Resaca Exploitation Inc : Interim results

Resaca Exploitation, Inc.

("Resaca" or "the Company")

Interim results for the six months ended 31 December 2012

Resaca (AIM:RSOX), the oil and natural gas production, exploitation, and development company focused on the Permian Basin in the USA, is pleased to announce its interim results for the six months ended 31 December 2012.

Highlights

Operational Highlights

·      Proved developed producing reserves of 3.1million barrels of oil equivalents ("MMboe") as of 31 December 2012; PV10 value of $64.5 million

·      Proved reserves of 14.2 MMboe as of 31 December 2012; PV10 value of $331.2 million

·      Proved and probable reserves of 29.8 MMboe as of 31 December 2012; PV10 value of $557.3 million

·      Production averaged 728 boepd (net) for six months ended 31 December 2012

Financial Highlights

·      Oil and gas revenues of $9.9 million (0.2% decrease over revenue for six months ended 31 December 2011)

·      Unrealized loss from hedging activities of $1.4 million

·      EBITDA of $2.5 million (67.7% decrease over EBITDA for six months ended 31 December 2011)

·      Net loss of $3.1 million versus net gain of $3.4 million for six months ended 31 December 2011

·      Net indebtedness of  $58.1 million ($56.2 million as at June 30, 2012)

J.P. Bryan, Resaca Chairman and CEO commented

"As previously disclosed, the Company remains in breach of certain of its financial covenants in relation to its credit facilities, being the senior Regions Facility and the subordinated Chambers Facility.  Management has therefore enacted cost cutting measures and is selectively pursuing the sale of equipment that is not critical to the Company's operations. Management expects that, with the success of these initiatives, cash on hand and anticipated cash flows from operations will be sufficient to satisfy its current expected working capital requirements (other than the Chambers Facility and the Regions Facility) and limited capital expenditure requirements through the end of 2013.  Furthermore, the Company is pursuing the sale of a significant portion of its properties to partially or completely satisfy its obligations under the Chambers Facility and the Regions Facility to either bring these facilities into compliance with their respective financial covenants or extinguish the facilities completely."

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About Resaca

Resaca is an independent oil and gas development and production company based in Houston, Texas. Resaca is focused on the acquisition and exploitation of long-life oil and gas properties, utilizing a variety of primary, secondary and tertiary recovery techniques. Resaca's current properties are located in the Permian Basin of West Texas and Southeast New Mexico. Additional information is available atwww.resacaexploitation.com.

Report and accounts

The interim report and accounts of Resaca for the six months ended 31 December 2012 will be available on the company's website at www.resacaexploitation.com.

CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S STATEMENT

I am pleased to present the Interim Report and Accounts for Resaca Exploitation for the six months ended 31 December 2012.

During this period, we continued to focus on our waterflood projects at both the Cooper Jal Unit and Langlie Jal Unit.  Increased water injection levels have been maintained and significant reservoir pressure increases have been noted.  At our Cooper Jal Unit, recent pressure measurements have exceeded 1000 psi compared to a starting point of 400 psi when we purchased the property.  Production levels have been consistent over this time frame and we expect to continue to advance the project in order to be ready to initiate CO2 injection at a later date.  Our Edwards Grayburg waterflood also exhibits very stable production rates as we continue to advance the waterflood restoration effort in this property.

Significant cost cutting measures have been implemented across the portfolio of properties aimed at reducing operating expenses, while minimizing any effect on the associated production volumes.  Our average production for the period was 728 boepd, a modest increase over the six months ending 31 December 2011, in light of the limited capital available to the Company.

In our Cotton Draw field, our first horizontal Bone Spring well has been completed and initial production rates appear very favorable.  Additional development opportunities exist in this area.

The Company remains in breach of financial covenants under its senior credit facility and subordinated credit facility (the "Facilities").  Our lenders under the Facilities have enforcement rights available to them which could include insolvency or liquidation proceedings.  The Company to date has not received any notice of the lenders intent to exercise those rights.  The Company is in regular contact with our lenders.  The lenders have been in support of our efforts to reduce indebtedness to date.

We continue to work diligently and expeditiously on strategic alternatives, which include the sale of assets with the goal of generating sufficient proceeds to pay off our debt obligations.  Our continued goal is to provide the most value to the shareholders.

J.P. Bryan
Chairman and Chief Executive Officer

Resaca Exploitation, INC. and subsidiary

CONSOLIDATED Financial Statements

six months ENDED dEcember 31, 2012 AND 2011

Resaca Exploitation, Inc.

C O N T E N T S

Page

Consolidated Financial Statements

Consolidated Balance Sheets ............................................................................................................................................  1

Consolidated Statements of Operations ..........................................................................................................................  2

Consolidated Statements of Stockholders' Equity ..........................................................................................................  3

Consolidated Statements of Cash Flows .........................................................................................................................  4

Notes to Consolidated Financial Statements ..................................................................................................................  5

Resaca Exploitation, Inc.

Consolidated Balance Sheets

Resaca Exploitation, Inc.

Consolidated Statements of Operations

Resaca Exploitation, Inc.

Consolidated Statements of Stockholders' Equity

Six Months Ended December 31, 2012

(unaudited)

Resaca Exploitation, Inc.

Consolidated Statements of Cash Flows

Six Months Ended December 31, 2013

Note A - Organization and Nature of Business

Resaca Exploitation, L.P. (the "Partnership") was formed on March 1, 2006 for the purpose of acquiring and exploiting interests in oil and gas properties located primarily in New Mexico and Texas.  The Partnership was funded and began operations on May 1, 2006.  Resaca Exploitation, G.P. served as the sole general partner (.667%) and various limited partners owned the remaining 99.333%.  Under the terms of the Limited Partnership Agreement, profits and losses were allocated to the general partner and limited partners based upon their ownership percentages.

On July 10, 2008, the Partnership converted from a Delaware partnership to a Texas corporation and became Resaca Exploitation, Inc. ("Resaca").  Following conversion, Resaca became subject to federal and certain state income taxes and adopted a June 30 year end for federal income tax and financial reporting purposes.  On July 17, 2008, Resaca completed an initial public offering (the "Offering") on the Alternative Investment Market of the London Stock Exchange.  In the initial public offering, Resaca raised $83.4 million before expenses.

Resaca Operating Company ("ROC"), a wholly-owned subsidiary, was formed on October 16, 2008 for the purpose of operating Resaca's oil and gas properties.  Resaca and ROC are referred to collectively as the "Company".  Activities for ROC are consolidated in the Company's financial statements. 

Note B - Going Concern

These consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern. These principles assume that the Company will be able to realize its assets and discharge its obligations in the normal course of operations.

As of December 31, 2012, the Company had an accumulated deficit of approximately $21.6 million and a working capital deficit of approximately $57.4 million primarily due to the classification of the Chambers Facility and Regions Facility balances as current liabilities due to the Company being in default of such credit agreements (see Note F).  These conditions raise substantial doubt about the Company's ability to continue as a going concern.  The Company's continuation as a going concern is dependent on its ability to meet its obligations, to obtain additional financing as may be required and ultimately to attain sustained profitability.

Management has enacted cost cutting measures and is selectively pursuing the sale of equipment that is not critical to the Company's operations (see Note O). Management expects that, with the success of these initiatives, cash on hand and anticipated cash flows from operations will be sufficient to satisfy its current expected working capital requirements (other than the Chambers Facility and the Regions Facility) and limited capital expenditure requirements through December 31, 2013.  The Company is additionally pursuing the sale of a significant portion of its properties to partially or completely satisfy its obligations under the Chambers Facility and the Regions Facility to either bring these facilities into compliance with their respective financial covenants or extinguish the facilities completely.  There can be no assurance that the Company will be able to raise sufficient funds through asset sales to meet these objectives.

Management believes the going concern assumption to be appropriate for these financial statements. If the going concern assumption was not appropriate, adjustments would be necessary to the carrying values of assets and liabilities and the balance sheet classifications presented in these consolidated financial statements.

Note C - Summary of Significant Accounting Policies

Principles of Consolidation: The consolidated financial statements include the accounts of Resaca and ROC.  All significant intercompany accounts and transactions have been eliminated.

Cash and Cash Equivalents:  Cash in excess of the Company's daily requirements is generally invested in short-term, highly liquid investments with original maturities of three months or less.  Such investments are carried at cost, which approximates fair value and, for the purposes of reporting cash flows, are considered to be cash equivalents.  The Company maintains its cash in bank deposits with various major financial institutions.  These accounts, at times, exceed federally insured limits.  The Company monitors the financial condition of the financial institutions and has not experienced any losses on such accounts.

Note C - Summary of Significant Accounting Policies (Continued)

Accounts Receivable:  Accounts receivable primarily consists of accrued revenues for oil and gas sales.  The Company routinely assesses the recoverability of all material receivables to determine their collectability.

Allowance for Doubtful Accounts:  The Company records a reserve on a receivable when, based on the judgment of management, it is likely that a receivable will not be collected and the amount of any reserve may be reasonably estimated.  As of December 31, 2012 and June 30, 2012, the Company had an allowance for doubtful accounts of $0 and $1,930,986, respectively.

Inventory: Inventory totaling $505,398 and $477,166 at December 31, 2012 and June 30, 2012, respectively, consists of piping and tubulars valued at the lower of cost or market and is included within prepaids and other current assets in the accompanying balance sheets.

Oil and Gas Properties:  Oil and gas properties are accounted for using the full-cost method of accounting.  Under this method, all productive and nonproductive costs incurred in connection with the acquisition, exploration, and development of oil and natural gas reserves are capitalized.  This includes any internal costs that are directly related to acquisition, exploration and development activities, including salaries and benefits, but does not include any costs related to production, general corporate overhead or similar activities.  During the six months ended December 31, 2012 and 2011, the Company capitalized $359,006, and $218,042, respectively, in overhead relating to these internal costs.

No gains or losses are recognized upon the sale or other disposition of oil and natural gas properties except in transactions that would significantly alter the relationship between capitalized costs and proved reserves.

Under the full cost method, the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed the estimated after-tax future net revenues from proved oil and natural gas properties, discounted at 10% (the "Ceiling Limitation").  In arriving at estimated future net revenues, estimated lease operating expenses, development costs, and certain production-related and ad valorem taxes are deducted.  In calculating future net revenues, prices and costs in effect at the time of the calculation are held constant indefinitely, except for changes that are fixed and determinable by existing contracts.  The excess, if any, of the net book value above the Ceiling Limitation is charged to expense in the period in which it occurs and is not subsequently reinstated.  The Company prepared its ceiling test at December 31, 2012 and June 30, 2012, and no impairment was deemed necessary.  Reserve estimates used in determining estimated future net revenues were prepared in house at December 31, 2012 using methodologies consistent with the reserve estimates prepared by an independent petroleum engineer at June 30, 2012.

The costs of unevaluated oil and natural gas properties are excluded from the amortizable base until the time that either proven reserves are found or it has been determined that such properties are impaired.  The Company currently has no material capitalized costs related to unevaluated properties.  All capitalized costs are included in the amortization base as of December 31, 2012 and June 30, 2012.

Depreciation and Amortization:  All capitalized costs of oil and natural gas properties and equipment, including the estimated future costs to develop proved reserves, are amortized using the unit-of-production method based on total proved reserves.  Depreciation of fixed assets is computed on the straight-line method over the estimated useful lives of the assets, typically three to five years.

General and Administrative Expenses:  General and administrative expenses are reported net of recoveries from owners in properties operated by the Company.

Revenue Recognition:  The Company recognizes oil and gas revenues from its interests in oil and natural gas producing activities as the hydrocarbons are produced and sold.

Accounting for Price Risk Management Activities and Other Derivative Instruments:  The Company periodically enters into certain financial derivative contracts utilized for non-trading purposes to hedge the impact of market price fluctuations on its forecasted oil and gas sales.  The Company follows the provisions of Accounting Standards Codification ("ASC") 815, Accounting for Derivative Instruments and Hedging Activities ("ASC 815"), for the accounting of its hedge transactions.  ASC 815 establishes accounting and reporting standards requiring that all derivative instruments be recorded in the consolidated balance sheet

Note C- Summary of Significant Accounting Policies (Continued)

as either an asset or liability measured at fair value and requires that the changes in the fair value be recognized currently in earnings unless specific hedge accounting criteria are met.  The Company has certain over-the-counter collar contracts to hedge the cash flow of the forecasted sale of oil and gas sales.  The Company did not elect to document and designate these contracts as hedges, thus the changes in the fair value of these over-the-counter collars are reflected in earnings for the six months ended December31, 2012 and 2011.

The Company has common stock warrants outstanding in connection with the unsecured credit facility agreement (the "Chambers Facility") (see Note F), which contains price protection provisions (or down-round provisions) which reduces the strike price of the warrants in the event the Company issues additional shares at a more favorable price than the strike price.  The warrants are measured and carried at fair value as a derivative liability on the Company's consolidated balance sheet.  The fair value of the warrants on the date of issuance of $2,662,000 was recognized as a discount to the unsecured credit facility at the time the Company received the proceeds from the credit facility.  The discount will be accreted to the credit facility, over the period from the funding date through the maturity date, using the effective interest rate method.  At December 31, 2012 the fair value of the warrants was zero.

Income Taxes:  The Company is subject to federal income tax, Texas state margin tax, and New Mexico state income tax.  The Company follows the guidance in ASC 740, Accounting for Income Taxes, which requires the use of the asset and liability method of accounting for deferred income taxes and provides deferred income taxes for all significant temporary differences.

The Company follows ASC 740-10, Accounting for Uncertainty in Income Taxes.The Interpretation prescribes guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  To recognize a tax position, the enterprise determines whether it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation, based solely on the technical merits of the position.  A tax position that meets the more likely than not threshold is measured to determine the amount of benefit to be recognized in the financial statements.  The amount of tax benefit recognized with respect to any tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.

Deferred Finance Costs:  The Company capitalizes all costs directly related to obtaining financing and such costs are amortized to interest expense over the life of the related facility.  During the six months ended December 31, 2012 and 2011, the Company did not incur or capitalize any finance costs.  At December 31, 2012 and June 30, 2012, the deferred finance costs balance is presented net of accumulated amortization of $690,452 and $519,339, respectively. 

Use of Estimates:  Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles.  Actual results could differ from those estimates.

Independent petroleum and geological engineers have prepared estimates of the Company's oil and natural gas reserves at June 30, 2012 and 2011.  Proved reserves, estimated future net revenues and the present value of our reserves are estimated based upon a combination of historical data and estimates of future activity.  In accordance with the current authoritative guidance, effective December 31, 2009, the Company calculated its estimate of proved reserves using a twelve-month average price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each period within the twelve-month period prior to the end of the reporting period.  The reserve estimates are used in calculating depreciation, depletion and amortization and in the assessment of the Company's ceiling limitation.  Significant assumptions are required in the valuation of proved oil and natural gas reserves which, as described herein, may affect the amount at which oil and natural gas properties are recorded.  Actual results could differ materially from these estimates.

Asset Retirement Obligations:  The Company follows ASC 410 ("ASC 410"), Asset Retirement and Environmental Obligations.  ASC 410 requires that an asset retirement obligation ("ARO") associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which a legal obligation is incurred and becomes determinable, with an offsetting increase in the carrying amount of the

Note C - Summary of Significant Accounting Policies (Continued)

associated asset.  The cost of the tangible asset, including the initially recognized ARO, is depreciated such that the cost of the ARO is recognized over the useful life of the asset.  The ARO is recorded at fair value, and accretion expense will be recognized over time as the discounted liability is accreted to its expected settlement value.  The fair value of the ARO is measured using expected future cash outflows discounted at the company's credit-adjusted risk-free interest rate.

Inherent in the fair value calculation of ARO are numerous assumptions and judgments, including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political environments.  To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance.

The following table is a reconciliation of the asset retirement obligation:

Share-Based Compensation:  The Company follows ASC 718 ("ASC 718"), Compensation-Stock Compensation, for all equity awards granted to employees.  ASC 718 requires all companies to expense the fair value of employee stock options and other forms of share-based compensation over the requisite service period.  The Company's share-based awards consist of stock options and restricted stock.

Earnings per Share:  Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period.  Except when the effect would be anti-dilutive, the diluted earnings per share include the dilutive effect of restricted stock awards and the assumed exercise of stock options using the treasury stock method.  The following table sets forth the calculation of basic and diluted earnings per share ("EPS"):

For the six months ended December 31, 2012, 91,285 share equivalents were excluded from the diluted average shares due to their anti-dilutive effect.

Subsequent Events: The Company evaluates events and transactions that occur after the balance sheet date but before the financial statements are available for issuance.  The Company evaluated such events and transactions through March 28, 2013, the date the financial statements were available to be issued (see Note O).

Note D - Other Receivable

In September 2009, the Company entered into a merger agreement with Cano Petroleum, Inc. (the "Cano merger agreement"), subsequently terminated in July 2010.  The Cano merger agreement provided for Resaca and Cano to, among other things, share equally certain expenses related to the printing, filing and mailing of the registration statement, the proxies/prospectuses, and the solicitation of stockholder approvals.  Following the termination of the Cano merger agreement, Resaca requested that Cano reimburse Resaca for Cano's share of such expenses in the amount $2.1 million.  On September 2, 2010, Cano filed an action against Resaca in the Tarrant County District Court seeking a declaratory judgment to clarify the scope and determine the amount of any expenses that are reimbursable by Cano under the Cano merger agreement.  In March 2012, Cano Petroleum, Inc. and various of its affiliates filed a chapter 11 case in the bankruptcy court for the northern district of Texas.  In August 2012, Cano sold all of its oil and gas properties and used the proceeds in bankruptcy primarily to satisfy its secured lenders, leaving a modest amount of residual proceeds for expenses and the unsecured creditors.  The receivable from Cano has been written off at December 31, 2012.

Note E - Related Party Transactions

The Company receives support services from Torch Energy Advisors Incorporated ("TEAI") and its subsidiaries, which includes office administration, risk management, corporate secretary, legal and litigation services, tax department services, financial planning and analysis, information technology management, financial reporting and accounting services, and engineering and technical services.  The Company was charged by TEAI and a subsidiary of TEAI $583,628 and $455,749 during the six months ended December 31, 2012 and 2011, respectively, for such services.  The majority of such fees are included in general and administrative expenses.

In the ordinary course of business, the Company incurs payable balances with TEAI resulting from the payment of costs and expenses of the Company and from the payment of support services fees.  Such amounts had been settled on a regular basis, generally monthly.  However, a Subordinated Unsecured Note was issued on June 30, 2010 for the outstanding balance payable to TEAI of $1,854,722 as of June 30, 2010.  The principal balance payable to TEAI was amended on December 15, 2010 to be $1,915,800 (see Note F). Subsequent to the issuance of this note, the Company resumed settling on a monthly basis with TEAI. 

Note F - Notes Payable

On June 26, 2009, the Company entered into a $50 million, three-year Senior Secured Revolving Credit Facility ("CIT Facility") with CIT Capital USA Inc. ("CIT") with a maturity date of July 1, 2012, which replaced a credit facility entered into in 2006.  The initial borrowing base of the CIT Facility was $35 million and CIT served as administrative agent.  Interest on the CIT Facility was set at LIBOR plus 5.5% subject to a 2.5% LIBOR floor.  Recourse for the CIT Facility was limited to the Company, as borrower, and the note was secured by all of the Company's oil and gas properties.  Throughout the term of the CIT Facility, the interest rate was 8.0%.  As a condition of closing the CIT Facility, the Company entered into additional natural gas hedges for January 2011 through June 2012 and additional oil hedges for June 2011 through June 2012.  Additionally, upon closing of the CIT facility, the Company wrote off $536,579 in deferred financing costs associated with a previous facility with third parties and paid debt extinguishment fee of $250,000.  The CIT Facility contained, among other terms, provisions for the maintenance of certain financial ratios and restrictions on additional debt.  On December 22, 2009, the Company executed an amendment to the CIT Facility which amended some of the financial ratio requirements.  On January 6, 2011, the CIT Facility was paid in full from proceeds received from the debt issuances described below.

On May 18, 2010, the Company, TEAI, and CIT entered into an agreement, which provided that, if the CIT Facility was not repaid in full by June 30, 2010, the outstanding payable by the Company to TEAI as of June 30, 2010 would be contractually subordinated to amounts payable under the CIT Facility.  On June 30, 2010, the Company entered into a Subordinated Unsecured Note ("Torch Note") with TEAI for $1,854,722. The Torch Note had a maturity date of October 1, 2012 and bore interest at Amegy Bank N. A.'s prime rate plus two percent.At June 30, 2010, the interest rate was 7.0%.  On December 15, 2010, the Torch Note was amended to increase the outstanding balance to $1,915,800, modify the interest provisions, provide for subordination to the Chambers Facility in addition to the Company's secured credit facility and extend the

Note F - Notes Payable (Continued)

maturity date to January 31, 2014.  At June 30, 2012, the interest rate was 12.0%.  The maturity date shall be accelerated in the event the senior debt issuance described below is repaid in full.  Interest shall only be payable in kind. 

On January 7, 2011, the Company entered into a $20 million, four-year unsecured credit facility (the "Chambers Facility") which bears interest at 9.5% per year.  Resaca also has the option to pay interest under the Chambers Facility in kind for the first two years at an interest rate of 12% per year.  The Chambers Facility contains certain financial ratio restrictions and other customary covenants.  This credit facility matures December 31, 2014. Proceeds from the Chambers Facility were used to repay a portion of the CIT Facility, to fund the Company's development program and for general corporate purposes.  In conjunction with the funding, Resaca issued warrants to the lenders under the Chambers Facility to purchase approximately 4.8 million shares of Resaca common stock at $1.93 per share.The purchase price for the Resaca common shares under the warrants is subject to customary weighted average dilution protections if Resaca issues stock at a price below the purchase price under the warrants.  In addition, the exercise price and the number of shares the lenders are able to purchase under the warrants will be adjusted in the case of certain Company distributions, dilutive equity issuances, share subdivisions, or share combinations.  The warrants were recorded and are adjusted every reporting period to fair value (see Note J).  As a result of the issuance of stock as part of the purchase price for a property acquisition, the warrant price was adjusted to $1.92 per share in August 2011.  The Company has elected to pay interest in kind.  With accrued paid-in kind interest, the balance payable on the Chambers Facility as of December 31, 2012 was $25.9 million.  The Chambers Facility includes a make-whole provision in the event that the total interest, principal and value of the warrants granted under the Chambers Facility do not generate a targeted return to the lenders upon repayment of the facility.  The amount of the make whole obligation is fixed through January 7, 2013, after which time the make whole obligation increases.  If the Chambers Facility had been repaid at December 31, 2012, the make whole obligation would have been approximately $5.3 million.  As of December 31, 2012 the Company was not compliant with all of the covenants under the Chambers Facility, which resulted in an event of default.  On March 6, 2012, the Company received notice that default interest (an additional 2% over the applicable cash or paid in kind interest rate) would be charged under the Chambers Facility until the Company is no longer in default. Under the terms of the agreement, if a condition of default occurs and is continuing, the lenders may demand that the default interest be payable in cash rather than in kind. The lenders under the Chambers Facility demanded that the interest accrued for the period from June 1, 2012 through June 30, 2012 be paid in cash.  The Company has not paid this amount and the unpaid amount continues to accrue interest at the default interest rate. The lenders under the Chambers Facility have not demanded any other cash interest payments.  The Company has classified the balance of the Chambers Facility at December 31, 2012 to current due to the default status of the loan. 

On January 7, 2011, the Company entered into a $75 million senior secured revolving credit facility (the "Regions Facility") with Regions Bank ("Regions").  The Regions Facility contains certain financial ratio restrictions and other customary covenants, including a requirement to hedge at least 75% of proved developed producing reserves through December 31, 2014.  This credit facility matures January 7, 2014.  Proceeds from the Regions Facility were used to repay a portion of the CIT Facility, to fund the Company's development program, future acquisitions and for general corporate purposes.  The Regions Facility is governed by semi-annual borrowing base redeterminations assigned to the Company's proved crude oil and natural gas reserves.  An initial borrowing base of $33 million was established based on the Company's reserves and the borrowing base has not been redetermined.  Under the Regions Facility, $33 million was outstanding at December 31, 2012.  The interest rate on outstanding borrowings was 7.5% at December 31, 2012.  At December 31, 2012, due to the noncompliance with the covenants under the Chambers Facility, the Company was not in compliance with the covenants related to this facility. In addition, the Company was not in compliance with the current asset to current liability ratio under the Regions Facility.  Accordingly, the Company has classified the balance of the Regions Facility at December 31, 2012 to current due to the default status of the loan. As a result of the covenant failure and effective on July 9, 2012, Regions exercised its rights under the Regions Facility to disallow LIBOR-based borrowings, effectively increasing the Company's cash interest rate from 4.00% to 5.50%. Further, beginning August 7, 2012, Regions began charging default interest at a rate of 2.00%, effectively increasing the Company's borrowing rate to 7.50%. Both conditions are in effect until the Company is again in compliance with the covenants related to this facility.  The Company is pursuing property sales to provide funds to either repay its obligations under both the Regions Facility and the Chambers Facility in full or to reduce its overall debt to bring its credit facilities into compliance with their financial covenants.  In the event the Company is not able to pay the sums

Note F - Notes Payable (Continued)

currently due, the lenders may be able to pursue their options of foreclosure at the Company as granted under the Regions Facility and the Chambers Facility.

Note G - Price Risk Management and Other Derivative Financial Instruments

The Company enters into hedging transactions with a major counterparty to reduce exposure to fluctuations in the price of crude oil and natural gas.  We use financially settled crude oil and natural gas zero-cost collars and swaps. Any gains or losses resulting from the change in fair value are recorded to unrealized gain (loss) from price risk management activities, whereas gains and losses from the settlement of hedging contracts are recorded in oil and gas revenues. 

With a zero-cost collar, the counterparty is required to make a payment to us if the settlement price for any settlement period is below the floor price of the collar, and we are required to make a payment to the counterparty if the settlement price for any settlement period is above the cap price for the collar. 

Cash settlements for the six months ended December 31, 2012 and 2011 resulted in a decrease in crude oil and natural gas sales in the amount of $101,806 and $665,925, respectively.

As of December 31, 2012, we had the following contracts outstanding:

(1) The contract price is weighted-averaged by contract volume.

The following table quantifies the fair values, on a gross basis, of all our derivative contracts and identifies its balance sheet location as of December 31, 2012:

Note G - Price Risk Management and Other Derivative Financial Instruments (Continued)

While notional amounts are used to express the volume of puts and over-the-counter options, the amounts potentially subject to credit risk, in the event of nonperformance by the third parties, are substantially smaller.  The Company does not anticipate any material impact to its financial position or results of operations as a result of nonperformance by third parties on financial instruments related to its option contracts.

Note H - Commitments and Contingencies

The Company, from time to time, is involved in certain litigation arising out of the normal course of business, none currently outstanding of which, in the opinion of management, will have any material adverse effect on the financial position, results of operations or cash flows of the Company as a whole.

On September 2, 2010, Cano Petroleum filed an action against Resaca in the Tarrant County District Court seeking a declaratory judgment to clarify the scope and determine the amount of any expenses that are reimbursable by Cano under the Cano merger agreement.  Resaca disputed the allegations by Cano (see Note D).  On March 7, 2012 Cano filed bankruptcy and the bankruptcy plan was approved on July 16, 2012.  The Company has filed a proof of claim.

On October 18, 2012, Resaca filed an action against Wind River Petroleum, LP ("Wind River") and Richard A. Counts ("Counts") for breach of the terms of the August 3, 2011 Purchase and Sale Agreement ("PSA") relating to the purchase of the Langlie Jal Unit seeking to enforce the obligations of Wind River and Counts under the PSA.  On October 19, 2012 Wind River filed an action against Resaca alleging a breach of the same PSA relating to the post-closing purchase price adjustment.

Note I - Share-Based Compensation

The Company has adopted a Share Incentive Plan ("The Plan") to foster and promote the long-term financial success of the Company and to increase shareholder value by attracting, motivating and retaining key personnel.  The Plan is considered an important component of total compensation offered to key employees and to directors.  The Plan consists of stock option and restricted stock awards. The restricted stock vests over a three-year period while the stock options vest over a three or one-year period. The Company expenses the fair-value of the share-based payments over the requisite service period of the awards.  At December 31, 2012, there was $288,201 in unrecognized compensation expense related to non-vested restricted stock grants and non-vested stock option grants that will be recognized over the next 20 months.

In conjunction with the initial public offering in 2008 (the "IPO"), certain officers and directors were granted restricted stock awards for an aggregate 821,103 shares of the Company's stock.  790,350 such shares vested over a three year period ended July 17, 2011; 30,753 of such shares were forfeited and returned to the Plan when an employee recipient resigned prior to the end of the vesting period. The Company also awarded 341,357 stock options at the time of the IPO, each option to purchase one share of our common stock at an exercise price of 6.70 British pounds per share.  The options were cancelled and new options for 341,357 shares were issued on January 18, 2011 with an exercise price of $1.61, a vesting period of one year and an expiration date on January 8, 2019.  On August 1, 2011, 40,000 stock options were issued to an officer with an exercise price of $1.52 per share, vesting period of three years and an expiration date of August 1, 2019.  On August 8, 2011, certain officers and directors were granted 175,000 shares of restricted stock and 360,000 stock options.  These shares vest over a three year period.  The stock options have an exercise price of $1.45 per share and expire on August 8, 2019.

At December 31, 2012, there were 820,347 stock options and 116,667 shares of restricted stock outstanding.  On April 28, 2012, the Plan was amended to allow the issuance of an additional 1,019,916 shares.  As of December 31, 2012, the Board of Directors and the CEO had the ability to authorize the issuance of another 1,079,394 stock options and restricted stock. 

Note I - Share-Based Compensation (Continued)

The following summary represents restricted stock awards outstanding at December 31, 2012 and June 30, 2012:

For stock options, the Company determines the fair value of each stock option at the grant date using a Black-Scholes pricing model, with the following assumptions used for the grants made on the date indicated:

Stock option awards have a three year or one year vesting period and expire five years or seven years after the vesting date.  A summary of stock options awarded during the six months ended December 31, 2012 is as follows:

A summary of stock options outstanding at December 31, 2012 is as follows:

*Exercise price is denominated in British pounds and has been converted at a rate of $1.6153 USD/GBP.

On July 3, 2012, the Company issued 100,000 stock options at an exercise price of £0.395 to a Resaca executive. The executive resigned on December 14, 2012 and the shares were forfeited.

Note J - Fair Value Measurements

ASC 820 requires enhanced disclosures regarding the assets and liabilities carried at fair value.  The pronouncement establishes a fair value hierarchy such that "Level 1" measurements include unadjusted quoted market prices for identical assets or liabilities in an active market, "Level 2" measurements include quoted market prices for identical assets or liabilities in an active market which have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but observable through corroboration with observable market data, including quoted market prices for similar assets, and "Level 3" measurements include those that are unobservable and of a highly subjective measure.

At December 31, 2012, the fair value of the Chambers Facility outstanding warrants was zero.

The Company utilizes the market approach for recurring fair value measurements of its oil and gas hedges.  The following table sets forth, by level within the fair value hierarchy, the Company's financial assets and liabilities that are accounted for at fair value on a recurring basis as of December 31, 2012.  As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement: