UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One) | |
ü | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE |
| ACT OF 1934 |
For the fiscal year ended:March 31, 2009 | |
or | |
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| 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 0-10707 | |
———————
Glen Rose Petroleum Corporation
(Exact name of registrant as specified in its charter)
———————
Delaware |
| 87-0372864 | |
(State or Incorporation) |
| (I.R.S. Employer Identification No.) | |
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(Address of Principal Executive Offices) | |||
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(860) 683-2005 | |||
(Registrant's telephone number) | |||
Securities registered pursuant to Section 12(b) of the Act: | ||
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Title of each class |
| Name of each exchange on which registered |
None |
| None |
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Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.001 par value | ||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨ No þ
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 þ No¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨
Indicate by check mark whether the registrant is a large accelerated filer, 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 (check one):
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Large accelerated filer¨ | Accelerated filer ¨ |
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Non-accelerated filer ¨ (Do not check if smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes¨ Noþ
As of March 31, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $446,390 based on the closing price as reported on the Nasdaq Capital Market.
Number of Shares of Common Stock outstanding as of March 31, 2009 was 10,816,200.
As of July 9, 2009, the Company’s shares had a closing bid price of $.16 and a total market capitalization of $ 1,730,592.
DOCUMENTS INCORPORATED BY REFERENCE
(To The Extent Indicated Herein)
Part III of this Report is incorporated by reference from the Registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders, which will be filed with the Commission no later than August 14, 2008.
2
CONTENTS
3
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K filed by Glen Rose Petroleum Corporation (referred to as “Glen Rose”, the “Company”, “we”, “us” or “our”) contains forward-looking statements. These are statements regarding financial and operating performance and results and other statements that are not historical facts. The words “expect,” “project,” “estimate,” “believe,” “anticipate,” “intend,” “plan,” “forecast,” and similar expressions are intended to identify forward-looking statements. Certain important risks could cause results to differ materially from those anticipated by some of the forward-looking statements. Some, but not all, of these risks include, among other things:
·
we may be unable to obtain the financing we need to continue our operations;
·
there may be changes in regulatory requirements that adversely affect our business;
·
there may be adverse changes in the prices for oil and gas that adversely affect our business;
·
recovery methods that we use in our oil and gas operations may not be successful; and
·
other uncertainties, all of which are difficult to predict and many of which are beyond our control.
We do not intend to update forward-looking statements. You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission.
4
PART I
As used herein, reference to “Glen Rose”, “the Company,” “management,” “we” and “our” refer to Glen Rose Petroleum Company and, where appropriate, its subsidiaries.
ITEM 1.
BUSINESS
Glen Rose Petroleum Corporation is a Delaware corporation formed in 2008. The Company was previously United Heritage Corporation, a Utah corporation that was formed in 1981 and was reincorporated in Delaware in 2008. The reincorporation entailed a reincorporation merger agreement between Glen Rose Petroleum Company and United Heritage Corporation, but there were no substantive changes in assets or personnel and we also have continuous financial reporting through the reincorporation.
Glen Rose owns UHC Petroleum Corporation (“Petroleum”), a Texas corporation, and licensed operator with the Texas Railroad Commission. Petroleum is an independent producer of natural gas and crude oil based in Dallas, Texas. Petroleum operates the Wardlaw Field, located approximately 28 miles west of Rocksprings in Edwards County, Texas. The Wardlaw Field lies in the southeast portion of the Val Verde Basin with oil production from the field coming from the Glen Rose formation at a depth of less than 600 feet. The leaseholds consist of approximately 10,502 gross acres of which approximately 10,000 grossacres are undeveloped. The leaseholds include 103 wellbores. Of these wells, approximately 90 are currently capable of producing. With one swabbing unit, we are daily producing 44 wells. We are in the process of evaluating the remaining wells. Petroleum has a gross working interest of 100% and a net revenue interest of 75% of the Wardlaw Field production. The original lease term was extended by a period of 90 days each time a well was drilled; therefore, based on prior drilling, the primary lease term is currently extended to 2014.
We produce a raw commodity. Currently one purchaser buys 100% of our production; but we believe that other purchasers are available for our production. Our customer risk primarily stems from the purchaser’s solvency relating to outstanding balances. The purchaser has historically timely paid and we have no information that would indicate that it would be unable to continue paying in the future.
We have no patents, trademarks, material license agreements, franchises, or labor contracts.
In addition to Petroleum, Glen Rose also owns, UHC Petroleum Services Corporation (“Services”) a Texas corporation. Our other subsidiaries are UHC New Mexico Corporation, a New Mexico corporation, and National Heritage Sales Corporation, a Texas corporation. UHC New Mexico Corporation and National Heritage Sales Corporation have not operated for a number of years, and the Company plans to wind up these corporations in the coming year.
Material Events during the Fiscal Year
On May 23, 2008, by the way of a 14C our shareholders’ approved a private placement in accredited investors in which a total of 400,000 shares of our common stock at a price of $0.75 per share were issued for gross proceeds of $300,000. The Company also approved the issuance of a note receivable to Joseph Langston, its CFO and President, in which a total of 66,667 shares of our common stock at a price of $0.75 per share were issued for a $50,000 long term notes receivable.
On May 27, 2008, Petroleum signed a letter of intent (“LOI”) to sell for $2.5 million a 50% interest in 2,560 acres (25%) of its Wardlaw Field to Wind Hydrogen Limited (“WHL”), a company listed on the Australian Stock Exchange (“ASX”). On July 23, 2008, Petroleum entered into a definitive agreement relating to the transaction referenced in the LOI. In addition to the initial purchase, WHL also purchased two options for 2,560 additional acres each to expand the venture. Note WHL discussion.
On June 12, 2008, WHL purchased 150,000 shares at $0.75 per share for $112,500 of the $500,000 private placement. In addition, WHL purchased 150,000 shares at $1.05 per share for $157,500, which the Board approved on June 30.
5
The Company granted options to purchase 25,000 shares to the Company’s Directors at the end of each month during the quarter ended June 30, 2008 for and in consideration of services provided to the Company. These options were issued at a weighted average exercise price of $0.99 per share for a term of three years.
On June 30, 2008, the Board of Directors awarded Mr. Langston 500,000 stock purchase options, vesting over six months with each priced as of the closing average bid price for the quarter ended. In addition, the Board of Directors of the Company approved an amendment to Joseph Langston’s employment agreement. The amendment increased Mr. Langston’s cash payments from $5,000 per month, to $12,500 per month, plus auto expense and health insurance.
On June 30, 2008 the Board approved the independent consulting agreement of Barry Pierce and the hiring of him as Controller with a one year contract. This contract has been fulfilled and has not been renewed. However, the company has retained Mr. Pierce’s services through a limited consulting engagement. This agreement included 100,000 stock purchase options to purchase 100,000 shares of common stock at 1.00 per share, fully vested after one year.
On June 30, 2008 the Board of Directors amended the compensation for Directors. They approved that each director could choose, calendar quarterly, their form of compensation. Each director has the option of $5,000 of common stock per month or 5,000 stock purchase options, with each price as of the closing average bid price for the previous ended quarter. The previous agreement provided for 5,000 stock purchase options per month, with the price to be calculated on the average closing bid price for the month.
On June 30, 2008 the Company issued 253,810 shares if its common stock to Richardson Patel in exchange for cancelling amounts due for legal services totaling $238,581.
On September 18, 2008, the Company issued 100,000 of its common shares in consideration for cancelling $97,988 of indebtedness due Porter LeVay (a public relations firm headquartered in New York City).
NASDAQ informed Glen Rose Petroleum Corporation in a letter dated September 22, 2008, that it was in violation of NASDAQ Marketplace Rule 4310(c)(4) in that the closing bid price for our common stock was below $1.00 for 30 consecutive days. The NASDAQ letter stated that Glen Rose Petroleum Corporation will have 180 calendar days (until March 23, 2008) to regain compliance with Rule 4310(c)(4) by demonstrating a closing bid price of $1.00 or more for at least ten and up to twenty consecutive business days.
The NASDAQ letter further stated that if Glen Rose Petroleum Corporation cannot demonstrate compliance with Rule 4310(c)(4) by March 23, 2008, the NASDAQ Staff will determine whether it meet the NASDAQ Capital Markets initial listing criteria except for the bid price requirement. If the Corporation meets the initial listing criteria, it may be granted an additional 180 day compliance period. If Glen Rose Petroleum Corporation is not eligible for the additional compliance period, NASDAQ staff will provide it with a delisting notice which may be appealed to the NASDAQ Listing Qualifications Panel.
Subsequently, NASDAQ temporarily suspended the compliance dates related to bid price deficiencies for all NASDAQ-listed companies. On December 19, 2008, it announced that it was suspending bid price qualification until April 20, 2009. On March 23, 2009, NASDAQ announced that it was further extending this suspension until July 19, 2009. Consequently, the 88 days between September 22, 2008 and December 19, 2008, count against the listing compliance time period, but not the period between December 19, 2008 and July 19, 2009. Thus, the deadline for the initial 180 day compliance period referenced in the NASDAQ listing deficiency notice letter is now October 19, 2009 with an additional 180 days available for compliance if Glen Rose Corporation meets the initial NASDAQ listing requirements other than bid price.
Glen Rose Petroleum Corporation currently does not meet the requirements for initial listing requirements other than bid price and thus, is not currently qualified for the additional extension after October 19, 2009. Specifically, 1) the stockholder’s equity is currently below the $4 million initial listing requirement; and 2) the market value of publicly held shares is well below the $5 million requirement.
On September 24, 2008, the Company terminated its auditing relationship with Hein & Associates, LLP and began an auditing relationship with Jonathon P. Reuben CPA, Accountancy Corporation.
6
On September 25, 2008, the Company agreed to issue 62,500 restricted common shares to its former CEO, Scott Wilson, in exchange for the cancellation of 500,000 stock options and mutual releases of claims.
On September 30, 2008, the Company issued 60,000 shares of common stock to certain Board of Directors as compensation for their services rendered for the quarter. The shares were valued at $46,800 which was charged to operations.
On October 6, 2008, Petroleum announced that it had drilled 8 of the first 10 wells to be permitted on the Wardlaw lease in Edwards County. Based on this success, Petroleum permitted for offset wells surrounding two of the WHL wells, as well as two additional wells in the surrounding sections, which will expand our operating area.
As of December 31, 2008, WHL had failed to fund the $1,000,000 cash call issued by Petroleum on November 7, 2008 and under the terms of the underlying Participation Agreement, the agreement was terminated.
As a result of the WHL not funding the $1,000,000 remaining on their agreement to fund Phase 1, Petroleum has not pursued meaningful new development activities on the Wardlaw lease since early December. This has been a difficult financial period. Petroleum has fallen behind in meeting its vendor obligations due to the ramp up in expenditure in expectation of the WHL investment in the field. Petroleum is in discussions with its vendors, and pursuing various financing options.
The Company’s common stock price has fallen, access to capital has been significantly restricted, and the steep decline in crude oil prices has adversely affected current revenue and capital efforts. The Company has fallen behind in meeting its vendor obligations. The Company is in discussions with several companies and individuals about a corporate financing, merger or acquisition.
Bowie Operating Company LLC, a related party managed by Mr. Langston, owes the Company $149,539. On November 13, 2008, the Company initially loaned Bowie $50,000, then subsequently provided other loans, the total amount as of March 31, 2009, inclusive of interest is $149,539. This loan is secured by a mechanic’s lien and is interest bearing at 18%.
Buccaneer Energy Corporation, an affiliate of Mr. Langston, owes $27,101 to the Company as of March 31, 2009. During the year ended March 31, 2009, Buccaneer also advanced $30,500 to Petroleum. The advances are evidenced by an unsecured promissory note that is due on demand after December 31, 2009. Interest accruing on the note and charged to operations during the year ended March 31, 2009 was $367. The balance of the note as of March 31, 2009 was $30,867.
On January 28, 2009, the Company entered into an agreement with its majority shareholder, Blackwood Ventures LLC, (“BVL”) for a $250,000 convertible debenture. This debenture is at 8% interest, per annum, payable in kind. This debenture is convertible into common stock of the Company at a 5% premium to the bid price on the first trading date of each calendar quarter commencing April 1, 2009. As of March 31, 2009, $116,000 has been funded. The balance has subsequently been funded.
The accounts payable of UHC Petroleum Corporation (“Petroleum”) totals $403,177 as of March 31, 2009. Of that amount, 60% is over 90 days. Several vendors have discontinued providing their services. Others provide their services on a cash basis only. Some have filed mechanic liens; others have turned the accounts over to a collection agency, or filed against the Company in Court. The Company has made advances and/or assisted Petroleum in paying their payables during the last fiscal year in the amount of $1,466,801. The Company will attempt to assist Petroleum, if possible. Petroleum is making every effort to increase daily production, to pay its bills, and to secure financing. There is no assurance of further financing, and Petroleum would not be cash flow positive from operations without further assistance. Consequently, without further outside capital Petroleum would not be viable as a going concern.
The Company’s accounts payable total $341,761 as of March 31, 2009. Of that amount, 33% is over 90 days. The bulk of these payables are to officers, directors, consultants and professional consultants which are cooperating with the Company. UHC Petroleum Corporation is the only business holding of the Company. The Company is dependent on the success of Petroleum. The Company is attempting to obtain a purchaser for a 50% ownership in Petroleum, or its only asset, the Wardlaw lease. If this sale took place, Petroleum could pay its vendors, and retire a portion of its debt to the Company. At which time, the Company would have the funding to diversify its operating
7
strategy. In addition, the Company is attempting to secure capital. If this capital is obtained, the Company may further assist Petroleum, and/or seek to diversify its investment strategy.
Subsequent Events to the year ended March 31, 2009
The Company entered into a new independent consulting engagement with Barry Pierce, whereby he will provide accounting services to the Company on a month to month basis, and will not be designated as an officer. His prior one year consulting agreement was fulfilled on March 23, 2009.
The Company has received the balance remaining of the January 2009 BVL Sub Debt financing of $105,000.
The Company has collected $77,743.25 from its loan to Bowie Operating LLC, and the balance is expected in ninety days.
Petroleum has retained counsel to assist in the restructuring of the vendor payables of UHC Petroleum Corporation.
The Company is in negotiations with several investors about purchasing an equity interest in the Company, and/or purchasing a partial interest in Petroleum or the Wardlaw field.However, there is no assurance of further financing, and the Company would not be cash flow positive from operations without further assistance. Consequently, without further outside capital the Petroleum and the Company would not be viable as a going concern.
On June 30, 2009, Paul Watson resigned as Chairman, Chief Executive Officer of the Company. In addition, Mr. Watson’s consulting company, Applewood Energy, resigned from its consulting agreement with the Company.
The 2009 Fiscal Year
On-Going Operations
UHC Petroleum Corporation operates the Wardlaw Field, located approximately 28 miles west of Rocksprings in Edwards County, Texas. The Wardlaw Field lies in the southeast portion of the Val Verde Basin with oil production from the field coming from the Glen Rose formation at a depth of less than 600 feet. The leaseholds consist of approximately 10,502 gross acres of which approximately 10,000 gross acres are undeveloped. The leaseholds include 103 wellbores. Of these wells, approximately 90 are currently capable of producing. With one swabbing unit, we are daily producing 44 wells. We are in the process of evaluating the remaining wells. UHC Petroleum has a gross working interest of 100% and a net revenue interest of 75% of the Wardlaw Field production. The original lease term was extended by a period of 90 days each time a well was drilled; therefore, based on prior drilling, the primary lease term is currently extended to 2014. The status report in th is paragraph is as of March 31, 2009.
Production in the Wardlaw Field is done via primary production methods; using swabbing, along with nitrogen injection under pressure and pump jacks. Our goal has been to develop the property to fully exploit all of their resources.
The following table shows the total net oil and gas production from Texas for each of the three most recent fiscal years. Oil production is shown in barrels (Bbl), and natural gas production is shown in thousand cubic feet (Mcf). As of March 30, 2007 we no longer owned the New Mexico properties.
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| March 31, |
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Area |
| 2009 |
| 2008 |
| 2007 |
| |||
Texas |
|
|
|
|
|
|
|
|
|
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Oil |
|
| 2,885Bbl |
|
| 1,255 Bbl |
|
| 1,402 Bbl |
|
Gas |
|
| — |
|
| — |
|
| — |
|
New Mexico |
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|
|
|
|
|
|
|
|
|
Oil |
|
|
|
|
|
|
|
|
|
|
Gas |
|
|
|
|
|
|
|
|
|
|
8
The following table illustrates the average sales price and the average production (lifting) costs per barrel and per thousand cubic feet for each of the three most recent fiscal years. As of March 30, 2007 we no longer owned the New Mexico properties.
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| March 31, |
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| 2009 |
| 2008 |
| 2007 |
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Items |
| Oil |
| Gas |
| Oil |
| Gas |
| Oil |
| Gas |
| ||||||
Texas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avg. Sales Price/Unit |
| $ | 35.96 |
|
| — |
| $ | 79.09 |
|
| — |
| $ | 38.33 |
|
| — |
|
Avg. Prod. Cost/Unit |
| $ | 41.29 |
|
| — |
| $ | 135.87 |
|
| — |
| $ | 144.79 |
|
| — |
|
New Mexico |
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|
|
|
|
|
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|
|
|
|
|
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Avg. Sales Price/Unit |
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|
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|
|
|
|
| $ | 44.73 |
| $ | 3.01 |
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Ave. Prod.Cost/Unit |
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|
|
|
|
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|
|
|
| $ | 42.96 |
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|
|
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The following table illustrates the results of the drilling activity during each of the three most recent fiscal years. As of March 30, 2007 we no longer owned the New Mexico properties.
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| March 31, |
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| 2009 |
| 2008 |
| 2007 |
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|
| Net |
| Dry |
| Net |
| Dry |
| Net |
| Dry |
| ||||||
Wells Drilled |
| Productive Holes |
| Productive Holes |
| Productive Holes |
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Texas |
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|
|
|
|
|
|
|
|
|
|
|
| ||||||
Exploratory |
|
| 3 |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
Development |
|
| 2 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
New Mexico |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploratory |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Development |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
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TOTAL |
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Exploratory |
|
| 3 |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
Development |
|
| 2 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
The following table illustrates estimates of the proved oil and gas reserves, for the Wardlaw Field, Edwards County, Texas, as of March 31, 2008 and March 31, 2009.
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| Oil |
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|
| Gas |
| ||
|
|
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|
|
|
|
| ||
March 31, 2008 |
|
| 526,762 |
|
|
|
| — |
|
Estimated Proved Reserves |
|
| — |
|
|
|
| — |
|
Extensions, additions and discoveries |
|
| 78,714 |
|
|
|
| 357,657 |
|
Revisions to previous estimates |
|
| — |
|
|
|
| — |
|
Production |
|
| (2,885 | ) |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
| 602,591 |
|
|
|
| 357,657 |
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We have no oil and gas reserves or production subject to long-term supply, delivery or similar agreements. Estimates of our total proved oil and gas reserves have not been filed with or included in reports to any federal authority or agency other than the Securities and Exchange Commission.
9
The following table illustrates the total gross and net oil and gas wells in which Petroleum had an interest at March 31, 2009. The existence of a productive well does not mean that the well is currently producing or will continue to be productive. Petroleum has a 100% Working Interest and a 75% Net Revenue Interest in the Wardlaw Lease, Edwards County, Texas.
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| Productive Wells |
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| Gross |
| Net |
| ||||||||
Area |
| Oil |
| Gas |
| Oil |
| Gas |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Texas |
|
| 44 |
|
| 1 |
|
| 33 |
|
| .75 |
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TOTAL |
|
| 44 |
|
| 1 |
|
| 33 |
|
| .75 |
|
The following table illustrates the gross and net acres of developed and undeveloped gas and oil leases held by Petroleum at March 31, 2009.
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| Developed Acres |
| Undeveloped Acres |
| ||||||||
Area |
| Gross |
| Net |
| Gross |
| Net |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Texas |
|
| 502 |
|
| 377 |
|
| 10,000 |
|
| 7,500 |
|
TOTAL |
|
| 502 |
|
| 377 |
|
| 10,000 |
|
| 7,500 |
|
Competition
The oil and gas industry is highly competitive. We compete with other oil and gas companies and investors in searching for, and obtaining, future desirable prospects, in securing contracts with third parties for the development of oil and gas properties, in securing contracts for the purchase or rental of drilling rigs and other equipment necessary for drilling operations, and in purchasing equipment necessary for the completion of wells, as well as in the marketing of any oil and gas which may be discovered. Many of our competitors are larger than we are and have substantially greater access to capital and technical resources than we do, giving them a substantial competitive advantage. We do not represent a significant presence in the oil and gas industry.
Regulation
State Regulation of Oil and Gas Production. Oil and gas operations are subject to various types of regulation by state and federal agencies. Legislation affecting the oil and gas industry is under constant review for amendment or expansion. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. The regulatory burden on the oil and gas industry increases the cost of doing business and, consequently, affects our profitability.
We currently have oil and gas operations only within the State of Texas. Our developmental activities require permits from the Texas Railroad Commission, a state agency that regulates oil and gas operations. The Texas Railroad Commission regulation includes requirements governing obtaining drilling permits, developing new fields, spacing and operation of wells and preventing waste of oil and gas resources. Our ongoing non-developmental activities must comply with Texas Railroad Commission requirements. This includes reporting production and maintaining an oil and gas operator’s license in good standing. To date, we have not found compliance with these regulations to be burdensome.
Environmental Regulations. Our activities are subject to federal and state laws and regulations governing environmental quality and pollution control. These regulations have a material effect on our operations, but the cost of such compliance has not been material to date. However, we believe that the oil and gas industry may experience increasing liabilities and risks under the Comprehensive Environmental Response, Compensation and Liability Act, as well as other federal, state and local environmental laws, as a result of increased enforcement of environmental laws by various regulatory agencies. As an “owner” or “operator” of property where hazardous materials may exist or be present, we, like all others in the petroleum industry, could be liable for fines and/or “clean-up” costs, regardless of whether the release of a hazardous substance was due to our conduct.
Employees
As of March 31, 2009, we had nine full time employees. In addition, we have consulting agreements with one management officer which account for over half or more of his business activity.
10
ITEM 2.
PROPERTIES
Our corporate headquarters is located at 4925 Greenville Avenue, Suite 200 Dallas, Texas 75206. This is not a long term lease.
Petroleum leases an oil field in Edwards County, Texas consisting of approximately 10,502 gross acres of which 10,000 gross acres are undeveloped. Pursuant to the leases, Petroleum receives a 100% gross working interest from production. The field is located in the southeast portion of the Val Verde Basin, 28 miles west of the city of Rocksprings, Texas.
ITEM 3.
LEGAL PROCEEDINGS
Black Sea Investments, Ltd. Lawsuit.
On November 21, 2007, a jury in Johnson County, Texas rendered a verdict in a trial in favor of the Company against Black Sea Investments, Ltd., Bradford A. Phillips, Clifton Phillips, Ryan T. Phillips, and F. Terry Shumate. On February 15, 2008, the 249th District Court in Johnson County, Texas entered a judgment in the amount of $4,020,551.05 with interest accruing at a rate of $583.01 per day until paid against these defendants in favor of the Company.
On March 17, 2008, the individual defendants filed a motion for new trial which was overruled by operation of law on April 30, 2008. The individual defendants then timely filed a Notice of Appeal for the matter to be heard by Texas Tenth Court of Appeals in Waco, Texas. On October 8, 2008, individual defendants filed a brief with the Tenth Court of Appeals. On January 14, 2009, the Company filed its brief in this matter. The defendants filed a reply brief on February 5, 2009. Also, a Baylor Law School professor filed an amicus letter with the Court on February 3, 2009. As of July 7, 2009, there had been no opinion released by the Texas Tenth Court of Appeals. In January 2009 Justice Rex D. Davis has recused himself from considering the matter.
The Company can provide no assurance that this judgment will withstand appeal or that, if upheld the Company will ever realize the collection of money from this judgment. The Company shares in 45% of these proceeds of the collected amount in this judgment with its attorney and 50% of the net balance with the Walter Mize Estate.
UHC Petroleum Corp. v. Lone Star Production Company, Buffalo Draw Partners, LLC, and T. Grant Johnson
On August 15, 2008, UHC Petroleum Corp., a wholly-owned subsidiary of the Company, filed a lawsuit against Lone Star Production Company, Buffalo Draw Partners, LLC, and T. Grant Johnson in Edwards County, Texas for declaratory judgment, tortuous interference with peaceful use and enjoyment of property, business disparagement and injurious falsehood, and tortuous interference with prospective contracts and business relations. The lawsuit alleges that Lone Star Production Company top-leased one of the Company’s Wardlaw Field leases in 2004 and in 2008 the defendants engaged in various actions that were detrimental to the Company.
Country Boy Feed and Supply v. United Heritage Corporation.
On May 6, 2009, Country Boy Feed and Supply filed a claim in small claims court in Edwards County, Texas for propane gas and other expenses in the amount of $9,462.59.
Other
The Company does not have any other litigation current or contemplated. However, the Company has terminated Geoff Beatson, a former engineering consultant, and taken issue with various vendors. Any of which could result in litigation, which the Company will vigorously pursue and defend.
11
The Company had option agreements to ex-employees and directors which exercised at $1.50 and $2.91 exercise prices. These options were modified to extend the expiration date to March 31, 2009, to add a put feature where the option holder can put the option back to the Company for the difference between $4.00 per share and the purchase price between April 1, 2008 and April 10, 2008, and to add a call feature whereby the Company can call the option for the difference between $7.50 and the purchase price. Since the put feature does not subject the holder to the normal risks of share ownership, the options the Company has classified the put options as liability awards and recorded at fair value. A liability and corresponding expense of $2,727,186 has been recorded in the prior financial statements. A majority of these option puts were exercised.
Also, we may routinely be involved in government administrative proceedings relating to our oil and gas operations. The Texas Railroad Commission regulates the oil and gas industry in Texas and Texas law requires that the Texas Railroad Commission issue permits for a variety of activities. Petroleum can provide no assurance that all of the Company’s requested permits will be granted.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company had a Shareholders Meeting on March 31, 2008. In addition, it had Rule 14-C approval by its shareholders in May 2008.
The Company plans to file a proxy statement for a Shareholders Meeting. This Shareholders’ Meeting will include:
·
Approval of the BVL financing of January 2009 for $250,000.
·
Approval of the BVL financing of June 2009 for $1,000,000, which in and of itself would constitute a 50% ownership in the Company
·
Approval to sell a half interest in the Wardlaw lease, which would constitute a sale of 50% of the Company’s assets.
·
Approval of a 1 for 200 reverse split the stock, then an immediate purchase the fractional shares at the then market price, and then on the same day a 200 for 1 forward split.
·
Such other items as my come before the Shareholders.
12
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
The principal market for our common stock is the Nasdaq Capital Market. Our common stock trades under the symbol “GLRP.”
The following table sets forth, for the periods indicated, the high and low sale price per share of our common stock as reported by Nasdaq.
|
| High |
| Low |
| ||
Fiscal Year Ended March 31, 2009 |
|
|
|
|
| ||
First Quarter |
| $ | 1.87 |
| $ | .62 |
|
Second Quarter |
| $ | 2.00 |
| $ | .45 |
|
Third Quarter |
| $ | .60 |
| $ | .03 |
|
Fourth Quarter |
| $ | .45 |
| $ | .11 |
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2008 |
|
|
|
|
|
|
|
First Quarter |
| $ | 1.08 |
| $ | .67 |
|
Second Quarter |
| $ | 1.00 |
| $ | .41 |
|
Third Quarter |
| $ | 1.88 |
| $ | .75 |
|
Fourth Quarter |
| $ | .81 |
| $ | .51 |
|
Shareholders
As of July 9, 2009, there were approximately 2,747 record holders of our common stock. This does not include an indeterminate number of shareholders whose shares are held by brokers in street name.
Dividends
We have never declared any cash dividends on our common stock and we do not anticipate declaring a cash dividend in the foreseeable future.
Sales of Unregistered Securities
On June 12, 2008, WHL purchased 150,000 shares at $0.75 per share for $112,500 of the $500,000 private placement. In addition, WHL purchased 150,000 shares at $1.05 per share for $157,500, which the Board approved on June 30.
On September 25, 2008, the Company issued 62,500 restricted common shares to its former CEO, Scott Wilson, in exchange for the cancellation of 500,000 stock options and mutual releases of claims.
On January 28, 2009, the Company entered into an agreement with its majority shareholder, Blackwood Ventures LLC, for a $250,000 convertible debenture. This debenture is at 8% interest, per annum, payable in kind. This debenture is convertible into common stock of the Company at a 5% premium to the bid price on the day on which the first subscription was made under the Debenture, which was January 28, 2009 on which day the low bid price was $0.17, which fluctuated up throughout the day and actually closed at $0.24, hence the conversion price was set at $0.19 before the closing bid price was established.
Equity Compensation Plan Information
The 2008 Equity Incentive Plan In January 2008, our board of directors approved and adopted the United Heritage Corporation 2008 Equity Incentive Plan (the “Plan”). We have reserved 5,000,000 shares of common stock for awards that will be granted from the Plan. The awards are subject to adjustment in the event of stock dividends, recapitalizations, stock splits, reverse stock splits, subdivisions, combinations, reclassifications or similar changes in
13
our capital structure. The Plan became effective upon adoption by the board, and, unless earlier terminated in accordance with the terms and provisions thereof, will remain in effect for a period of ten years from the date of adoption. As of March 31, 2009, there were no awards outstanding under the plan.
Other Plans - The 1995 Stock Option Plan was effective September 11, 1995 and included 66,667 shares of our authorized but unissued common stock. As of March 31, 2006 no awards were outstanding under this plan. The 1998 Stock Option Plan was effective July 1, 1998 and included 66,667 shares of our authorized but unissued common stock. As of March 31, 2006, there was one award outstanding under the plan for the right to purchase a total of 66,667 shares. The 2000 Stock Option Plan of United Heritage Corporation was effective on June 5, 2000 and included 1,666,667 shares of our authorized but unissued common stock. As of March 31, 2009, there were 19 awards outstanding under the plan for the right to purchase a total of 1,658,333 shares.
Plan Category |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
| Weighted average exercise price of outstanding options warrants and rights |
| Number of securities remaining available for future issuance under the equity compensation plan (excluding securities reflected in column) |
|
|
| (a) |
| (b) |
| (c) |
|
|
|
|
|
|
|
|
|
Shareholder Approved(1) |
| 2,215,000 |
| $1.30 |
| 74,995 |
|
|
|
|
|
|
|
|
|
Non-Shareholder Approved |
| 0 |
| N/A |
| 0 |
|
(1) No options have been granted from the 2002 Consultant Equity Plan. However, we have paid consultants in the past by granting shares of our common stock from the 2002 Consultant Equity Plan.
ITEM 6.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Management’s discussion and analysis of results of operations and financial condition is based upon our consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates based on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
OVERVIEW
We are an independent producer of natural gas and crude oil based in Dallas, Texas. We produce from properties we lease in Texas, the Wardlaw lease in Edwards County, Texas. We currently have 103 wellbores, 90 of which are capable of production, and 44 are currently producing. Our plan has been to develop these properties by reworking many of the existing wells and drilling additional wells. However, the revenues we earned did not provide us with enough money to implement our development plans.
During the 2009 fiscal year, the sale price of oil produced by our properties in Texas fell from $89.36 a barrel, to $33.15 a barrel. The closing price was $79.09 a barrel as of March 31, 2008, versus $35.96, as of March 31, 2009. Production costs during the 2009 fiscal year decreased from $135.87 a barrel during the 2008 fiscal year to $41.29 a barrel, because we were able to increase average daily production, while keeping our field expenses constant.
Except as otherwise discussed in this Annual Report, there are no trends, and events or uncertainties in the oil industry and financial community are reasonably likely to have, a material impact on our short-term or long-term liquidity, as well as our net sales or revenues from continuing operations.
14
During the next fiscal year, our plan is to continue redevelopment of our properties if we are successful in finding other funding sources or, alternatively, we will seek investors or buyers.
Going Concern Status
Our financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. We have incurred substantial losses from operations and we have a working capital deficit which raises substantial doubt about our ability to continue as a going concern. We sustained a net loss of $2,181,974 for the fiscal year ended March 31, 2009 and, as of the same period, we had a working capital deficit of $2,702,752. We must obtain financing in order to develop our properties and alleviate the doubt about our ability to continue as a going concern.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The reported financial results and disclosures were determined using the significant accounting policies, practices and estimates described below.
Oil and Gas Properties
Proved Reserves - Proved reserves are defined by the Securities and Exchange Commission as those volumes of crude oil; condensate, natural gas liquids and natural gas that geological and engineering data demonstrate with reasonable certainty are recoverable from known reservoirs under existing economic and operating conditions. Proved developed reserves are volumes expected to be recovered through existing wells with existing equipment and operating methods. Although our engineers are knowledgeable of and follow the guidelines for reserves established by the Securities and Exchange Commission, the estimation of reserves requires engineers to make a significant number of assumptions based on professional judgment. Reserve estimates have been updated at least annually and consider recent production levels and other technical information about each well. Estimated reserves are often subject to future revision, which could be substantial, based on the availabilit y of additional information including: reservoir performance, new geological and geophysical data, additional drilling, technological advancements, price changes and other economic factors. Changes in oil and gas prices can lead to a decision to start-up or shut-in production, which can lead to revisions to reserve quantities. Reserve revisions in turn cause adjustments in the depletion rates utilized by the Company. The Company cannot predict what reserve revisions may be required in future periods.
Depletion rates are determined based on reserve quantity estimates and the capitalized costs of producing properties. As the estimated reserves are adjusted, the depletion expense for a property will change, assuming no change in production volumes or the costs capitalized. Estimated reserves are used as the basis for calculating the expected future cash flows from a property, which are used to determine whether that property may be impaired. Reserves are also used to estimate the supplemental disclosure of the standardized measure of discounted future net cash flows relating to oil and gas producing activities and reserve quantities disclosure in Footnote 20 to the consolidated financial statements. Changes in the estimated reserves are considered changes in estimates for accounting purposes and are reflected on a prospective basis.
We employ the full cost method of accounting for our oil and gas production assets, which are located in the southwestern United States. Under the full cost method, all costs associated with the acquisition, exploration and development of oil and gas properties are capitalized and accumulated in cost centers on a country-by-country basis. The sum of net capitalized costs and estimated future development and dismantlement costs for each cost center is depleted on the equivalent unit-of-production basis using proved oil and gas reserves as determined by independent petroleum engineers.
Net capitalized costs are limited to the lower of unamortized cost net of related deferred tax or the cost center ceiling. The cost center ceiling is defined as the sum of (i) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on un-escalated year-end prices and costs; (ii) the cost of properties not being amortized; (iii) the lower of cost or market value of unproved properties included in the costs being amortized; less (iv) income tax effects related to differences between the book and tax basis of the oil and gas properties.
The ceiling test is affected by a decrease in net cash flow from reserves due to higher operating or finding costs or reduction in market prices for natural gas and crude oil. These changes can reduce the amount of economically
15
producible reserves. If the cost center ceiling falls below the capitalized cost for the cost center, we would be required to report an impairment of the cost center’s oil and gas assets at the reporting date.
Impairment of Properties - We will continue to monitor our long-lived assets recorded in oil and gas properties in the consolidated balance sheet to ensure they are fairly presented. We must evaluate our properties for potential impairment when circumstances indicate that the carrying value of an asset could exceed its fair value. A significant amount of judgment is involved in performing these evaluations since the results are based on estimated future events. Such events include a projection of future oil and natural gas sales prices, an estimate of the ultimate amount of recoverable oil and gas reserves that will be produced from a field, the timing of future production, future production costs, and future inflation. The need to test a property for impairment can be based on several factors, including a significant reduction in sales prices for oil and/or gas, unfavorable adjustment to reserves, or other changes to contracts, environmental regulatio ns or tax laws. All of these factors must be considered when testing a property's carrying value for impairment. We cannot predict whether impairment charges may be required in the future.
Revenue Recognition -Oil and gas production revenues are recognized at the point of sale. Production not sold at the end of the fiscal year is included as inventory.
Income Taxes- Included in our net deferred tax assets are approximately $16.4 million of future tax benefits from prior unused tax losses. Realization of these tax assets depends on sufficient future taxable income before the benefits expire. We are unsure if we will have sufficient future taxable income to utilize the loss carry-forward benefits before they expire. Therefore, we have provided an allowance for the full amount of the net deferred tax asset. Moreover, our recent change of majority ownership significantly reduced our ability to carry forward our net operating losses.
Accounting Estimates - Management uses estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. In particular, there is significant judgment required to estimate oil and gas reserves, impairment of unproved properties and asset retirement obligations. Actual results could vary significantly from the results that are obtained by using management’s estimates.
OFF-BALANCE SHEET ARRANGEMENTS
It is customary for oil and gas companies to seek partners in developing their assets. In doing so, you dilute your ownership but share the risk and capital expense of development. Consequently, Petroleum has accepted a partner in a portion of the development of its Wardlaw Lease in Edwards County, Texas.
On May 27, 2008, Petroleum signed a letter of intent (‘LOI’), to sell for $2.5 million a 50% interest in 2,560 acres (25%) of its Wardlaw Field to Wind Hydrogen Limited (‘WHL’), a publicly-listed company on the Australian Stock Exchange (‘ASX’). The Wardlaw lease is a 10,502 gross acre field located in Edwards County, Texas. In addition, WHL at closing purchased two options to expand the venture for 2,560 acres each. The Participation Agreement required that WHL pay 100% of the drilling costs, up to $2.5 million, for a 50% working interest in the first 2,546 acres (Phase 1). After funding $1.5 million and participating in the drilling of three wells,
The definitive agreement for this transaction was signed on July 22, 2008. Petroleum has received $1.5 million toward the participation financing of Phase 1, along with option payments of $150,000 each for Phases 2 and 3. In addition to the participation and option monies received, Petroleum has recorded $305,979 of non-refundable Administrative and General Expense reimbursements, which are allotted for in the agreement to be reimbursed from WHL.
As of December 31, 2008, WHL had failed to fund the $1,000,000 cash call issued by Petroleum on November 7, 2008. This failure is a material breach under the Participation Agreement, and Petroleum plans that WHL will no longer provide additional funding and the Participation Agreement has been terminated.
16
The purpose of the Participation Agreement was, in part, to increase the Company’s capital resources available for developmental activities. The Participation Agreement had an impact on the Company’s financial statements for the year ending March 31, 2009 through showing a $1,516,968 advance on the Participation Agreement in the Statement of Cash Flows, Cash Flows from Investing Activities. Because the Participation Agreement is terminated, we do not anticipate that the Participation Agreement will have a material impact on our future financial statements.
RESULTS OF OPERATIONS
The following selected financial data for the two years ended March 31, 2009 and March 31, 2008 is derived from our consolidated financial statements. The data is qualified in its entirety and should be read in conjunction with the consolidated financial statements and related notes contained elsewhere herein.
|
| Year Ended |
| Year Ended |
| ||
|
| March 31, |
| March 31, |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Income Data: |
|
|
|
|
| ||
Revenues |
| $ | 122,279 |
| $ | 62,025 |
|
Income Profit (Loss) |
| $ | (2,181,974 | ) |
| (3,251,650 | ) |
Income Profit (Loss) |
|
|
|
|
|
|
|
Per Share |
| $ | (0.21 | ) | $ | (0.46 | ) |
Weighted Average |
|
|
|
|
|
|
|
Number of Shares |
|
| 10,431,234 |
|
| 7,111,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
Working Capital (deficit) |
| $ | (2,702,752 | ) | $ | (2,714,405 | ) |
Total Assets |
| $ | 6,249,381 |
| $ | 6,074,484 |
|
Current Liabilities |
| $ | 2,948,077 |
| $ | 2,870,071 |
|
Long-Term Liabilities |
| $ | 116,961 |
| $ | 87,918 |
|
Shareholders’ Equity |
| $ | 3,184,342 |
| $ | 3,116,495 |
|
Combined Results
Our revenues for the 2009 fiscal year were $122,279, an increase of $60,254 or approximately 97%, as compared to revenues of $62,025 for the 2008 fiscal year.
Total operating expenses of $2,303,828 reflects a decrease of $1,254,916, or approximately 35%, for the 2009 fiscal year as compared to operating expenses of $3,558,744 for the 2008 fiscal year. The significant operating expenses reported for the 2009 fiscal year resulted from the recognition the expense portion of warrants and stock options. General and administrative expenses decreased by $326,116, or approximately 24%, from $1,334,095 in the 2008 fiscal year to $1,007,979 in the 2009 fiscal year. We also incurred a warrants and stock options expense of $1,017,489 during the fiscal year ended March 31, 2009. Interest expense was $3,201 in the 2009 fiscal year, as compared to $70,117 in the 2008 fiscal year.
Our net loss for the 2009 fiscal year was $2,181,974 a decrease of $1,069,676 or approximately 33%, as compared to a net loss of $3,251,650 for the 2008 fiscal year
Oil and Gas Activity
Oil and gas sales during the 2009 fiscal year were $122,279, an increase of $60,254 or approximately 97%, as compared to sales of $62,025 during the 2008 fiscal year. Recent volatility in crude oil prices has caused substantial variations in unit prices and our revenues may vary considerably base on crude oil unit prices.
17
Receivables from a single oil and gas customer comprised 61% of our trade receivable balance at March 31, 2009. No allowance for doubtful accounts has been included in our financial statements since recorded amounts are determined to be fully collectible, based on management’s review of customer accounts, historical experience and other pertinent factors. During the fiscal year ended March 31, 2009, we recorded oil and gas sales to only one customer. However, buyers of crude oil are plentiful and can be easily replaced.
Production and operating expenses were $94,541 during the 2009 fiscal year as compared to $72,166 in production and operating expenses during the 2008 fiscal year, an increase of $22,375 or approximately 31%. Depreciation and depletion expense for the 2009 fiscal year was $58,466 as compared to depreciation and depletion expense of $1,868 for the 2008 fiscal year, an increase of $56,598. Demand for oil field service providers may vary substantially with the unit price of gas and crude oil which would have a corresponding effect on the price of oil field goods and services.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our sales revenues have not been adequate to support our operations
Our current assets increased by $89,659 or approximately 58%, from $155,666 at March 31, 2008 to $245,325 at March 31, 2009. Current liabilities increased from $2,870,071 at March 31, 2008, to $2,948,077 at March 31, 2009, an increase of $78,006 or approximately 3%. The increase in current liabilities was due to increases in accounts payable balances. Working capital was a deficit of $2,702,752 at March 31, 2009 as compared to the March 31, 2008 deficit of $2,714,405, a decrease of $11,653 or less than 1%. The decrease deficit was due primarily to the addition of property, plant and equipment.
Total assets were $6,249,381 at March 31, 2009, an increase of $174,897 as compared to $6,074,484 for the 2008 fiscal year.
Capital Resources
Our business plan for the next fiscal year entails redevelopment activities on the Wardlaw properties which may result in a capital expenditure greater than $1 million, in addition to the WHL venture discussed below. Petroleum will not be able to generate this necessary amount internally. Petroleum will rely on additional equity financing, bank debt financing, as well as off balance sheet joint ventures.
Petroleum will not be making any commitment of capital resources until it has secured the capital resources necessary to make such a commitment.
We also have current accounts payables to oil and gas trade creditors. Our ability to conduct developmental activities will be hindered until we pay those oil and gas trade creditors. We may need to raise new capital to pay those trade creditors.
Cash Flow
Our operations used $237,421 of cash in the 2009 fiscal year as compared to $2,172,016 used in the 2008 fiscal year. The cash flow deficits are due to the operating losses incurred.
Cash of $525,981 was used in investing activities during the 2009 fiscal year and cash of $59,348 was used in investing activities for the 2008 fiscal year. Cash of $1,876,191 was used for capital expenditures for our oil and gas properties and for the purchase of equipment. During the 2008 fiscal year, cash flows used in investing activities related primarily to capital expenditures for our oil and gas properties.
In the 2009 fiscal year, cash of $716,500 was provided by financing activities.
At March 31, 2009 we had cash of $18,867.
18
Subsequent Events
The Company entered into a new independent consulting engagement with Barry Pierce, whereby he will provide accounting services to the Company on a month to month basis, and will not be designated as an officer. His prior one year consulting agreement was fulfilled on March 23, 2009.
The Company has received a portion of the remaining balance of the January 2009 BVL Sub Debt financing, $105,000.
The Company has collected $ 77,743.25 from its loan to Bowie Operating Company, LLC, and the balance is expected in ninety days.
The Company and Petroleum have retained counsel to assist in the restructuring of its vendor payables.
The Company and Petroleum are in negotiations with several investors about purchase an equity interest in the Company, or purchasing a partial interest in the Wardlaw field.However, there is no assurance of further financing, and the Company would not be cash flow positive from operations without further assistance. Consequently, without further outside capital the Company and Petroleum would not be viable as a going concern.
Non-Compliance with Nasdaq Rules
NASDAQ informed Glen Rose Petroleum Corporation in a letter dated September 22, 2008, that it was in violation of NASDAQ Marketplace Rule 4310(c)(4) in that the closing bid price for our common stock was below $1.00 for 30 consecutive days. The NASDAQ letter stated that Glen Rose Petroleum Corporation will have 180 calendar days (until March 23, 2008) to regain compliance with Rule 4310(c)(4) by demonstrating a closing bid price of $1.00 or more for at least ten and up to twenty consecutive business days.
The NASDAQ letter further stated that if Glen Rose Petroleum Corporation cannot demonstrate compliance with Rule 4310(c)(4) by March 23, 2008, the NASDAQ Staff will determine whether it meet the NASDAQ Capital Markets initial listing criteria except for the bid price requirement. If the Corporation meets the initial listing criteria, it may be granted an additional 180 day compliance period. If Glen Rose Petroleum Corporation is not eligible for the additional compliance period, NASDAQ staff will provide it with a delisting notice which may be appealed to the NASDAQ Listing Qualifications Panel.
Subsequently, NASDAQ temporarily suspended the compliance dates related to bid price deficiencies for all NASDAQ-listed companies. On December 19, 2008, it announced that it was suspending bid price qualification until April 20, 2009. On March 23, 2009, NASDAQ announced that it was further extending this suspension until July 19, 2009. Consequently, the 88 days between September 22, 2008 and December 19, 2008, count against the listing compliance time period, but not the period between December 19, 2008 and July 19, 2009. Thus, the deadline for the initial 180 day compliance period referenced in the NASDAQ listing deficiency notice letter is now October 19, 2009 with an additional 180 days available for compliance if Glen Rose Corporation meets the initial NASDAQ listing requirements other than bid price.
FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
Risks Related to Our Business
We do not earn enough money to support our operations. We may be unable to continue our business.
UHC Petroleum Corporation does not earn enough money from our oil and gas sales to pay its operating expenses. Due to our substantial losses and our working capital deficit, Petroleum may be unable to continue as a going concern. If Petroleum does not obtain financing, it will be required to severely curtail, or to completely cease operations.
Jonathon P. Reuben, CPA, our independent auditor, has included in its report on our financial statements a paragraph stating that that we may be unable to continue as a going concern.
We have experienced net losses and negative cash flows from operations. We sustained a net loss of $2,181,974 and a working capital deficit of $2,702,752 for the fiscal year ended March 31, 2009. We have an accumulated deficit of
19
$48,432,770. We sold all of our proved reserves in 2007 and we currently do not have significant revenue producing assets. In addition, we have limited capital resources. All of these factors raise substantial doubt about our ability to continue as a going concern. The financial statements included in this report do not include any adjustments that might result from the outcome of these uncertainties. As noted in an explanatory paragraph in the report of Jonathon R. Reuben CPA, our independent certified public accountants, on our consolidated financial statements for the year ended March 31, 2009 these conditions have raised substantial doubt about our ability to continue as a going concern.
We must estimate our proved oil and gas reserves and the estimated future net cash flows from the reserves. These estimates may prove to be inaccurate.
This Form 10-K contains estimates of our proved oil and gas reserves and the estimated future net cash flows from such reserves. These estimates are based upon various assumptions, including assumptions required by the Securities and Exchange Commission relating to oil and gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating oil and natural gas reserves is complex. This process requires significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir and is therefore inherently imprecise. Additionally, our interpretations of the rules governing the estimation of proved reserves could differ from the interpretation of staff members of regulatory authorities resulting in estimates that could be challenged by these authorities.
Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves will most likely vary from those estimated. Any significant variance could materially affect the estimated quantities and present value of reserves set forth in this Annual Report and the information incorporated by reference. Our properties may also be susceptible to hydrocarbon drainage from production by other operators on adjacent properties. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond our control.
Our business plan anticipates that we will be able to develop our oil and gas properties. The cost to develop our oil properties is significant, and, to date, we have been unable to do so due to our lack of funds. Unless we can develop our oil properties, our revenues and results of operations will be adversely affected.
We believe that our properties have significant reserves of oil; however, we have not had the funds to fully exploit these resources. The costs associated with the development of oil and gas properties, including engineering studies, equipment purchase or leasing and personnel costs, are significant. In order to become profitable we must enhance our oil production, which means that we must drill and/or recomplete more wells. In order to accomplish this, we must find additional sources of capital.
Even if we fully develop our oil properties, we may not be profitable. Our inability to operate profitably will adversely affect our business.
We have assumed that once we fully develop our oil properties we will be profitable. However, even if we were able to fully develop our properties, there is no guarantee that we would achieve profitability. Our reserves may prove to be lower than expected, production levels may be lower than expected, the costs to exploit the oil may be higher than expected, new regulations may adversely impact our ability to exploit these resources and the market price for crude oil may be lower than current prices.
We also face competition from other oil companies in all aspects of our business, including obtaining oil leases, marketing oil, and obtaining goods, services and labor to exploit our resources. Many of our competitors have substantially larger financial and other resources than we have, and we may not be able to successfully compete against them. Competition is also presented by alternative fuel sources, which may be more efficient and less costly and may result in our products becoming less desirable.
Any of these factors could prevent us from attaining profitability.
20
The development and exploitation of oil properties is subject to many risks that are beyond our control. The occurrence of any of these events could have a material adverse effect on our business and results of operations.
Our crude oil drilling and production activities are subject to numerous risks, many of which are beyond our control. These risks include the following:
·
that no commercially productive crude oil reservoirs will be found;
·
that crude oil drilling and production activities may be shortened, delayed or canceled; and
·
that our ability to develop, produce and market our reserves may be limited by title problems, weather conditions, compliance with governmental requirements, and mechanical difficulties or shortages or delays in the delivery of drilling rigs and other equipment.
We cannot assure you that the new wells we drill, or the wells that are currently in existence, will be productive or that we will recover all or any portion of our investment in them. Drilling for crude oil and natural gas may be unprofitable. Dry holes and wells that are productive but do not produce sufficient net revenues after drilling, operating and other costs are unprofitable.
Our industry also experiences numerous operating risks. These operating risks include the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards. Environmental hazards include oil spills, natural gas leaks, ruptures or discharges of toxic gases. If any of these industry operating risks occur, we could sustain substantial losses. Substantial losses also may result from injury or loss of life, severe damage to or destruction of property, clean-up responsibilities, regulatory investigation and penalties and suspension of operations.
Any of these events could adversely affect our business.
We may not have enough insurance to cover all of the risks we face. If our insurance coverage is inadequate to pay a claim, we would be responsible for payment. The requirement that we pay a significant claim would materially, adversely impact our financial condition and results of operations.
In accordance with customary industry practices, we maintain insurance coverage against some, but not all, potential losses in order to protect against the risks we face. We may elect not to carry insurance if our management believes that the cost of available insurance is excessive relative to the risks presented. In addition, we cannot insure fully against pollution and environmental risks. The occurrence of an event not fully covered by insurance which we may be required to pay could have a material adverse effect on our financial condition and results of operations.
Oil and natural gas prices are highly volatile in general and low prices negatively affect our financial results.
Our revenue, profitability, cash flow, future growth and ability to borrow funds or obtain additional capital, as well as the carrying value of our properties, are substantially dependent upon prevailing prices of oil and natural gas. Historically, the markets for oil and natural gas have been volatile, and such markets are likely to continue to be volatile in the future. Prices are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control. These factors include the level of consumer product demand, weather conditions, domestic and foreign governmental regulations, the price and availability of alternative fuels, political conditions, the foreign supply of oil and natural gas, the price of foreign imports and overall economic conditions. While we attempt to mitigate price volatility when we can by acquiring “put s” to protect our prices, we cannot assure you that such transactions will reduce the risk or minimize the effect of any decline in oil or natural gas prices. Any substantial or extended decline in the prices of or demand for oil or natural gas would have a material adverse effect on our financial condition and results of operations.
Government regulation and liability for environmental matters may adversely affect our business and results of operations.
Oil and natural gas operations are subject to various federal, state and local government regulations, which may be changed from time to time. Matters subject to regulation include discharge permits for drilling operations, drilling
21
bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity in order to conserve supplies of oil and natural gas. There are federal, state and local laws and regulations primarily relating to protection of human health and the environment applicable to the development, production, handling, storage, transportation and disposal of oil and natural gas, by-products thereof and other substances and materials produced or used in connection with oil and natural gas operations. Furthermore, we may be liable for environmental damages caused by previous owners of property we purchase or lease. As a result, we may incur substantial liabilities to third parties or governmental entities. We are also subject to changing and extensive tax laws, the effects of which cannot be predicted. While the regulations governing our industry have not had a material adverse effect on our operations to date, the implementation of new laws or regulations, or the modification of existing laws or regulations, could have a material adverse effect on us.
We may not be able to replace production with new reserves.
In general, the volume of production from oil and gas properties declines as reserves are depleted. The decline rates depend on reservoir characteristics. Our aggregate reserves will decline as they are produced unless we acquire properties with proved reserves or conduct successful development and exploration drilling activities. Our future natural gas and oil production is highly dependent upon our level of success in finding or acquiring additional reserves.
ITEM 7.
FINANCIAL STATEMENTS
The financial statements and supplementary data required to be included in this Item 7 are set forth at page F-1 of this Annual Report.
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On March 28, 2008, the Audit Committee of our Board of Directors approved the engagement of Hein & Associates LLP as our new principal independent accountant to audit our consolidated financial statements for the year ending March 31, 2008. Prior to engaging Hein & Associates LLP, the Company had not consulted Hein & Associates LLP, regarding the application of accounting principles to a specified transaction, completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements. Further details of this engagement of a new principal independent accountant to audit our financial statements may be found in our Form 8-K dated April 3, 2008, which is incorporated here by reference.
On September 24, 2008, the Company terminated its auditing relationship with Hein & Associates, LLP and began an auditing relationship with Jonathon P. Reuben CPA, Accountancy Corporation. Prior to engaging Jonathon P. Reuben CPA, the Company had not consulted Jonathon Reuben, regarding the application of accounting principles to a specified transaction, completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements. Further details of this engagement of a new principal independent accountant to audit our financial statements may be found in our Form 8-K dated September 25, 2008, which is incorporated here by reference.
ITEM 8A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
In the year ending March 31, 2009, Glen Rose Petroleum Corporation’s management team conducted tests of its disclosure control and procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
22
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The evaluation was undertaken in consultation with our accounting personnel. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, due to the loss of a number of employees, we no longer have the capacity to ensure that information required to be disclosed by us 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 Securities and Exchange Commission’s rules and forms. As of June 29, 2009, our CFO, Joseph F. Langston, also assumed the role of CEO upon the acceptance of Paul Watson’ ;s resignation.
In management's opinion, based on the assessment completed for the year ended March 31, 2009, and as of March 31, 2009, the internal controls over financial reporting are not operating effectively. Further, in management’s opinion, based on the assessment completed for the year ended March 31, 2009, and as of March 31, 2009, the disclosure controls and procedures are not operating effectively.
There have been no changes in internal control over financial reporting during the fourth quarter that could materially affect or is reasonably likely to affect our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Glen Rose Petroleum Corporation’s management is responsible for establishing and maintaining systems of adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and Disclosure Controls and Procedures as such term is defined in Exchange Act Rule 13a-15(e) . Because of its inherent limitations, internal control over financial reporting and disclosure controls and procedures may not prevent or detect misstatements.
In the year ending March 31, 2009 Glen Rose Petroleum Corporation’s management team conducted tests of its internal control over financial reporting in accordance with the standards set forth by the Public Company Accounting Oversight Board ("PCAOB") in the United States. In accordance with these standards, management assessed and tested, on a sample basis, Glen Rose Petroleum Corporation’s internal control over financial reporting according to a comprehensive risk analysis using the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). It is management's opinion that the testing methodology of the internal control framework is appropriate and provides reasonable assurance as to the integrity and reliability of the internal control over financial reporting.
Furthermore, management determined that a material weakness existed in the processes, procedures and controls related to the preparation of our quarterly and annual financial statements due to limited personnel and a lack of segregation of duties. In connection with the preparation of this report, we discovered that, due to the difficulty experienced by management in applying complex accounting standards, our control environment is dependent upon a review function and the ability to recognize and obtain assistance for complex transactions, which does not exist. The ineffectiveness of these controls resulted in adjustments related to the recording of stock options, warrants, and conversion of debt. This material weakness could result in the reporting of financial information and disclosures in future consolidated annual and interim financial statements that are not in accordance with generally accepted accounting principles.
The annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
ITEM 8B.
OTHER INFORMATION
Not applicable.
23
PART III
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Below is information about our directors, executive officers and significant employees. There are no family relationships among our executive officers and directors. Paul Watson served as Chairman and Chief Executive Officer until his resignation on June 30, 2009. The Company held no annual meeting during the fiscal year ending March 31, 2009 and no director failed to attend 75% of the Company’s Board meetings during that time.
Joseph F. Langston Jr. President, Chief Executive and Financial Officer, Secretary and director
Director since October 2007 Age 57
Mr. Langston was appointed to our board of directors and as our interim chief executive officer, interim president and chief financial officer on October 8, 2007. On January 14, 2008, Mr. Langston relinquished his position as interim chief executive officer and was appointed as our president, secretary and, again, as our chief financial officer. Mr. Langston provides approximately 30 hours per week in services to us.
From 1995 through the present, Mr. Langston has been the founder and executive officer of Langston Investments, Inc. based in Dallas Texas. Langston Investments, Inc. specializes in private investment banking for mid-sized companies. From 1989 through 1995, Mr. Langston was the vice-president of finance of Search Exploration, Inc., a public company that developed oil and gas prospects in Texas and the Louisiana gulf coast region. Search Exploration, Inc. merged with Harken Energy Corporation in May 1995. From 1977 through 1982 Mr. Langston was chief financial officer of Trans-Western Exploration, Inc., a company he helped found. During that period he raised funds from United States and European institutions for oil and gas exploration. Mr. Langston received his Bachelor of Business Administration degree in accounting and finance from the University of Texas at Arlington in 1974 and became a certified public accountant in 1978. Mr.&nbs p;Langston also serves as a director and President of Buccaneer Energy Corporation, a private company.
Franz A. Skryanz Director since May 2007 Age 71
Mr. Skryanz was appointed to our board of directors and as the chairman of the audit committee on May 16, 2007. Mr. Skryanz was a director of Xethanol Corporation, a publicly traded company, from August 2000 until his resignation in October 2006. He also served as Xethanol Corporation’s secretary and treasurer until his resignation in August 2008. From 2000 to late 2002 Mr. Skryanz also consulted with London Manhattan Securities, Inc. assisting in the development of international projects and managing accounting and administration of that company. Mr. Skryanz has also provided financial management, corporate secretary and treasurer services to early-stage entrepreneurial companies. Prior to joining Xethanol, he served as treasurer and secretary of NETdigest.com, Inc., chief financial officer of Cam Designs, Inc. and chief financial officer and treasurer of Nyros Telecom Services, Inc., a privately-held company with telecom ventures in Russia. Mr. Skryanz holds a Masters of Business Administration degree from the University of Vienna, Austria and was an exchange student at Cambridge University, England and the University of Valencia, Spain.
Theodore D. Williams Director since October 2007 Age 38
Mr. Williams was appointed to our board of directors and as a member of the audit committee on October 8, 2007. In August 2003 Mr. Williams co-founded, and since September 2003 Mr. Williams has been the managing partner of, Point Capital Partners, LLC. Point Capital Partners, LLC, located in Chatham, New Jersey, is a private merchant bank focused on principal investments in the healthcare, energy and information technology industries. From February 2003 to August 2003, Mr. Williams was vice president of healthcare investment banking at Morgan Joseph & Co. Inc. From May 2000 to November 2002, Mr. Williams was a senior associate of healthcare investment banking with Thomas Weisel Partners LLC. Mr. Williams graduated from the United States Military Academy in West Point, New York and served in the United States Army from April 1995 through February 1997. Mr. Williams is a directo r of Lothian Oil Inc.
24
Paul K. HickeyDirector since October 2007 Age 76
Mr. Hickey was appointed to our board of directors on October 8, 2007, and Chairman of the Audit Committee on March 3, 2008. Since March 1971, Mr. Hickey has been the President of P.K. Hickey & Co., Inc., a privately held investment banking firm based in New York City.
No family relationships exist among our executive officers and directors. With the exception of Messrs. Langston, all of the members of our board of directors are independent, as that term is defined in section (a)15 of Rule 4200 of the Nasdaq Marketplace Rules.
Except as otherwise described below, none of our directors or executive officers has, during the past five years,
·
had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time,
·
been convicted in a criminal proceeding and none of our directors or executive officers is subject to a pending criminal proceeding,
·
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities, or
·
been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
We have an audit committee composed of Messrs. Hickey, Skryanz, and Williams. The members of the Audit Committee are independent as that term is defined in Rule 5605(a)(2) of the Nasdaq Marketplace Rules. We consider Mr. Hickey, the Chairman of the Audit Committee,to be an audit committee financial expert. An audit committee financial expert is defined as a person who has the following attributes:
·
An understanding of generally accepted accounting principles and financial statements;
·
The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;
·
Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and level of complexity of issues that can reasonably be expected to be raised by our financial statements, or experience actively supervising one or more persons engaged in such activities;
·
An understanding of internal control over financial reporting; and
·
An understanding of audit committee functions.
The audit committee financial expert may have acquired such attributes through:
·
Education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions;
·
Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions;
·
Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or
·
Other relevant experience.
25
Consulting Agreements:
On November 27, 2007 our board of directors approved, and on November 28, 2007 we entered into, a 12 month Consulting Agreement (the “DK/RTP Consulting Agreement”) with DK True Energy Development Ltd. and RTP Secure Energy Corp. (the “Consultants”). The Consultants are to provide services to us including, but not limited to, reservoir analysis and geological and engineering expertise.
DK True Energy Development Ltd. is a company controlled by Dr. David Kahn. Dr. Kahn is a reservoir engineer with 20 years experience in heavy oil projects with Texaco and Baker Hughes and, more recently, was a principal in development stage heavy oil companies that engaged in merger and acquisition transactions with Megawest Energy Inc. and Pearl Exploration and Production Ltd., a Canadian-based oil and gas company.
On January 15, 2008 the Company entered into a Consulting Agreement with Blackwood Capital Limited (“BCL”), which is a managing member of our controlling shareholder. BCL began providing services to us beginning on September 1, 2007. The services provided to us by BCL include assisting us with preparing business plans and projections, analyzing our financial data, advising us on our capital structure and on alternative structures for raising capital, reviewing our managerial needs and advising us with respect to retaining the services of managerial candidates, advising us on public relations.
Security Holder Communications to the Board of Directors
The Company does not currently have an independent means for direct communications from security holders to the Board of Directors because, given the Company’s financial state, it must economize on its general and administrative costs. However, the Company will direct security holders communications sent to it at One Energy Square, 4925 Greenville Ave., Suite 200, Dallas, Texas 75206 to its Board members. The Company intends to convey security holders communications relating to corporate governance, company operations and company finances to its Board Members.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers, directors, and persons who own more than ten percent of a registered class of our equity securities to file reports of ownership with the Securities and Exchange Commission.
During the fiscal year ending March 31, 2009, the directors and Blackwood Ventures, LLC. did not file Form 5 annual reports. Further, on October 6, 2008 Blackwood Ventures LLC was issued 814,788 and Langston Family LP, which is affiliated with Joseph Langston, was issued 161,884 shares. No Form 4 was filed on these transactions to date. Also, no amended Schedule 13D was filed by Blackwood Ventures, LLC. The directors and Blackwood Ventures, LLC will endeavor to complete these filings by July 30, 2009. Other than the above issuances to Mr. Langston and Blackwood Ventures, LLC, there were no other issuances of common shares to or sales of common shares by directors or shareholders who meet or exceed the 10 percent ownership threshold.
Code of Ethics
We have adopted a code of ethics that applies to all of our employees, including our principal executive officer and principal financial officer. We will provide to any person, upon request and without charge, a copy of our Code of Ethics. Requests should be in writing and addressed to Mr. Joseph F. (“Chip”) Langston, President, Glen Rose Petroleum Corporation, 4925 Greenville Avenue Suite 200, Dallas, Texas, 75206.
ITEM 10.
EXECUTIVE COMPENSATION
Officer and Director Compensation
The Company determined to award its officers and directors through a mixture of salary and performance-related compensation. The performance-related compensation entails performance metrics. First, the value of our officers’ and directors options and warrants will fluctuate in tandem with our stock price. If our stock price increases, the options and warrants possessed by and awarded to our officers and directors will grow more valuable. Conversely, these options and warrants will become less valuable should the stock price decrease.
26
Mr. Paul D. Watson, Chairman and Chief Executive Officer --
For Mr. Watson’s services, we agreed to issue to Applewood shares of our common stock having a value of $60,000 and to pay cash compensation of $5,000 per month. We began paying the monthly cash compensation in December 2007. We have not yet issued the shares of common stock. The Applewood Consulting Agreement requires us to use the closing price of our common stock on the date the agreement was executed to compute the number of shares to be issued. On November 28, 2007 the closing price of our common stock was $1.84, therefore we are required to issue to Applewood 32,609 shares of our common stock. Mr. Watson resigned his engagement for Applewood effective December 31, 2008, and therefore, did not earn any of the contingent (performance) warrants. However, on June 25, 2009 the Board has agreed to issue Mr. Watson 100,000 shares of common stock as director fees for his participation on the board. These director fees are cumulative of the director fees he has already earned and are not in addition to.
Mr. Joseph F. (“Chip”) Langston, Secretary, President and Chief Financial Officer --
In October 2007 Mr. Langston agreed to be interim president and director for $7,500 per month, payable $2,500 in cash and the balance in common stock at an agreed-upon value of $0.75 per share. We are required to issue 20,000 shares of our common stock to Mr. Langston in exchange for the services he rendered pursuant to this agreement, although the shares have not yet been issued.
As of January 1, 2008, Mr. Langston agreed to be president, chief financial officer and a director in exchange for compensation consisting of cash, common stock was granted having a value of $60,000 (80,000 shares, the stock price was $0.75 per share at the time) and to pay cash compensation of $5,000 per month. None of the compensation to be paid with common stock or options has yet been issued by the transfer agent, but the Company recognizes the obligation. On June 30, 2008, the Board of Directors awarded Mr. Langston 500,000 stock purchase options, vesting over six months with each priced as of the closing average bid price for the quarter ended. In addition, the Board of Directors of the Company approved an amendment to Joseph Langston’s employment agreement. The amendment increased Mr. Langston’s cash payments from $5,000 per month, to $12,500 per month, plus auto expense and health insurance. Effective upo n Mr. Watson resignation, Mr. Langston assumed the duties of Chief Executive Officer. Mr. Langston subscribed to $50,000 of the spring 2008 private placement by way of a note payable to the Company, collateralized by the stock purchased.
Officer Compensation Table
Name and |
| Year |
| Salary |
| Bonus |
| Stock |
| Option |
| Nonequity |
| Non- qualified deferred earnings |
| All other |
| Total |
Paul Watson, |
| Year ending March 31, 2009 |
| $ 48,000 |
| $0 |
| $25,971 |
| $ 11,393 |
|
|
|
|
| 0 |
| $ 85,364 |
Joseph F. "Chip" Langston, |
| Year ending March 31, 2009 |
| $148,743 |
| $0 |
| $25,971 |
| $642,167 |
|
|
|
|
|
|
| $816,881 |
Paul Watson receives his compensation pursuant to a consulting agreement owned by an affiliate. Mr. Watson’s resignation was accepted on June 29, 2009.
Joseph Langston receives his compensation pursuant to a consulting agreement owned by a affiliated entity.
Director Compensation
Prior to July 1, 2008 the directors of the Company received compensation of $5,000 per month, payable in full vested three year common stock purchase options. The values of the stock options were determined as of the
27
monthly closing average bid price for each month of service. These directors’ options were valued as of June 30, 2008 at $1.35 per share.
On June 30, 2008 the Board of Directors amended the compensation for Directors. They approved that each director could choose, calendar quarterly, their form of compensation. Each director has the option of $5,000 of common stock per month or 5,000 stock purchase options, with each price as of the closing average bid price for the previous ended quarter.
Director Compensation Table
Name |
| Fees earned |
| Stock |
| Option |
| Non-equity |
| Nonqualified |
| All other |
| Total |
Theodore Williams |
|
|
| $25,971 |
| $11,393 |
|
|
|
|
|
|
| $37,364 |
Franz Skyranz |
|
|
|
|
| $22,948 |
|
|
|
|
|
|
| $22,948 |
Paul Hickey |
|
|
| $25,971 |
| $11,393 |
|
|
|
|
|
|
| $37,364 |
Joseph F. Langston |
|
|
| $25,971 |
| $11,393 |
|
|
|
|
|
|
| $37,364 |
Paul D. Watson |
|
|
| $25,971 |
| $11,393 |
|
|
|
|
|
|
| $37,364 |
Paul D. Watson’s resignation as a director was accepted on June 29, 2009.
The following table describes equity awards held by our executive officers and directors as of the end of our last completed fiscal year, March 31, 2009.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|
| Option awards |
| Stock awards | ||||||||||||||
Name |
| Number of |
| Number of |
| Equity |
| Option |
| Option |
| Number of |
| Market |
| Equity |
| Equity |
Paul Watson |
| 30,000 |
|
|
|
|
| $1.01 |
| 3/30/2012 |
|
|
|
|
|
|
|
|
Joseph F. Langston |
| 545,000 |
|
|
|
|
| $1.10 |
| 3/30/2012 |
|
|
|
|
|
|
|
|
Theodore Williams |
| 45,000 |
|
|
|
|
| $1.11 |
| 3/30/2012 |
|
|
|
|
|
|
|
|
Franz Skyranz |
| 115,000 |
|
|
|
|
| $0.77 |
| 3/30/2012 |
|
|
|
|
|
|
|
|
Paul Hickey |
| 45,000 |
|
|
|
|
| $1.11 |
| 3/30/2012 |
|
|
|
|
|
|
|
|
Paul D. Watson’s resignation as an officer and director was accepted on June 29, 2009.
28
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Management
The following table shows beneficial ownership, on July 2, 2009, of shares of our common stock by all five percent shareholders, executive officers and directors.
Name and Address of |
| Amount and Nature of |
| Percent |
Beneficial Owner |
| Beneficial Owner |
| Of Class(1) |
|
|
|
|
|
Blackwood Ventures LLC |
| 14,157,602(2) |
| 81.4517% |
400 Rella Boulevard, Montebello |
|
|
|
|
New York, New York 10910 |
|
|
|
|
|
|
|
|
|
Joseph F. Langston Jr., president, chief financial officer and director |
| 808,919(3) |
| 4.6539% |
|
|
|
|
|
Theodore Williams, Director |
| 113,919(4) |
| * |
|
|
|
|
|
Paul Hickey, Director |
| 113,919(4) |
| * |
|
|
|
|
|
Franz Skyranz, Director |
| 115,000(4) |
|
|
|
|
|
| * |
All officers and directors as a group (4 persons) |
| 1,151,757 |
| 6.6263% |
———————
*
Less than 1%.
(1)
Based on 12,371,758 shares (17,381,599 including outstanding options and warrants) of common stock issued and outstanding as of July 2, 2009.
(2)
Blackwood Ventures LLC owns 7,965,453 shares of our common stock as of March 31, 2009 and warrants that allow it to purchase a total of 2,906,666 shares of common stock. The warrants were acquired from Mr. Walter Mize, who acquired them from Lothian Oil Inc. The warrants were issued on October 7, 2005, are immediately exercisable and have five year terms. These warrants and 3,759,999 of Blackwood Ventures, LLC’s shares of our common stock are pledged to the Estate of Walter G. Mize as collateral for a promissory note relating to the financing of the purchase of these shares and warrants from Walter G. Mize. This number also includes 128,000 shares of common stock issued to Blackwood Ventures LLC as a result of its agreement to accept units comprised of 128,000 shares of common stock and a warrant to purchase 209,012 shares of common stock at an exercise price of $1.40 per share in exchange for debt totaling $96,000. This number does includes the warrant included in the units or an additional 48,750 shares of common stock and a warrant to purchase 36,563 shares of common stock at an exercise price of $1.40 per share in exchange for debt totaling $39,000. These securities will not be issued until 20 days following the date we mail this information statement to our shareholders, but are included in our calculations because Regulation S-K incorporates SEC Rule 13d-3(d)(1) by reference and that rule requires us to include rights to acquire beneficial ownership of securities within 60 days. This total also includes 1,500,000 warrants issued with a purchase price $1.05 to Blackwood Capital Limited, an affiliate of Blackwood Ventures, LLC, as previously disclosed in our Form 8-K filed January 22, 2008. This total also includes 1,163,158 of the January 28, 2009 Debenture agreement were as the debenture has a conversion option were the debenture can converted into shares of com mon stock with a purchase price of $0.19. These and other warrants have a cashless settlement provision in which the number of shares issued may vary from the face amount of the warrants based on a formula based on trading stock price. Thus, it is possible that the actual number of shares issued pursuant to the formula may be greater or less than the amount of shares designated on the warrants. The percentage calculation presented includes the warrants and is based on the fully-diluted number of shares. This percentage is also based on a fully-diluted calculation of 17,381,599 shares outstanding. Without reference to options and warrants or fully-diluted shares outstanding, Blackwood Ventures, LLC owns 8,342,203 of the 12,371,758 shares outstanding as of July 2, 2009 which is a 67.4294% ownership percentage Voting and investment control over the shares held by Blackwood Ventures LLC is exercised by Mr. Andrew Taylor-Kimmins, Dr. David Kahn and Mr. Walter Reissman, collectiv ely.
(3)
In October 2007 Mr. Langston agreed to be interim president and director for $7,500 per month, payable $2,500 in cash and the balance in common stock at an agreed-upon value of $0.75 per share. We are required to issue 20,000 shares of our common stock to Mr. Langston in exchange for the services he rendered pursuant to this agreement, although the shares have not yet been issued. As of January 1, 2008, Mr. Langston agreed to be president, chief financial officer and a director in exchange for compensation consisting of cash, common stock and options to purchase common stockwas granted having a value of $60,000 (80,000 shares, the stock price was $0.75 per share at the time) and to pay cash compensation of $5,000 per month. None of the compensation to be paid with common stock or options has yet been issued by the transfer agent, but the Company recognizes the obligatio n. In 2007, Mr. Langston purchased 45,000 shares of common stock were purchased in the market by Mr. Langston. 17,000 shares were purchased for his adult child and 28,000 shares were purchased for a retirement account. Mr. Langston disclaims ownership in the securities purchased for his child. Mr. Langston As of July 2, 2009 Mr. Langston owned 545,000 stock options which are included in these calculations and the percentage calculation is on a fully-diluted basis.Mr. Langston subscribed to $50,000 of the spring 2008 private placement by way of a note payable to the Company, collateralized by the stock purchased.Mr. Langston’s ownership percentage without options and share dilutions is 2.1332%.
(4)
The referenced non-officer director holdings are in-the-money options.
29
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
With the exception of Mr. Joseph F. Langston, the members of our Board of Directors and the members of the Audit Committee are independent, as that term is defined in section (a)15 of Rule 4200 of the Nasdaq Marketplace Rules.
Termination of Obligations
ITEM 13.
EXHIBITS
Exhibits
3.1
Certificate of Incorporation filed in Delaware on May 22, 2008 (5)
3.3
Bylaws of Corporation (6)
10.1
1995 Stock Option Plan (1)
10.2
1998 Stock Option Plan (2)
10.3
2000 Stock Option Plan (3)
10.4
2008 Stock Option Plan (4)
Amended Agreement with Joseph F. Langston (11)
10.7
Debenture issued to Blackwood Ventures, LLC dated January 28, 2009 (9)
10.8
Consulting Agreement with DK True Energy Development Ltd. and RTP Secure Energy Corp. dated November 27, 2007 (7)
10.9
Consulting Agreement with Blackwood Capital, Ltd. dated January 15, 2008 (8)
14
Code of Ethics (9)
21
Subsidiaries of the Company (10)
Consent of Jonathon P. Reuben CPA, An Accountancy Corporation (11)
Consent of Hein & Associates, LLP (11)
Certification of Chief Executive Officer and Chief Financial Officer (11)
Certification pursuant to Section 906 of the Sarbanes Oxley Act (11)
———————
(1)
Incorporated by reference to Exhibit 10.3 of the Registrant’s Form SB-2 Registration Statement filed May 4, 2004.
(2)
Incorporated by reference to Exhibit 99.01 the Registrant’s Form S-8 registration statement filed on September 30, 1998 as document number 333-64711.
(3)
Incorporated by reference to Exhibit 4.01 of Registrant’s Form S-8 Registration Statement filed on December 6, 2000.
(4)
Incorporated by reference to Exhibit 10-1 to Registrant’s Form S-8 Registration Statement filed May 30, 2008.
(5)
Incorporated by reference to Exhibit 3.1 to Registrant’s Form 10-K for period ending March 31, 2008 filed July 14, 2008.
(6)
Incorporated by reference to Exhibit 3.1 to Registrant’s Form 10-K for period ending March 31, 2008 filed July 14, 2008.
30
(7)
Incorporated by reference to Exhibit 10-1 to Registrant’s Form 8-K filed December 3, 2007
(8)
Incorporated by reference to Exhibit 10-2 to Registrant’s Form 8-K filed January 22, 2008
(9)
Incorporated by reference to Exhibit 14 to Registrant’s Form 10-KSB for the year ending March 30, 2004 filed June 29, 2004.
(10)
Incorporated by reference to Exhibit 21 to Registrant’s Form 10-K for period ending March 31, 2008 filed July 14, 2008.
(11)
Filed herewith
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth fees billed to us by Jonathon P. Reuben CPA and Hein & Associates L.L.P. during the fiscal years ended March 31, 2009 and March 31, 2008 for: (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services that were reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees, (iii) services rendered in connection with tax compliance, tax advice and tax planning, and (iv) all other fees for services rendered. Jonathon P. Rueben CPA. was engaged by the Company in September 2008.
|
|
|
| March 31, 2009 |
| March 31, 2008 |
| |||
|
|
|
|
|
|
|
| |||
(i) |
|
| Audit Fees |
| $ | 28,682 |
| $ | 119,000 |
|
(ii) |
|
| Audit Related Fees |
| $ | — |
| $ | — |
|
(iii) |
|
| Tax Fees |
| $ | 5,294 |
| $ | 12,000 |
|
(iv) |
|
| All Other Fees |
| $ | 3,013 |
| $ | — |
|
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
Date: July 10, 2009 | GLEN ROSE PETROLEUM CORPORATION | |
|
|
|
| By: | /s/ JOSEPH F. (“CHIP”) LANGSTON |
| Joseph F. (“Chip) Langston | |
| President and Chief Financial Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on this 10th day of July 2009.
|
|
|
|
/s/ JOSEPH F. (“CHIP”) LANGSTON |
|
|
|
Joseph F. (“Chip”) Langston |
|
|
|
President, Secretary, and Chief Financial Officer | |||
|
|
|
|
/s/ FRANZ SKRYANZ |
|
|
|
Franz Skryanz |
|
|
|
Director |
|
|
|
|
|
|
|
/s/ TED WILLIAMS |
|
|
|
Ted Williams |
|
|
|
Director |
|
|
|
|
|
|
|
/s/ PAUL K. HICKEY |
|
|
|
Paul K. Hickey |
|
|
|
Director |
|
|
|
32
INDEX TO FINANCIAL STATEMENTS
|
|
| PAGE |
|
|
|
|
|
|
|
| F-2 |
| |
|
|
|
|
|
|
| F-4 |
| |
|
|
|
|
|
Consolidated Statements of Operations for the Years Ended March 31, 2009 and 2008 |
|
| F-6 |
|
|
|
|
|
|
|
| F-7 |
| |
|
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended March 31, 2009 and 2008 |
|
| F-8 |
|
|
|
|
|
|
|
| F-10 |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Glen Rose Petroleum Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheet of Glen Rose Petroleum Corporation and subsidiaries (the “Company”) as of March 31, 2008, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2008, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of March 31, 2008 included in the accompanying Form 10-K and, accordingly, we do not express an opinion thereon.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has limited capital resources and no significant revenue producing assets which combine to raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ HEIN & ASSOCIATES LLP
Dallas, Texas
July 11, 2008
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Glen Rose Petroleum Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheet of Glen Rose Petroleum Corporation and subsidiaries (the “Company”) as of March 31, 2009, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2009, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of March 31, 2009 included in the accompanying Form 10-K and, accordingly, we do not express an opinion thereon.
The accompanying financial statement has been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, the Company has negative working capital, incurred significant losses, and has an accumulated deficit of $48,432,770 as of March 31, 2009. As discussed in Note 2, these conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Jonathon P. Reuben CPA,
An Accountancy Corporation
July 10, 2009
F-3
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2009 AND 2008
ASSETS
|
|
|
|
|
|
|
|
|
|
| MARCH 31, |
| |||||
|
| 2009 |
|
| 2008 |
| ||
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 18,867 |
|
| $ | 65,769 |
|
Accounts receivable, no allowance considered necessary |
|
| 10,273 |
|
|
| 2,081 |
|
Receivable from taxing authority |
|
| 6,697 |
|
|
| — |
|
Notes receivable related parties – short term |
|
| 176,640 |
|
|
| — |
|
Inventory |
|
| 10,221 |
|
|
| 79,241 |
|
Prepaid expenses |
|
| 22,627 |
|
|
| 8,575 |
|
|
|
|
|
|
|
| ||
Total current assets |
|
| 245,325 |
|
|
| 155,666 |
|
|
|
|
|
|
|
|
|
|
OIL AND GAS PROPERTIES, accounted for using the full cost method |
|
|
|
|
|
|
|
|
Unimproved |
|
| — |
|
|
| 5,915,184 |
|
Improved |
|
| 5,798,856 |
|
|
| — |
|
|
|
| 5,798,856 |
|
|
| 5,915,184 |
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, at cost: |
|
|
|
|
|
|
|
|
Field equipment |
|
| 171,670 |
|
|
| — |
|
Computer equipment |
|
| 14,206 |
|
|
| 2,699 |
|
Vehicles |
|
| 41,281 |
|
|
| 6,752 |
|
|
|
|
|
|
|
| ||
|
|
| 227,157 |
|
|
| 9,451 |
|
Less Accumulated Depreciation |
|
| (21,957 | ) |
|
| (5,817 | ) |
|
|
|
|
|
|
| ||
|
|
| 205,200 |
|
|
| 3,634 |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 6,249,381 |
|
| $ | 6,074,484 |
|
|
|
|
|
|
|
| ||
- Continued -
F-4
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
| MARCH 31, |
| |||||
|
| 2009 |
|
| 2008 |
| ||
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 629,173 |
|
| $ | 364,819 |
|
Accounts payable — related parties |
|
| 140,267 |
|
|
| 13,732 |
|
Accrued expenses |
|
| — |
|
|
| 343,750 |
|
Note payable — related party |
|
| 30,867 |
|
|
| — |
|
Accrued put option liability |
|
| 2,147,770 |
|
|
| 2,147,770 |
|
|
|
|
|
|
|
| ||
Total current liabilities |
|
| 2,948,077 |
|
|
| 2,870,071 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
|
Asset retirement obligation |
|
| — |
|
|
| 87,918 |
|
Note payable – related party |
|
| 116,962 |
|
|
| — |
|
|
|
|
|
|
|
| ||
Total liabilities |
|
| 3,065,039 |
|
|
| 2,957,989 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Notes 6, 7, and 13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
Preferred stock, $.0001 par value; 5,000,000 shares authorized, none issued or outstanding |
|
| — |
|
|
| — |
|
Common stock, $.001 par value; 125,000,000 shares authorized; 10,816,200 issued and outstanding at March 31, 2009 and 9,424,214 issued and outstanding at March 31, 2008 |
|
| 10,816 |
|
|
| 9,424 |
|
Common stock subscription receivable - related party |
|
| (50,000 | ) |
|
| — |
|
Additional paid-in capital |
|
| 51,656,296 |
|
|
| 49,357,867 |
|
Accumulated deficit |
|
| (48,432,770 | ) |
|
| (46,250,796 | ) |
|
|
|
|
|
|
| ||
Total shareholders’ equity |
|
| 3,184,342 |
|
|
| 3,116,495 |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
| $ | 6,249,381 |
|
| $ | 6,074,484 |
|
See accompanying notes to these consolidated financial statements
F-5
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
| FOR THE YEARS ENDED |
| |||||
|
| MARCH 31, |
| |||||
|
| 2009 |
|
| 2008 |
| ||
OPERATING REVENUES – |
|
|
|
|
|
|
|
|
Oil and gas sales |
| $ | 122,279 |
|
| $ | 62,025 |
|
|
|
|
|
|
|
| ||
Total operating revenues |
|
| 122,279 |
|
|
| 62,025 |
|
|
|
|
|
|
|
|
|
|
OPERATING COSTS AND EXPENSES: |
|
|
|
|
|
|
|
|
Production and operating |
|
| 94,541 |
|
|
| 72,166 |
|
Impairment: Improved properties |
|
| 125,353 |
|
|
| — |
|
Depreciation and depletion |
|
| 58,466 |
|
|
| 1,868 |
|
Accretion of asset retirement obligation |
|
| — |
|
|
| 4,976 |
|
General and administrative |
|
| 1,007,979 |
|
|
| 1,334,095 |
|
Bad debt expense |
|
| — |
|
|
| 258,814 |
|
Warrants expense |
|
| — |
|
|
| 1,156,049 |
|
Stock based compensation |
|
| 1,017,489 |
|
|
| 476,857 |
|
Put option expense |
|
| — |
|
|
| 253,919 |
|
|
|
|
|
|
|
| ||
Total operating costs and expenses |
|
| 2,303,828 |
|
|
| 3,558,744 |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
| (2,181,549 | ) |
|
| (3,496,719 | ) |
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
Loss on cancellation of indebtedness |
|
| (4,856 | ) |
|
| — |
|
Gain on sale of investments |
|
| — |
|
|
| 303,155 |
|
Gain (loss) on sale of property and equipment |
|
| (749 | ) |
|
| 12,031 |
|
Interest income |
|
| 8,381 |
|
|
| — |
|
Interest expense |
|
| (3,201 | ) |
|
| (70,117 | ) |
|
|
|
|
|
|
| ||
Total other income (expense) |
|
| (425 | ) |
|
| 245,069 |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
NET LOSS |
| $ | (2,181,974 | ) |
| $ | (3,251,650 | ) |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE: |
|
|
|
|
|
|
|
|
Basic and diluted |
| $ | (0.21 | ) |
| $ | (0.46) |
|
|
|
|
|
|
|
| ||
Weighted average number of shares outstanding, basic and diluted |
|
| 10,431,234 |
|
|
| 7,111,758 |
|
|
|
|
|
|
|
| ||
See accompanying notes to these consolidated financial statements
F-6
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER EQUITY FOR YEARS ENDED MARCH 31, 2009 AND 2008
|
| Common Stock |
| Subscription Receivable |
| Additional Paid-in Capital |
|
| Accumulated Deficit |
|
| Totals |
| |||||||||
|
| Shares |
|
| Amount |
|
|
|
|
|
|
| ||||||||||
BALANCE, March 31, 2007 |
|
| 6,446,758 |
|
| $ | 6,447 |
| $ | — |
| $ | 43,796,676 |
|
| $ | (42,999,146 | ) |
| $ | 803,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation recognized on stock option grants |
|
| — |
|
|
| — |
|
| — |
|
| 358,504 |
|
|
| — |
|
|
| 358,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for conversion of debt |
|
| 498,606 |
|
|
| 499 |
|
| — |
|
| 434,708 |
|
|
| — |
|
|
| 435,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash |
|
| 1,238,038 |
|
|
| 1,238 |
|
| — |
|
| 802,994 |
|
|
| — |
|
|
| 804,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for conversion of put option |
|
| 1,111,113 |
|
|
| 1,111 |
|
| — |
|
| 910,002 |
|
|
| — |
|
|
| 911,113 |
|
Issuance of common stock for services |
|
| 129,699 |
|
|
| 129 |
|
| — |
|
| 118,225 |
|
|
| — |
|
|
| 118,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party forgiveness of debt |
|
| — |
|
|
| — |
|
| — |
|
| 1,780,709 |
|
|
| — |
|
|
| 1,780,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued for service |
|
| — |
|
|
| — |
|
| — |
|
| 1,156,049 |
|
|
| — |
|
|
| 1,156,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| — |
|
|
| — |
|
| — |
|
| — |
|
|
| (3,251,650 | ) |
|
| (3,251,650 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March 31, 2008 |
|
| 9,424,214 |
|
| $ | 9,424 |
| $ | — |
| $ | 49,357,867 |
|
| $ | (46,250,796 | ) |
| $ | 3,116,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation recognized on stock option grants |
|
| — |
|
|
| — |
|
| — |
|
| 913,607 |
|
|
| — |
|
|
| 913,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for conversion of debt |
|
| 353,810 |
|
|
| 353 |
|
| — |
|
| 318,228 |
|
|
| — |
|
|
| 318,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash |
|
| 700,000 |
|
|
| 700 |
|
| — |
|
| 569,300 |
|
|
| — |
|
|
| 570,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services |
|
| 275,676 |
|
|
| 276 |
|
| — |
|
| 103,606 |
|
|
| — |
|
|
| 103,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cancellation of options |
|
| 62,500 |
|
|
| 63 |
|
| — |
|
| 343,688 |
|
|
| — |
|
|
| 343,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for note |
|
| — |
|
|
| — |
|
| (50,000 | ) |
| 50,000 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| — |
|
|
| — |
|
| — |
|
| — |
|
|
| (2,181,974 | ) |
|
| (2,181,974 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March 31, 2009 |
|
| 10,816,200 |
|
| $ | 10,816 |
| $ | (50,000 | ) | $ | 51,656,296 |
|
| $ | (48,432,770 | ) |
| $ | 3,184,342 |
|
See accompanying notes to these consolidated financial statements
F-7
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR YEAR ENDED MARCH 31, 2009
- Continued -
F-8
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest |
| $ | 3,201 |
|
| $ | 70,117 |
|
Taxes |
| $ | — |
|
| $ | — |
|
|
|
|
|
|
|
| ||
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Investment exchanged for notes payable and accrued interest, related party |
| $ | — |
|
| $ | 2,130,155 |
|
Stock issued for conversion of debt and put option |
| $ | 313,726 |
|
| $ | 1,346,320 |
|
Issuance of common stock for cancellation of options |
| $ | 343,750 |
|
| $ | — |
|
Related party forgiveness of debt |
| $ | — |
|
| $ | 1,780,709 |
|
|
|
|
|
|
|
| ||
See accompanying notes to these consolidated financial statements
F-9
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Glen Rose Petroleum Corporation (the “Company”, “we” or “our”) and its wholly owned subsidiaries, Glen Rose Petroleum Services, UHC Petroleum Corporation, UHC Petroleum Services Corporation, UHC New Mexico Corporation and National Heritage Sales Corporation.
The name of the Company was changed from United Heritage Corporation to Glen Rose Petroleum Corporation in May, 2008.
Concurrent with the name change, the Company entered into a statutory merger whereby it moved its state of incorporation from Utah to Delaware and United Heritage Corporation, the Utah Corporation, merged into the newly formed Delaware Corporation, Glen Rose Petroleum Corporation.
All significant intercompany transactions and balances were eliminated in consolidation.
Nature of Operations
Glen Rose Petroleum Corporation owns contiguous oil and gas properties located in Edwards County, Texas. The Company began production of the Texas properties during the year ended March 31, 2000. The Company sold a significant portion of its oil and gas properties in 2007. The Company continues to operate its remaining contiguous oil and gas properties located in Edwards County, Texas and does not operate oil and gas properties in any other fields or areas.
Revenue Recognition
Oil and gas production revenues are recognized at the point of sale. Production not sold at the end of the fiscal year is included as inventory in the accompanying consolidated financial statements.
Inventory
Inventory consists of oil in tanks, which is valued at the lower of the cost to produce the oil or the current available sales price.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas properties, which are located in the Edwards County, Texas. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves are capitalized.
All capitalized costs, including the estimated future costs to develop proved reserves are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects will not be amortized until proved reserves associated with the projects can be determined or until impairment occurs.
Potential impairment of unproved properties and other oil and gas property and equipment are assessed periodically. If the assessment indicates that the properties are impaired, the amount of the impairment will be added to the capitalized costs to be amortized.
In addition, capitalized costs are subject to a “ceiling test”, which limits such costs to the aggregate of the estimated present value using a 10% discount rate (based on prices and costs at the balance sheet date) of future net revenues from proved reserves based on current economic and operating conditions, plus the lower of cost (net of impairments) or fair market value of unproved properties.
F-10
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company retained outside independent petroleum engineers to evaluate the properties of the Company as of March 31, 2009. Based on this review and internal assessments the Company determined that it had an impairment loss of $125,353 relating to its oil and gas properties for the year ended March 31, 2009. The Company determined its oil and gas properties were not impaired for the year ended March 31, 2008.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets primarily by the straight-line method as follows:
Equipment |
| 3-14 years |
Vehicles |
| 3-5 years |
Gains and losses resulting from sales and dispositions of property and equipment are included in current operations. Maintenance and repairs are charged to operations as incurred. Depreciation expense for the year ended March 31, 2009 and 2008 amounted $16,590 and $1,868, respectively.
Earnings (Loss) per Common Share
The Company adopted the provisions of SFAS No. 128, Earnings Per Share (“EPS”). SFAS No. 128 provides for the calculation of basic and diluted earnings per share. Basic EPS includes no dilution and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings or losses of the entity. For the years ended March 31, 2009 and 2008 basic and diluted loss per share are the same since the calculation of diluted per share amounts would result in an anti-dilutive calculation that is not permitted and therefore not included. The Company’s diluted loss per share would include options and warrants exercisable into 24,021,420 shares of common stock and debt convertible into 615,589 shares of common stock. At March 31, 2008, the Company had potentially diluti ve options and warrants totaling 23,701,420 shares.
Cash Flows Presentation
For purposes of the consolidated statement of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates of oil and gas reserves, the asset retirement obligation and impairment on unproved properties are inherently imprecise and may change materially in the near term.
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and notes payable. Recorded values of cash, receivables and payables approximate fair values due to short maturities of the instruments.
Issuance of Stock for Non-Cash Consideration
All issuances of the Company's stock for non-cash consideration have been assigned a per share amount equaling either the market value of the shares issued or the value of consideration received, whichever is more readily determinable. The majority of the non-cash consideration received pertains to services rendered by consultants and others and has been valued at the market value of the shares on the dates issued.
F-11
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and EITF 00-18, Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance with EITF 00-18, an asset acquired in exchange for the issuance of fully vested, nonforfeitable equity in struments should not be presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting purposes. Accordingly, the Company records the fair value of the fully vested non-forfeitable common stock issued for future consulting services as prepaid services in its consolidated balance sheet.
Share-Based Compensation
We measure and record compensation expense for all share-based payment awards to consultants, employees and directors based on estimated fair values. Additionally, compensation costs for share-based awards are recognized over the requisite service period based on the grant-date fair value.
Long-Lived Assets
Long-lived assets to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company periodically evaluates the recoverability of its long-lived assets based on estimated future cash flows and the estimated fair value of such long-lived assets, and provides for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the long-lived assets.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB Statement No. 109, Accounting for Income Taxes. As changes in tax laws or rate are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
FASB issued Staff Position No. 142-3 - In April 2008, the FASB issued Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. FSP 142-3 is effective for the Company in the first quarter of 2009. The adoption of FSP 142-3 has not had a significant impact on our financial statements.
FASB issued Staff Position No. EITF 03-6-1 - In June 2008, the FASB issued Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“EITF 03-6-1”). EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore, need to be included in the earnings allocation in calculating earnings per share under the two-class method described in FASB Statement of Financial Accounting Standards No. 128, “Earnings per Share.” EITF 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. EITF 03-6-1 is
F-12
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effective for the Company in the first quarter of 2009. The adoption of EITF 03-6-1 has not had a significant impact on our financial statements
SFAS No. 157 - The Company adopted in the first quarter of fiscal 2009, the Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (“SFAS No. 157”) for all financial assets and financial liabilities and for all non-financial assets and non-financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. The effect on the Company’s periodic fair value measurements for financial and non-financial assets and liabilities was not material.
In October 2008, the Financial Accounting Standards Board (“FASB”) issued Financial Staff Position 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS No. 157 in a market that is not active, and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. FSP 157-3 is effective for all periods presented in accordance with SFAS No. 157. The adoption of FSP 157-3 did not have a significant impact on our financial statements or the fair values of our financial assets and liabilities.
In December 2008, the FASB issued Financial Staff Position (“FSP”) Financial Accounting Standard No. 140-4 and FASB Interpretation 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP FAS 140-4” and “FIN 46(R)-8”). The document increases disclosure requirements for public companies and is effective for reporting periods (interim and annual) that end after December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8 became effective for us on December 31, 2008. The adoption of FSP FAS 140-4 and FIN 46(R)-8 did not have a significant impact on our financial statements.
In December 2007, the Financial Accounting Standards Board issued Emerging Issues Task Force (EITF) Issue No. 07-1, Accounting for Collaborative Arrangements, which applies to collaborative arrangements that are conducted by the participants without the creation of a separate legal entity for the arrangement and clarifies, among other things, how to determine whether a collaborative arrangement is within the scope of this issue. EITF Issue No. 07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of EITF Issue No. 07-1 did not have a significant impact on our financial statements.
In December 2007, SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51, was issued. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 is effecti ve for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. The effect of adopting SFAS No. 160 is not currently expected to have an effect on our consolidated financial position, results of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides entities with an option to report selected financial assets and liabilities at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective as of the beginning of the first fiscal year that begins after November 15, 2007 and thus applies to the Company’s fiscal year ending March 31, 2009. The adoption of SFAS No. 159 did not have a significant impact on our financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivatives Instruments and Hedging Activities, an Amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS
F-13
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
161”). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures stating how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. FAS 161 require that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. FAS 161 are effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. FAS 161 also encourage, but do not require, comparative disclosures for earlier periods at initial adoption The adoption of SFAS No 161 has not had a significant impact on our financial statements
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations ("SFAS No. 141R"). Among other things, SFAS No. 141R establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited. This standard will change our accounting treatment for business combinations on a prospective basis.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no impact on the reported prior year net loss.
2. GOING CONCERN
The Company’s financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from operations and it has a working capital deficit which raises substantial doubt about its ability to continue as a going concern. The Company sustained a net loss of $2,181,974 for the fiscal year ended March 31, 2009 and it had a working capital deficit of $2,702,752 at March 31, 2009. The Company is currently looking for financing to provide the needed funds for operations. However, the Company can provide no assurance that it will be able to obtain the financing it needs to develop its properties and alleviate doubt about its ability to continue as a going concern.
3. NOTE RECEIVABLE– RELATED PARTY
Bowie Operating Company LLC
During the year ended March 31, 2009, the Company advanced Bowie $157,401 of which $15,000 was repaid. The advances are assessed interest at rate of 18% per annum. The advances are evidenced by a secured promissory note that is due on demand after September 1, 2009. Interest accruing on the note and charged to operations during the year ended March 31, 2009 was $7,138. The balance of the note as of March 31, 2009 was $149,539. Bowie is managed by the Company’s President.
Buccaneer Energy Corporation
During the year ended March 31, 2009, Glen Rose Petroleum Corporation advanced Buccaneer totaling $25,858 to pay for Buccaneer’s accounting services. The advances are assessed interest at rate of 18% per annum. The advances are evidenced by an unsecured promissory note that is due on demand after December 31, 2009. Interest accruing on the note and charged to operations during the year ended March 31, 2009 was $1,243. The balance of the note as of March 31, 2009 was $27,101. Buccaneer also is managed by the Company’s President.
F-14
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ASSET RETIREMENT OBLIGATIONS
The FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. This statement, adopted by the Company as of April 1, 2003, establishes accounting and reporting standards for the legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction or development and the normal operation of long-lived assets. It requires that the fair value of the liability for asset retirement obligations be recognized in the period in which it is incurred. Upon initial recognition of the asset retirement liability, an asset retirement cost is capitalized by increasing the carrying amount of the long-lived asset by the same amount as the liability. In periods subsequent to initial measurement, the asset retirement cost is allocated to expense using a systematic method over the asset’s useful life. Changes in the liability f or the asset retirement obligation are recognized for (a) the passage of time and (b) revisions to either the timing or the amount of the original estimate of undiscounted cash flows.
A reconciliation of the changes in the estimated asset retirement obligation follows:
|
| 2009 |
|
| 2008 |
| ||
Beginning asset retirement obligations |
| $ | 87,918 |
|
| $ | 82,942 |
|
Additional liability incurred |
|
| — |
|
|
| — |
|
Liabilities assumed by others |
|
| — |
|
|
| — |
|
Accretion expense |
|
|
|
|
|
| 4,976 |
|
Asset retirement costs incurred |
|
| (87,918 | ) |
|
| — |
|
Ending asset retirement obligation |
| $ | — |
|
|
| 87,918 |
|
During the years ended March 31, 2009 and 2008, accretion expense of $0 and $4,976, respectively, was recognized and is reported in the consolidated statements of operations. During 2009, the Company determined that it no longer was subject to any legal obligation associated with the retirement of its long-term assets and therefore it charged off its asset retirement obligation.
5. INVENTORY
Inventory consists of the following:
|
| March 31 |
| |||||
|
| 2009 |
|
| 2008 |
| ||
Oil in tanks |
| $ | 10,220 |
|
| $ | 79,241 |
|
6. NOTES PAYABLE, RELATED PARTIES
Lothian Oil, Inc.
During the year ended March 31, 2008, Lothian, a former majority shareholder of the Company, forgave a debt totaling $1,780,709 that was credited to equity.
Blackwood Ventures LLC
During the year ended March 31, 2009, Blackwood Ventures LLC has made advances to the Company totaling $116,000. The advances are assessed interest at an annual rate of 8%. Accrued interest is payable quarterly commencing on April 1, 2009. In lieu of receiving cash, Blackwood has the right to receive sharers of the Company’s common stock as payment for accrued interest at a conversion price of 5% over the bid price on the date of payment. The advances are evidenced by a debenture which is convertible into common stock of the Company at price per share of $ 0.19. The debenture matures on September 30, 2010. Accrued interest on the Note for the year ended March 31, 2009 amounted to $962, which was charged to operations. The balance of the note as of March 31, 2009 was $116,962. Blackwood is the Company’s majority shareholder.
F-15
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Buccaneer Energy Corporation
During the year ended March 31, 2009, Buccaneer advanced $30,500 to UHC Petroleum Corporation. The advances are evidenced by an unsecured promissory note that is due on demand after December 31, 2009. Interest accruing on the note and charged to operations during the year ended March 31, 2009 was $367. The balance of the note as of March 31, 2009 was $30,867. As indicated, Buccaneer is managed by the Company’s President.
7. ACCRUED PUT OPTION LIABILITY
The holders of our Put Option liability are prior employees, officers and directors of United Heritage Corporation. These individuals had accrued this compensation in prior years. To record this obligation, we entered into option agreements dated May 30, 2003 and May 24, 2004 under our 2000 Stock Option Plan to purchase shares of $.001 par value stock of United Heritage Corporation at a price of $1.50 per share as adjusted for reverse stock splits. As a result of the proposed merger with Lothian Oil, Inc., these option agreements were modified via amendment on or about February 16, 2006, to grant the Purchaser a put option to require United Heritage Corporation to purchase said options for a price of $4.00 per share less the purchase price, as adjusted by reverse stock splits, of $1.50 per share by making demand between April 1, 2008 and April 10, 2008 (“Put Option”). The Put Holders demanded their rights in the required per iod and this obligation of the Company was recognized as a liability.
8. MAJOR CUSTOMERS
During the years ended March 31, 2009 and 2008, the Company’s only operations pertained to its oil and gas producing activities in which it sold its production to one customer.
9. UNREGISTERED SALE OF EQUITY SECURITIES
Private Placement
On November 28, 2007 the Company completed the sale and issuance of units having a total gross value of $600,000 in a private placement to accredited investors. Each unit was comprised of (i) 32,000 shares of the Company’s common stock, par value $0.001 per share, and (ii) a 5 year callable warrant to purchase up to 52,253 shares of the Company’s common stock, subject to certain vesting requirements, at an exercise price of $1.40 per share. The warrants were not exercisable until the Company obtained shareholder approval of their issuance. The Company sold and issued a total of 21 units at a price of $24,000 per unit, for net cash proceeds of approximately $504,000. The Company also converted debt in the amount of $96,000 owed to Blackwood, its largest shareholder, into 4 units. No underwriting discounts or commissions were paid in connection with the November Offering. The Company is obligated to register the shares underlying t he warrants, subject to compliance with Rule 415 promulgated under the Securities Act of 1933, as amended.
On March 11, 2008, Blackwood Ventures, LLC purchased an additional 566,038 shares of our common stock at $.53 per share resulting in proceeds received by the company of $300,000.
On May 23, 2008, by the way of a 14C our shareholders’ approved a private placement in accredited investors in which a total of 550,000 shares of our common stock at a price of $0.75 per share were issued for gross proceeds of $412,500. The Company also approved the issuance of a subscription receivable to Joseph Langston, its CFO and President, in which a total of 66,667 shares of our common stock at a price of $0.75 per share were issued for a $50,000 long term subscription receivable.
On June 12, 2008, Wind Hydrogen, Ltd. purchased 150,000 shares at $0.75 per share for $112,500 of the $500,000 private placement. In addition, Wind Hydrogen, Ltd. purchased 150,000 shares at $1.05 per share for $157,500, which the Board approved on June 30.
F-16
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Issuance of Common Stock for Conversion of Debt
On December 19, 2007, the Company entered into an Agreement to Convert Debt with Richardson & Patel, LLP pursuant to which Richardson & Patel LLP agreed to accept (i) 296,856 shares of our common stock and (ii) a warrant for the purchase of 222,642 shares of our common stock in full payment of $237,485 in legal services previously rendered. The warrant has an exercise price of $1.40 per share; a term of seven years and a cashless exercise provision, at the holders’ election, such that fewer than 222,642 shares may be issued upon full exercise. The warrant was valued at $103,015. The debt was converted at the rate of $0.80 per share before considering the value of the warrant. On December 18, 2007, the closing price of our common stock was $0.92. The transaction resulted in a loss on conversion of $35,262.
On December 19, 2007, the Company entered into an Agreement to Convert Debt with Blackwood Ventures LLC, our largest shareholder, pursuant to which Blackwood Ventures LLC agreed to accept (i) 48,750 shares of our common stock, representing a price of $0.80 per share, and (ii) a warrant to purchase 36,563 shares of our common stock at an exercise price of $1.40 per share in return for the cancellation of $39,000 of debt owed by us to Blackwood resulting from its prior discharge of certain of our accounts payable. The warrant will have a term of seven years and was valued at $16,917. On December 18, 2007, the last trading day immediately prior to the execution of the Agreement to Convert Debt, the last sale price of our common stock was $0.92. The transaction resulted in a loss on conversion of $5,850.
On June 30, 2008 the Board approved the offer by Richardson Patel to convert $215,738 of indebtedness due them for past legal services into common stock. The Company issued 253,810 shares of its common stock in consideration for the cancellation and recognized a $22,844 loss on the conversion that was charged to operations.
On September 18, 2008, the Company issued 100,000 shares of its common stock to Porter LeVay in consideration for the cancellation of $97,988 of indebtedness due them for past public relation services. The Company recognized a $17,988 gain on the cancellation of the debt that was credited to operation.
Issuance of Common Stock for Cancellation of Options
On September 25, 2008, the Company agreed to issue 62,500 restricted common shares to its former CEO, Scott Wilson, in exchange for the cancellation of 500,000 stock options and mutual releases of claims. On the original grant, the Company recorded the option value of $343,750 as accrued compensation. Upon the issuance of the shares and cancellation of the grant, the Company reclassed the $343,750 to equity.
Issuance of Common Stock for Conversion of Put Option
On January 15, 2008 the Company entered into an agreement to cancel an $833,335 option put held by Walter G. Mize (“Mize”), Consideration for the cancellation included 1,111,113 shares of the Company’s common stock and a stock warrant to purchase 555,556 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrant expires in three years and was valued at $88,220. The per share market price of the common stock at the time of conversion was $0.82. The transaction resulted in a loss on conversion of $77,778.
Stock and Warrants Issued for Service
During the year ended March 31, 2008 as part of Joseph F. Langston’s consideration for services as a Company officer and director, he received 30,000 shares valued at $36,600.
Mr. Langston’s long term consulting agreement, entered into on December 18, 2007, provides for an annual salary of $60,000 per year and a $60,000 bonus paid in shares. The bonus resulted in the issuance of 65,217 common shares valued at $53,478. In addition to this basic compensation, Mr. Langston receives up to 1,200,000 stock purchase warrants which are earned based on net production in the Wardlaw Field measured on an average daily basis by month determination and 300,000 warrants based on the successful closing of a Company financing of $1 million or more. The warrants have not been earned and no expense has been recognized as of March 31, 2008 and 2009.
Applewood Energy plc represents the services to be provided by Paul Watson, the Company Chairman and Chief Executive Officer. Similar to Mr. Langston, Applewood received a consulting agreement on November 27, 2007,
F-17
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
providing for an annual salary of $60,000 per year and a $60,000 bonus paid in shares. The bonus resulted in the issuance of 34,482 common shares valued at $28,276. Mr. Watson is a geologist and engineering professional with direct oversight of field operations. Consequently, in addition to this basic compensation, Applewood receives up to 1,600,000 stock purchase warrants which are earned based on net production in the Wardlaw Field measured on an average daily basis by month determination. The warrants have not been earned and no expense has been recognized as of March 31, 2008 and 2009.
On November 28, 2007 we entered into, a 12 month consulting agreement with DK True Energy Development Ltd. and RTP Secure Energy Corp. These Consultants are to provide us services that include reservoir, geological, and engineering analysis. These Consultants agreed to accept warrants to purchase up to a total of 9,000,000 shares of our common stock at an exercise price of $1.05 per share, exercisable after December 31, 2007 and only on a cashless basis in place of cash compensation. The number of shares that would be issued is determined by multiplying the difference between the fair market value of the common stock and the warrant exercise price times the number of shares to be purchased and divide the product by the fair market value of the common stock. The fair market value of the common stock is computed by taking the average of the closing bid and asked prices of the common stock quoted in the Over-The-Counter Market or the last reported sale price of the common stock or the closing price quoted on the Nasdaq Capital Market or on any exchange on which the common stock is listed for the 30 trading days prior to the date of the company’s receipt of the warrant. The warrants will have a 5 year term. DK True Energy Development Ltd. will have the right to purchase 5,250,000 shares of our common stock and RTP Secure Energy will have the right to purchase 3,750,000 shares of our common stock. Blackwood Ventures LLC, has executed a voting agreement to approve the Consultants’ warrants. The right to purchase 1,147,500 shares of our common stock will vest 20 days following the date the information statement was sent to our shareholders; the right to purchase 2,452,500 shares of common stock will vest when we announce that we are implementing a development program based on the results of a pilot program completed for the Wardlaw field; and the right to purchase 5,400,000 shares of our common stock will vest at the rate of 675,000 sh ares when we produce an average of 250 barrels of oil per day over 30 days (“bopd30av”), 500 bopd30av, 750 bopd30av, 1,000 bopd30av, 1,250 bopd30av, 1,500 bopd30av, 1750 bopd30av and 2,000 bopd30av. The warrant will be fully vested when production reaches 2,000 bopd30av. This warrant issuance resulted in an expense of $395,346 during the year ended March 31, 2008.
On January 15, 2008, the Company entered into a consulting agreement with Blackwood Capital Ltd. effective September 1, 2007, for a term of one year, which can be terminated by either party on 45 days notice, for cash compensation of $15,000 per month, plus expense reimbursement. In addition, the Company issued a warrant for the purchase of 1,500,000 shares of our common stock at an exercise price of $1.05 per share. The term of the warrant is four years and the warrant has a cashless exercise provision, at the holder’s election, such that fewer than 1,500,000 shares may be issued upon full exercise. On January 15, 2008, the closing price of our common stock was $0.82. The issuance of this warrant required the expense of $552,550.
On June 30, 2008, the Company amended its Directors’ compensation plan. At the end of each month, each director has the option of receiving $5,000 in the form of shares of the Company’s common stock or stock options to purchase 5,000 shares of the Company’s common stock. The price per share assigned to each issuance is equal to the closing average bid price of the Company’s common stock for the previous quarter. The previous agreement provided for the grant of 5,000 stock purchase options per month, with the price to be calculated on the average closing bid price for the month. In addition to the option grant indicated above, the Company also granted its President options to purchase 500,000 shares of the Company’s common stock at a price per share of $0.99. These 500.000 options fully vested on December 31, 2008.
During the year ended March 31, 2009, the Company issued 275,676 shares of common stock to certain Board of Directors as compensation for their services rendered. The shares were valued at $103,882 which was charged to operations.
During the year ended March 31, 2009, the Company granted options to purchase 620,000 shares of common stock to certain directors and officers as compensation for their services. The options were valued at $688,227, which was charged to operations. The exercise prices of these options range from $0.39 per share to $0.99 per share. In addition, during the year ended March 31, 2009, the Company granted options to certain consultants to purchase 200,000 shares of the Company’s common stock. The options were valued at $225,380.
F-18
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK-BASED COMPENSATION
Stock Option Plans
In January 2008, our board of directors approved and adopted the United Heritage Corporation 2008 Equity Incentive Plan (the “Plan”). We have reserved 5,000,000 shares of common stock for awards that will be granted from the Plan. The awards are subject to adjustment in the event of stock dividends, recapitalizations, stock splits, reverse stock splits, subdivisions, combinations, reclassifications or similar changes in our capital structure. The Plan became effective upon adoption by the board, and, unless earlier terminated in accordance with the terms and provisions thereof, will remain in effect for a period of ten years from the date of adoption.
Directors of the Company adopted the 1998 Stock Option Plan effective July 1, 1998. This Plan and its subsequent amendment set aside 66,667 shares of the authorized but unissued common stock of the Company for issuance under the Plan. Options may be granted to directors, officers, consultants, and/or employees of the Company and/or its subsidiaries. Options granted under the Plan are exercisable over a period to be determined when granted, but may be affected by the termination of employment. As a result of a grant in January 2006 to the Company’s chief executive officer, discussed in more detail below, options to purchase 66,667 shares are outstanding under this plan.
Directors of the Company adopted the 2000 Stock Option Plan effective June 5, 2000. This Plan set aside 1,666,667 shares of the authorized but unissued common stock of the Company for issuance under the Plan. Options may be granted to directors, officers, consultants, advisors, and/or employees of the Company and/or its subsidiaries. Options granted under the Plan must be exercised within the number of years determined by the Stock Option Committee and allowed in the Stock Option Agreement. The Stock Option Agreement may provide that a period of time must elapse after the date of grant before the options are exercisable. The options may not be exercised as to less than 100 shares at any one time.
On January 3, 2006, the Company granted options to purchase 500,000 shares to the Company’s chief executive officer for and in consideration of services provided to the Company. The options were issued with an exercise price of $1.05 per share for a term of three years with one-third of the options being exercisable immediately and one-third exercisable in each of the following two years. In September 2008, these options were cancelled in consideration for issuing 500,000 shares of the Company’s common stock. Upon the original issuance of the options, the Company recorded $343,750 as accrued compensation. The accrued compensation was reclassed to equity upon the issuance of the 500,000 shares.
During the year ended March 31, 2008, the Company granted options to purchase 170,000 shares of common stock to certain directors and officers as compensation for their services. The options were valued at $44,137, which was charged to operations. The exercise prices of these options range from $0.63 per share to $1.71 per share. The options expire three years from date of grant.
The Company granted options to purchase 5,000 shares to the Company’s Directors at the end of each month during the month ended April 30, 2008 for and in consideration of services provided to the Company. The options to purchase 25,000 shares of common stock were issued at a weighted average exercise price of $0.78 per share for a term of three years. The Company recognized compensation expense of $8,310 on the issuance of these stock options.
The Company granted options to purchase 5,000 shares to the Company’s Directors at the end of each month during the month ended May 31, 2008 for and in consideration of services provided to the Company. The options to purchase 25,000 shares of common stock were issued at a weighted average exercise price of $0.85 per share for a term of three years. The Company recognized compensation expense of $20,081 on the issuance of these stock options.
The Company granted options to purchase 5,000 shares to the Company’s Directors at the end of each month during the month ended June 30, 2008 for and in consideration of services provided to the Company. The options to purchase 25,000 shares of common stock were issued at a weighted average exercise price of $1.35 per share for a
F-19
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
term of three years. The Company recognized compensation expense of $28,573 on the issuance of these stock options.
On June 30, 2008, the Board of Directors awarded Mr. Langston 500,000 stock purchase options, vesting over six months with each priced as of the closing average bid price for the quarter ended June 30, 2008. The Company recognized compensation expense of $630,774 on the issuance of these stock options.
On June 30, 2008 the Board of Directors approved the hiring of Bill Hopper as Vice President of Operations. His employment agreement included 100,000 stock purchase options priced as of May 1, 2008, and vested in one year. The Company recognized compensation expense of $88,526 on the issuance of these stock options.
On June 30, 2008 the Board approved the independent consulting agreement of Barry Pierce and the hiring of him as Controller with a one year contract, this agreement included 100,000 stock purchase options to purchase 100,000 shares of common stock at $1.00 per share, fully vested after one year. The Company recognized compensation expense of $125,788 on the issuance of these stock options.
Director’s compensation was amended on June 30, 2008. Under the revised plan, each director can choose each month to receive either $5,000 in the form of the Company’s common stock or stock options to purchase 5,000 shares of common stock. The option price is equal to the Company’s closing average bid price for the previous ended quarter. The previous agreement provided for 5,000 stock purchase options per month, with the price to be calculated on the average closing bid price for the month.
The Company granted options to purchase 5,000 shares to the Company’s Directors at the end of each month during the quarter ended March 31, 2009 for and in consideration of services provided to the Company. The options to purchase 15,000 shares of common stock were issued at a weighted average exercise price of $0.39 per share for a term of three years. The Company recognized compensation expense of $2,221 on the issuance of these stock options.
The Black-Scholes option-pricing model was used to estimate the option fair values. The option-pricing model requires a number of assumptions, of which the most significant are the risk free rate, the expected stock price volatility, the expected pre-vesting forfeiture rate and the expected option term (the amount of time from the grant date until the options are exercised or expire). The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility was calculated based upon actual historical stock price movements over the most recent periods ending March 31, 2009. The expected option term was calculated based on the vesting period and the polling of the option holder. The expected forfeiture rate is based on historical experience and expectations about future forfeitures.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table.
Weighted average Black-Scholes fair value |
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assumptions: |
| 2009 |
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| 2008 |
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Risk free rate |
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| 2.58 | % |
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| 2.48% |
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Expected life |
| 3 yrs |
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|
| 3 yrs |
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Expected volatility |
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| 103 | % |
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| 84% |
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Expected dividend yield |
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| 0.0 | % |
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| 0.0% |
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F-20
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is an option activity summary under the plans for the years ending March 31, 2008 and 2009.
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| Weighted Average Grant Fair Value Date |
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| Weighted Average Remaining Contractual Life (years) |
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| Weighted Average Exercise Price |
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| Aggregate Intrinsic Value |
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| Number of Stock Options |
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Outstanding, March 31, 2007 |
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| 1,725,000 |
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| $ | 1.40 |
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| 4.08 |
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Granted |
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| 170,000 |
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| $ | 1.03 |
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| $ | 0.25 |
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Exercised |
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Forfeited or Expired |
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Outstanding, March 31, 2008 |
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| 1,895,000 |
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| $ | 1.37 |
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| 3.07 |
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| $ | * |
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Granted |
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| 820,000 |
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| $ | 0.35 |
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| $ | 1.17 |
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Exercised |
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Forfeited or expired |
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| (500,000 | ) |
| $ | (1.05 | ) |
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Outstanding, March 31, 2009 |
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| 2,215,000 |
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| $ | 1.30 |
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| 1.06 |
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Exercisable, March 31, 2009 |
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| 2,115,000 |
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| $ | 1.31 |
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| 1.05 |
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———————
*
As of March 31, 2008 and 2009, there is no intrinsic value associated with the outstanding or exercisable options as the Company’s stock price is lower than the exercise price of the options.
No options were exercised in the year ended March 31, 2009. No options remained unvested as of March 31, 2009.
The Company recognized $476,857 and $913,607 compensation expense on the granting of options in the years ended March 31, 2008 and 2009.
F-21
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information for options outstanding as of March 31, 2009:
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Options Outstanding |
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Exercise Price |
| Number |
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< $1.00 |
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| 920,000 |
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| 2.18 |
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| $ | 0.93 |
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| 820,000 |
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| $ | 0.94 |
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| 2.17 |
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1.35 |
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| 25,000 |
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| 2.25 |
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| 1.35 |
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| 25,000 |
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| 1.35 |
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1.45 |
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| 1.92 |
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| 1.45 |
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| 20,000 |
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| 1.45 |
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| 1.92 |
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1.50 |
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| 1,185,000 |
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| 0.17 |
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| 1.50 |
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| 1,185,000 |
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| 1.50 |
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| 0.17 |
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1.71 |
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| 25,000 |
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| 1.92 |
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| 1.71 |
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| 25,000 |
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| 1.71 |
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| 1.92 |
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2.91 |
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| 40,000 |
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| 0.17 |
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| 2.91 |
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| 40,000 |
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| 2.91 |
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| 0.17 |
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$ <1.00-$2.91 |
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| 2,215,000 |
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| 1.06 |
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| $ | 1.30 |
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| 2,115,000 |
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| $ | 1.32 |
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| 1.01 |
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Nonvested, April 1, 2008 |
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| 180,000 |
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Granted |
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| 170,000 |
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| $ | 0.25 |
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Vested |
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| (350,000) |
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Expired/forfeited |
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| — |
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Nonvested, March 31, 2008 |
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| — |
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Granted |
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| 700,000 |
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| $ | 0.97 |
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Vested |
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| (600,000) |
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Expired/forfeited |
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Nonvested, March 31, 2008 |
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| 100,000 |
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| $ | 0.82 |
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The stock options described in Note 10 related to the options with $1.50 and $2.91 exercise prices were modified to extend the expiration date to March 31, 2009, add a put feature where the option holder can put the option back to the Company for the difference between $4.00 per share and the purchase price between April 1, 2008 and April 10, 2008 and add a call feature whereby the Company can call the option for the difference between $7.50 and the purchase price. Since the put feature does not subject the holder to the normal risks of share ownership, the options are classified as liability awards and recorded at fair value. A liability and corresponding expense of $2,727,186 has been recorded in the accompanying financial statements as of March 31, 2007. The liability was $2,147,770 at March 31, 2008 and 2009. An additional expense of $253,919 was incurred during the year end March 31, 2008 related to the accrued put options.
On January 15, 2008, the Company entered into an agreement to convert an $833,335 option put right held by Walter G. Mize (“Mize”) into 1,111,113 shares of the Company’s common stock and a three-year warrant to purchase 555,556 shares of the Company’s common stock at an exercise price of $1.50 per share (the “Mize Agreement”).
Stock Warrants
The Company entered into stock warrant agreements effective January 12, 2004. Pursuant to the agreements, the Company issued 500,000 warrants to purchase common stock $2.25 (250,000 warrants) and $3.00 (250,000 warrants) in connection with a private placement. The stock purchase price and warrant numbers as stated are adjusted for the December 2005 reverse stock split. Warrants issued under the agreements must be exercised by March 15, 2014.
As referenced in previous financial statements, the Company entered into stock warrant agreements effective April 2004 in connection with the offering of convertible promissory notes relating to a proposed merger. That
F-22
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
merger never occurred and no promissory notes or warrants were issued, or obligated to be issued, in connection with this offering.
The Company granted 50,234 warrants were issued for legal services exercisable at $1.50 per share to satisfy liabilities in fiscal 2006.
Warrants were issued in fiscal 2008 for private placements, consulting agreements, conversion of debt and put conversion. The warrants have an average term of 5.2 years. The following schedule summarizes these warrants.
1)
Private placement warrants for the purchase of 1,306,325 shares with an exercise price of $1.40 per share;
2)
Consulting agreement warrants for the purchase of 14,600,000 shares with an average exercise price of $1.40 per share;
3)
Debt conversion agreement warrants for the purchase of 259,205 shares with an average exercise price of $1.40 per share;
4)
Put conversion agreement warrants for the purchase of 555,556 shares with an average exercise price of $1.50 per share;
The following schedule summarizes pertinent information with regard to the stock warrants for the years ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| 2009 |
|
| 2008 |
| |||||||||||
|
| Shares Outstanding |
|
| Weighted Average Exercise Price |
|
| Shares Outstanding |
|
| Weighted Average Exercise Price |
| |||||
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
| |||||||||
Beginning of year: |
|
| 21,806,420 |
|
| $ | 1.80 |
|
|
| 5,085,334 |
|
| $ | 3.08 |
| |
Granted |
|
| — |
|
|
| — |
|
|
| 16,721,086 |
|
|
| 1.41 |
| |
Exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |
Forfeited |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |
Expired |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |
End of year |
|
| 21,806,420 |
|
| $ | 1.80 |
|
|
| 21,806,420 |
|
| $ | 1.80 |
| |
Exercisable |
|
| 21,806,420 |
|
| $ | 1.80 |
|
|
| 21,806,420 |
|
| $ | 1.80 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
The following table summarizes information for warrants outstanding as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Warrants Outstanding |
|
| Warrants Exercisable |
| |||||||||||||||||
Exercise Price Range |
| Number |
|
| Weighted Average Remaining Life-Years |
|
| Weighted Average Exercise Price |
|
| Number |
|
| Weighted Average Exercise Price |
| ||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||
$1.05 - $2.20 |
|
| 14,121,086 |
|
|
| 3.63 |
|
| $ | 1.23 |
|
|
| 4,746,086 |
|
| $ | 1.22 |
| |
$2.25 - $3.00 |
|
| 4,778,667 |
|
|
| 4.23 |
|
| $ | 2.49 |
|
|
| 2,178,667 |
|
| $ | 2.62 |
| |
$3.15 - $3.75 |
|
| 2,906,667 |
|
|
| 1.72 |
|
| $ | 3.42 |
|
|
| 2,906,667 |
|
| $ | 3.42 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
$1.05 - $3.75 |
|
| 21,806,420 |
|
|
| 3.51 |
|
| $ | 1.80 |
|
|
| 9,831,420 |
|
| $ | 2.18 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
During the year ended March 31, 2008, the Company recorded expenses for services rendered related to warrants issued under the agreements in the amount $1,156,049. During the year ended March 31, 2009, the Company did not record any expenses for services rendered related to warrants issued under the agreements.
F-23
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
The Company has no federal tax provision due to its operating losses.
The effective tax rate on the net loss before income taxes differs from the U.S. statutory rate as follows:
|
| 2009 |
|
| 2008 |
| ||
U.S. statutory rate |
|
| 34 | % |
|
| 34 | % |
Related party forgiveness of debt |
|
| — |
|
|
| — |
|
Valuation allowance |
|
| (34 | )% |
|
| (34 | )% |
Other |
|
| — |
|
|
| — |
|
Effective tax rate |
|
| — |
|
|
| — |
|
At March 31, the deferred tax asset and liability balances are as follows:
|
| 2009 |
|
| 2008 |
| ||
Deferred tax asset: |
|
|
|
|
|
|
|
|
Net operating loss |
| $ | 1,052,895 |
|
| $ | 5,587,522 |
|
Accrued put option |
|
| — |
|
|
| 730,242 |
|
Stock option expense |
|
| 1,017,489 |
|
|
| 121,891 |
|
Long-term assets |
|
| 106,834 |
|
|
|
|
|
Accrued expenses |
|
| — |
|
|
| 146,767 |
|
|
|
| 2,177,218 |
|
|
| 6,586,422 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liability – difference in basis long -term assets |
|
| — |
|
|
| (555,586) |
|
|
|
|
|
|
|
| ||
Net deferred tax asset |
|
| 2,177,218 |
|
|
| 6,030,836 |
|
Valuation allowance |
|
| (2,177,218 | ) |
|
| (6,030,836 | ) |
|
|
|
|
|
|
| ||
Deferred tax asset (liability) |
| $ | — |
|
| $ | — |
|
The net change in the valuation allowance for 2009 was a decrease of $4,977,941 and 2008 had an increase of $431,483. The deferred tax asset is due primarily to the net operating loss carryover and the accrued put option expense.
The Company has a net operating loss carryover of approximately $16,400,000 available to offset future income for income tax reporting purposes, which will expire between 2007 and 2029, if not previously utilized. However, due to a change in majority ownership in 2007 and 2008, the Company’s ability to use the carryover net operating loss may be substantially limited or eliminated pursuant to Internal Revenue Code Section 382.
We adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on April 1, 2007. We had no material unrecognized income tax assets or liabilities at the date of adoption or during the twelve months ended March 31, 2009.
Our policy regarding income tax interest and penalties is to expense those items as general and administrative expense but to identify them for tax purposes. During the twelve months ended March 31, 2009, there were no income tax interest and penalty items in the income statement, or as a liability on the balance sheet. We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal or state income tax examination by tax authorities for years before 2004. We are not currently involved in any income tax examinations.
F-24
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK BONUS PLAN
The Company has a stock bonus plan, which provides incentive compensation for its directors, officers, and key employees. The Company has reserved 30,000 shares of common stock for issuance under the plan. As of March 31, 2007, 27,800 shares had been issued and remain outstanding in accordance with the plan. No shares were issued under the plan in 2008 or 2009.
13. CONTINGENCIES
The Company is involved in various claims incidental to the conduct of our business. Based on consultation with legal counsel, we do not believe that any claims, either individually or in the aggregate, to which the Company is a party will have a material adverse effect on our financial condition or results of operations.
14. FAIR VALUE
The Company adopted Statement of Financial Accounting Standard No. 157, Fair Value Measurements (“SFAS 157”), to measure the fair value of certain of its financial assets required to be measured on a recurring basis. The adoption of SFAS 157 did not impact the Company’s consolidated financial position or results of operations. SFAS 157 establishes 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). SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liab ility occurs in the principal market for the asset or liability. The three levels of the fair value hierarchy under SFAS 157 are described below:
Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.
The Company’s Level 1 assets include cash, accounts payable and accrued expenses. Due to the short term maturity of these liabilities, the Company valued them at net book value.
Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
The Company has no Level 2 assets or liabilities.
Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company’s Level 3 assets include notes receivable and notes payable. Due to the short term maturities, the Company valued the respective notes at the face value.
The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis.
|
| March 31, 2009 Fair Value Measurements |
| ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Fair Value |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
| $ | 18,867 |
| $ | — |
| $ | — |
| $ | 18,867 |
|
Accounts receivable |
| $ | 10,273 |
| $ | — |
| $ | — |
| $ | 10,273 |
|
Notes receivable |
| $ | — |
| $ | — |
| $ | 176,640 |
| $ | 176,640 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
| $ | 769,440 |
| $ | — |
| $ | — |
| $ | 769,440 |
|
Notes payable |
| $ | — |
| $ | — |
| $ | 147,829 |
| $ | 147,829 |
|
F-25
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
| Notes Receivable |
| Notes Payable |
| ||||
Balance – March 31, 2008 |
|
|
|
|
|
|
| $ | — |
| $ | — |
|
Increase in receivable/payable |
|
|
|
|
|
|
|
| 176,640 |
|
| 147,829 |
|
Balance – March 31, 2009 |
|
|
|
|
|
|
| $ | 176,640 |
| $ | 147,829 |
|
15. OIL AND GAS OPERATIONS
Capitalized costs related to oil and gas producing activities and related accumulated depletion, depreciation and amortization at March 31 are as follows:
|
| 2009 |
|
| 2008 |
| ||
Capitalized costs of oil and gas properties |
|
|
|
|
|
|
|
|
Proved |
| $ | 5,840,732 |
|
| $ | — |
|
Unproved |
|
| — |
|
|
| 5,915,184 |
|
|
|
| 5,840,732 |
|
|
| 5,915,184 |
|
Less: accumulated depletion, depreciation and amortization |
|
| (41,876 | ) |
|
| — |
|
|
|
|
|
|
|
| ||
|
| $ | 5,798,856 |
|
| $ | 5,915,184 |
|
Depletion expense for the year ended March 31, 2009 totaled $41,876 (approximately $.006 per unit of production
On July 23, 2008, the Company entered into a Participation Agreement with WHL Energy Limited. Under the terms of the agreement, the Company agreed to assign a 50% interest in certain leaseholds referred to as the Phase I Development in exchange for $2,500,000. Upon the execution of the agreement, WHL also paid $300,000 towards options to participate in the Phase II and Phase III development programs. Under the agreement, the $2,500,000 was paid in phases. WHL had the right not to pay the final $1,000,000 installment that was due in November 2008 and thereby terminate the agreement. During the year ended March 31, 2009, the Company received a total of $1,800,000 of which $287,241 was applied against the agreed upon monthly non allocable general and administrative reimbursement, $53,447 was allocated against equipment purchases and $1,459,312 was allocated to the cost of the development of the Company’s oil and gas properties. WHL elec ted not to pay the $1,000,000 final installment for Phase I and thereby terminated the agreement.
Costs incurred in oil and gas producing activities were as follows:
|
|
|
|
|
|
|
|
|
|
| 2009 |
|
| 2008 |
| ||
Property acquisitions: |
|
|
|
|
|
|
|
|
Proved |
| $ | — |
|
| $ | — |
|
Unproved |
|
| — |
|
|
| — |
|
Exploration |
|
| — |
|
|
| — |
|
Development |
|
| 138,819 | * |
|
| — |
|
|
| $ | 138,819 |
|
| $ | — |
|
———————
*
net of $1,459,612 reimbursement under the WHL participation agreement.
F-26
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Results of operations of oil and gas producing activities for the years ended March 31 are as follows:
|
|
|
|
|
|
|
|
|
|
| 2009 |
|
| 2008 |
| ||
Revenues from oil and gas activities: |
|
|
|
|
|
|
|
|
Sales to unaffiliated parties |
| $ | 122,279 |
|
| $ | 62,025 |
|
Expenses: |
|
|
|
|
|
|
|
|
Production and operating |
|
| 94,541 |
|
|
| 72,166 |
|
Depreciation, depletion and accretion |
|
| 55,102 |
|
|
| 6,844 |
|
General and administrative |
|
| 110,783 |
|
|
| 391,245 |
|
Impairment of proved reserves |
|
| 125,353 |
|
|
| — |
|
Loss on sale of oil and gas assets |
|
| — |
|
|
| — |
|
Total expenses |
|
| 385,779 |
|
|
| 470,255 |
|
Pretax loss from producing activities |
|
| (263,500 | ) |
|
| (408,230 | ) |
Income tax expense |
|
| — |
|
|
| — |
|
Results of oil and gas producing activities |
| $ | (263,500 | ) |
| $ | (408,230 | ) |
SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
Proved Reserves
Independent petroleum engineers have estimated the Company’s proved oil and gas reserves, all of which are located in Edwards County, Texas. Proved reserves are the estimated quantities that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as additional information becomes available.
The reserves actually recovered and the timing of production of these reserves may be substantially different from the original estimate. Revisions result primarily from new information obtained from development drilling and production history and from changes in economic factors.
|
| Oil (Bbls) |
|
| Gas (Mcf) |
| ||
March 31, 2007 |
|
| — |
|
|
| — |
|
Extensions, additions and discoveries |
|
| — |
|
|
| — |
|
Revisions of previous estimates |
|
| 528,017 |
|
|
| — |
|
Oil and gas asset sales |
|
| — |
|
|
| — |
|
Production |
|
| (1,255 | ) |
|
| — |
|
Balance, March 31, 2008 |
|
| 526,762 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
Extensions, additions and discoveries |
|
| 78,714 |
|
|
| 357,657 |
|
Revisions of previous estimates |
|
| — |
|
|
| — |
|
Oil and gas asset sales |
|
|
|
|
|
| — |
|
Production |
|
| (2,885 | ) |
|
| — |
|
Balance, March 31, 2009 |
|
| 602,591 |
|
|
| 357,657 |
|
|
|
|
|
|
|
| ||
Proved Developed Reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008 |
|
| 526,762 |
|
|
| — |
|
Balance, March 31, 2009 |
|
| 602,591 |
|
|
| 357,657 |
|
The Company did not commission a reserve report for March 31, 2007 and thus reported zero reserves in its Form 10-K for the period ending March 31, 2007, despite also reporting 44 wells capable of producing as of March 31, 2007. The Company commissioned a reserve report for March 31, 2008. This was the primary cause of the revision of previous reserve estimates for March 31, 2007.
F-27
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ending March 31, 2009, the Company conducted developmental activities on its Edwards County, Texas properties and commissioned a reserve report as of March 31, 2009. This caused the revision of previous estimates for March 31, 2009.
Standardized Measure
The standardized measure of discounted future net cash flows (“standardized measure”) and changes in such cash flows are prepared using assumptions required by the Financial Accounting Standards Board. Such assumptions include the use of year-end prices for oil and gas and year-end costs for estimated future development and production expenditures to produce year-end estimated proved reserves. Discounted future net cash flows are calculated using a 10% rate. Estimated future income taxes are calculated by applying year-end statutory rates to future pre-tax net cash flows, less the tax basis of related assets and applicable tax credits.
The standardized measure does not represent management’s estimate of the Company’s future cash flows or the value of proved oil and gas reserves. Probable and possible reserves, which may become proved in the future, are excluded from the calculations. Furthermore, year-end prices used to determine the standardized measure of discounted cash flows, are influenced by seasonal demand and other factors and may not be the most representative in estimating future revenues or reserve data.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Reserves for its sole oil and gas properties located in Edwards County, Texas.
| Years ended March 31, |
| ||||
| 2008 |
| 2009 |
| ||
Future cash inflows (a) | $ | 50,304,485 |
| $ | 22,308,530 |
|
Future costs: (a) |
|
|
|
|
|
|
Production Cost |
| (14,117,866 | ) |
| (6,178,624 | ) |
Development Cost |
| (2,002,500 | ) |
| (1,444,500 | ) |
Future income tax expense (a) |
| (11,078,515 | ) |
| (4,993,038 | ) |
Future net cash flows |
| 23,105,604 |
|
| 9,692,368 |
|
10% annual discount for estimated timing of cash flows |
| (10,134,869 | ) |
| (3,447,329 | ) |
Standardized measure of discounted future net cash flows related to proved reserves | $ | 12,970,735 |
| $ | 6,245,039 |
|
———————
a)
Future net cash flows were computed using year-end prices and costs, and year-end statutory tax rates that relate to existing proved oil and gas reserves in which the Company has mineral interest.
Changes in Standardized Measure of Discounted Future Net Cash Flows
|
| 2009 |
| 2008 |
| ||
Balance Beginning of Year |
| $ | 12,970,735 |
| $ | — |
|
Sales of oil and gas, net of production costs |
|
| — |
|
| 10,141 |
|
Net changes in prices and production and development costs |
|
| (20,056,713 | ) |
| 50,437 |
|
Net change in future development costs |
|
| 558,000 |
|
| — |
|
Purchase of minerals in place |
|
| — |
|
| — |
|
Extensions and discoveries |
|
| — |
|
| — |
|
Revision of previous quantity estimates |
|
| — |
|
| 21,220,510 |
|
Net change in income taxes |
|
| (6,085,477 | ) |
| (7,027,825 | ) |
Accretion of discount |
|
| 6,687,540 |
|
| — |
|
Sales of reserves |
|
| — |
|
| — |
|
Other |
|
| — |
|
| (1,282,528 | ) |
Balance end of year |
| $ | 6,245,039 |
| $ | 12,970,735 |
|
The major decrease in future net cash flows between 2008 and 2009 pertains to the number of marginal wells that were projected to be drilled in 2008 that were not included in 2009 due to the actual decrease in the price per barrel of oil.
F-28
GLEN ROSE PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUBSEQUENT EVENTS
The Company entered into a new independent consulting engagement with Barry Pierce, whereby he will provide accounting services to the Company on a month to month basis, and will not be designated as an officer. His prior one year consulting agreement was fulfilled on March 23, 2009.
The Company received $105,000 from Blackwood Ventures, LLC. This $105,000 has been consolidated into the convertible debenture due Blackwood (See Note 6).
F-29
