XNYS:GMXR Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

GMXR-2012.6.30-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________ 
FORM 10-Q
 ______________________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
Commission File Number 001-32977
 ______________________________________ 
GMX RESOURCES INC.
(Exact name of registrant as specified in its charter)
______________________________________ 
Oklahoma
 
73-1534474
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
One Benham Place, 9400 North Broadway, Suite 600
Oklahoma City, Oklahoma
 
73114
(Address of principal executive offices)
 
(Zip Code)
(Registrants’ telephone number, including area code): (405) 600-0711
______________________________________ 
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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o 
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  o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
 
o
Accelerated filer
 
x
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  o    No  x
The number of shares outstanding of the registrant’s common stock as of August 8, 2012 was 75,533,632, which included 2,364,375 shares under a share loan which will be returned to the registrant upon conversion of certain outstanding convertible notes.



GMX Resources Inc.
Form 10-Q
For the Quarter Ended June 30, 2012
TABLE OF CONTENTS
 


2


PART I. FINANCIAL INFORMATION
ITEM 1.
Financial Statements.
GMX Resources Inc. and Subsidiaries
Consolidated Balance Sheets
 
June 30, 2012
 
December 31, 2011
ASSETS
(Unaudited)
 
 
CURRENT ASSETS:
(In thousands, except share data)
Cash and cash equivalents
$
32,122

 
$
102,493

Restricted cash
4,325

 
4,325

Short-term investments
6,008

 

Accounts receivable – interest owners
5,952

 
8,607

Accounts receivable – oil and natural gas revenues, net
4,705

 
7,082

Derivative instruments
1,929

 

Inventories
326

 
326

Prepaid expenses and deposits
1,583

 
2,655

Assets held for sale
410

 
2,045

Total current assets
57,360

 
127,533

OIL AND NATURAL GAS PROPERTIES, BASED ON THE FULL COST METHOD
 
 
 
Properties being amortized
1,105,167

 
1,062,801

Properties not subject to amortization
162,783

 
147,224

Less accumulated depreciation, depletion, and impairment
(1,003,510
)
 
(871,346
)
 
264,440

 
338,679

PROPERTY AND EQUIPMENT, AT COST, NET
63,159

 
65,858

DERIVATIVE INSTRUMENTS
1,451

 

OTHER ASSETS
8,382

 
10,131

TOTAL ASSETS
$
394,792

 
$
542,201

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
11,582

 
$
13,550

Accrued expenses
15,911

 
17,835

Accrued interest
4,956

 
3,256

Revenue distributions payable
5,609

 
5,980

Short-term derivative instruments
1,141

 

Current maturities of long-term debt
51,256

 
26

Total current liabilities
90,455

 
40,647

LONG-TERM DEBT, LESS CURRENT MATURITIES
362,987

 
426,805

DEFERRED PREMIUMS ON DERIVATIVE INSTRUMENTS
608

 

OTHER LIABILITIES
8,415

 
7,476

EQUITY:
 
 
 
Preferred stock, par value $.001 per share, 10,000,000 shares authorized:
 
 
 
Series A Junior Participating Preferred Stock, 25,000 shares authorized, none issued and outstanding

 

9.25% Series B Cumulative Preferred Stock, 6,000,000 shares authorized, 3,176,734 shares issued and outstanding as of June 30, 2012 and December 31, 2011 (aggregate liquidation preference $79,418 as of June 30, 2012 and December 31, 2011)
3

 
3

Common stock, par value $.001 per share – 250,000,000 shares authorized, 74,451,790 shares issued and outstanding as of June 30, 2012 and 63,085,432 shares issued and outstanding as of December 31, 2011
74

 
63

Additional paid-in capital
709,829

 
690,986

Accumulated deficit
(796,073
)
 
(649,341
)
Accumulated other comprehensive income, net of taxes
7,764

 
14,029

Total GMX Resources’ equity
(78,403
)
 
55,740

Noncontrolling interest
10,730

 
11,533

Total equity
(67,673
)
 
67,273

TOTAL LIABILITIES AND EQUITY
$
394,792

 
$
542,201

See accompanying notes to consolidated financial statements.

3


GMX Resources Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except share and per share data)
OIL AND GAS SALES
$
16,283

 
$
32,858

 
$
33,684

 
$
62,235

EXPENSES:
 
 
 
 
 
 
 
Lease operations
2,888

 
2,836

 
5,996

 
5,733

Production and severance taxes
556

 
166

 
319

 
549

Depreciation, depletion, and amortization
6,974

 
13,304

 
14,439

 
26,093

Impairment of oil and natural gas properties and assets held for sale
91,690

 
16,861

 
120,690

 
65,181

General and administrative
6,802

 
7,605

 
13,797

 
14,683

Total expenses
108,910

 
40,772

 
155,241

 
112,239

Loss from operations
(92,627
)
 
(7,914
)
 
(121,557
)
 
(50,004
)
NON-OPERATING INCOME (EXPENSES):
 
 
 
 
 
 
 
Interest expense
(10,122
)
 
(7,832
)
 
(20,825
)
 
(15,854
)
Gain (loss) on conversion/extinguishment of debt
831

 
(67
)
 
3,612

 
(176
)
Interest and other income
35

 
12

 
108

 
282

Unrealized gain (loss) on derivatives
(11
)
 
5,437

 
779

 
4,992

Total non-operating expense
(9,267
)
 
(2,450
)
 
(16,326
)
 
(10,756
)
Loss before income taxes
(101,894
)
 
(10,364
)
 
(137,883
)
 
(60,760
)
INCOME TAX PROVISION
(1,418
)
 
(1,436
)
 
(3,305
)
 
(2,868
)
NET LOSS
(103,312
)
 
(11,800
)
 
(141,188
)
 
(63,628
)
Net income attributable to noncontrolling interest
982

 
1,746

 
1,870

 
3,158

NET LOSS APPLICABLE TO GMX RESOURCES
(104,294
)
 
(13,546
)
 
(143,058
)
 
(66,786
)
Preferred stock dividends
1,837

 
1,837

 
3,673

 
3,047

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
$
(106,131
)
 
$
(15,383
)
 
$
(146,731
)
 
$
(69,833
)
LOSS PER SHARE – Basic
$
(1.52
)
 
$
(0.28
)
 
$
(2.23
)
 
$
(1.43
)
LOSS PER SHARE – Diluted
$
(1.52
)
 
$
(0.28
)
 
$
(2.23
)
 
$
(1.43
)
WEIGHTED AVERAGE COMMON SHARES – Basic
69,925,895

 
55,660,978

 
65,832,321

 
48,959,825

WEIGHTED AVERAGE COMMON SHARES – Diluted
69,925,895

 
55,660,978

 
65,832,321

 
48,959,825

See accompanying notes to consolidated financial statements.

4


GMX Resources Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Net loss
$
(103,312
)
 
$
(11,800
)
 
$
(141,188
)
 
$
(63,628
)
Other comprehensive loss, net of income tax:
 
 
 
 
 
 
 
Change in fair value of derivative instruments, net of income tax of $0, ($79), $0 and $2, respectively

 
(153
)
 

 
3

Reclassification of gain on settled contracts, net of income taxes of ($1,418), ($1,357), ($3,227) and ($2,868), respectively
(2,753
)
 
(2,634
)
 
(6,265
)
 
(5,568
)
Comprehensive loss
(106,065
)
 
(14,587
)
 
(147,453
)
 
(69,193
)
Comprehensive income attributable to the noncontrolling interest
982

 
1,746

 
1,870

 
3,158

Comprehensive loss attributable to GMX shareholders
$
(107,047
)
 
$
(16,333
)
 
$
(149,323
)
 
$
(72,351
)
See accompanying notes to consolidated financial statements.
 

5


GMX Resources Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended
 
June 30,
 
2012
 
2011
CASH FLOWS DUE TO OPERATING ACTIVITIES
(In thousands)
Net loss
$
(141,188
)
 
$
(63,628
)
Depreciation, depletion, and amortization
14,439

 
26,093

Impairment of oil and natural gas properties and assets held for sale
120,690

 
65,181

Deferred income taxes
3,305

 
2,867

Non-cash compensation expense
2,292

 
2,155

(Gain) loss on conversion/extinguishment of debt
(3,612
)
 
176

Non-cash interest expense
4,163

 
4,622

Non-cash change in fair value of derivative financial instruments
(779
)
 
(4,992
)
Non-cash derivative gain in oil and gas sales
(9,493
)
 

Other
(28
)
 
(722
)
Decrease (increase) in:
 
 
 
Accounts receivable
4,856

 
(634
)
Inventory and prepaid expenses
1,166

 
(231
)
Increase (decrease) in:
 
 
 
Accounts payable and accrued liabilities
(3,515
)
 
5,474

Revenue distributions payable
(358
)
 
1,263

Net cash (used in) provided by operating activities
(8,062
)
 
37,624

CASH FLOWS DUE TO INVESTING ACTIVITIES
 
 
 
Purchase, exploration and development of oil and natural gas properties
(52,974
)
 
(192,708
)
Proceeds from sale of oil and natural gas properties, property, equipment and assets held for sale
1,765

 
2,189

Purchase of short term investments
(6,029
)
 

Purchase of property and equipment
(418
)
 
(1,739
)
Net cash used in investing activities
(57,656
)
 
(192,258
)
CASH FLOWS DUE TO FINANCING ACTIVITIES
 
 
 
Borrowings on revolving bank credit facility

 
26,000

Repayments of long-term debt
(24
)
 
(168,035
)
Proceeds from issuance of long-term debt

 
193,666

Proceeds from sale of common stock

 
105,324

Proceeds from sale of preferred stock

 
25,809

Dividends paid on Series B preferred stock
(1,837
)
 
(3,047
)
Fees paid related to financing activities
(118
)
 
(16,132
)
Contributions from non-controlling interest member

 
385

Distributions to non-controlling interest member
(2,674
)
 
(6,816
)
Net cash (used in) provided by financing activities
(4,653
)
 
157,154

NET (DECREASE) INCREASE IN CASH
(70,371
)
 
2,520

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
102,493

 
2,357

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
32,122

 
$
4,877

SUPPLEMENTAL CASH FLOW DISCLOSURE
 
 
 
CASH PAID DURING THE PERIOD FOR:
 
 
 
INTEREST, Net of amounts capitalized
$
11,531

 
$
3,336

INCOME TAXES, Paid
$
24

 
$
1

NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Debt extinguished with common stock
$
20,753

 
$

Additions to oil and natural gas properties in exchange for common stock
$

 
$
31,612

Decrease in accounts payable for property additions
$
4,451

 
$
7,079

Interest paid in the form of additional notes ("PIK Election")
$
5,102

 
$

See accompanying notes to consolidated financial statements.

6


GMX Resources Inc. and Subsidiaries
Condensed Notes to the Consolidated Interim Financial Statements
(Unaudited)

NOTE A – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
GMX Resources Inc. and its subsidiaries (collectively, “GMX” the “Company”, “we,” “us” and “our”) is an independent oil and natural gas exploration and production company with a portfolio of leasehold acreage in multiple resource plays that allows the Company flexibility to deploy capital based on a variety of economic and technical factors, including commodity prices (including differentials applicable to the basin), well costs, service availability, and take-away capacity.
Prior to 2011, the Company focused on the development of the hydrocarbon formations in East Texas including the Cotton Valley Sands (“CVS”) layer in the Schuler formation and the Upper, Middle and Haynesville/Lower Bossier layers of the Bossier formation (“H/B”), in the Sabine Uplift of the Carthage, North Field primarily located in Harrison and Panola counties of East Texas (previously designated as our “primary development area”).
In late 2010, we made a strategic decision to expand our asset base and development activities into other basins in order to diversify our significant concentration in natural gas to a multiple basin and commodity strategy with more liquid hydrocarbon opportunities. In the first half of 2011, we acquired core positions in over 75,000 undeveloped net acres in two of the leading oil resource plays in the U.S.: the Williston Basin of North Dakota/Montana, targeting the Bakken/ Three Forks Formation; and in the oil window of the Denver Julesburg Basin (the “DJ Basin”) of Wyoming, targeting the emerging Niobrara Formation. We believe the oil production from the liquids-rich (estimated 90% oil) Bakken and Niobrara acreage will enable us to generate higher cash flow growth to fund our capital expenditure program. The Company is utilizing our expertise in H/B shale horizontal drilling to explore and develop these oil resources.
We have three subsidiaries: Diamond Blue Drilling Co. (“Diamond Blue”), which sold its assets in 2011 and is not active, Endeavor Pipeline Inc. (“Endeavor Pipeline”), which operates our water supply and salt water disposal systems in our East Texas development area, and Endeavor Gathering, LLC (“Endeavor Gathering”), which owns the natural gas gathering system and related equipment operated by Endeavor Pipeline. Kinder Morgan Endeavor LLC (“KME”) owns a 40% membership interest in Endeavor Gathering.
Basis of Presentation
The accompanying unaudited consolidated financial statements and condensed notes thereto of GMX have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in GMX’s 2011 Annual Report on Form 10-K (“2011 Form 10-K”).
In the opinion of GMX’s management, all adjustments (all of which are normal and recurring) have been made which are necessary to fairly state the unaudited consolidated balance sheet of GMX as of June 30, 2012, and the results of its operations and cash flows for the three and six months ended June 30, 2012 and 2011.
Liquidity and Management's Plans
At June 30, 2012, the Company had a working capital deficit of $33.1 million, which included $51.2 million in current liabilities related to the 5.00% Convertible Notes due February 2013 ("5.00% Convertible Notes") and cash, restricted cash and short-term investments of $42.5 million in current assets.
The Company has successfully reduced the original principal amount of the 5.00% Convertible Notes by $73 million and is undertaking multiple steps to address the remaining $52 million principal balance. The Company continues to evaluate potential debt-for-equity exchanges with holders of the 5.00% Convertible Notes, as well as evaluating a potential debt-for-debt exchange. The Company is also focused on increasing its liquidity to fund the on-going Bakken oil drilling program.
In July 2012, the Company engaged a financial advisor in connection with a proposed sale of a portion of the Company's Cotton Valley Sand liquids rich natural gas properties located in East Texas. The Proved Developed and Producing wells are in the mature stage of production with shallow decline rates. The assets being sold have additional upside through infill horizontal development on acreage that is all held by production. The Company currently expects the sale of these properties to occur during the third quarter of 2012, with the proceeds to be used for our Bakken drilling program. We are also analyzing

7


our seismic program in the Niobrara which may facilitate a partial sale or joint venture on our 40,000 acres, potentially increasing the Company's liquidity position for more oil development. In addition to asset sales and continued execution of our business plan, the Company has relied on the capital markets to fund the acceleration of its drilling programs. Management believes that these actions will enable the Company to meet its liquidity requirements through the next twelve months.
Earnings Per Share
Basic earnings (loss) per common share is computed by dividing the net income (loss) applicable to common stock by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share is calculated in the same manner, but also considers the impact to net income (loss) and common shares for the potential dilution from our convertible notes, outstanding stock options and non-vested restricted stock awards. Because the Company was in a loss position for the three and six months ended June 30, 2012 and 2011, the instruments mentioned above would decrease diluted loss per share, which would result in antidilutive instruments. Therefore, there were no dilutive shares for the three and six months ended June 30, 2012 and 2011.
Oil and Natural Gas Properties
The Company follows the full cost method of accounting for its oil and natural gas properties and activities. Accordingly, the Company capitalizes all costs incurred in connection with the acquisition, exploration and development of oil and natural gas properties. The Company capitalizes internal costs that can be directly identified with exploration and development activities, but does not include any costs related to production, general corporate overhead, or similar activities. Capitalized costs include geological and geophysical work, 3D seismic, delay rentals, drilling and completing and equipping oil and gas wells, including salaries and benefits and other internal costs directly attributable to these activities. Also included in oil and natural gas properties are tubular and other lease and well equipment of $3.6 million as of June 30, 2012 and $3.8 million as of December 31, 2011, respectively, that have not been placed in service but for which we plan to utilize in our on-going exploration and development activities.
Capitalized costs are subject to a “ceiling test,” which limits the net book value of oil and natural gas properties less related deferred income taxes to the estimated after-tax future net revenues discounted at a 10-percent interest rate. The cost of unproved properties is added to the future net revenues less income tax effects. Future net revenues are calculated using prices that represent the average of the first day of the month price for the 12-months ending at the end of the period. Such prices are utilized except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including the effects of derivatives qualifying as cash flow hedges.
The primary factors impacting the full cost method ceiling test are expenditures added to the full cost pool, reserve levels, natural gas and oil prices and their associated impact on the present value of estimated future net revenues. Revisions to estimates of natural gas and oil reserves and/or an increase or decrease in prices can have a material impact on the present value of estimated future net revenues. Any excess of the net book value is generally written off as an expense. Natural gas represents 79% of the Company’s total production for the three months ended June 30, 2012, and as a result, a decrease in natural gas prices can significantly impact the Company’s ceiling test. During the first six months of 2012, the 12-month average of the first day of the month natural gas price decreased 24% from $4.12 per million British thermal units (MMbtu) at December 31, 2011 to $3.15 per MMbtu at June 30, 2012. As a result of the Company’s quarterly ceiling test, the Company recorded impairment expense related to oil and gas properties of $91.8 million and $120.8 million for the three and six months ended June 30, 2012, respectively.
Assets held for sale are carried on the balance sheet at their carrying value or fair value less cost to sell, whichever is less. Subsequent increases in fair value less cost to sell will be recognized as a gain, but not in excess of the cumulative loss previously recognized. In April 2012, the Company sold a compressor, which was included in assets held for sale as of March 31, 2012, for $1.5 million and a gain of $0.1 million was recognized on that sale. The remaining assets held for sale of $0.4 million as of June 30, 2012 consist of valves and pipe, which the Company is actively marketing.
Recent Accounting Standards
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The issuance of ASU 2011-5 is intended to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The guidance in ASU 2011-5 supersedes the presentation options in ASC Topic 220 and facilitates convergence of U.S. generally accepted accounting principles and International Financial Reporting Standards ("IFRS") by eliminating the option to present components of other comprehensive income as part of the statement of changes in shareholders' equity and requiring that all non-owner changes in shareholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective during the interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material

8


impact on the Company’s consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S GAAP and IFRS. This amendment of the FASB Accounting Standards Codification is to ensure that fair value has the same meaning in U.S. GAAP and IFRS and that their respective fair value measurement and disclosure requirements are the same. This guidance is effective during the interim and annual periods beginning after December 15, 2011. The adoption of the guidance did not have any material effect on the Company’s financial statements.
NOTE B – LONG-TERM DEBT
The table below presents the carrying amounts and approximate fair values of our debt obligations. The approximate fair values of our convertible and other debt securities are determined based on market quotes from independent third party brokers as they are actively traded in an established market.
 
 
June 30, 2012
 
December 31, 2011
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
(in thousands)
 
 
5.00% Convertible Senior Notes due February 2013
$
51,230

 
$
41,598

 
$
70,757

 
$
46,560

4.50% Convertible Senior Notes due May 2015
78,634

 
38,813

 
77,457

 
41,400

11.375% Senior Notes due February 2019
1,915

 
1,290

 
1,912

 
1,300

Senior Secured Notes due December 2017
281,194

 
236,056

 
275,411

 
283,475

Joint venture financing(1)
1,270

 
1,270

 
1,294

 
1,294

Total
$
414,243

 
$
319,027

 
$
426,831

 
$
374,029

 __________________
(1)
Non-recourse, no interest rate
5.00% Convertible Senior Notes
As of June 30, 2012 and December 31, 2011, the net carrying amount of our 5.00% Convertible Senior Notes (the "5.00% Convertible Notes") was as follows (amounts in thousands):
 
June 30, 2012
 
December 31, 2011
Principal amount
$
51,997

 
$
72,750

Less: Unamortized debt discount
(767
)
 
(1,993
)
Carrying amount
$
51,230

 
$
70,757

The 5.00% Convertible Notes bear interest at a rate of 5.00% per year, payable semi-annually in arrears on February 1 and August 1 of each year, beginning August 1, 2008. As a result of the amortization of the debt discount through non-cash interest expense, the effective interest rate on the 5.00% Convertible Notes is 7.68% per annum. The amount of the cash interest expense recognized with respect to the 5.00% contractual interest coupon for the three and six months ended June 30, 2012 was $0.7 million and $1.6 million, respectively, and $0.9 million and $2.3 million for the three and six months ended June 30, 2011, respectively. The amount of non-cash interest expense related to the amortization of the debt discount and amortization of the transaction costs for the three and six months ended June 30, 2012 was $0.4 million and $1.0 million, respectively, and $0.4 million and $1.1 million for the three and six months ended June 30, 2011, respectively.
As of June 30, 2012, the unamortized debt discount is expected to be amortized into earnings over 0.6 years. The carrying value of the equity component of the 5.00% Convertible Notes was $3.9 million as of June 30, 2012. As of June 30, 2012 and December 31, 2011, unamortized debt issue costs were approximately $0.2 million and $0.6 million, respectively, with all costs included in prepaid expenses and deposits and other assets, respectively, to reflect the current and long-term amortization periods consistent with the current and long-term classification of the related 5.00% Convertible Notes.
As of June 30, 2012, the balance of the 5.00% Convertible Notes was classified as a current liability due to the maturity date of February 1, 2013. During 2012, we entered into separate exchange agreements with various holders of our 5.00% Convertible Notes. Pursuant to these agreements, as consideration for the surrender by the holders of $20.8 million aggregate principal amount of the 5.00% Convertible Notes, we issued to the holders an aggregate of 11,271,510 shares of our common stock. As a result, the Company has recorded a net gain of approximately $3.8 million, including a loss of approximately $15.4

9


million for the early conversion offer and a gain of approximately $19.2 million for the cancellation of indebtedness of such 5.00% Convertible Notes. We continue to evaluate additional options for refinancing and/or repayment of these notes prior to their maturity in February 2013. See discussion of these options in Note A - Nature of Operations and Summary of Significant Accounting Policies.
4.50% Convertible Senior Notes
As of June 30, 2012 and December 31, 2011, the net carrying amount of our 4.50% Convertible Senior Notes due 2015 (the "4.50% Convertible Notes") was as follows (amounts in thousands):
 
June 30, 2012
 
December 31, 2011
Principal amount
$
86,250

 
$
86,250

Less: Unamortized debt discount
(7,616
)
 
(8,793
)
Carrying amount
$
78,634

 
$
77,457

The 4.50% Convertible Notes bear interest at a rate of 4.50% per year, payable semiannually in arrears on November 1 and May 1 of each year, beginning May 1, 2010. As a result of the amortization of the debt discount through non-cash interest expense, the effective interest rate on the 4.50% Convertible Notes is 9.09% per annum. The amount of the cash interest expense recognized with respect to the 4.50% contractual interest coupon for the three and six months ended June 30, 2012 was $1.0 million and $1.9 million, respectively, and $1.0 million and $1.9 million for the three and six months ended June 30, 2011, respectively. The amount of non-cash interest expense related to the amortization of the debt discount and transaction costs for the three and six months ended June 30, 2012 was $0.7 million and $1.5 million, respectively, and $0.6 million and $1.1 million for the three and six months ended June 30, 2011, respectively. As of June 30, 2012, the unamortized discount is expected to be amortized into earnings over 2.8 years. The carrying value of the equity component of the 4.50% Convertible Notes was $8.4 million as of June 30, 2012.
11.375% Senior Notes
On February 9, 2011, the Company successfully completed the issuance and sale of $200 million aggregate principal amount of 11.375% Senior Notes due 2019 (the “11.375% Senior Notes”). The 11.375% Senior Notes are jointly and severally, and unconditionally, guaranteed (the “guarantees”) on a senior unsecured basis initially by two of our wholly-owned subsidiaries, and all of our future subsidiaries other than immaterial subsidiaries (such guarantors, the “Guarantors”). The 11.375% senior notes and the guarantees were issued pursuant to an indenture dated as of February 9, 2011 (the “Indenture”), by and among the Company, the Guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., a national banking association, as trustee (the “Trustee”).
In December 2011, the Company entered into an exchange transaction related to the new Senior Secured Notes mentioned below. Approximately $198 million of the 11.375% Senior Notes were exchanged to new Senior Secured Notes. As of June 30, 2012 and December 31, 2011, the net carrying amount of the 11.375% Senior Notes was as follows (amounts in thousands):
 
June 30, 2012
 
December 31, 2011
Principal amount
$
1,970

 
$
1,970

Less: Unamortized debt discount
(55
)
 
(58
)
Carrying amount
$
1,915

 
$
1,912

The 11.375% senior notes bear interest at a rate of 11.375% per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning August 15, 2011. As a result of the amortization of the debt discount through non-cash interest expense, the effective interest rate on the 11.375% senior notes is 12.94% per annum. The amount of the cash interest expense recognized with respect to the 11.375% contractual interest coupon for the three and six months ended June 30, 2012 was $56,000 and $112,000, respectively, and $5.7 million and $9.0 million for the three and six months ended June 30, 2011, respectively. The amount of non-cash interest expense related to the amortization of the debt discount and transaction costs for the three and six months ended June 30, 2012 was $2,700 and $5,000, respectively, and $0.4 million and $0.6 million for the three and six months ended June 30, 2011, respectively. As of June 30, 2012, the unamortized discount is expected to be amortized into earnings over 6.6 years.
Material covenants were removed as part of the exchange offer and issuance of the Senior Secured Notes during December 2011.

10


Senior Secured Notes
On December 19, 2011, the Company executed an indenture (the “Senior Secured Notes Indenture”), among the Company, the guarantors party thereto and U.S. Bank National Association, as trustee. The Company issued $283,475,000 aggregate principal amount of Senior Secured Notes due 2017 (the “Senior Secured Notes”) pursuant to the Senior Secured Notes Indenture. The Senior Secured Notes are fully and unconditionally guaranteed (the “Guarantees”), jointly and severally, on a senior secured basis by each of the Company’s existing and future domestic restricted subsidiaries (the “Guarantors”). All of the Company’s existing subsidiaries other than Endeavor Gathering, LLC are domestic restricted subsidiaries and Guarantors. As of June 30, 2012 and December 31, 2011, the net carrying amount of the Senior Secured Notes was as follows (amounts in thousands):
 
June 30, 2012
 
December 31, 2011
Principal amount
$
288,577

 
$
283,475

Less: Unamortized debt discount
(7,383
)
 
(8,064
)
Carrying amount
$
281,194

 
$
275,411

The Senior Secured Notes bear interest at a rate of 11.00% per year, payable semiannually on June 1 and December 1 of each year, beginning June 1, 2012. The Indenture for the Senior Secured Notes provide the Company the option to pay a portion of the interest due in the form of additional notes ("PIK Election"), which allows for a 9.00% cash interest payment along with additional Senior Secured Notes of 4.00% resulting in an annual interest rate of 13.00%. For the June 1, 2012 interest payment, the Company elected the PIK Election and paid cash interest of $11.5 million and issued an additional $5.1 million of Senior Secured Notes. As a result of the amortization of the debt discount through non-cash interest expense, the effective interest rate on the Senior Secured Notes is 11.68% per annum if the cash only option is elected. If the PIK option is elected, the effective interest rate on the Senior Secured Notes is 13.52% per annum. The amount of the interest expense recognized with respect to the 13.00% PIK Election interest coupon for the three and six months ended June 30, 2012 was $9.3 million and $18.7 million, respectively. The amount of non-cash interest expense for the three and six months ended June 30, 2012 related to the amortization of the debt discount and transaction costs was $0.3 million and $0.5 million, respectively. As of June 30, 2012, the unamortized discount is expected to be amortized into earnings over 5.4 years.
NOTE C – DERIVATIVE ACTIVITIES
The Company is subject to price fluctuations for natural gas and crude oil. Prices received for natural gas and crude oil sold on the spot market are volatile due to factors beyond the Company’s control. Reductions in crude oil and natural gas prices could have a material adverse effect on the Company’s financial position, results of operations, capital expenditures and quantities of reserves recoverable on an economic basis. Any reduction in reserves, including reductions due to lower prices, can affect the Company’s liquidity and ability to obtain capital for acquisition and development activities.
To mitigate a portion of its exposure to fluctuations in commodity prices, the Company enters into financial price risk management activities with respect to a portion of projected crude oil and natural gas production through financial price swaps, collars and put spreads (collectively, “derivatives”). Additionally, the Company uses basis protection swaps to reduce basis risk. Basis is the difference between the price of the physical commodity being hedged and the price of the futures contract used for hedging. Basis risk is the risk that an adverse change in the futures market will not be completely offset by an equal and opposite change in the cash price of the commodity being hedged. Basis risk exists in natural gas due to the geographic price differentials between a given cash market location and the futures contract delivery locations. Settlement or expiration of the hedges is designed to coincide as closely as possible with the physical sale of the commodity being hedged—daily for oil and monthly for natural gas—to obtain reasonable assurance that a gain in the cash sale will offset the loss on the hedge and vice versa.
The Company utilizes counterparties that the Company believes are credit-worthy entities at the time the transactions are entered into. The Company closely monitors the credit ratings of these counterparties. Additionally, the Company performs both quantitative and qualitative assessments of these counterparties based on their credit ratings and credit default swap rates where applicable. However, the recent events in the financial markets demonstrate there can be no assurance that a counterparty financial institution will be able to meet its obligations to the Company.
None of the Company’s derivative instruments contain credit-risk-related contingent features. Additionally, the Company has not incurred any credit-related losses associated with derivative activities and believes that its counterparties will continue to be able to meet their obligations under these transactions.

11


As a result of hedging transactions entered into in the first half of 2012, the Company recorded a net derivative asset. This net derivative asset is being accounted for at fair value with the changes in fair value recorded to the consolidated statement of operations.
The following is a summary of the asset and liability fair values of our derivative contracts:
 
 
Asset Fair Value
 
Liability Fair Value
 
Net Derivative Fair Value
  
Balance Sheet Location
 
June 30, 2012
 
December 31, 2011
 
June 30, 2012
 
December 31, 2011
 
June 30, 2012
 
December 31, 2011
 
 
 
(in thousands)
 
(in thousands)
 
(in thousands)
Derivatives not designated as Hedging Instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas
Current derivative liability
 
$

 
$

 
$
1,141

 
$

 
$
(1,141
)
 
$

Crude oil
Current derivative asset
 
1,929

 

 

 

 
1,929

 

Natural gas
Other liabilities – non-current
 

 

 
453

 

 
(453
)
 

Crude oil
Derivative instruments – non-current asset
 
1,451

 

 

 

 
1,451

 

 
 
 
$
3,380

 
$

 
$
1,594

 
$

 
$
1,786

 
$

The following table summarizes the outstanding natural gas and crude oil derivative contracts the Company had in place as of June 30, 2012:
Effective Date
 
Maturity Date
 
Notional
Amount
Per
Month
 
Remaining
Notional
Amount as
of June 30, 2012
 
Additional
Put
Options
 
Floor
 
Ceiling
 
Designation under
ASC 815
Natural Gas (MMBtu):












 

7/1/2012

12/31/2012

429,113

2,574,680



$2.60

$2.60

Not designated
7/1/2012

12/31/2012

97,184

583,104



$2.50

$3.20

Not designated
1/1/2013

12/31/2013

353,559

4,242,710



$3.50

$3.50

Not designated
1/1/2013

12/31/2013

82,240

986,876

$3.00

$3.68

$3.68

Not designated
Crude Oil (Bbls):














7/1/2012

12/31/2012

5,060

30,360



$96.50

$96.50

Not designated
7/1/2012

12/31/2012

3,237

19,421

$90.00

$100.00



Not designated
7/1/2012

12/31/2013

3,749

67,489



$106.40

$106.40

Not designated
1/1/2013

12/31/2013

3,498

41,975

$65.50

$106.40



Not designated
1/1/2013

12/31/2013

3,194

38,325

$70.00

$90.00



Not designated
1/1/2013

12/31/2013

2,221

26,654



$100.00



Not designated
1/1/2014

12/31/2014

2,961

35,528

$80.00

$100.00

$114.10

Not designated
1/1/2014

12/31/2014

1,658

19,893

$75.00

$95.00



Not designated
1/1/2014

12/31/2014

3,042

36,500

$70.00

$90.00



Not designated
All of the above natural gas contracts are settled against NYMEX, and all oil contracts are settled against NYMEX Light Sweet Crude. The NYMEX and NYMEX Light Sweet Crude have historically had a high degree of correlation with the actual prices received by the Company. In connection with our natural gas swaps, we also entered into a Basis Swap in which we locked in a natural gas price at the Houston Ship Channel at a $0.08/MMbtu discount to NYMEX. The combination of these

12


trades effectively locks in a sales price to GMXR of $2.52 for 2.57 BCF during the last 6 months of 2012, and $3.42 for 4.24 BCF during 2013.
Effects of derivative instruments on the Consolidated Statement of Operations
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income ("OCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
In December 2011, the Company settled its entire hedge portfolio. Under ASC 815-30-40, the Company is required to recognize the balance of the cumulative gain, recorded in accumulated other comprehensive income in the previous periods, over the life of the remaining contractual life of the original hedged transaction. For the three and six months ended June 30, 2012, the Company recognized $4.2 million and $9.5 million, respectively, of the cumulative gain in oil and gas sales on the consolidated statement of operations. As of June 30, 2012, the balance of the Company's cumulative gain, net of taxes, recorded in accumulated other comprehensive income was $7.8 million, of which $4.8 million will be recognized into earnings through December 31, 2012, with the remainder recognized in 2013.
There were no oil or gas derivatives classified as hedges for the three and six months ended June 30, 2012. A summary of the effect of the natural gas derivatives qualifying for hedges for the three and six months ended June 30, 2011 is as follows:
 
 
 
Natural Gas Derivatives
Qualifying as Hedges
 
Location of
Amounts
 
Three Months Ended June 30, 2011
 
 
 
(in thousands)
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
OCI
 
(232
)
Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion)
Oil and Gas
Sales
 
3,991

Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Oil and Gas
Sales
 
315

 
 
 
Natural Gas Derivatives
Qualifying as Hedges
 
Location of
Amounts
 
Six Months Ended June 30, 2011
 
 
 
(in thousands)
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
OCI
 
5

Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion)
Oil and Gas
Sales
 
8,436

Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Oil and Gas
Sales
 
722

For derivative instruments that do not qualify as hedges pursuant to ASC 815, changes in the fair value of these derivatives that occur prior to their maturity (i.e., temporary fluctuations in value) are recognized in current earnings. A summary of the effect of the derivatives not qualifying for hedges is as follows:

13


 
Location of Gain (Loss) Recognized in
Income on Derivative
 
Amount of Gain (Loss) Recognized in
Income on Derivative
 
 
 
Three Months Ended
June 30,
 
 
 
2012
 
2011
 
 
 
(in thousands)
Realized
 
 
 
 
 
Natural gas
Oil and gas sales
 
$
509

 
$

Crude oil
Oil and gas sales
 
244

 
(44
)
Unrealized
 
 
 
 
 
Natural gas
Unrealized gain or (loss)on derivatives
 
(2,107
)
 
5,110

Crude oil
Unrealized gain or (loss)on derivatives
 
2,096

 
327

 
 
 
$
742

 
$
5,393

 
Location of Gain (Loss) Recognized in
Income on Derivative
 
Amount of Gain (Loss) Recognized in
Income on Derivative
 
 
 
Six Months Ended
June 30,
 
 
 
2012
 
2011
 
 
 
(in thousands)
Realized
 
 
 
 
 
Natural gas
Oil and gas sales
 
$
509

 
$

Crude oil
Oil and gas sales
 
244

 
(44
)
Unrealized
 
 
 
 
 
Natural gas
Unrealized gain or (loss)on derivatives
 
(1,594
)
 
5,110

Crude oil
Unrealized gain or (loss)on derivatives
 
2,373

 
(118
)
 
 
 
$
1,532

 
$
4,948

The valuation of our derivative instruments are based on industry standard models that primarily rely on market observable inputs. Substantially all of the assumptions for industry standard models are observable in active markets throughout the full term of the instrument. The Company categorizes these measurements as Level 2. The following table sets forth by level within the fair value hierarchy our derivative instruments, which are our only financial assets and liabilities that were accounted for at fair value on a recurring basis, as of June 30, 2012 and December 31, 2011:
 
As of June 30, 2012
 
As of December 31, 2011
 
Quoted
Prices  in
Active
Markets
(Level  1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Quoted
Prices  in
Active
Markets
(Level  1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Natural gas derivative instruments
$

 
$
(1,594
)
 
$

 
$

 
$

 
$

Crude oil derivative instruments
$

 
$
3,380

 
$

 
$

 
$

 
$

NOTE D – STOCK COMPENSATION PLANS
We recognized $1.6 million and $1.2 million of stock compensation expense for the three months ended June 30, 2012 and 2011, respectively, and $2.5 million and $2.4 million for the six months ended June 30, 2012 and 2011, respectively. These non-cash expenses are reflected as a component of the Company’s general and administrative expense. To the extent recognized compensation costs relates to employees directly involved in exploration and development activities, such amounts are

14


capitalized to oil and natural gas properties. Stock based compensation capitalized as part of oil and natural gas properties was $0.1 million and $0.1 million for the three months ended June 30, 2012 and 2011, respectively, and $0.2 million and $0.3 million for the six months ended June 30, 2012 and 2011, respectively.
Restricted Stock
A summary of the status of our unvested shares of restricted stock and the changes for the year ended December 31, 2011 and the six months ended June 30, 2012 is presented below:
 
Number of
unvested
restricted shares
 
Weighted
average  grant-
date fair value
per share
Unvested shares as of December 31, 2010
691,996

 
$
13.47

Granted
807,848

 
$
4.79

Vested
(245,924
)
 
$
16.46

Forfeited
(5,521
)
 
$
19.42

Unvested shares as of December 31, 2011
1,248,399

 
$
7.24

Vested
(104,761
)
 
$
17.53

Forfeited
(8,371
)
 
$
9.28

Unvested shares as of June 30, 2012
1,135,267

 
$
6.28

In March 2012, the vesting period of the restricted shares issued to the executives and members of the Board of Directors on August 2, 2011 were accelerated to an earlier date. There were no incremental compensation costs calculated as a result of the modification. Unamortized compensation costs were accelerated to earlier future periods consistent with the new vesting schedule of the restricted shares.
As of June 30, 2012, there was $4.6 million of unrecognized compensation expense related to non-vested restricted stock grants. This unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.2 years.

NOTE E – CAPITAL STOCK
Share Lending Arrangement
In February 2008, in connection with the offer and sale of the 5.00% Convertible Notes, we entered into a share lending agreement (the “Share Lending Agreement”). Under this agreement, we loaned to the share borrower up to the maximum number of shares of our common stock underlying the 5.00% Convertible Notes. As of June 30, 2012 there were 2,364,375 shares of our outstanding common stock subject to loans to the share borrower under the Share Lending Agreement.
Issuance of Common Stock
During the six months ended June 30, 2012, the Company converted $20.8 million aggregate principal amount of its 5.00% Convertible Notes due 2013 to 11,271,510 shares of common stock. See Note B, Long-Term Debt.

NOTE F – INCOME TAXES
We recorded tax provisions of $1.4 million and $1.4 million for the three months ended June 30, 2012 and 2011, respectively, and $3.3 million and $2.9 million for the six months ended June 30, 2012 and 2011, respectively, due to changes in the valuation allowance on deferred tax assets.  The valuation allowance was adjusted due to increases or decreases in offsetting deferred tax liabilities, primarily as a result of unrealized gains or losses on derivative instruments that qualify for hedge accounting. In determining the carrying value of a deferred tax asset, accounting standards provide for the weighing of evidence in estimating whether and how much of a deferred tax asset may be recoverable. As the Company has incurred net operating losses in prior years, relevant accounting guidance suggests that cumulative losses in recent years constitute significant negative evidence, and that future expectations about income are insufficient to overcome a history of such losses. In 2008, the Company reduced the carrying value of its net deferred tax asset to zero and maintained that position as of June 30, 2012 and December 31, 2011.  The valuation allowance has no impact on our net operating loss (“NOL”) position for tax purposes, and if the Company generates taxable income in future periods, the Company will be able to use its NOLs to offset taxes due at that time. The Company will continue to assess the valuation allowance against deferred tax assets considering all available evidence obtained in future reporting periods.

15



NOTE G – COMMITMENTS AND CONTINGENCIES
Litigation
A putative class action lawsuit was filed by the Northumberland County Retirement System and Oklahoma Law Enforcement Retirement System (collectively, the “Nothumberland Plaintiffs”)in the District Court in Oklahoma County, Oklahoma, purportedly on March 10, 2011, against the Company and certain of its officers along with certain underwriters of the Company's July 2008, May 2009 and October 2009 public offerings. Discovery requests and summons were filed and issued in late April 2011. The complaint alleges that the registration statement and the prospectus for contained material misstatements and omissions and seeks damages under Sections 11, 12 and 15 of the Securities Act of 1933 of an unspecified equitable relief. Defendants removed the case to federal court on May 12, 2011 and filed motions to dismiss on June 20, 2011. Plaintiffs filed a motion to remand the case to state court on June 10, 2011, and Defendants filed an opposition to that motion. By order dated November 16, 2011, the court denied Plaintiffs' motion to remand. On February 3, 2012, Plaintiffs moved to be appointed lead plaintiff under the Private Securities Litigation Reform Act. By order dated July 3, 2012, the Court appointed the Northumberland Plaintiffs lead plaintiff. By August 16, 2012, Plaintiffs are expected to elect to move forward with their existing complaint or to file an amended complaint, with Defendants' responses thereto expected to be filed later in 2012. We are currently unable to assess the probability of loss or estimate a range of potential loss, if any, associated with the securities class action case, which is at an early stage.
On August 5, 2011, an individual filed a shareholders' derivative action in the United States District Court for the Western District of Oklahoma, for the Company's benefit, as nominal defendant, against the Company's Chief Executive Officer, President, Chief Financial Officer, and certain members of the Company's board of directors. The complaint alleges breaches of fiduciary duty, waste of corporate assets, and unjust enrichment on the part of each of the named defendants and is premised on substantially the same facts alleged in the above-described securities lawsuit. The complaint seeks unspecified amounts of compensatory damages, implementation of certain corporate governance changes, and disgorgement of compensation and trading profits from the individual defendants, as well as interest and costs, including legal fees from the defendants. The Company is a nominal defendant, and the complaint does not seek any damages against the Company; however, the Company may have indemnification obligations to one or more of the defendants under the Company's organizational documents. On October 17, 2011, the individual defendants and the Company as nominal defendant filed motions to dismiss the complaint for failure to make demand, or in the alternative, to stay the derivative action pending the outcome of the securities lawsuit. The case is currently stayed pending the outcome of the motions to dismiss that are expected to be filed with respect to the securities lawsuit described above. On March 23, 2012, an additional plaintiff filed a similar derivative action in the United States District Court for the Western District of Oklahoma. The parties agreed to consolidate this case with the existing federal court derivative action. The federal court derivative actions have been consolidated, and the cases are stayed pending the outcome of the motions to dismiss the securities lawsuit described above. We are currently unable to assess the probability of loss or estimate a range of potential loss, if any, associated with this case.
On February 7 and 9, 2012, two individuals filed separate shareholder derivative actions in the District Court of Oklahoma County, in the State of Oklahoma, for the Company's benefit, as nominal defendant, against the Company's Chief Executive Officer, President, Chief Financial Officer, and each member of the Company's board of directors. The petitions assert claims and seek relief similar to those asserted and sought in the federal court derivative action described above. Plaintiffs filed a motion to consolidate the two state court derivative actions, and the court consolidated the two actions. The parties have agreed that plaintiffs will file an amended and consolidated petition after the plaintiffs in the federal securities action described above file their amended complaint. On April 9, 2012, defendants filed a motion to dismiss, a motion to stay, and a motion for protection from discovery. By stipulation dated May 29, 2012, the parties agreed to stay these cases pending the outcome of the motions to dismiss the securities lawsuit described above and to stay discovery. We are currently unable to assess the probability of loss or estimate a range of potential loss, if any, associated with this case.
The Company is party to various legal actions arising in the normal course of business. Matters that are probable to have an unfavorable outcome to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, the Company's estimates of the outcomes of such matters, and its experience in contesting, litigating, and settling similar matters. None of the actions are believed by management to involve future amounts that would be material to the Company's financial position or results of operations after consideration of recorded accruals.
Insurance Matters
The Company maintains property damage, business interruption and other insurance coverage, the scope and amounts of which we believe are customary and prudent for the nature and extent of our operations. The Company also believes its deductibles are consistent with customary and prudent industry practices and does not expect that the payment of any deductibles would have a material adverse effect on the Company's financial condition or results of operations. While we

16


believe the Company maintains adequate insurance coverage, insurance may not fully cover every type of damage, interruption or other loss that might occur.  If we were to incur a significant loss for which we were not fully insured, it could have a material impact on our financial position, results of operations and cash flows.  In addition, there may be a timing difference between amounts we are required to pay in connection with a loss and amounts we receive from insurance as reimbursement. Any event that materially interrupts the revenues generated by our consolidated operations, or other losses that require us to make material expenditures not covered by insurance, could adversely affect our cash flows and financial condition and, accordingly, adversely affect the market price of our securities.

17


NOTE H – CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Shown below are condensed consolidating financial statements for GMX Resources Inc. on a stand-alone, unconsolidated basis, its combined guarantor subsidiaries and its non-guarantor subsidiary as of June 30, 2012 and December 31, 2011 and for the three and six months ended June 30, 2012 and 2011. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the subsidiaries operated as independent entities.

Condensed Consolidating Balance Sheets
 
June 30, 2012
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
(In thousands)
 
 
 
 
ASSETS

 

 

 

 

CURRENT ASSETS

 

 

 

 

Cash and cash equivalents
$
31,339

 
$
46

 
$
737

 
$

 
$
32,122

Restricted cash
4,325

 

 

 

 
4,325

Short term investments
6,008

 

 

 

 
6,008

Accounts receivable – interest owners
5,952

 

 

 

 
5,952

Accounts receivable – oil and natural gas revenues, net
7,150

 
152

 

 
(2,597
)
 
4,705

Accounts receivable - intercompany
15,565

 
13,197

 
1,000

 
(29,762
)
 

Derivative instruments
1,929

 

 

 

 
1,929

Inventories
326

 

 

 

 
326

Prepaid expenses and deposits
1,556

 
1

 
26

 

 
1,583

Assets held for sale
410

 

 

 

 
410

Total current assets
74,560

 
13,396

 
1,763

 
(32,359
)
 
57,360

OIL AND NATURAL GAS PROPERTIES, BASED ON THE FULL COST METHOD

 

 

 


 

Properties being amortized
1,104,383

 
713

 
71

 

 
1,105,167

Properties not subject to amortization
162,783

 

 

 

 
162,783

Less accumulated depreciation, depletion, and impairment
(1,003,510
)
 

 

 

 
(1,003,510
)

263,656

 
713

 
71

 

 
264,440

PROPERTY AND EQUIPMENT, AT COST, NET
14,377

 
4,917

 
43,865

 

 
63,159

DERIVATIVE INSTRUMENTS
1,451

 

 

 

 
1,451

OTHER ASSETS
8,382

 

 

 

 
8,382

INVESTMENT IN SUBSIDIARIES
34,719

 

 

 
(34,719
)
 

TOTAL ASSETS
$
397,145

 
$
19,026

 
$
45,699

 
$
(67,078
)
 
$
394,792

LIABILITIES AND EQUITY

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Accounts payable
11,545

 

 
37

 

 
11,582

Accounts payable - intercompany
13,450

 
16,225

 
87

 
(29,762
)
 

Accrued expenses
15,581

 
2,749

 
178

 
(2,597
)
 
15,911

Accrued interest
4,956

 

 

 

 
4,956

Revenue distributions payable
5,609

 

 

 

 
5,609

Short-term derivative instrument
1,141

 

 

 

 
1,141

Current maturities of long-term debt
51,256

 

 

 

 
51,256

Total current liabilities
103,538

 
18,974

 
302

 
(32,359
)
 
90,455

LONG-TERM DEBT, LESS CURRENT MATURITIES
362,987

 

 

 

 
362,987

DEFERRED PREMIUMS ON DERIVATIVE INSTRUMENTS
608

 

 

 

 
608

OTHER LIABILITIES
8,415

 

 

 

 
8,415

EQUITY


 


 


 


 


Total GMX equity
(78,403
)
 
52

 
45,397

 
(45,449
)
 
(78,403
)
Noncontrolling interest

 

 

 
10,730

 
10,730

Total equity
(78,403
)
 
52

 
45,397

 
(34,719
)
 
(67,673
)
TOTAL LIABILITIES AND EQUITY
$
397,145

 
$
19,026

 
$
45,699

 
$
(67,078
)
 
$
394,792

 
 
 
 
 
 
 
 
 
 

18



 
December 31, 2011
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
(In thousands)
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
98,118

 
$
3,672

 
$
703

 
$

 
$
102,493

Restricted cash
4,325

 

 

 

 
4,325

Accounts receivable – interest owners
8,607

 

 

 

 
8,607

Accounts receivable – oil and natural gas revenues, net
12,564

 
295

 

 
(5,777
)
 
7,082

Accounts receivable - intercompany
15,205

 
13,033

 
790

 
(29,028
)
 

Derivative instruments

 

 

 

 

Inventories
326

 

 

 

 
326

Prepaid expenses and deposits
2,574

 
2

 
79

 

 
2,655

Assets held for sale
1,999

 
46

 

 

 
2,045

Total current assets
143,718

 
17,048

 
1,572

 
(34,805
)
 
127,533

OIL AND NATURAL GAS PROPERTIES, BASED ON THE FULL COST METHOD

 

 

 


 

Properties being amortized
1,061,961

 
713

 
127

 

 
1,062,801

Properties not subject to amortization
147,224

 

 

 

 
147,224

Less accumulated depreciation, depletion, and impairment
(871,346
)
 

 

 

 
(871,346
)

337,839

 
713

 
127

 

 
338,679

PROPERTY AND EQUIPMENT, AT COST, NET
15,531

 
5,216

 
45,111

 

 
65,858

DERIVATIVE INSTRUMENTS

 

 

 

 

OTHER ASSETS
10,131

 

 

 

 
10,131

INVESTMENT IN SUBSIDIARIES
35,980

 

 

 
(35,980
)
 

TOTAL ASSETS
$
543,199

 
$
22,977

 
$
46,810

 
$
(70,785
)
 
$
542,201

LIABILITIES AND EQUITY

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Accounts payable
13,527

 

 
23

 

 
13,550

Accounts payable - intercompany
13,126

 
15,684

 
218

 
(29,028
)
 

Accrued expenses
17,263

 
6,056

 
293

 
(5,777
)
 
17,835

Accrued interest
3,256

 

 

 

 
3,256

Revenue distributions payable
5,980

 

 

 

 
5,980

Current maturities of long-term debt
26

 

 

 

 
26

Total current liabilities
53,178

 
21,740

 
534

 
(34,805
)
 
40,647

LONG-TERM DEBT, LESS CURRENT MATURITIES
426,805

 

 

 

 
426,805

DEFERRED PREMIUMS ON DERIVATIVE INSTRUMENTS

 

 

 

 

OTHER LIABILITIES
7,476

 

 

 

 
7,476

EQUITY


 


 


 


 


Total GMX equity
55,740

 
1,237

 
46,276

 
(47,513
)
 
55,740

Noncontrolling interest

 

 

 
11,533

 
11,533

Total equity
55,740

 
1,237

 
46,276

 
(35,980
)
 
67,273

TOTAL LIABILITIES AND EQUITY
$
543,199

 
$
22,977

 
$
46,810

 
$
(70,785
)
 
$
542,201

 
 
 
 
 
 
 
 
 
 

19



Condensed Consolidating Statements of Operations

 
 
 
 
 
 
 
 
 
 
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
(In thousands)
 
 
 
 
Three Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
TOTAL REVENUES
$
16,102

 
$
292

 
$
2,126

 
$
(2,237
)
 
$
16,283

COSTS AND EXPENSES

 

 

 

 

Lease operating
4,446

 
388

 
246

 
(2,192
)
 
2,888

Production taxes
556

 

 

 

 
556

Depreciation, depletion, and amortization
6,169

 
179

 
626

 

 
6,974

Impairment of oil and natural gas properties and assets held for sale
91,815

 

 
(125
)
 

 
91,690

General and administrative
6,499

 
321

 
27

 
(45
)
 
6,802

Total expenses
109,485

 
888

 
774

 
(2,237
)
 
108,910

Income (loss) from operations
(93,383
)
 
(596
)
 
1,352

 

 
(92,627
)
NON-OPERATING INCOME (EXPENSE)

 

 

 

 

Interest expense
(10,122
)
 

 

 

 
(10,122
)
Gain (loss) on conversion/extinguishment of debt
831

 

 

 

 
831

Interest and other income
35

 

 

 

 
35

Unrealized gain on derivatives
(11
)
 

 

 

 
(11
)
Equity income (loss) of subsidiaries
(226
)
 

 

 
226

 

Total non-operating expense
(9,493
)
 

 

 
226

 
(9,267
)
Income (loss) before income taxes
(102,876
)
 
(596
)
 
1,352

 
226

 
(101,894
)

XNYS:GMXR Quarterly Report 10-Q Filling

XNYS:GMXR Stock - Get Quarterly Report SEC Filing of XNYS:GMXR stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNYS:GMXR Quarterly Report 10-Q Filing - 6/30/2012
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