The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Nature of Operations and Basis of Presentation
Nature of Operations
4 Phoenix Oil & Gas, LLC, a limited liability company, was formed under the laws of the state of Texas on October 19, 2009 (“Predecessor”). On August 10, 2010, we formed United American Petroleum Corp. a Company incorporated under the laws of the state of Nevada. United American Petroleum Corp.’s principal business is the acquisition and management of leasehold interests in petroleum and natural gas rights, either directly or indirectly, and the exploitation and development of properties subject to these leases. In these notes, the terms “United,” “Company,” “we,” “us,” “successor," or “our” mean United American Petroleum Corp.
On October 15, 2010, United American Petroleum Corp. purchased the Lozano and Marcee working interests from 4 Phoenix Oil and Gas, LLC, triggering predecessor accounting and financial statement presentation.
Successor company references herein are referring to consolidated information pertaining to United American Petroleum Corp. and our wholly owned subsidiaries.
Predecessor company references herein relate to 4 Phoenix Oil & Gas, LLC a former working interest owner of the Lozano lease.
On December 31, 2010, the Company entered into a Plan of Merger (the “Merger”) with Forgehouse, Inc. and their newly formed wholly-owned subsidiary United PC Acquisition Corp. Following the closing and pursuant to the Plan of Merger, effective as of December 31, 2010, the Company merged with and into United PC Acquisition Corp. with the Company surviving (the “Reverse Merger”). The Company, as a wholly-owned subsidiary of Forgehouse, Inc. was then merged with and into Forgehouse, Inc. and Forgehouse, Inc. changed its name to United American Petroleum Corp. For accounting purposes, the Merger was treated as a reverse merger and a recapitalization of United American Petroleum Corp.
On January 13, 2011, the Company formed a wholly owned subsidiary, UAP Management, LLC, a Texas limited liability company, for the purpose of managing the Gabriel Rosser, LP (see Note 8).
On January 13, 2011, the Company formed a wholly owned subsidiary, United Operating, LLC, a Texas limited liability company, for the purpose of operating and managing the various interests acquired from Patriot Minerals, LLC (see Note 8).
Basis of Presentation
These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim consolidated financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of SEC Regulation S-X. The principles for interim consolidated financial information do not require the inclusion of all the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements on Form 10-K for the years ended December 31, 2011. The condensed consolidated financial statements included herein are unaudited; however, in the opinion of management, they contain all normal recurring adjustments necessary for a fair statement of the condensed results for the interim periods. Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. We made certain reclassifications to prior-period amounts to conform to the current presentation.
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company has incurred a net loss and negative operating cash flows since inception through March 31, 2012. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's management is implementing plans to sustain the Company’s cash flow from operating activities and/or acquire additional capital funding. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
3. Related Party Payable
As of March 31, 2012 and December 31, 2011, the Company had a related party payable in the amount of $91,970 payable to two Companies with working interest amounts receivable. Our directors are also officers in these two Companies.
4. Embedded Derivative Liabilities
Conversion Option Liability
As described in Note 8, the Company has issued convertible notes with certain reset provisions. The Company accounted for these reset provisions in accordance with ASC 815-40, which requires that the Company bifurcate the embedded conversion option as liability at the grant date and to record changes in fair value relating to the conversion option liability in the statement of operations as of each subsequent balance sheet date. The debt discount related to the convertible note is amortized over the life of the note using the effective interest method. See Note 5 for a reconciliation of the changes in fair value of the Company’s embedded derivative.
December 31, 2010 Convertible Note Installments (First Financing)
On March 31, 2012, the Company determined a fair value of $2,387,648 for the conversion option liability for its convertible notes using the Black Scholes Option Pricing Model based upon the following: dividend yield of -0-%, volatility of 107.06%, risk free rate of 0.33% and an expected term of approximately 1.75 years.
October 14, 2011 Convertible Note Installments (Second Financing)
On March 31, 2012, the Company determined a fair value of $2,824,819 for the conversion option liability for its convertible notes using the Black Scholes Option Pricing Model based upon the following: dividend yield of -0-%, volatility of 101.12%, risk free rate of 0.33% and an expected term of approximately 2.5 years.
Based upon the decrease in the fair value of the conversion option liability, the Company recognized a non-cash gain included in other expense of $3,369,644 for the three months ended March 31, 2012.
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As described in Note 8, the Company issued a convertible note with detachable warrants. The Company accounted for these detachable warrants in accordance with ASC 470-20, which requires that the Company calculate the relative fair value of the warrants at the grant date to additional paid-in capital. The Company amortizes the debt discount associated with the warrants over the life of the convertible notes using the effective interest method.
On February 10, 2012, the Company determined a relative fair value of $61,353 for the detachable warrants for the fourth installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 110.77%, risk free rate of 1.04% and an expected term of approximately 5 years.
On March 30, 2012, the Company determined a relative fair value of $130,853 for the detachable warrants for the fifth installment of the convertible notes. In calculating the relative fair value of the warrants the Company used the Black Scholes Option Pricing Model based upon the following assumptions: dividend yield of -0-%, volatility of 110.64%, risk free rate of 1.04% and an expected term of approximately 5 years.
The Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
| | Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| | Level 2 | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and |
| | Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
The following table sets forth the Company's consolidated financial assets and liabilities measured at fair value by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
| | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | LIABILITIES: | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Conversion option liability | | | 5,212,467 | | | | - | | | | - | | | | 5,212,467 | |
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Fair Value (Continued)
The following is a reconciliation of the conversion option liability and detachable warrant liability for which Level 3 inputs were used in determining fair value:
| | Beginning balance January 1, 2012 | $ | 1,138,989 | |
| | | | | |
| | | | | |
| | Initial recognition of debt derivative from issuance of February 10, 2012, $150,000 convertible note | | 189,051 | |
| | | | | |
| | Initial recognition of debt derivative from issuance of March 30, 2012, $250,000 convertible note | | 514,783 | |
| | | | | |
| | Mark to market of debt derivative | | 3,369,644 | |
| | | | | |
| | | | | |
| | Ending balance as of March 31, 2012 | $ | 5,212,467 | |
During the period ended March 31, 2012, the loss on embedded derivatives of in the condensed consolidated statement of operations consisted of a loss on the change in fair value of 3,369,644 noted above and a loss of $496,042 which was the amount by which the embedded derivative liabilities exceeded the principal of the related notes payable on the date the notes were issued.
The Company’s conversion option liabilities are valued using pricing models and the Company generally uses similar models to value similar instruments. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs. These consolidated financial liabilities do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy. See Note 4 for Black Scholes Option Pricing Model inputs.
7. Oil and Gas Properties
On October 15, 2010, the Company paid $250,000 to acquire oil, gas and mineral leases on the Lozano and Marcee properties. As a result of the asset purchase, we own a twenty-five percent (25%) working interest in the Lozano lease, which is a currently producing asset with three wells. The Lozano lease covers approximately 110 gross acres and is located in Frio County, Texas. The Company has a one hundred percent interest (100%) working interest in the Marcee lease located in Gonzales County Texas. The Marcee lease contains one well, is being developed for production and has proved reserves.
As part of the Reverse Merger, the Company acquired an oil and gas lease in Anchorage, Alaska. Production on the properties has not commenced and there can be no assurance that any hydrocarbons will be economically recoverable; however, pre-production activities, such as a multi-phase exploration program of trenching, sampling, geophysical surveys and test drilling have commenced.
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Oil and Gas Properties (Continued)
On January 28, 2011, United American Petroleum Corp. entered and closed a purchase and sale agreement with Patriot Minerals, LLC, a Texas limited liability company for a $5,000 payment to a consultant. The Purchase Agreement provides, among other things, that United American Petroleum Corp. shall purchase multiple undivided working interests to certain existing wells and to certain leases located in Texas. In connection with the Purchase Agreement, United American Petroleum Corp. formed a wholly owned subsidiary, United Operating, LLC, a Texas limited liability company, for the purpose of operating the various interests set forth in the Purchase Agreement. The properties purchased from Patriot Minerals by United American Petroleum Corp. are producing at December 31, 2011. The Company is currently undergoing various reserve studies to assess potential production and to continue the development of the wells purchased.
On January 28, 2011, United American Petroleum Corp. entered and closed a purchase, sale and participation agreement with Gabriel Rosser, LP (“Gabriel”). The purchase agreement provides that the Company shall purchase Gabriel's undivided 50.83% working interest and 39.131% revenue interest in the Gabriel 2 SWD Gabriel 3, 4, 5, 9, 15, Rosser #2 and #4 and Koi #1wells in exchange for consideration of $10 and the assumed and paid $84,975 of liabilities, which were owed to certain vendors of Gabriel. The properties purchased from Gabriel Rosser, LP by United American Petroleum Corp. are unevaluated and non-producing as of December 31, 2011, and the Company is currently undergoing various reserve studies to assess potential production and develop the wells purchased.
On November 4, 2011, United American Petroleum Corp. entered into and closed an Agreement with Alamo Energy Corp., a Nevada corporation pursuant to which United American acquired a 75% working interest in an oil and gas lease totaling approximately 110 gross acres located in Frio County, Texas and all wellbores and personal property related thereto for the total purchase price of $160,000. The Company currently has a 100% working interest in the Lozano lease, which is a producing property with three wells.
On November 30, 2011, the Company entered into and closed an asset purchase agreement with McKenzie Oil Corp. pursuant to which United American acquired a 100% working interest in what is designated as the McKenzie State Well No. 1, located in Pecos County, Texas, in exchange for an aggregate cash sum of $550,000 and 50,000 shares of the Company’s common stock valued at $40,500. The McKenzie well currently has one producing well valued at $80,655. The remaining wells are classified as unproved.
During the three months ended March 31, 2012 the Company capitalized $212,292 of development costs for the Gabriel Rosser and Marcee leases under the full cost method of accounting.
8. Convertible Note Payable
Credit Facility – October 14, 2011
On October 14, 2011, we entered into a Note and Warrant Purchase Agreement with an investor pursuant to which the investor agreed to lend up to $1,500,000 in multiple installments in exchange for a senior secured convertible promissory note with a conversion price of $0.50 per share and five-year warrants to acquire shares of common stock at an exercise price of $1.00 per share in the amount of each installment. The first installment of $400,000 was delivered on the date of the Purchase Agreement and we issued 400,000 warrants to the investor in connection with the first installment. The notes matures on October 14, 2014, or upon default, whichever is earlier and bear interest at an annual rate of 10%.
The fourth installment of $150,000 was delivered on February 10, 2012 and we issued 150,000 warrants in connection with the fourth installment.
The fifth installment of $250,000 was delivered on March 30, 2012 and we issued 250,000 warrants in connection with the fifth installment.
Using a pro rata contribution, the Company allocated the proceeds of the February 10, 2012, March 30, 2012 convertible notes first to the relative fair value of the warrants and the remainder to the fair value of the embedded derivative on the date of grant as follows:
UNITED AMERICAN PETROLEUM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. Convertible Note Payable (Continued)
Notes issued in 2012
| | | | February 10, 2012 | | | March 30, 2012 | | | Total | |
| | | | | | | | | | | |
| | Total Proceeds | | $ | 150,000 | | | $ | 250,000 | | | $ | 400,000 | |
| | | | | | | | | | | | | | |
| | Allocated to: | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Conversion Option Liability | | | 189,051 | | | | 514,783 | | | | 703,834 | |
| | | | | | | | | | | | | | |
| | Relative Fair Value of Warrants | | | 61,355 | | | | 130,853 | | | | 192,208 | |
| | | | | 250,406 | | | | 645,636 | | | | 896,042 | |
| | Debt Discount | | | (150,000 | ) | | | (250,000 | ) | | | (400,000 | ) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Loss on debt derivative | | $ | 100,406 | | | $ | 395,636 | | | $ | 496,042 | |
During the three months ended March 31, 2012 and 2011, the Company amortized $38,887 and $28,746 of the debt discount to interest expense.
9. Warrants
As described in Note 9, the Company issued a convertible note with detachable warrants. A summary of warrant activity for the period from December 31, 2011 through March 31, 2012 is presented below:
| | | | Number of Warrants | | | Weighted Average Exercise Price | | Weighted Average Remaining Contract Term | |
| | Outstanding December 31, 2011 | | | 2,185,000 | | | $ | 1.00 | | 4.45 years | |
| | Issued | | | 400,000 | | | $ | 1.00 | | 4.45 years | |
| | Exercised | | | - | | | | - | | - | |
| | Outstanding March 31, 2012 | | | 2,585,000 | | | $ | 1.00 | | 4.26 years | |
| | Exercisable, March 31, 2012 | | | 2,585,000 | | | $ | 1.00 | | 4.26 years | |
| | | | | | | | | | | | |
Shares Reserved for Future Issuance
The Company has reserved shares for future issuance upon conversion of convertible notes payable and warrants as follows:
| | Conversion of notes payable | 5,170,000 | |
| | Warrants | 2,585,000 | |
| | Reserved shares at March 31, 2012 | 7,755,000 | |
10. Subsequent Events
On April 13, 2012, the Company received a notice of conversion from an investor to convert their convertible note in the amount of $620,000 dated December 31, 2010 for 1,240,000 shares (.50 per share).
Forward Looking Statements
This Quarterly Report of United American Petroleum Corp. on Form 10-Q contains forward-looking statements, particularly those identified with the words “anticipates,” “believes,” “expects,” “plans,” “intends,” “objectives” and similar expressions. These statements reflect management's best judgment based on factors known at the time of such statements. The reader may find discussions containing such forward-looking statements in the material set forth under “Management's Discussion and Analysis and Plan of Operations,” generally, and specifically therein under the captions “Liquidity and Capital Resources” as well as elsewhere in this Quarterly Report on Form 10-Q. Actual events or results may differ materially from those discussed herein. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guarantee, or warranty is to be inferred from those forward-looking statements.
The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.
Critical Accounting Policy and Estimates. Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. In addition, these accounting policies are described at relevant sections in this discussion and analysis and in the notes to the financial statements included in this Quarterly Report on Form 10-Q for the period ended March 31, 2012.
Oil and Gas Properties
The Company follows the full cost method of accounting for its investments in oil and gas properties. Under the full cost method, all costs associated with the exploration of properties are capitalized into appropriate cost centers within the full cost pool. Internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken and do not include any costs related to production, general corporate overhead, or similar activities. Cost centers are established on a country-by-country basis.
Capitalized costs within the cost centers are amortized on the unit-of-production basis using proved oil and gas reserves. The cost of investments in unproved properties and major development projects are excluded from capitalized costs to be amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such a determination is made, the properties are assessed annually to ascertain whether impairment has occurred. The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that the well is dry.
For each cost center, capitalized costs are subject to an annual ceiling test, in which the costs shall not exceed the cost center ceiling. The cost center ceiling is equal to i) the present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus ii) the cost of properties not being amortized; plus iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less iv) income tax effects related to differences between the book and tax basis of the properties. If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs.
Share-Based Compensation
The Company accounts for share-based compensation in accordance with Accounting Standards Codification subtopic 718-10, Stock Compensation (“ASC 718-10”). This requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.
As of March 31, 2012, there were no outstanding employee stock options.
Recent Accounting Pronouncements
In December 2008, the SEC issued Release No. 33-8995,Modernization of Oil and Gas Reporting (ASC 2010-3), which amended the oil and gas disclosures for oil and gas producers contained in Regulations S-K and S-X, and added a section to Regulation S-K (Subpart 1200) to codify the revised disclosure requirements in Securities Act Industry Guide 2, which was eliminated. The goal of Release No. 33-8995 is to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves. Energy companies affected by Release No. 33-8995 are now required to price proved oil and gas reserves using the unweighted arithmetic average of the price on the first day of each month within the 12-month period prior to the end of the reporting period, unless prices are defined by contractual arrangements, excluding escalations based on future conditions. SEC Release No. 33-8995 is effective beginning for financial statements for fiscal years ending on or after December 31, 2009. The Company adopted SEC Release No. 33-8995 effective December 31, 2009. The impact on the Company's operating results, financial position and cash flows has been recorded in the financial statements and additional disclosures were added to the accompanying notes to the consolidated financial statements for the Company's supplemental oil and gas disclosure.
In January 2010, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2010-03 Oil and Gas Estimation and Disclosures (ASU 2010-03). This update aligns the current oil and natural gas reserve estimation and disclosure requirements of the Extractive Industries Oil and Gas topic of the FASB Accounting Standards Codification (ASC Topic 932) with the changes required by the SEC final rule ASC 2010-3. As discussed above, ASU 2010-03 expands the disclosures required for equity method investments, revises the definition of oil- and natural gas-producing activities to include nontraditional resources in reserves unless not intended to be upgraded into synthetic oil or natural gas, amends the definition of proved oil and natural gas reserves to require 12-month average pricing in estimating reserves, amends and adds definitions in the Master Glossary that is used in estimating proved oil and natural gas quantities and provides guidance on geographic area with respect to disclosure of information about significant reserves. ASU 2010-03 must be applied prospectively as a change in accounting principle that is inseparable from a change in accounting estimate and is effective for entities with annual reporting periods ending on or after a change in accounting estimate and is effective for entities with annual reporting periods ending on or after December 31, 2009. The Company adopted ASU 2010-03 effective December 31, 2009.
In April 2010, the FASB issued ASU 2010-17, Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition. The amendments in this update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.
There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.
Overview. United American Petroleum Corp. (“We” or the “Company”), formerly Forgehouse, Inc., was incorporated in the State of Nevada on November 19, 2004. On December 31, 2010, the Company entered into and closed an Agreement and Plan of Merger (the “Merger Agreement”) by and among, the Company, United American Petroleum Corp., a Nevada corporation (“United”), and our newly formed wholly-owned subsidiary, United PC Acquisition Corp., a Nevada corporation. The transaction contemplated under the Merger Agreement was deemed to be a reverse acquisition, where the Company (the legal acquirer) is considered the accounting acquiree and United (the legal acquiree) is considered the accounting acquirer. The Company is deemed a continuation of the business of United, and the historical financial statements of United became the historical financial statements of the Company.
On December 31, 2010, we entered into and closed an Agreement and Plan of Merger (“Merger Agreement”) with our newly formed wholly-owned subsidiary, United PC Acquisition Corp., a Nevada corporation (“Merger Sub”), and United American Petroleum Corp., a Nevada Corporation (“United”) (the “Merger Transaction”), pursuant to which Merger Sub merged with and into United with United surviving, making United our new wholly-owned subsidiary. Immediately thereafter and pursuant to the Merger Agreement, United merged with and into the Company, with the Company surviving and we changed our name to “United American Petroleum Corp.” In connection with the Merger Transaction, we assumed all of United’s contractual obligations and acquired certain oil and gas properties of United in Texas.
Our Business. We are an exploration company engaged in the acquisition, exploration, development and production of oil and gas properties. Our principal business is the acquisition of leasehold interests in petroleum and natural gas rights, either directly or indirectly, and the exploitation and development of properties subject to these leases. Our primary focus is to develop our properties that have potential for near-term production. We also provide operational expertise for several third-party well owners out of our operation base in Austin, Texas. We currently have proved reserves in the State of Texas.
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements for the period ended March 31, 2012, together with notes thereto, which are included in this Quarterly Report.
For the three months ended March 31, 2012, as compared to the three months ended March 31, 2011.
Results of Operations.
Revenues. We had total revenues of $90,887 for the three months ended March 31, 2012, which were generated from oil sales of $38,490, gas sales of $143 and well operating income of $52,254. This is in comparison to revenues of $34,888 for the three months ended March 31, 2011, which were generated from oil sales of $7,453 and well operator income of $27,435. The increase in oil sales between the comparable periods is due to an increase in the number of wells that are now producing. Our well operator income was a result of income derived from oil and gas administrative fees charged by United Operating, LLC to well owners for managing and accounting for the development and production of their oil and gas property interests.
To expand our operations during the next twelve months, we need to generate increased revenues from our existing oil and natural gas leases. Our failure to do so will hinder our ability to increase the size of our operations and to generate additional revenues.
Operating Expenses. For the three months ended March 31, 2012, our total operating expenses were $283,943, which consisted of lease operating expenses of $101,073, accretion expense of $1,971, depletion expense of $13,380, and general and administrative expenses of $167,519. By comparison, for the three months ended March 31, 2011, our total operating expenses were $290,661, which consisted of lease operating expenses of $7,901, accretion expense of $299, depletion expense of $1,657, and general and administrative expenses of $280,804. The increase in lease operating expenses between the comparable periods is due to workovers that we conducted on our wells.
We expect that our future monthly operating expenses for fiscal year 2012 will be similar to our current expense levels, plus additional direct costs relating to newly acquired interests and any additional costs related to maintenance of our wells. We will continue to incur significant general and administrative expenses, but expect to generate increased revenues after further developing our business.
Other Expenses. For the three months ended March 31, 2012, we accrued interest expense in the amount of $95,255 related to outstanding note payables and a loss on embedded derivatives of $3,865,685. This is in comparison to accrued interest expense in the amount of $48,993 and a loss on embedded derivatives of $1,948,147 for the three months ended March 31, 2011.
Net Loss. For the three months ended March 31, 2012, our net loss was $4,153,996, as compared to a net loss of $2,252,913 for the three months ended March 31, 2011. The significant increase in our net loss between the comparable periods was directly related to the increase in net other expense for the three months ended March 31, 2012, which increased significantly from the loss on embedded derivatives. We hope to generate additional revenues from our projects to cover our operating costs, which will reduce our net loss in the future. We cannot guarantee that we will be able to generate additional revenues or, if that we do generate additional revenues, that such increased revenues will reduce our net loss in future periods.
Liquidity and Capital Resources. As of March 31, 2012, our current assets were $1,096,296, which consisted of cash of $798,452, accounts receivable of $99,679, prepaid expenses of $10,073 and other receivable of $188,092. Our current assets of $1,096,296, together with our evaluated oil and gas properties of $550,458, net of accumulated depletion of $36,515, and our unevaluated oil and gas properties of $794,630, represent our total assets of $2,441,384 as of March 31, 2012.
On December 31, 2010, we entered into a credit facility with one investor, whereby the investor agreed to lend up to $2,250,000 to us in multiple installments in exchange for senior secured convertible promissory notes with a conversion price of $0.50 per share and five-year warrants to acquire shares of common stock at an exercise price of $1.00 per share in the amount of each installment. The notes are due on December 31, 2013, or upon default, whichever is earlier, and bear interest at the annual rate of 10%. Pursuant to the credit facility, we issued the following notes and warrants to the investor on the following dates:
| Date of Note | Amount of Note | Number of Warrants |
| December 31, 2010 | $620,000 | 620,000 |
January 20, 2011 | $150,000 | 150,000 |
| March 9, 2011 | $250,000 | 250,000 |
| June 20, 2011 | $75,000 | 75,000 |
| June 30, 2011 | $115,000 | 115,000 |
| | | |
| TOTAL | $1,210,000 | 1,210,000 |
The agreement provides that the investor will lend additional installments to us in amounts as requested by us; provided however, that we provide the proposed use of proceeds for each requested amount.
On October 14, 2011, we entered into a credit facility with an investor unrelated to the investor described above pursuant to which the investor agreed to lend up to $1,500,000 to us in multiple installments in exchange for a convertible promissory note with a conversion price of $0.50 per share and five-year warrants to acquire shares of common stock at an exercise price of $1.00 per share in the amount of each installment. Pursuant to the credit facility, we issued the following notes and warrants to the investor on the following dates:
| Date of Note | Amount of Note | Number of Warrants |
| October 14, 2011 | $400,000 | 400,000 |
| November 29, 2011 | $550,000 | 550,000 |
| December 19, 2011 | $25,000 | 25,000 |
| February 10, 2012 | $150,000 | 150,000 |
| March 30, 2012 | $250,000 | 250,000 |
| | | |
| TOTAL | $1,375,000 | 1,375,000 |
The agreement provides that the investor will lend additional installments to us in amounts as requested by us; provided however, that we provide the proposed use of proceeds for each requested amount.
As of March 31, 2012, we had current liabilities in the amount of $920,242, of which $388,031 were represented by accounts payable and accrued expenses, $91,970 represented by related party payable, and $440,241 represented by other payable. As of March 31, 2012, we had long-term liabilities of $661,890 related to our convertible note net of discount, an embedded derivative liability of $5,212,467 and an asset retirement obligation of $58,193.
We had no other liabilities and no other long term commitments or contingencies as of March 31, 2012.
As of March 31, 2012, we had cash of $798,452. In the opinion of management, available funds will not satisfy our working capital requirements to operate at our current level of activity for the next twelve months. If we do not raise additional capital, then we may not be able to conduct oil and gas exploration and development activities and expand our operations. Our forecast for the period for which our financial resources will be adequate to support our operations involves risks and uncertainties and actual results could differ as a result of a number of factors. In addition to generating revenues from our current operations, we will need to raise additional capital to expand our operations to the point at which we are able to operate profitably.
We have been, and intend to continue, working toward identifying and obtaining new sources of financing. No assurances can be given that we will be successful in obtaining additional financing in the future. Any future financing that we may obtain may cause significant dilution to existing stockholders. Moreover, in the event that we can raise additional funds, we cannot guarantee that additional funding will be available on favorable terms. Any debt financing or other financing of securities senior to common stock that we are able to obtain will likely include financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would have a negative impact on our business, prospects, financial condition, results of operations and cash flows.
If adequate funds are not available, we may be required to delay, scale back or eliminate portions of our operations or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain of our assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of our assets and could also adversely affect our ability to fund our continued operations and our expansion efforts with respect to our properties.
During 2012, we expect that the following will continue to impact our liquidity: (i) legal and accounting costs of being a public company; (ii) expected expenses related to the exploration and development of our properties; (iii) expected expenses related to repair and maintenance costs on wells that are currently producing and (iv) anticipated increases in overhead and the use of independent contractors for services to be provided to us. We will need to obtain funds to pay those expenses. Other than those items specified above, we are not aware of any other known trends, events or uncertainties, which may affect our future liquidity.
We are in the exploration stage, have limited revenue and have incurred net losses. These factors raise substantial doubt about our ability to continue as a going concern. Our management is implementing plans to sustain our cash flow from operating activities and/or acquire additional capital funding (see Note 1). No assurances can be given that we will obtain sufficient working capital to sustain ongoing operations. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
We are not currently conducting any research and development activities. We do not anticipate conducting such activities in the near future. In the event that we expand our operations, then we may need to hire additional employees or independent contractors as well as purchase or lease additional equipment. Our management believes that we do not require the services of independent contractors to operate at our current level of activity. However, if our level of operations increases beyond the level that our current staff can provide, then we may need to supplement our staff in this manner.
Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements as of March 31, 2012.
Not applicable.
Evaluation of disclosure controls and procedures. We maintain controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures. Based upon their evaluation of those controls and procedures performed as of the end of the period covered by this report, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective due to our over reliance on consultants in our accounting and financial statement closing processes.
Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
None.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
None.
Not applicable.
None.
| |
| |
| 101.ins | XBRL Instance Document |
| 101.sch | XBRL Taxonomy Schema Document |
| 101.cal | XBRL Taxonomy Calculation Linkbase Document |
| 101.lab | XBRL Taxonomy Label Linkbase Document |
| 101.pre | XBRL Taxonomy Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | United American Petroleum Corp., a Nevada corporation | |
| | | | |
| Date: May 21, 2012 | By: | /s/ Michael Carey | |
| | | Michael Carey | |
| | | Chief Executive Officer, Chief Financial Officer, President, Treasurer and a director (Principal Executive and Financial Officer) | |
| | | | |
