf in the same time period in 2018, a decrease of approximately $0.49 per mcf or 17.6%.

Revenues from lease operations were $187,000 in the first six months of 2019 compared to $130,000 in the first six months of 2018, an increase of approximately $57,000 or 43.9%. This increase is due primarily to an increase in field supervision charges. Revenues from lease operations are derived from field supervision charged to operated leases along with operator overhead charged to operated leases.

Revenues from gas gathering, compression and equipment rental for the first six months of 2019 were $66,000 compared to $61,000 for the same period in 2018, an increase of approximately $5,000 or 8.2%. These revenues are derived from gas volumes produced and transported through our gas gathering systems.

Real estate revenue was approximately $119,000 during the first six months of 2019 compared to $116,000 for the first six months of 2018, an increase of approximately $3,000, or 2.6%.

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Interest income was $113,000 during the first six months of 2019 as compared to $88,000 during the same period in 2018, an increase of approximately $25,000 or 28.4%. The increase in interest income was due to the Company investing its funds in both long-term and short-term certificates of depository accounts paying higher rates of interest than those received in prior periods.

Other revenues for the first six months of 2019 were $22,000 as compared to $29,000 for the same time period in 2018, a decrease of approximately $7,000 or 24.1%.

Lease operating expenses in the first six months of 2019 were $821,000 as compared to $738,000 in the first six months of 2018, a net increase of $83,000, or 11.3%. Of this net increase, approximately $10,000 is due to net increases in operating expenses billed by third-party operators on non-operated properties. The remaining net increase of approximately $73,000 represents overall increases and decreases in well expenditures on various properties.

Production taxes, gathering and marketing expenses in the first six months of 2019 were approximately $388,000 as compared to $496,000 for the first six months of 2018, a decrease of approximately $108,000, or 21.8%. This decrease relates directly to the decrease in oil and gas revenues as described in the above paragraphs.

Pipeline and rental expenses for the first six months of 2019 were $19,000 compared to $37,000 for the same time period in 2018, a decrease of approximately $18,000 or 48.7% . The decrease in 2019 is due to non-recurring repair and maintenance expenses in the first half of 2018.

Real estate expenses in the first six months of 2019 were approximately $72,000 compared to $73,000 during the same period in 2018, a decrease of approximately $1,000 or 1.4%.

Depreciation, depletion, and amortization expenses for first six months of 2019 were $270,000 as compared to $292,000 for the same period in 2018, a decrease of $22,000, or 7.5%. $239,000 of the amount for the first six months of 2019 was for amortization of the full cost pool of capitalized costs compared to $262,000 for the same period of 2018, a decrease of $23,000 or 8.8%. The Company re-evaluated its proved oil and natural gas reserve quantities as of December 31, 2018. This re-evaluated reserve base was reduced for oil and gas reserves that were produced or sold during the first six months of 2019 and adjusted for newly acquired reserves or for changes in estimated production curves and future price assumptions.

A depletion rate of 3.191% for the first quarter of 2019 and a depletion rate of 3.554% for the second quarter of 2019 was calculated and applied to the Company’s full cost pool of capitalized oil and natural gas properties compared to rates of 2.636% and 3.320% for the first two quarters of 2018 respectively.

Asset Retirement Obligation (“ARO”) expense for the first six months of 2019 was approximately $94,000 as compared to approximately $18,000 for the same time period in 2018, an increase of approximately $76,000 or 422.2%. The ARO expense is calculated to be the discounted present value of the estimated future cost to plug and abandon the Company’s producing wells.

General and administrative expenses for the first six months of 2019 were approximately $1,491,000 as compared to approximately $1,301,000 for the same time period of 2018, an increase of approximately $190,000 or 14.6%. Approximately 67% of the increase comes from increased salary, wages, benefits, and other personnel costs. The remaining 33% of the increase is due to office, computer, and other expenses.

Three months ended June 30, 2019 compared to three months ended June 30, 2018

Oil and natural gas revenues for the three months ended June 30, 2019 were $1,210,000, compared to $1,864,000 for the same time period in 2018, a decrease of $654,000, or 35.1%.

Oil sales for the second quarter of 2019 were approximately $734,000 compared to approximately $1,243,000 for the same period of 2018, a decrease of approximately $509,000 or 41.0%. Oil volumes sold for the second quarter of 2019 were approximately 10,200 bbls compared to approximately 12,700 bbls during the same period of 2018, a decrease of approximately 2,500 bbl or19.7%.

Average oil prices received were approximately $54.67 per bbl in the second quarter of 2019 compared to $65.00 per bbl during the same period of 2018, a decrease of approximately $10.33 per bbl, or 15.9%.

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Natural gas revenues for the second quarter of 2019 were $476,000 compared to $621,000 for the same period in 2018, a decrease of $145,000 or 23.4%. Natural gas volumes sold for the second quarter of 2019 were approximately 237,000 mcf compared to approximately 196,000 mcf during the same period of 2018, an increase of approximately 41,000 mcf, or 20.9%.

Average natural gas prices received were approximately $2.10 per mcf in the second quarter of 2019 as compared to approximately $2.55 per mcf during the same period in 2018, a decrease of approximately $0.45 or 17.7%.

Revenues from lease operations for the second quarter of 2019 were approximately $132,000 compared to approximately $60,000 for the second quarter of 2018, an increase of approximately $72,000 or 120.0%. This increase is due primarily to an increase in field supervision charges. Revenues from lease operations are derived from field supervision charged to operated leases along with operator overhead charged to operated leases.

Revenues from gas gathering, compression and equipment rental for the second quarter of 2019 were approximately $33,000, compared to approximately $25,000 for the same period in 2018, an increase of approximately $8,000 or 32.0%. These revenues are derived from gas volumes produced and transported through our gas gathering systems.

Real estate revenue was approximately $59,000 during the second quarter of 2019 compared to $59,000 for the same time period of 2018,

Interest income for the second quarter of 2019 was approximately $42,000 as compared with approximately $39,000 for the same period in 2018, an increase of approximately $3,000 or 7.7%. Interest income is derived from investments in both short-term and long-term certificates of deposit as well as money market accounts at banks.

Other revenues for second quarter of 2019 were approximately $11,000 as compared with approximately $16,000 for the same period in 2018, a decrease of approximately $5,000 or 31.3%.

Lease operating expenses in the second quarter of 2019 were $493,000 as compared to $377,000 in the second quarter of 2018, a net increase of approximately $116,000, or 30.8%. Of this net increase, approximately $ 136,000 is from overall increases and decreases in well expenditures on various operated properties, offset by a $21,000 reduction in net operating expenses billed by third-party operators on non-operated properties

Production taxes, gathering, transportation and marketing expenses for the second quarter of 2019 were approximately $194,000 as compared to $295,000 during the second quarter of 2018, a net decrease of approximately $101,000 or 34.2%. These decreases relate directly to the decrease in oil and gas revenues as described in the above paragraphs.

Pipeline and rental expenses for the second quarter of 2019 were $16,000 compared to $23,000 for the same time period in 2018, a decrease of approximately $7,000, or 30.4%

Real estate expenses during the second quarter 2019 were approximately $33,000 compared to approximately $43,000 for the same period in 2018, a decrease of approximately $10,000 or 23.3%. This decrease is due primarily to non-recurring HVAC expenses incurred in the second quarter of 2018.

Depreciation, depletion, and amortization expenses for the second quarter of 2019 were $148,000 as compared to $161,000 for the same period in 2018, a decrease of $13,000, or 8.1%. $132,000 of the amount for the second quarter of 2019 was for amortization of the full cost pool of capitalized costs compared to $146,000 for the second quarter of 2018, a decrease of $14,000 or 9.4%. The Company re-evaluated its proved oil and natural gas reserve quantities as of December 31, 2018. This re-evaluated reserve base was reduced for oil and gas reserves that were produced or sold during the first six months of 2019 and adjusted for newly acquired reserves or for changes in estimated production curves and future price assumptions. A depletion rate of 3.191% for the first quarter of 2019 and a depletion rate of 3.554% for the second quarter of 2019 was calculated and applied to the Company’s full cost pool of capitalized oil and natural gas properties compared to rates of 2.636% and 3.320% for the first two quarters of 2018 respectively.

Asset Retirement Obligation (“ARO”) expense for the second quarter of 2019 was approximately $47,000 as compared to approximately $9,000 for the same time period in 2018, an increase of approximately $38,000. The ARO expense is calculated to be the discounted present value of the estimated future cost to plug and abandon the Company’s producing wells.

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General and administrative expenses for the second quarter of 2019 were $783,000 compared to $666,000 for the same period in 2018, an increase of approximately $117,000 or 17.6%. Approximately 67% of the increase comes from increased salary, wages, benefits, and other personnel costs. The remaining 33% of the increase is due to office, computer, and other expenses.

Financial Condition and Liquidity

The Company's operating capital needs, as well as its capital spending program are generally funded from cash flow generated by operations. Because future cash flow is subject to a number of variables, such as the level of production and the sales price of oil and natural gas, the Company can provide no assurance that its operations will provide cash sufficient to maintain current levels of capital spending. Accordingly, the Company may be required to seek additional financing from third parties in order to fund its exploration and development programs.

Item 4. - Controls and Procedures

(a) As of the end of the period covered by this report, Spindletop Oil & Gas Co. carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Principal Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 and 15d-15. Based upon the evaluation, the Company's Principal Executive Officer and Principal Financial and Accounting Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by the report.

(b) There have been no changes in the Company's internal controls over financial reporting during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect the Company's internal controls over financial reporting.

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Part II – Other Information

Item 5. – Other Information

East Texas

Effective April 1, 2019, the Company sold its interest in the J. M. Watts Gas Unit #1 and associated leases. The Company is pursuing Section 1031-Like Kind Exchange treatment for the proceeds from this transaction and has not calculated the income tax implications of the divestiture.

West Texas

Effective August 1, 2019, the Company acquired a 0.28% royalty interest in two wells located in Howard County, Texas. In addition, the Company acquired a 0.17% royalty interest in two other wells also located in Howard County, Texas.

Subsequent to the end of the second quarter, the Company sold its interest in approximately 16.77 net leasehold acres located in Loving County, Texas. The Company is pursuing Section 1031-Like Kind Exchange treatment for the proceeds from this transaction and has not calculated the income tax implications of the divesture.

New Mexico

Effective April 1, 2019, the Company sold its working interest in the Yarbro A Comm #1 well located in Eddy County, New Mexico.

Effective June 19, 2019, the Company sold its interest in approximately 182 net leasehold acres located in Eddy County, New Mexico. The Company is pursuing Section 1031, Like Kind Exchange Treatment for the proceeds from this transaction and has not calculated the income tax implications of the divesture.

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Item 6. - Exhibits

The following exhibits are filed herewith or incorporated by reference as indicated.

____________________________

* filed herewith

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.