UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR

☐ 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 000-54967

BRUSHY RESOURCES, INC.

(Exact name of registrant as specified in its charter)

Delaware	45-5634053
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

300 E. Sonterra Blvd, Suite 1220 San Antonio, Texas	78258
(Address of principal executive offices)	(Zip Code)

(210) 999-5400

(Registrant’s telephone number, including area code)

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  ☐  No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☑
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐  Yes  ☑  No

As of May 19, 2016, there were 12,711,986 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

BRUSHY RESOURCES, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2016

INDEX

			Page
Cautionary Note About Forward-Looking Statements			3
PART I — FINANCIAL INFORMATION
	Item 1. — Financial Statements		5
		Condensed Consolidated Balance Sheets at March 31, 2016 (unaudited) and December 31, 2015	5
		Condensed Consolidated Statements of Operations  for the Three Months Ended March 31, 2016 and 2015 (unaudited)	7
		Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2016 and 2015 (unaudited)	8
		Notes to the Condensed Consolidated Financial Statements	9
	Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
	Item 3. — Quantitative and Qualitative Disclosures About Market Risk		27
	Item 4. — Controls and Procedures		27
PART II — OTHER INFORMATION
	Item 1. — Legal Proceedings		28
	Item 1A. — Risk Factors		30
	Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds		31
	Item 3. — Defaults Upon Senior Securities		31
	Item 4. — Mine Safety Disclosures		31
	Item 5. — Other Information		31
	Item 6. — Exhibits		31
SIGNATURES			32
EXHIBIT INDEX			33

2

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact included or incorporated by reference in this Form 10-Q are forward-looking statements, including, without limitation, but are not limited to, any statements regarding business strategy, estimated current and future net reserves and present values of such reserves, drilling and completion of wells including our identified locations, financial strategy, budget projections, operating results, marketing and realized prices for oil, natural gas and natural gas liquids, timing and amount of future production of oil and natural gas, availability and cost of drilling and production equipment, availability and cost of oilfield labor, the amount, nature and timing of capital expenditures, including future development costs, our ability to fund our 2016 capital expenditure budget, availability and terms of capital, development results from our identified drilling locations, property acquisitions, property development and operating costs, general economic conditions, the commodity price environment, the effectiveness and extent of our risk management activities, our insurance coverage, estimates of future potential impairments, environmental liabilities, technology, counterparty credit risk, government regulation of and tax treatment for the oil and gas industry, non-historical plans, objectives, expectations and intentions contained in this Form 10-Q, future revenues, future costs and expenses, earnings, earnings per share, margins, cash flows, liquidity and dividends. Important factors which may affect the actual results include, but are not limited to, the resolution of the litigation involving Giddings Oil & Gas LP, Hunton Oil Partners LP and Asym Energy Fund III LP (the “Partnerships”), the proposed merger with Lilis Energy, Inc. (“Lilis”), political developments, market and economic conditions, changes in raw material, transportation and energy costs, inflation, industry competition, lack of availability of drilling and production equipment and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating oil and natural gas reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures, cost of services, service and equipment providers and the ability to execute and realize the expected benefits from strategic initiatives, including revenue and reserve growth plans, mergers and acquisitions and their integration, changes in financial markets and changing legislation and regulations, including changes in tax law or tax regulations and other risks described in our “Risk Factors” section commencing on page 30 of this Form 10-Q. In some cases, you can identify a forward-looking statement by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target” or “continue,” the negative of such terms or variations thereon, or other comparable terminology.

These forward-looking statements involve certain risks and uncertainties. Actual results may differ materially from those contemplated in the forward-looking statements due to, among others, the factors discussed under “Risk Factors” beginning on page 30 of this Form 10-Q, as well as the following factors:

● the possibility that we or Lilis may be unable to obtain stockholder approvals required for the merger;

● the possibility that problems may arise in successfully integrating the businesses of the two companies;

● the possibility that the merger may involve unexpected costs; and

● the possibility that the businesses may suffer as a result of uncertainty surrounding the merger.

Should one or more of the risks or uncertainties described in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this Form 10-Q are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All forward-looking statements in this Form 10-Q are expressly qualified by the statements in this section to reflect events or circumstances after the date of this Form 10-Q. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

3

Unless expressly indicated or the context requires otherwise, the terms “Brushy,” “we,” “our” or “the Company” refer to Brushy Resources, Inc. and its subsidiaries.

NON-GAAP FINANCIAL MEASURES

We refer to the term PV-10 in this Form 10-Q. This is a supplemental financial measure that is not prepared in accordance with U.S. generally accepted accounting principles, or GAAP. Any analysis of non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP. PV-10 is the present value of the estimated future cash flows from estimated total proved reserves after deducting estimated production and ad valorem taxes, future capital costs, abandonment costs, net of salvage value, and operating expenses, but before deducting any estimates of future income taxes. The estimated future cash flows are discounted at an annual rate of 10% to determine their “present value.” We believe PV-10 to be an important measure for evaluating the relative significance of our oil and gas properties and that the presentation of the non-GAAP financial measure of PV-10 provides useful information to investors because it is widely used by professional analysts and investors in evaluating oil and gas companies. Because there are many unique factors that can impact an individual company when estimating the amount of future income taxes to be paid, we believe the use of a pre-tax measure is valuable for evaluating our Company. We believe that PV-10 is a financial measure routinely used and calculated similarly by other companies in the oil and gas industry. However, PV-10 is considered a non-GAAP financial measure under SEC regulations because it does not include the effects of future income taxes, as is required in computing the standardized measure of discounted future net cash flows.

The U.S. Securities and Exchange Commission (“SEC”) has adopted rules to regulate the use in filings with the SEC and in public disclosures of “non-GAAP financial measures,” such as PV-10. These measures are derived on the basis of methodologies other than in accordance with GAAP. These rules govern the manner in which non-GAAP financial measures are publicly presented and require, among other things:

● a presentation with equal or greater prominence of the most comparable financial measure or measures calculated and presented in accordance with GAAP; and

● a statement disclosing the purposes for which the company’s management uses the non-GAAP financial measure.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

BRUSHY RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value and share data)

	March 31, 2016		December 31, 2015
ASSETS	(Unaudited)
Current assets
Cash	$	864	$	2,839
Trade receivable		785		1,101
Joint interest receivable		162		172
Current derivative asset		-		733
Prepaid expenses		124		59
Total current assets		1,935		4,904
Oil and natural gas properties and other equipment
Oil and natural gas properties, successful efforts method, net of accumulated depletion and impairment		16,366		16,884
Other property and equipment, net of depreciation		63		67
Total oil and natural gas properties and other equipment, net		16,429		16,951
Other assets
Goodwill		960		960
Other		359		359
Total other assets		1,319		1,319
Total assets	$	19,683	$	23,174

The accompanying notes are an integral part of these condensed financial statements

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BRUSHY RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value and share data)

	March 31, 2016			December 31, 2015
	(Unaudited)
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable and accrued liabilities	$	4,728		$	5,564
Going public delay fee		738			738
Joint interest revenues payable		1,025			1,018
Current maturities of related party notes payable		21,718			20,892
Current maturities of notes payable		13,743			14,172
Current asset retirement obligations		400			392
Total current liabilities		42,352			42,776
Long-term liabilities
Asset retirement obligations		3,260			3,204
Other long-term liabilities		30			35
Total long-term liabilities		3,290			3,239
Commitments and contingencies
Stockholders’ deficit
Preferred stock, $.001 par value, authorized 10,000,000 shares; none issued and outstanding		-			-
Common stock, $.001 par value, authorized 150,000,000 shares; 12,711,986 shares issued at March 31, 2016 and December 31, 2015		13			13
Additional Paid-in capital		57,251			57,044
Accumulated deficit		(83,223	)		(79,898	)
Total stockholders’ deficit		(25,959	)		(22,841	)
Total liabilities and stockholders’ deficit	$	19,683		$	23,174

The accompanying notes are an integral part of these condensed financial statements

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BRUSHY RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share data)

	Three Months Ended March 31,
	2016			2015
Oil, natural gas, and related product sales	$	1,232		$	2,757
Expenses
Depreciation and depletion		718			2,507
Lease operating		908			1,126
General and administrative		684			1,342
Professional fees		674			211
Production taxes		59			103
Accretion of discount on asset retirement obligation		63			63
Exploration		-			21
Total expenses		3,106			5,373
Operating loss		(1,874	)		(2,616	)
Other expenses
Interest		(1,100	)		(773	)
Realized gain from derivative contracts		732			616
Change in fair value of derivative contracts		(733	)		(202	)
Loss on sales of assets		-			(2	)
Settlement expense		(350	)		-
Total other expenses		(1,451	)		(361	)
Loss before income taxes		(3,325	)		(2,977	)
Deferred income taxes		-			288
Net loss	$	(3,325	)	$	(2,689	)
Net loss per basic and diluted common shares	$	(0.26	)	$	(0.22	)
Weighted average basic and diluted common share outstanding		12,711,986			12,482,711

The accompanying notes are an integral part of these condensed financial statements

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BRUSHY RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended March 31,
	2016			2015
Cash flows from operating activities
Net loss	$	(3,325	)	$	(2,689	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and depletion		718			2,507
Deferred income taxes		-			(288	)
Stock-based compensation		206			506
Accretion of asset retirement obligation		63			63
Change in fair value of derivative contracts		733			202
Loss on asset sales		-			2
Amortization of debt issuance costs		7			54
Increase (decrease) in cash attributable to changes in operating assets and liabilities:
Trade receivables		316			631
Joint interest receivables		10			135
Prepaid expenses and other assets		(65	)		15
Accounts payable and accrued liabilities		(117	)		(2,151	)
Joint interest revenues payable		7			(118	)
Net cash  (used) in operating activities		(1,447	)		(1,131	)
Cash flows from investing activities
Acquisition and development of oil and natural gas properties		(90	)		(316	)
Acquisition of other property and equipment		(4	)		-
Proceeds from sales of oil and natural gas properties		-			3
Net cash (used) in investing activities		(94	)		(313	)
Cash flows from financing activities
Proceeds from notes payable		608			-
Repayments of notes payable		(1,042	)		(765	)
Deferred offering costs		-			(7	)
Net cash (used) in financing activities		(434	)		(772	)
Net  decrease in cash		(1,975	)		(2,216	)
Cash, beginning of period		2,839			3,574
Cash, end of period	$	864		$	1,138
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	451		$	270
Supplemental disclosure of non-cash investing transactions
Payables related to oil and natural gas capitalized expenditures	$	102		$	298

The accompanying notes are an integral part of these condensed financial statements

8

BRUSHY RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - NATURE OF OPERATIONS

Brushy was originally formed as Starboard Resources LLC in Delaware on June 2, 2011 as a limited liability company to acquire, own, operate, produce, and develop oil and natural gas properties primarily in Texas and Oklahoma. On June 28, 2012, Starboard converted from a Delaware limited liability company to a Delaware C-Corporation and was named Starboard Resources, Inc. The membership units of Starboard Resources LLC were exchanged on a 1:1 basis for common shares of the Company. On July 31, 2015, Brushy sold substantially all of its Oklahoma producing properties and is primarily now focused on its Texas and New Mexico properties. On August 25, 2015, Starboard changed its name to Brushy Resources, Inc. (“Brushy,” the “Company,” or “its”).

NOTE 2 - GOING CONCERN

The Company’s independent registered public accounting firm for the year ended December 31, 2015 issued their report dated April 20, 2016, that included an explanatory paragraph describing the existence of conditions that raise substantial doubt about the Company’s  ability to continue as a going concern due to its significant accumulated deficit, working capital deficit, significant net losses and need to raise additional funds to meet its obligations and sustain its operations.

Given the precipitous decline in oil and natural gas prices during 2015 and into 2016, the Company expects to continue to face liquidity constraints. The Company’s cash flows are negatively impacted by lower realized oil and natural gas sales prices and the significant decline in oil and natural gas prices also increases the uncertainty as to the impact of commodity prices on its estimated proved reserves.  As a result, the Company has been in default under the 2013 Credit Agreement between it and Independent Bank, acting for itself and as administrative agent for the other lenders (as amended, the “IB Credit Agreement”) since November 2015.  As a result of these defaults, the Company is no longer permitted  to make further draws on the IB Credit Agreement and has been subject to a forbearance agreement with the  lenders (the “IB Forbearance Agreement”) pursuant to which the lenders agreed to forbear exercising any of their remedies for the existing covenant defaults for a period of time (the “Forbearance Period”) to permit the Company to seek refinancing of the indebtedness owed under the IB Credit Agreement in the approximate amount of $11,000,000, which is referred to as the IB Indebtedness or a sale of sufficient assets to repay the IB Indebtedness. During the Forbearance Period the Company is not permitted to drill new oil or gas wells or make distributions to equity holders. Furthermore, this also cross defaulted the SOSventures Credit Agreement.  The Forbearance Period began with the execution of the IB Forbearance Agreement on November 24, 2015 and ended on January 31, 2016, was subsequently extended to March 31, 2016.  The Company is currently in discussions with the lender under  the IB Credit Agreement regarding a further extension of the Forbearance Period. If the Company does not obtain a further extension of the Forbearance Period, the lenders under the IB Credit Agreement will be able to accelerate the repayment of debt under the IB Credit Agreement. For more information see Note 9 - Notes Payable.

Proposed Merger with Lilis

On December 29, 2015, the Company agreed to combine its business with Lilis pursuant to the Agreement and Plan of Merger (the “merger agreement”). Pursuant to the merger agreement, Lilis Merger Sub, Inc. (“Merger Sub”) will merge with and into Brushy, with Brushy surviving the merger as a wholly-owned subsidiary of Lilis (the “merger”). Upon completion of the merger, each share of the Company’s common stock issued and outstanding immediately prior to the effective time will be converted into the right to receive an amount of shares of Lilis’s common stock such that the Company’s former stockholders will represent approximately 50% of the then-outstanding shares of Lilis’s common stock after the closing of the merger (without taking into account outstanding restricted stock units or options or warrants to purchase shares of Lilis’s common stock). In connection with the merger, the Company is obligated to convey Giddings Field and the Bigfoot Area, to SOSventures, LLC (“SOSventures”), in exchange for a release of its obligations under the subordinated credit agreement with SOSventures, dated March 29, 2013, as amended. The Company expects the closing of the merger to occur in the first half of 2016. However, the merger is subject to the satisfaction or waiver of other conditions, and it is possible that factors outside the Company’s control could result in the merger being completed at an earlier time, a later time or not at all. If the merger has not been completed on or before May 31, 2016, either Lilis or Brushy may terminate the merger agreement unless the failure to complete the merger by that date is due to the failure of the party seeking to terminate the merger agreement to fulfill any material obligations under the merger agreement or a material breach of the merger agreement by such party.

9

Collectively, these matters raise substantial doubt about the Company’s ability to continue as a going concern.  The Company’s Board of Directors and management team continue to take steps to try to strengthen the Company’s balance sheet.  The Company intends to execute the merger (which is subject to usual and customary closing conditions beyond the Company’s control) and, in the event the merger is not consummated, the Company intends to refinance its existing debt, sell non-core properties and seek private financings to fund its cash needs.  Any decision regarding the merger or financing transaction, and the Company’s ability to complete such a transaction, will depend on prevailing market conditions and other factors.  No assurances can be given that such transactions can be consummated on terms that are acceptable to the Company, or at all.  If the Company is unable to restructure its current obligations under its existing outstanding debt and preferred stock instruments, and address near-term liquidity needs, the Company may need to seek relief under the U.S. Bankruptcy Code. This relief may include: (i) seeking bankruptcy court approval for the sale or sales of some, most or substantially all of the Company’s assets pursuant to section 363(b) of the U.S. Bankruptcy Code and a subsequent liquidation of the remaining assets in the bankruptcy case; (ii) pursuing a plan of reorganization (where votes for the plan may be solicited from certain classes of creditors prior to a bankruptcy filing) that the Company would seek to confirm (or “cram down”) despite any classes of creditors who reject or are deemed to have rejected such plan; or (iii) seeking another form of bankruptcy relief, all of which involve uncertainties, potential delays and litigation risks.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Additionally, the accompanying unaudited condensed consolidated financial statements as of March 31, 2016 and for the three months ended March 31, 2016 and 2015 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q, and reflect, in the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2015 and filed with the SEC on April 20, 2016.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company together with its wholly owned subsidiaries, ImPetro Resources, LLC (“ImPetro”) and ImPetro Operating (“Operating”) which collectively are referred to as the Company. All intercompany transactions and balances have been eliminated in consolidation.

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Reclassification

In April 2015, the FASB issued ASU No. 2015-03 (“ASU 2015-03”), “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of being presented as an asset. ASU 2015-03 is effective for the Company on January 1, 2016. Once adopted, entities are required to apply the new guidance retrospectively to all prior periods presented. The retrospective application represents a change in accounting principle. Early adoption is permitted for financial statements that have not been previously issued. The Company adopted of this guidance during the first quarter of 2016.  The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

A $7,000 reclassification from “Prepaid expenses” to a reduction of “Current maturities of related party notes payable” associated with the aforementioned adoption of ASU No. 2015-3,  “Interest – Imputation of Interest,” have been made to 2015 condensed consolidated financial statements to conform to the 2016 presentation and have no effect on previously reported net (loss).

Oil and Gas Natural Gas Properties

The Company uses the successful efforts method of accounting for oil and natural gas producing activities, as further defined under ASC 932, Extractive Activities - Oil and Natural Gas. Under these provisions, costs to acquire mineral interests in oil and natural gas properties, to drill exploratory wells that find proved reserves, and to drill and equip development wells are capitalized.

Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves. A determination of whether a well has found proved reserves is made shortly after drilling is completed. The determination is based on a process that relies on interpretations of available geologic, geophysic and engineering data. If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well. Capitalized costs of producing oil and natural gas interests are depleted on a unit-of-production basis at the field level.

If an exploratory well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made. If a determination cannot be made as to whether the reserves that have been found can be classified as proved, the cost of drilling the exploratory well is not carried as an asset for more than one year following completion of drilling. If, after that year has passed, a determination that proved reserves exist cannot be made, the well is assumed to be impaired and its costs are charged to expense. Its cost can, however, continue to be capitalized if a sufficient quantity of reserves is discovered in the well to justify its completion as a producing well and the entity is making sufficient progress assessing the reserves and the economic and operating viability of the project.

The carrying value of oil and gas properties is assessed for possible impairment on a field by field basis and on at least an annual basis, or as circumstances warrant, based on geological analysis or changes in proved reserve estimates. When impairment occurs, an adjustment is recorded as a reduction of the asset carrying value. For the three months ended March 31, 2016 and 2015, there were no impairment charge.

Goodwill

Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the acquisition of a business. Goodwill is not amortized; rather, it is tested for impairment annually and when events or changes in circumstances indicate that fair value of a reporting unit with goodwill has been reduced below carrying value. The impairment test requires allocating goodwill and other assets and liabilities to reporting units. However, the Company only has one reporting unit. To assess impairment, the Company has the option to qualitatively assess if it is more likely than not that the fair value of the reporting unit is less than the book value. Absent a qualitative assessment, or, through the qualitative assessment, if the Company determines it is more likely than not that the fair value of the reporting unit is less than the book value, a quantitative assessment is prepared to calculate the fair market value of the reporting unit. If it is determined that the fair value of the reporting unit is less than the book value, the recorded goodwill is impaired to its implied fair value with a charge to operating expenses. As of March 31, 2016 and December 31, 2015 there was no impairment of goodwill. Goodwill of $959,681 was from the acquisition of ImPetro on June 13, 2011.

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Revenue Recognition and Natural Gas Imbalances

The Company utilizes the accrual method of accounting for natural gas and crude oil revenues, whereby revenues are recognized based on the Company’s net revenue interest in the wells upon delivery to third parties. The Company will also enter into physical contract sale agreements through its normal operations.

Gas imbalances are accounted for using the sales method. Under this method, revenues are recognized based on actual volumes of oil and gas sold to purchasers. However, the Company has no history of significant gas imbalances.

Stock-Based Compensation and Equity Incentive Plans

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation. The standard requires the measurement and recognition of compensation expense in the Company’s condensed consolidated statements of operations for all share-based payment awards made to the Company’s employees, directors and consultants including employee stock options, non-vested equity stock and equity stock units, and employee stock purchase grants. Stock-based compensation expense is measured at the grant date, based on the estimated fair value of the award, reduced by an estimate of the annualized rate of expected forfeitures, and is recognized as an expense over the employees’ expected requisite service period, generally using the straight-line method. In addition, ASC 718 requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under previous accounting rules.

The Company’s forfeiture rate represents the historical rate at which the Company’s stock-based awards were surrendered prior to vesting. ASC 718 requires forfeitures to be estimated at the time of grant and revised on a cumulative basis, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

During the three months ended March 31, 2016 and 2015, the Company incurred stock based compensation expense of approximately $206,000 and $506,000, respectively, and is included in the accompanying condensed consolidated statements of operations in general and administrative expenses.

Net Loss Per Common Share

Basic net loss per common share is computed by dividing the net loss attributable to stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is calculated in the same manner, but also considers the impact to common shares for the potential dilution from stock options, non-vested share appreciation rights and non-vested restricted shares.  For the three months ended March 31, 2016, there were 900,000 potentially dilutive non-vested and vested stock options and 2,542,397 stock warrants.  For the three months ended March 31, 2015, there were 900,000 potentially dilutive non-vested restricted shares and stock options. The potentially dilutive shares, for the three months ended March 31, 2016 and 2015, are considered antidilutive since the Company is in a net loss position and thus result in the basic net loss per common share equaling the diluted net loss per common share.

12

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company’s estimates of oil and natural gas reserves are, by necessity, projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of natural gas and oil that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable natural gas and oil reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effect of regulations by governmental agencies, and assumptions governing future natural gas and oil prices, future operating costs, severance taxes, development costs and workover costs, all of which may in fact vary considerably from actual results. The future drilling costs associated with reserves assigned to proved, undeveloped locations may ultimately increase to the extent that these reserves are later determined to be uneconomic. For these reasons, estimates of the economically recoverable quantities of expected natural gas and oil attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity of the reserves, which could affect the carrying value of the Company’s oil and natural gas properties and/or the rate of depletion related to the oil and natural gas properties.

The most significant financial estimates are associated with the Company’s estimated volumes of proved oil and natural gas reserves, asset retirement obligations, assessments of impairment imbedded in the carrying value of undeveloped acreages undeveloped properties and developed properties, fair value of financial instruments, including derivative liabilities, depreciation and accretion, income taxes and contingencies.

New Accounting Pronouncement

           In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to employee share-based payment accounting, which includes provisions intended to simplify various aspects related to how share-based compensation payments are accounted for and presented in the financial statements. This amendment will be effective prospectively for reporting periods beginning on or after December 15, 2016, and early adoption is permitted. The Company is currently assessing the impact of the ASU on the Company’s condensed consolidated financial statements.

NOTE 4 - FAIR VALUE MEASUREMENTS

As defined by ASC 820, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale, which was further clarified as the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in an orderly transaction between market participants at the measurement date. The carrying amounts of the Company’s financial assets and liabilities, such as cash, trade receivable, joint interest receivable, joint interest revenues payable, accounts payable and accrued liabilities and related party payable, approximate their fair values because of the short maturity of these instruments. The carrying amount of the notes payable in long-term debt also approximates fair value due to its variable-rate characteristics.

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The following tables present information about the Company’s financial assets and liabilities measured at fair value as of March 31, 2016 and December 31, 2015:

($ in thousands)	Level 1		Level 2		Level 3		Balance as of March 31, 2016
Assets(at fair value):
Derivative assets (oil collar and put options)	$	-	$	-	$	-	$	-
Liabilities (at fair value):
Asset Retirement Obligations	$	-	$	-	$	3,660	$	3,660

($ in thousands)	Level 1		Level 2		Level 3		Balance as of December 31, 2015
Assets(at fair value):
Derivative assets (oil collar and put options)	$	-	$	733	$	-	$	733
Liabilities (at fair value):
Asset Retirement Obligations	$	-	$	-	$	3,597	$	3,597

The Company’s derivative contracts consist of NYMEX-based fixed price commodity swaps and NYMEX collars. The NYMEX-based fixed price derivative contracts are indexed to NYMEX futures contracts, which are actively traded, for the underlying commodity and are commonly used in the energy industry. A number of financial institutions and large energy companies act as counter-parties to these type of derivative contracts. As the fair value of these derivative contracts is based on a number of inputs, including contractual volumes and prices stated in each derivative contract, current and future NYMEX commodity prices, and quantitative models that are based upon readily observable market parameters that are actively quoted and can be validated through external sources, the Company have characterized these derivative contracts as Level 2.

The asset retirement liability is measured using primarily Level 3 inputs.  The significant unobservable inputs to this fair value measurement include estimates of plugging costs, remediation costs, inflation rate and well life.  The inputs are calculated based on historical data as well as current estimated costs. See Note 7 - Asset Retirement Obligations.

The Company estimates the expected undiscounted future cash flows of its oil and natural gas properties and compares such amounts to the carrying amount of the oil and natural gas properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, the Company will adjust the carrying amount of the oil and natural gas properties to fair value. The factors used to determine fair value are subject to management’s judgment and expertise and include, but are not limited to, recent sales prices of comparable properties, the present value of future cash flows, net of estimated operating and development costs using estimates or proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures and various discount rates commensurate with the risk and current market conditions associated with realizing the expected cash flows projected. These assumptions represent Level 3 inputs.

NOTE 5 - PROPERTY ACQUISITION AND DIVESTITURE

On July 31, 2015, the Company sold all of its Oklahoma properties, which were located in Logan and Kingfisher Counties, Oklahoma, to Remora Petroleum, LP (Austin, TX) for $7,249,390. The purchaser is not affiliated with any Company officers, directors or stockholders.

The following table summarized the results of operation from the properties sold during three months ended March 31, 2015:

Oil, natural gas, and related product sales	$	720
Expenses		138
Operating income	$	582

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As part of this transaction, the Company entered into the Fifth Amendment to its Credit Agreement with Independent Bank (“Fifth Amendment”). The Fifth Amendment provides that $4,000,000 of the purchase price was paid to Independent Bank to pay down its credit facility with Independent Bank.

NOTE 6 - OIL AND NATURAL GAS PROPERTIES

The following table presents a summary of the Company’s oil and natural gas properties at March 31, 2016 and December 31, 2015:

($ in thousands)	March 31, 2016			December 31, 2015
Oil and natural gas properties
Proved-developed producing properties	$	43,710		$	43,912
Proved-developed non-producing properties		6,228			5,865
Proved-undeveloped properties		-			-
Unproved properties		2,420			2,389
Gross oil and natural gas properties		52,358			52,166
Less: Accumulated depletion		(35,992	)		(35,282	)
Total oil and natural gas properties, net of accumulated depletion and impairment	$	16,366		$	16,884

During the three months ended March 31, 2016 and 2015, the Company incurred depletion expense of approximately $710,000 and $2,495,000, respectively.   As of March 31, 2016 and December 31, 2015, the accumulated impairment was approximately $55,985,000.

NOTE 7 - ASSET RETIREMENT OBLIGATIONS

The Company has recognized the fair value of its asset retirement obligations related to the future costs of plugging, abandonment, and remediation of oil and natural gas producing properties. The present value of the estimated asset retirement obligations has been capitalized as part of the carrying amount of the related oil and natural gas properties. The liability has been accreted to its present value as of the end of each period. At December 31, 2015 and December 31, 2014, the Company evaluated 147 and 169 wells, respectively, and has determined a range of abandonment dates between April 2016 and October 2044. The following table represents a reconciliation of the asset retirement obligations for the three months ended March 31, 2016 and the year ended December 31, 2015:

	Three Months Ended March 31, 2016		Year Ended December 31, 2015
($ in thousands)
Asset retirement obligations, beginning of period	$	3,597	$	3.606
Additions to asset retirement obligation		-		-
Liabilities settled during the period		-		(155	)
Accretion of discount		63		187
Revision of estimate		-		(41	)
Asset retirement obligations, end of period	$	3,660	$	3,597

During the three months ended March 31, 2016 and 2015, the Company incurred accretion expense of approximately $63,000 and $63,000, respectively.   As of March 31, 2016 and December 31, 2015, the current asset retirement obligation was approximately $400,000 and $392,000 respectively, and the long term asset retirement obligation was approximately $3,260,000 and $3,204,000, respectively.

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See Note 4 - Fair Value Measurements.

NOTE 8 – DERIVATIVES

The Company uses derivatives to hedge its oil production. The Company’s hedge position as of December 31, 2015 consisted of put options, some of which were deferred premiums paid at settlement. As of March 31, 2016, pursuant to the IB Forbearance Agreement, the Company did not have any remaining hedge positions.  Specifically, the Company unwound the remaining existing hedge contract with Cargill and Cargill paid Independent Bank all hedge settlement proceeds, all hedge liquidation proceeds, and all amounts otherwise payable by Cargill to the Company.  Such payments satisfied outstanding interest and default interest owing to Independent Bank as well as certain other expenses.

Fair Value of Derivative Financial Instruments

($ in thousands)	March 31, 2016		December 31, 2015
Derivative financial instruments - Current asset	$	-	$	733
Derivative financial instruments - Long-term assets		-		-
Net derivative financial instruments	$	-	$	733

Effect of Derivative Financial Instruments

	Three Months Ended March 31,
($ in thousands)		2016			2015
Realized gain/(loss) on settlement of derivative contracts		$	732		$	616
Change in fair value of derivative contracts		$	(733	)	$	(202	)

NOTE 9 - NOTES PAYABLE

On June 27, 2013, the Company entered into the IB Credit Agreement to borrow up to $100,000,000 at a current rate of 4.00% annum. The IB Credit Agreement was obtained to fund the development of the Company’s oil and natural gas properties and refinance the prior bank facility. At March 31, 2016 and December 31, 2015, the Company had approximately $11,363,000 and $12,400,000 in borrowings outstanding under the IB Credit Agreement, respectively.

In November 2015, counsel for Independent Bank notified the Company that it was in default under IB Credit Agreement.

On November 24, 2015, the Company entered into the IB Forbearance Agreement and the Third Amendment to the IB Credit Agreement with Independent Bank under which Independent Bank, acting for itself and as administrative agent for other lenders, agreed to forbear exercising any of its remedies for the existing covenant defaults for period of time to permit the Company to seek refinancing of the indebtedness owed to Independent Bank, which is referred to as the IB Indebtedness or a sale of sufficient assets to repay the IB Indebtedness. The Forbearance Period began with the execution of the IB Forbearance Agreement on November 24, 2015 and ended on January 31, 2016.  The Forbearance Period was subsequently extended to March 31, 2016.

At the time of the extension of the Forbearance Period to March 31, 2016, the Company agreed to unwind the remaining existing hedge contract with Cargill and permit Cargill to pay to Independent Bank all hedge settlement proceeds, all hedge liquidation proceeds, and all amounts otherwise payable by Cargill to the Company.  Such payments satisfied outstanding interest and default interest owing to Independent Bank as well as certain other expenses.  In addition, such payments reduced the principal due Independent Bank by $406,720.

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During the Forbearance Period, the Company is not permitted to drill new oil or gas wells or to make any distributions to equity holders. Furthermore, this default also cross defaulted the SOSVentures Credit Agreement, however the maturity of the second lien note to SOSventures was extended to August 1, 2016.

The Company is currently in discussions with the lenders under the IB Credit Agreement regarding a further extension of the Forbearance Period.  The Company is also in discussions with Lilis and other financing parties regarding possible refinance options for the amount outstanding under the IB Credit Agreement

On December 29, 2015, the Company entered into the merger agreement.  At March 31, 2016 and December 31, 2015, the refundable deposit paid by Lilis to the Company was approximately $2,358,000 and $1,750,000, respectively.

NOTE 10 - STOCK BASED COMPENSATION AND CONDITIONAL PERFORMANCE AWARDS

On April 1, 2012, the Company entered into employment agreements (the “Employment Agreement”) which provided a restricted stock grant and a conditional performance award to key members of management.

The restricted stock grant of 349,650 shares had a grant date fair value of $10.00 per share as approved by the Company’s compensation committee and vests in full upon the earlier of an initial public offering (“IPO”) which includes the sale of shares to the public, a business combination whereas 50% or more of the voting power is transferred to the new owners, or March 1, 2015. Those 349,650 shares were earned by the employee recipients and issued to them during the three months ended March 31, 2015.

During the three months ended March 31, 2016 and 2015, the Company incurred a stock-based compensation expense of approximately $0 and $300,000, respectively, related to the restricted stock grant, which is included in the accompanying condensed consolidated statements of operations in general and administrative expenses.

Additionally, the Employment Agreement provides for a conditional performance award  if an IPO occurs, the employee will receive: (1) a cash payment of 1% of the difference between the Company market capital and the book value at the time of the IPO, (2) common stock options to purchase 1.0% of the fully-diluted capital stock as of the IPO date and IPO price which will vest over a four year period and contain a cashless exercise, (3) common stock options to purchase 1.0% of the fully-diluted capital stock as of the 2nd anniversary of the IPO date at the closing price of the common stock on the 2nd anniversary date of the IPO and will vest six years after the grant and contain a cashless exercise. As of the three months ended March 31, 2016 and 2015, the conditional performance feature is not probable and as such, no compensation expense related to the conditional performance feature has been recognized.

On August 30, 2014, the Company amended and restated the Employment Agreement which provided for additional stock options.

The equity award of options to purchase 900,000 shares of common stock at the exercise price of $4.75 per share and vesting over three years from September 4, 2014 with a one-year cliff (in respect of 300,000 shares) and monthly vesting thereafter of 25,000 shares over the remaining two years. During the three months ended March 31, 2016 and 2015, the Company incurred a stock-based compensation expense of approximately $206,000 in both years related to stock options, which is included in the accompanying condensed consolidated statements of operations in general and administrative expenses. As of March 31, 2016, there was approximately $1,169,000 of unrecognized stock-based compensation related to the non-vested stock options to be recognized over 1.42 years.

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The assumptions used in the Black-Scholes Option Pricing Model for the stock options granted were as follows:

	2014
Risk-free interest rate			1.87	%
Expected volatility of common stock			92	%
Dividend yield		$	0.00
Expected life of options	5.72 years

For the three months ended March 31, 2016, there were no new stock options granted.  As of March 31, 2016, there were 900,000 stock options outstanding and the intrinsic value of the associated options was zero. The weighted average exercise of $4.75/share, weighted average grant date fair value of $2.75/share and the weighted average remaining contractual life of 8.3 years. On March 31, 2016, 500,000 stock options were exercisable.

NOTE 11 - RELATED PARTY TRANSACTIONS

Subordinated Credit Facility with SOSVentures

A director currently serving on the Company’s Board of Directors, Bill Liao, works for SOSventures. Further, a group composed of SOSventures, Sean O’Sullivan Revocable Living Trust and Bradford R. Higgins constitute a group owning 4,863,720 or 39.34% of the Company’s common stock shares.

On June 3, 2014, the Company agreed to amend its credit agreement with SOSventures, originally entered into on July 25, 2013, providing for a term loan through February 16, 2016 in an amount up to $20,000,000 at an 18.00% interest rate. The loan under this agreement is secured by a second lien on the Company’s assets.

The SOSventures credit agreement requires the Company to maintain certain financial ratios. First, the Company must maintain an interest coverage ratio of 3:1 at the end of each quarter so that its consolidated net income less the Company’s fees under the credit facility, lender expenses, non-cash charges relating to the hedge agreements, interest, income taxes, depreciation, depletion, amortization, exploration expenditures and costs and other non-cash charges (netted for noncash income) (“EBITDAX”) is greater than 3 times the Company’s interest expense under the credit facility. Second, the Company must maintain a debt to EBITDAX ratio of less than 3.5:1 at the end of each quarter. Third, the Company must maintain a current ratio of at greater than 1:1 at the end of each quarter, meaning that the Company’s consolidated current assets (including the unused amount of the credit facility by excluding non-cash assets under ASC 410 and 815) must be greater than the Company’s consolidated current liabilities (excluding non-cash obligations under ASC 410 and 815 and current maturities under the credit facility.)

The credit agreement prevents the Company from incurring indebtedness to banks or lenders, other than Independent Bank, without the consent of SOSventures. It also prevents the Company from incurring most contingent obligations or liens (other than to Independent Bank). It also restricts the Company’s ability to pay dividends, issue options and warrants and repurchase the Company’s common stock shares. The limitation on options and warrants does not apply to equity compensation plans.

This credit facility is currently in default due to the default under the IB Credit Agreement.

As of March 31, 2016, with accrued and unpaid interest the Company has $21,718,000 drawn against the SOSventures credit facility. In light of the December 19, 2014 notice from Independent Bank relating to the payment of interest to SOSventures, pursuant to the Intercreditors Agreement, the Company is accruing interest payments to SOSventures since the date of that notice.

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NOTE 12 - LEGAL PROCEEDINGS

From time-to-time, the Company may become subject to proceedings, lawsuits and other claims in the ordinary course of business including proceedings related to environmental and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance.

The Company is subject to various possible contingencies that arise primarily from interpretation of federal and state laws and regulations affecting the oil and natural gas industry. Such contingencies include differing interpretations as to the prices at which oil and natural gas sales may be made, the prices at which royalty owners may be paid for production from their leases, environmental issues and other matters. Although management believes that it has complied with the various laws and regulations, administrative rulings and interpretations thereof, adjustments could be required as new interpretations and regulations are issued. In addition, environmental matters are subject to regulation by various federal and state agencies.

Lawsuit Relating to 17.23% of the Company’s Common Stock Shares

Approximately 17.23% of the Company common stock was interpleaded into Connecticut Superior Court for the Judicial District of Stamford/Norwalk at Stamford, Cause No. FST-CV12-6015112-S (“Interpleader Action”). These are the residual shares of common stock that belonged to the Partnerships, after the distribution of the partnerships shares. Claims related to the Interpleader Action were heard in an American Arbitration Association arbitration in 2015. The claims, counterclaims and cross claims relate to the governance, control and termination of the Partnerships, including the distribution by the Partnerships of the Company’s shares of common stock to the limited partners in the Partnerships in a liquidating distribution in February 2014 as part of a “monetization” event, and other matters. On September 10, 2015, the American Arbitration Association issued an arbitration award in the Interpleader Action.

Bexar County Proceedings

On April 17, 2015,the Company was served with a lawsuit filed in Bexar County, Texas (the “Bexar County Proceedings”) by William F. Pettinati, Jr., Nicholas Garofolo, Sigma Gas Barbastella Fund and Sigma Gas Antrozous Fund against Starboard (now Brushy), its directors, its Chief Operating Officer, Edward Shaw, its former Chief Financial Officer, Eric Alfuth, the Company’s stockholder, Bradford Higgins, and Sean O’Sullivan, the managing director of the Company’s stockholder, SOSventures (the “Plaintiffs”). Mr. Pettinati, Mr. Garofolo and the Sigma Gas Antrozous Fund are stockholders. Mr. Pettinati owns 145,112 shares, Mr. Garofolo owns 226,680 shares of common stock and Sigma Gas Antrozous Fund owns 44,610 shares of common stock. Combined these stockholders account for approximately 3.3% of the Company’s outstanding common stock. These parties became stockholders in February 2014.

The Plaintiffs allege several derivative and direct causes of action. These derivative claims include, breach of fiduciary duty, waste of corporate assets, concerted action and conspiracy, joint enterprise, agency, alter ego, exemplary damages, and unjust enrichment. The direct claims include, breach of fiduciary duty, conversion, stockholder oppression, concerted action and conspiracy, declaratory judgment that the distribution of stock to the plaintiffs was invalid, joint enterprise, agency, alter ego, exemplary damages, concerted action and conspiracy and failure to allow for inspection of books and records. Many of the allegations relate to events that allegedly happened before the Plaintiffs became stockholders, including the distributions from the Partnerships that led to the Plaintiffs becoming stockholders in February 2014. Some similar claims involving these Plaintiffs (including the legality of the Partnerships’ liquidating distribution) were previously heard in the arbitration relating to the Partnerships referenced above. Plaintiffs were parties to that arbitration. For actions after February 2014, Plaintiffs complain that the Company’s common stock still lacks a trading venue, that a books and records request was not honored, that the Company “delayed” a public offering, that SOSventures had allegedly taken steps to “foreclose” on the Company’s assets under the SOSventures Credit Agreement and that the Company filed for an extension to the filing date for the Company’s annual report on Form 10-K for the year ended December 31, 2014. On October 6, 2015, Plaintiffs withdrew the claim about not honoring a books and records request.

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The Company’s directors and officers are subject to indemnification under the Company’s bylaws.

Settlement of Interpleader Action and Bexar County Proceedings

On February 17, 2016, the various parties to the Interpleader Action and the Bexar County Proceedings entered into a global settlement agreement (the “Settlement Agreement”) under which the parties to the proceedings issued mutual releases and the plaintiffs in all proceedings agreed to withdraw their claims. In return, the plaintiffs received a cash settlement, the majority of which was covered by the Company’s insurance. $350,000 of the settlement payment will be due and payable by the Company on the first to occur of (a) consummation of the merger with Lilis and (b) July 31, 2016.

NOTE 13 – STOCKHOLDERS’ EQUITY

Warrants

Upon entering into the Second Amendment to the First Amended and Restated Credit Agreement on April 15, 2015 with SOSVentures, SOSVentures received warrants to purchase 2,542,397 shares of the Company’s common stock for $1.00 per share with a two-year term. The intrinsic value associated with the outstanding warrants was zero at March 31, 2016, as the strike price of all warrants exceeded the implied market price for common stock. The remaining contract life was 1 year. The implied value of the warrants were based on the Company’s peer group, which included Company’s owning assets in the same areas and of similar size.  This valuation determined that the value of the warrants was approximately zero.  As such, the Company has placed no value on the warrants issued.

NOTE 14 – SUBSEQUENT EVENTS

Special Meeting of Stockholders Regarding Merger Agreement

On May 20, 2016, the Company held a special meeting of stockholders to consider and vote on (1) a proposal to approve and adopt the merger agreement; and (2) a proposal to authorize the Company’s board of directors, in its discretion, to adjourn the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies in favor of the proposal to approve and adopt the Merger Agreement. The proposals were approved by the Company’s stockholders.

Third Amendment to Forbearance Agreement with Independent Bank

On May 20, 2016, the Company, ImPetro and Operating entered into the Third Amendment to the Forbearance agreement (the “Third Amendment”) with Independent Bank, pursuant to which Independent Bank agreed to extend the Forbearance Period to May 31, 2016 (and in certain circumstances June 15, 2016) upon payment by the Company of (i) $79,772.64, such payment representing non-default and default interest accrued and to be accrued through May 31, 2016, and (ii) $30,000, such payment representing legal fees and expenses incurred by Independent Bank in connection with the Third Amendment. In the event the Company pays Independent Bank, on or before May 31, 2016, an additional $18,938.11, the Forbearance Period will be extended to June 15, 2016. On May 20, 2016, the above referenced payments were made to Independent Bank by the Company.

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

This section should be read in conjunction with “Note 2 — Going Concern” and “Note 9 — Notes Payable” in the Notes to the condensed consolidated financial statements included in this Form 10-Q and Item 1A “Risk Factors,” Our independent registered public accounting firm for the year ended December 31, 2015 issued their report dated April 20, 2016, that included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern due to our accumulated deficit, working capital deficit, significant net losses and need to raise additional funds to meet our obligations and sustain our operations. The discussion includes certain forward-looking statements. For a discussion of important factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see “Risk Factors” and “Cautionary Note About Forward-Looking Statements.”

Overview

We are an independent energy company engaged primarily in the exploration for, and development of, natural gas and crude oil reserves. We generate revenues and cash flows from two primary sources: investing activities and the proceeds from the sale of oil and gas production on properties we hold or participate in.

As of March 31, 2016, we own interests in 118 producing oil and natural gas wells, with 18 wells in the Crittendon Field. We operate 114 or 97% of those wells. Our oil and natural gas production for three month ended March 31, 2016 consisted of 37,318 bbls of oil and 100,487 Mcf of gas.

We began 2016 with estimated proved reserves of 1,130 MBOE, with 770 MBOE allocated to the Crittendon Field.

Strategy

We produce from operated oil and natural gas wells in the liquids rich, oil-bearing window of the Eagle Ford trend of South Texas and the nearby, oil-prone Giddings Field where in combination we control 15,260 gross acres (13,970 net acres). We also operate acreage in the Delaware Basin located in the Crittendon Field and controls 7,217 gross acres (3,458 net acres).

Our total proved reserves, based on our January 1, 2016 independent reserve estimate report, were 1,130 MBOE, (with 770 MBOE allocated to the Crittendon Field), consisting of 2,769 MMcf of natural gas, 669 Mbbl of oil. The PV-10 of our proved reserves at January 1, 2016 was $14.7 million based on the average of the beginning of each month prices through December 2015 of $50.16 per Bbl for oil and condensate and $2.63 per MMBtu for natural gas. At January 1, 2016, 100% of our estimated proved reserves were proved developed reserves and 59% of estimated proved reserves were oil and condensate. Our average daily production for the last month ending December 31, 2015 was 543 BOE per day.

As part of this strategy, we focused on the following areas:

Giddings – Bastrop and Bigfoot – Texas

We control about 12,300 gross acres (11,000 net acres) located within the Eagle Ford trend. Giddings Field is spread across Bastrop, Burleson, Brazos, Fayette, Lee, and Gonzales counties. We also control the Bigfoot Area which is about 3,000 gross acres across Frio and Atascosa counties in southern Texas.

Delaware Basin – Winkler Counties – Texas and Lea County, New Mexico

In Winkler and Loving Counties, Texas, we control about 5,160 gross acres (3,264 net acres). In Lea County, New Mexico, we started producing the Mexico P #1 Federal well on September 12, 2015 and now hold 520 gross acres (504.7 net acres) by production.

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Results of Operations

Total Revenues. Total revenues decreased $1,343,000 to $1,232,000 for the three months ended March 31, 2016 from $2,757,000 for the three months ended March 31, 2015, driven primarily by decrease in oil and natural gas prices and the sales of Oklahoma properties which were located in Logan and Kingfisher Counties. The Company’s average sales price received for natural gas decreased to $2.09 per Mcf for the three months ended March 31, 2016 from $3.02 per Mcf for the same period in 2015. The Company’s average sales price received for oil decreased to $28.85 per bbl for the three months ended March 31, 2016 from $45.70 per bbl for the same period in 2015.

Oil and Gas Production. Total natural gas and oil production for the three months ended March 31, 2016 consisted of 100,487 Mcf of natural gas and 37,318 bbls of oil, as compared to total natural gas and oil production for the three months ended March 31, 2015, which consisted of 218,254 Mcf of natural gas and 45,890 bbls of oil due to primarily sale of Oklahoma properties which were located in Logan and Kingfisher Counties.

Costs and Expenses. Total costs and expenses (excluding depreciation, depletion, impairment and gain on sales) increased $199,000 to $3,838,000 for the three months ended March 31, 2016 from $3,639,000 for the same period in 2016, due generally to increase in other expenses. For the three months ended March 31, 2016, the Company incurred other expense from the Bexar County Proceeding settlement of $350,000.  Lease operating expenses decrease $218,000 to $908,000 for the three months ended March 31, 2016 from $1,126,000 for the same period in 2015, due primarily to the sale of Oklahoma properties located in Logan and Kingfisher counties. Depletion, depreciation and amortization expense decreased to $718,000 for the three months ended March 31, 2016 from $2,507,000 for the same period in 2015, due primarily to decrease in production and lower oil and natural gas properties basis.

Net Loss. Net loss was ($3,325,000) or ($0.26) per diluted  common share, for the three months ended March 31, 2016 as compared to ($2,689,000) or ($0.22) per diluted share of common stock, for the same period in 2015. The increase in net loss was attributable to decrease in revenues.

 Liquidity and Capital Resources

During the three months ended March 31, 2016 net cash flow used by operating activities increased by $316,000 from $1,131,000 for the three months ended March 31, 2015 to $1,447,000 for the three months ended March 31, 2016. This increase was primarily attributable to lower revenue due to volatility of commodity prices and sales of Oklahoma properties located in Logan and Kingfisher counties.

Cash used by investing activities decreased by $219,000 for the three months ended March 31, 2016 from the same period last year.  The decrease was due primarily to cash outflow of $90,000 used to purchase oil and natural gas properties during the three months ended March 31, 2016 as compared to $313,000 for the same period in 2015.

Net cash used in financing activities was $434,000 for the three months ended March 31, 2016 compared to $772,000 used for the same period in 2015.  The decrease in cash used in financing activities primarily reflects proceeds from the Lilis Energy refundable deposit for the three months ended March 31, 2016.

As of March 31, 2016, the Company had a working capital deficit of $41,417,000, which consisted $1,935,000 of current assets offset by $42,352,000 of current liabilities. Current assets as of March 31, 2016 included cash of $864,000 and account receivable of $785,000 compared to cash of $2,839,000 and account receivable of $1,101,000 at December 31, 2015.  Current liabilities as of March 31, 2016 included accounts payable and accrued liabilities of $4,729,000 and revenue payable of $1,025,000 as compared to accounts payable and accrued liabilities of $5,564,000 and revenue payable of $1,018,000 at December 31, 2015.  Included in the current liabilities are the Independent Bank note of $11,363,000, Lilis’s refundable deposit of $2,358,100 and SOS Venture note and interest of $21,718,000 as of March 31, 2016.

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The condensed consolidated financial statements continue to reflect a curtailed drilling program which amounted to $90,000 for the three months ended March 31, 2016. Our capital program is designed to increase production through exploration and workovers within our fields and through joint venture programs. This strategy will involve industry partners in these efforts so as to reduce our upfront cash requirements and reduce risk dollars expended. This represents a decrease of $219,000 from our capital investment for the same period in 2015.

Historically, our primary sources of liquidity have been borrowings under bank credit facilities, cash flows from operations, and private financings. Our primary use of capital has been for the exploration, development and acquisition of oil and gas properties. As we pursue reserves and production growth, we continually consider which capital resources, including equity and debt financings, are available to meet our future financial obligations, planned capital expenditure activities and liquidity requirements. Our future ability to grow proved reserves and production will be highly dependent on the capital resources available to us. We continually monitor market conditions and consider taking on additional debt, selling non-core assets, or farm-out arrangements. Depending on the timing and concentration of the development of our non-proved locations, we may be required to generate or raise significant amounts of capital to develop all of our potential drilling locations should we endeavor to do so. In the event our cash flows are materially less than anticipated and other sources of capital we historically have utilized are not available on acceptable terms, we may curtail our capital spending.

The exact amount of capital spending for 2016 will depend upon the ability to refinance the existing debt with Independent Bank and our ability to raise third party financing. We may also need to modify our capital budget based on well performance results and cash flow. In addition, we have offered participations in our drilling program to industry partners over this time frame, further reducing our capital requirements. If necessary, we may also access capital through proceeds from potential non-core property asset dispositions and the future issuance of debt and/or equity securities.

Since the majority of our acreage is held by production, we have the flexibility to develop our acreage in a disciplined manner in order to maximize the resource recovery of the assets. We consistently monitor and adjust our projected capital expenditures in response to success or lack of success in drilling activities, changes in prices, availability of financing, drilling and acquisition costs, industry conditions, the timing of regulatory approvals, the availability of rigs, contractual obligations, internally generated cash flow and other factors both within and outside our control.

On December 29, 2015, we agreed to combine our business with Lilis pursuant to the merger agreement. Upon completion of the merger, each share of our common stock issued and outstanding immediately prior to the effective time will be converted into the right to receive an amount of shares of Lilis’s common stock such that our former stockholders will represent approximately 50% of the then-outstanding shares of Lilis’s common stock after the closing of the merger (without taking into account outstanding restricted stock units or options or warrants to purchase shares of Lilis’s common stock). In connection with the merger, we are obligated to convey the Giddings Field assets to SOSventures in exchange for a release of our obligations under the SOSventures Credit Agreement. We expect the closing of the merger to occur in the first half of 2016. However, the merger is subject to the satisfaction or waiver of other conditions, and it is possible that factors outside our control could result in the merger being completed at an earlier time, a later time or not at all. If the merger has not been completed on or before May 31, 2016, either Lilis or Brushy may terminate the merger agreement unless the failure to complete the merger by that date is due to the failure of the party seeking to terminate the merger agreement to fulfill any material obligations under the merger agreement or a material breach of the merger agreement by such party.

Collectively, these matters raise substantial doubt about our ability to continue as a going concern.  Our Board of Directors and management team continue to take steps to try to strengthen our balance sheet.  We intend to execute the merger (which is subject to usual and customary closing conditions beyond our control) and, in the event the merger is not consummated, we intend to refinance our existing debt, sell non-core properties and seek private financings to fund our cash needs. Any decision regarding the merger or financing transaction, and our ability to complete such a transaction, will depend on prevailing market conditions and other factors.  No assurances can be given that such transactions can be consummated on terms that are acceptable to us, or at all.

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Credit Facilities and Forbearance Agreement

In November 2015, counsel for Independent Bank had notified us of the following defaults under IB Credit Agreement: i) the interest coverage ratio covenant set forth in Section 7.15.1 of the IB Credit Agreement for the fiscal quarter ended June 30, 2015, (ii) the current ratio covenant set forth in Section 7.15.2 of the IB Credit Agreement for the fiscal quarter ended June 30, 2015, (iii) the leverage ratio covenant set forth in Section 7.15.3 of the IB Credit Agreement for the fiscal quarter ended June 30, 2015, and (iv) the Company is not currently maintaining the minimum Commodity Hedging Transactions (as defined in the IB Credit Agreement) required by Section 7.21 of the IB Credit Agreement. The letter further stated that the bank was contemplating its course of action.

On November 24, 2015, we entered into the Forbearance Agreement and the Third Amendment to the Amended and Restated Credit Agreement with Independent Bank under which Independent Bank, acting for itself and as administrative agent for other lenders, agreed to forbear exercising any of its remedies for the existing covenant defaults for period of time to permit us to seek refinancing of the indebtedness owed to Independent Bank in the approximate amount of $11,000,000, which is referred to as the IB Indebtedness or a sale of sufficient assets to repay the IB Indebtedness. The Forbearance Period began with the execution of the IB Forbearance Agreement on November 24, 2015 and ended on January 31, 2016.  The Forbearance Period was subsequently extended to March 31, 2016.

In connection with IB Forbearance Agreement, we provided certain additional collateral protections to Independent Bank. The Company granted a first lien mortgage on a newly completed well in New Mexico. We also delivered certain written directives to Independent Bank. In the event of default on the IB Forbearance Agreement or any IB Non-Forbearance Default, Independent Bank is authorized to send the written directives to Cargill, the counterparty to certain hedging contracts with the Company. These written directives instruct Cargill to pay over to Independent Bank “all hedge settlement proceeds, all hedge liquidation proceeds, and all amount otherwise payable by such hedge providers to Brushy.” We also executed and delivered to Independent Bank certain letters in lieu of transfer orders, whereby we instructed first purchasers of oil and gas production to pay directly to Independent Bank all production revenues attributable to our interest in such oil and gas assets. Independent Bank agrees not to send such letters provided that the IB Indebtedness is paid in full on or before the end of the Forbearance Period. At the time of the extension of the Forbearance Period to March 31, 2016, we agreed to unwind the remaining existing hedge contract with Cargill and permit Cargill to pay to Independent Bank all hedge settlement proceeds, all hedge liquidation proceeds, and all amounts otherwise payable by Cargill to us.  Such payments satisfied outstanding interest and default interest owing to Independent Bank as well as certain other expenses.  In addition, such payments reduced the principal due Independent Bank by $406,720.

           During the Forbearance Period, we are not permitted to drill new oil or gas wells or to make any distributions to equity holders. Furthermore, this also cross defaulted the SOSventures Credit Agreement, however the maturity of the second lien note to SOSventures was extended to August 1, 2016.

           We are currently in discussions with the lenders under the IB Credit Agreement regarding a further extension of the Forbearance Period.  We are also in discussions with Lilis and other financings parties regarding possible refinance options for the amount outstanding under the IB Credit Agreement. If we do not refinance the IB Credit Agreement or obtain a further extension of the Forbearance Period, the lenders under the IB Credit Agreement will be able to accelerate the repayment of debt. Furthermore, if we are unable to restructure or refinance our current obligations under our existing debt, and address near-term liquidity needs, we may need to seek relief under the U.S. Bankruptcy Code. This relief may include: (i) seeking bankruptcy court approval for the sale or sales of some, most or substantially all of our assets pursuant to section 363(b) of the U.S. Bankruptcy Code and a subsequent liquidation of the remaining assets in the bankruptcy case; (ii) pursuing a plan of reorganization (where votes for the plan may be solicited from certain classes of creditors prior to a bankruptcy filing) that we would seek to confirm (or “cram down”) despite any classes of creditors who reject or are deemed to have rejected such plan; or (iii) seeking another form of bankruptcy relief, all of which involve uncertainties, potential delays and litigation risks.

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Critical Accounting Policies and Estimates

The following discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate such estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our condensed consolidated financial statements. Below, we have provided expanded discussion of the more significant accounting policies, estimates and judgments. We believe these accounting policies reflect the more significant estimates and assumptions used in preparation of our condensed consolidated financial statements. Please read the notes to our audited consolidated financial statements included in this report for a discussion of additional accounting policies and estimates made by management.

Oil and Gas Producing Activities

Our oil and gas producing activities were accounted for using the successful efforts method of accounting as further defined under FASB ASC 932, Extractive Activities - Oil and Natural Gas. Costs to acquire leasehold rights in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, delay rentals and geological and geophysical costs are expensed.

Depletion and Depreciation

Estimates of natural gas and oil reserves utilized in the calculation of depletion are prepared using certain assumptions. Reserve estimates are based upon existing economic and operating conditions with no provision for price and cost escalations except by contractual arrangements. Natural gas and oil reserve estimates are inherently imprecise and are subject to change as more current information becomes available. Capitalized costs are depleted and amortized using the units of production method, based upon reserve estimates.

Impairments

The carrying value of oil and gas properties is assessed for possible impairment on a field by field basis and on at least an annual basis, or as circumstances warrant, based on geological analysis or changes in proved reserve estimates

Asset Retirement Obligations

The Company records for the estimated liability for the plugging and abandonment of natural gas and oil wells at the end of their productive lives following the provisions of ASC 410-20, Asset Retirement Obligations. Asset retirement obligations are estimated at the present value of expected future net cash flows based on reserve estimates and federal and state regulatory requirements and are discounted using the Company’s credit adjusted risk free rate. Because the Company uses unobservable inputs in estimating asset retirement obligations, it considers such obligations a Level 3 measurement under ASC 820. At the time of abandonment, we recognize a gain or loss on abandonment to the extent that actual costs do not equal the estimated costs.

Goodwill

At March 31, 2016 and December 31, 2015, the Company had goodwill of $959,681.

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Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The Company follows FASB ASC Topic 350 Goodwill and Intangible Asset Impairment Testing. Our analysis consists of two steps. Step 1 tests the company for impairment by comparing the fair value of equity to the book value of equity. If the fair value is less than the book value, then Step 2 analysis must be performed. If the fair value of goodwill is less than its carrying amount, impairment is recorded based on the difference. The Company annually assesses the carrying value of goodwill for impairment.

Pricing mechanism for oil and gas reserves estimation

The SEC’s rules require reserve estimates to be calculated using a 12-month average price. Price changes can still be incorporated to the extent defined by contractual arrangements.

The SEC rules also amend the definition of proved oil and gas reserves to include reserves located beyond development spacing areas that are immediately adjacent to developed spacing areas if economic recoverability can be established with reasonable certainty. These revisions are designed to permit the use of alternative technologies to establish proved reserves in lieu of requiring companies to use specific tests. In addition, they establish a uniform standard of reasonable certainty that applies to all proved reserves, regardless of location or distance from producing wells. Because the revised rules generally expand the definition of proved reserves, proved reserve estimates could increase in the future based upon adoption of the revised rules.

Estimated proved oil and gas reserves

The evaluation of our oil and gas reserves is critical to management of our operations and ultimately our economic success. Decisions such as whether development of a property should proceed and what technical methods are available for development are based on an evaluation of reserves. These oil and gas reserve quantities are also used as the basis of calculating the unit-of-production rates for depreciation, evaluating impairment and estimating the life of our producing oil and gas properties in our asset retirement obligations. Proved reserves are classified as either proved developed or proved undeveloped. Proved developed reserves are those reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Estimated proved undeveloped reserves include reserves expected to be recovered from new wells from undrilled proven reservoirs or from existing wells where a significant major expenditure is required for completion and production.

Independent reserve engineers prepare the estimates of our oil and gas reserves presented in this report based on guidelines promulgated under GAAP and in accordance with the rules and regulations of the SEC. The evaluation of our reserves by the independent reserve engineers involves their rigorous examination of our technical evaluation and extrapolations of well information such as flow rates and reservoir pressure declines as well as other technical information and measurements. Reservoir engineers interpret this data to determine the nature of the reservoir and ultimately the quantity of total oil and gas reserves attributable to a specific property. Our total reserves in this report include only quantities that we expect to recover commercially using current prices, costs, existing regulatory practices and technology. While we are reasonably certain that the total reserves will be produced, the timing and ultimate recovery can be affected by a number of factors including completion of development projects, reservoir performance, regulatory approvals and changes in projections of long-term oil and gas prices. Revisions can include upward or downward changes in the previously estimated volumes or proved reserves for existing fields due to evaluation of (1) already available geologic, reservoir or production data or (2) new geologic or reservoir data obtained from wells. Revisions can also include changes associated with significant changes in development strategy, oil and gas prices or production equipment/facility capacity.

Standardized measure of discounted future net cash flows

The standardized measure of discounted future net cash flows relies on these estimates of oil and gas reserves using commodity prices and costs at year-end. The benchmark oil and gas prices used are the preceding 12-month averages of the first-day-of-the month spot prices posted for the WTI oil and Henry Hub natural gas. Oil prices are based on a benchmark price of $47.03 per barrel and have been adjusted by lease for gravity, transportation fees, and regional price differentials. Gas prices per thousand cubic feet are based on a benchmark price of $2.22 per million British thermal units and have been adjusted by lease for Btu content, transportation fees, and regional price differentials. The adjustments are based on the differential between historic oil and gas sales and the corresponding benchmark price. While we believe that future operating costs can be reasonably estimated, future prices are difficult to estimate since the market prices are influenced by events beyond our control. Future global economic and political events will most likely result in significant fluctuations in future oil prices.

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Unproved reserves

The SEC’s rules permit disclosure of probable and possible reserves and provide definitions of probable reserves and possible reserves. Disclosure of probable and possible reserves is optional. We have chosen not to disclose probable and possible reserves.

Executive Compensation

The Company entered into employment contracts with Michael Pawelek and Edward Shaw which provide for stock grants, stock options and change of control payments. The Company accounts for these grants, options and payments under FASB 718.

No Delayed Adoption of New or Revised Accounting Standards under the Jumpstart our Business Startups Act (JOBS ACT)

We made the irrevocable decision under the JOBS Act to implement new or revised accounting standards applicable to reporting issuers when required of reporting issuers that are not Emerging Growth Companies under the JOBS Act.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is a Smaller Reporting Company as defined by SEC Rules 405 and 12b-2 and is not required to disclose the information required by Regulation S-K, Item 305 pursuant to the Smaller Reporting Company exemption in Regulation S-K, Item 305(e).

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer (“CEO”) and our controller, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Form 10-Q. Based on this evaluation, our CEO and controller concluded that, because of certain material weaknesses in our internal control over financial reporting as described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC, our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act were not effective.

We are committed to improving our financial organization. Our control weaknesses are largely a function of not having sufficient staff. In the event the merger with Lilis is consummated, we will have additional resources available to us to increase the effectiveness of our internal control, including a chief financial officer, and extended management team.  Additionally, as financial resources become available, we have been engaging third-party consultants to assist with control activities.

We will continue to monitor and evaluate the effectiveness of our internal control over financial reporting on an ongoing basis and are committed to taking further action by implementing additional enhancements or improvements, or deploying additional human resources as may be deemed necessary.

Changes in Internal Control Over Financial Reporting

For the quarter ended March 31, 2016, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Lawsuit Relating to 17.23% of our Common Stock Shares

Approximately 17.23% of our common stock was interpleaded into Connecticut Superior Court for the Judicial District of Stamford/Norwalk at Stamford, Cause No. FST-CV12-6015112-S (“Interpleader Action”). These are the residual shares of common stock that belonged to the Partnerships after the distribution of the partnerships shares. Claims related to the Interpleader Action were heard in an American Arbitration Association arbitration in 2015. The claimants were Gregory Imbruce; Giddings Investments LLC; Giddings Genpar LLC, Hunton Oil Genpar LLC, ASYM Capital Ill LLC, Glenrose Holdings LLC; ASYM Energy Investments LLC. “Certain” respondents and counterclaimants were Charles Henry, Ahmed Ammar; John P. Vaile, as Trustee of John P. Vaile Living Trust, John Paul Otieno, SOSventures, Bradford Higgins, William Mahoney, Edward M. Conrads, Robert J. Conrads, and the Partnerships. “PKG Respondents” and cross claimants were William F. Pettinati, Jr., Sigma Gas Barbastella Fund, Sigma Gas Antrozous Fund, Nicholas P. Garofolo (the plaintiffs in the above-referenced stockholder litigation) who made claims against Charles S. Henry, III, Bradford Higgins and SOSventures. The relief respondents were Rubicon Resources LLC, Sean O’Sullivan, King Lee, Michael Rihner, Scott Decker, Andrew Gillick, Briana Gillick, Steve Heinemann, Stanley Goldstein, Sidney Orbach, James P. Ashman, and Patricia R. Ashman. The claims, counterclaims and cross claims relate to the governance, control and termination of the Partnerships, including the distribution by the Partnerships of our shares of common stock to the limited partners in the Partnerships in a liquidating distribution in February 2014 as part of a “monetization” event, and other matters.

    On September  10, 2015, the American Arbitration Association issued an arbitration award in the Interpleader Action, which is referred to as the Award.  The Award states as follows:

1) All claims asserted by Claimants, including Gregory Imbruce and various business entities controlled by Mr. Imbruce against all Respondents were denied and award was made in favor of the “Certain” respondents, including our director, Charles S. Henry, III, as well as SOSventures, Bradford Higgins, John Paul Otieno, Estate of William Mahoney, Ahmed Ammar, John P. Vaile, as Trustee of John P. Vaile Living Trust, Edward M. Conrads, Robert J. Conrads, Giddings Oil & Gas LP, Asym Energy Fund III LP and Hunton Oil Partners LP.

2) All claims asserted by Claimants, Gregory Imbruce and various business entities controlled by Mr. Imbruce against Relief Respondents, including Rubicon Resources LLC, Sean O’Sullivan Revocable Living Trust, King Lee, Michael Rihner, Scott Decker, Andrew Gillick, Briana Gillick, Steve Heinemann, Stanly Goldstein, Sidney Orbach, James P. Ashman and Patricia R. Ashman, were denied.

3) An award was made in favor of the “Certain” respondents, including our director, Charles S. Henry, III, as well as SOSventures, Bradford Higgins, John Paul Otieno, Estate of William Mahoney, Ahmad Ammar, John P. Vaile, as Trustee of John P. Vaile Living Trust, Edward M. Conrads, Robert J. Conrads, Giddings Oil & Gas LP, Asym Energy Fund III LP and Hunton Oil Partners LP against Mr. Imbruce and his entities on the following claims:

a) breach of fiduciary duty;

b) breach of implied covenant of good faith and fair dealing;

c) partnership dissolution;

d) unjust enrichment;

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e) breach of contract;

f) accounting;

g) violation of Connecticut Unfair Trade Practices Act;

h) civil theft; and

i) piercing the corporate veil.

4) All claims asserted by William F. Pettinati, Jr. Sigma Gas Barbastella Fund, Sigma Gas Antrozous Fund and Nicholas P. Garofolo against our director, Charles S. Henry III, as well as SOSventures and Bradford Higgins were denied.

5) A declaratory award was entered declaring that the removal of Hunton Oil Genpar LLC, Giddings Genpar LLC and Asym Capital III LLC and/or Gregory Imbruce as the General Partner(s) of the Partnerships was lawful and in compliance with all legal and contractual requirements, and thus was effective;

6) A declaratory award that the distribution of our -issued common stock made in February 2014 to limited partners in the Partnerships with remaining shares of common stock ultimately being interpleaded into Court in Connecticut was lawful, met all legal requirements and is effective in that the distribution was the result of a “monetization” event under the Partnership agreements;

7) A declaratory award that the Partnerships were effectively dissolved at the time of the distribution of the above-referenced shares of common stock issued by us from the Partnerships to the limited partners in the Partnerships;

8) A denial of any and all fees and expenses claimed by Mr. Imbruce and his entities due to “multiple and repeated violations of the Connecticut Uniform Securities Act;”

9) A denial of fees and expenses claimed by Mr. Imbruce and his entities for the time periods subsequent to the 2011 rollup that formed us;

10) An award of damages in favor of the “Certain” respondents, in the amount of $1,602,235, subject to trebling under a Civil Theft finding to $4,806,705, plus attorney and expert fees of $2,998,839 for a total award of $7,805,544, payable by Claimants, including Mr. Imbruce and his business entities;

11) Injunctive relief ordering an accounting of the sources and uses of all funds and other assets of the Partnerships during the time that Mr. Imbruce and his entities served as general partners of the Partnerships;

12) Post-judgment interest at 10 percent per year payable by Mr. Imbruce and his business entities; and

13) Arbitration administrative fees, expenses and compensation of the Arbitrator totaling $122,200 to be paid by Gregory Imbruce et al, and William F. Pettinati, Jr., Sigma Gas Barbastella Fund, Sigma Gas Antrozous Fund and Nicholas P. Garofolo.

The “Certain” respondents filed in Connecticut Superior Court seeking to confirm the Award. Likewise, Claimants have filed in Connecticut Superior Court to vacate the Award. If the Connecticut Superior Court confirms the Award, we anticipate that the Court will subsequently issue a related order as to ownership of the 2,190,891 shares of our common stock, which may result in modifying our ownership structure.

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Bexar County Proceedings

On April 17, 2015, we were served with a lawsuit filed in Bexar County, Texas (the “Bexar County Proceedings”) by William F. Pettinati, Jr., Nicholas Garofolo, Sigma Gas Barbastella Fund and Sigma Gas Antrozous Fund against Starboard (now Brushy), its directors, its Chief Operating Officer, Edward Shaw, its former Chief Financial Officer, Eric Alfuth, our stockholder, Bradford Higgins, and Sean O’Sullivan, the managing director of our stockholder, SOSventures (the “Plaintiffs”).  Mr. Pettinati, Mr. Garofolo and the Sigma Gas Antrozous Fund are stockholders.  Mr. Pettinati owns 145,112 shares, Mr. Garofolo owns 226,680 shares of common stock and Sigma Gas Antrozous Fund owns 44,610 shares of common stock. Combined these stockholders account for approximately 3.3% of our outstanding common stock. These parties became stockholders in February 2014.

The Plaintiffs allege several derivative and direct causes of action. These derivative claims include, breach of fiduciary duty, waste of corporate assets, concerted action and conspiracy, joint enterprise, agency, alter ego, exemplary damages, and unjust enrichment. The direct claims include, breach of fiduciary duty, conversion, stockholder oppression, concerted action and conspiracy, declaratory judgment that the distribution of stock to the plaintiffs was invalid, joint enterprise, agency, alter ego, exemplary damages, concerted action and conspiracy and failure to allow for inspection of books and records. Many of the allegations relate to events that allegedly happened before the Plaintiffs became stockholders, including the distributions from the Partnerships that led to the Plaintiffs becoming stockholders in February 2014. Some similar claims involving these Plaintiffs (including the legality of the Partnerships’ liquidating distribution) were previously heard in the arbitration relating to the Partnerships referenced above. Plaintiffs were parties to that arbitration. For actions after February 2014, Plaintiffs complain that our common stock still lacks a trading venue, that a books and records  request was not honored, that we “delayed” a public offering, that SOSventures had allegedly taken steps to “foreclose” on our assets under the SOSventures Credit Agreement and that we filed for an extension to the filing date for our annual report on Form 10-K for the year ending December 31, 2014. On October 6, 2015 Plaintiffs withdrew the claim about not honoring a books and records request.

The matter is styled Sigma Barbastella Fund et al v. Charles S. Henry, III et al. and it is Cause No. 20105-CI-05672 in the 224th District Court in Bexar County, Texas.

Our directors and officers are subject to indemnification under our bylaws.

Settlement of Interpleader Action and Bexar County Proceedings

On February 17, 2016, the various parties to the Interpleader Action and the Bexar County Proceedings entered into a global settlement agreement (the “Settlement Agreement”) under which the parties to the proceedings issued mutual releases and the plaintiffs in all proceedings agreed to withdraw their claims.  In return, the plaintiffs received a cash settlement, the majority of which was covered by our insurance. $350,000 of the settlement payment will be due and payable on the first to occur of (a) consummation of the merger with Lilis and (b) July 31, 2016.

Item 1A. Risk Factors.

In addition to the information set forth in this Form 10-Q, you should also carefully review and consider the risk factors contained in our other reports and periodic filings with the SEC, including without limitation the risk factors contained under the caption “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 that could materially and adversely affect our business, financial condition, and results of operations. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. There have been no material changes in the significant factors that may affect our business and operations as described in “Item 1A—Risk Factors” of the Annual Report on 10-K for the year ended December 31, 2015.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

In November 2015, counsel for Independent Bank notified us of the following defaults under the 2013 Credit Agreement between us and Independent Bank, acting for itself and as administrative agent for the other lenders (as amended, the “IB Credit Agreement”): i) the interest coverage ratio covenant set forth in Section 7.15.1 of the IB Credit Agreement for the fiscal quarter ended June 30, 2015, (ii) the current ratio covenant set forth in Section 7.15.2 of the IB Credit Agreement for the fiscal quarter ended June 30, 2015, (iii) the leverage ratio covenant set forth in Section 7.15.3 of the IB Credit Agreement for the fiscal quarter ended June 30, 2015, and (iv) the Company is not currently maintaining the minimum Commodity Hedging Transactions (as defined in the IB Credit Agreement) required by Section 7.21 of the IB Credit Agreement. The letter further stated that the bank was contemplating its course of action.

On November 24, 2015, we entered into the Forbearance Agreement and the Third Amendment to the Amended and Restated Credit Agreement with Independent Bank under which Independent Bank, acting for itself and as administrative agent for other lenders, agreed to forbear exercising any of its remedies for the existing covenant defaults for period of time to permit us to seek refinancing of the indebtedness owed to Independent Bank in the approximate amount of $11,000,000, which is referred to as the IB Indebtedness or a sale of sufficient assets to repay the IB Indebtedness. The Forbearance Period began with the execution of the IB Forbearance Agreement on November 24, 2015 and ended on January 31, 2016.  The Forbearance Period was subsequently extended to March 31, 2016.

Furthermore, this also cross defaulted the SOSventures Credit Agreement, however the maturity of the second lien note to SOSventures was extended to August 1, 2016.

Please see the information set forth in Item 5 below regarding the further extension of the Forbearance Agreement, which information is incorporated by reference herein.  We are also in discussions with Lilis and other financings parties regarding possible refinance options for the amount outstanding under the IB Credit Agreement.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Because this Form 10-Q is being filed within four business days from the date of the reportable event, we have elected to make the following disclosure in this Form 10-Q instead of in a Current Report on Form 8-K under Item 1.01.

On May 20, 2016, the Company, ImPetro and Operating entered into the Third Amendment to the Forbearance agreement (the “Third Amendment”) with Independent Bank, pursuant to which Independent Bank agreed to extend the Forbearance Period to May 31, 2016 (and in certain circumstances June 15, 2016) upon payment by the Company of (i) $79,772.64, such payment representing non-default and default interest accrued and to be accrued through May 31, 2016, and (ii) $30,000, such payment representing legal fees and expenses incurred by Independent Bank in connection with the Third Amendment. In the event the Company pays Independent Bank, on or before May 31, 2016, an additional $18,938.11, the Forbearance Period will be extended to June 15, 2016. On May 20, 2016, the above referenced payments were made to Independent Bank by the Company.

The foregoing description of the Third Amendment is not complete and is qualified in its entirety by reference to the full text of the Third Amendment, a copy of which is filed as Exhibit 10.1.03 to this Form 10-Q and is incorporated herein by reference.

Item 6. Exhibits

The documents listed in the Exhibit Index of this Form 10-Q are incorporated by reference or are filed with this Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

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SIGNATURES

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

	Brushy Resources, Inc.
Date:  May 23, 2016	By:	/s/ Michael J. Pawelek
		Chief Executive Officer
		(Principal Executive Officer)
Date:  May 23, 2016	By:	/s/ N. Kim Vo
		Controller
		(Principal Financial Officer and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
10.1.01	First Amendment to Forbearance Agreement,  between Brushy Resources, Inc., ImPetro Resources, LLC, ImPetro Operating, LLC and Independent Bank, dated February 18, 2016 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the SEC on February 24, 2016).
10.1.02	Second Amendment to Forbearance Agreement,  between Brushy Resources, Inc., ImPetro Resources, LLC, ImPetro Operating, LLC and Independent Bank, dated March 9, 2016 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the SEC on March 11, 2016).
10.1.03	Third Amendment to Forbearance Agreement,  between Brushy Resources, Inc., ImPetro Resources, LLC, ImPetro Operating, LLC and Independent Bank, dated May 20, 2016 (filed herewith).
31.1	Management Certification - Principal Executive Officer (filed herewith).
31.2	Management Certification - Principal Accounting Officer (filed herewith).
32.1	Section 1350 Certification (furnished herewith).
101.INS	XBRL Instance Document (filed herewith).
101.SCH	XBRL Taxonomy Schema Linkbase Document (filed herewith).
101.CAL	XBRL Taxonomy Calculation Linkbase Document (filed herewith).
101.DEF	XBRL Taxonomy Definition Linkbase Document (filed herewith).
101.LAB	XBRL Taxonomy Labels Linkbase Document (filed herewith).
101.PRE	XBRL Taxonomy Presentation Linkbase Document (filed herewith).

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