SECURITIES EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended July 31, 2007
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-09923
IMPERIAL PETROLEUM, INC.
(Exact name of registrant as specified in its charter)
| | |
Nevada | | 95-3386019 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer identification No.) |
329 Main Street, Suite 801
Evansville, IN 47708
Registrant’s telephone number, including Area Code: (812) 867-1433
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 13(g) of the Act: Common Stock. $0.006 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
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 x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of the Regulation K is not contained herein, and will not be contained to the best of the 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. x.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-Accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
On July 31, 2007, there were 14,964,441 shares of the Registrant’s common stock issued and outstanding. The aggregate market value of the Registrant’s voting stock held by non-affiliates is $2,186,372. See Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters.
Documents Incorporated by Reference: NONE
IMPERIAL PETROLEUM, INC
FORM 10-K
FISCAL YEAR ENDED JULY 31, 2007
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
In the interest of providing the Company’s stockholders and potential investors with certain information regarding the Company’s future plans and operations, certain statements set forth in this Form 10-K relate to management’s future plans and objectives. Such statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Although any forward looking statements contained in this Form 10-K or otherwise expressed on behalf of the Company are, to the knowledge and in the judgment of the officers and directors of the Company, expected to prove to come true and to come to pass, management is not able to predict the future with absolute certainty. Forward looking statements involve known and unknown risks and uncertainties which may cause the Company’s actual performance and financial results in future periods to differ materially from any projection, estimate or forecasted result. These risks and uncertainties include, among other things, volatility of commodity prices, changes in interest rates and capital market conditions, competition, risks inherent in the Company’s operations, the inexact nature of interpretation of seismic and other geological, geophysical, petro-physical and geo-chemical data, the imprecise nature of estimating reserves, events that deprive the Company of the services of its Chairman of the Board, Chief Executive Officer and largest shareholder, and such other risks and uncertainties as described from time to time in the Company’s periodic reports and filings with the Securities and Exchange Commission. Accordingly stockholders and potential investors are cautioned that certain events or circumstances could cause actual results to differ materially from those projected, estimated or predicted. The Company does 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.
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PART I
Definitions
As used in this Form 10-K, the following terms shall have the following meanings.
“Base Metals” refers to a family of metallic elements, including copper, lead and zinc.
“Bbl” means barrel.
“Bcf” means billion cubic feet.
“Bcfe” means billion cubic feet equivalent.
“BOE” means equivalent barrels of oil.
“Company,” unless the context requires otherwise, means Imperial Petroleum, Inc., a Nevada corporation (“Imperial”) and its consolidated subsidiaries. Ridgepointe Mining Company, a Delaware corporation (“Ridgepointe”), I.B. Energy, Inc., an Oklahoma corporation (“I.B. Energy”), Premier Operating Company, a Texas corporation (“Premier”), LaTex Resources International, a Delaware corporation (“LRI”), Phoenix Metals, Inc., dba The Rig Company a Texas corporation (“Phoenix”) and Hoosier Biodiesel Company (formerly global/Imperial Joint Venture Inc.) a Nevada corporation. LRI and Phoenix were acquired effective April 30, 1997. The operations of LRI ceased in 1997 with the expiration of its remaining foreign activities. Phoenix has conducted limited activities since 1997 as Imperial Environmental Company and subsequently as The Rig Company although it has not officially changed its name. Eighty-percent control of SilaQuartz was acquired effective November 23, 1998 as an investment. The Company acquired 90% control of Oil City Petroleum, Inc. (“Oil City”), an Oklahoma corporation effective August 31, 1998 as an investment and sold its interest effective November 28, 2000. The Company owns approximately 7.6 % of the common stock of Warrior Resources, Inc., (“Warrior”) an Oklahoma corporation which is now called Roadhouse Foods, Inc., and carries its ownership under as an asset acquisition. Hoosier Biodiesel Company was incorporated in Nevada in 2000.
“Grade” refers to the metal or mineral content of rock, ore or drill or other samples. With respect to precious metals, grade is generally expressed as troy ounces per ton of rock.
“Gross” refers to the total leasehold acres or wells in which the Company has a working interest.
“MBbls” means thousand barrels.
“MBOE” means thousands equivalent barrels of oil.
“Mcf” means thousand cubic feet.
“Mcfe” means thousand cubic feet equivalent.
“Mineable” refers to that portion of a mineral deposit from which it is economically feasible to extract ore.
“MMBbls” means million barrels.
“MMcf” means million cubic feet.
“Mmcfe” means million cubic feet equivalent.
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“Net” refers to gross leasehold acres or wells multiplied by the percentage working interest owned by the Company.
“Net production” means production that is owned by the Company less royalties and production due others.
“Net Smelter Royalty” is a royalty based on the actual sale price received for the subject metal less the cost of smelting and/or refining the material at an offsite refinery or smelter along with off-site transportation costs.
“Oil” includes crude oil, condensate and natural gas liquids.
“Patented Mining Claim” is a mining claim, usually comprising about 20 acres, to which the US Government has conveyed title to the owner.
“Proved developed reserves” are those reserves which are expected to be recovered through existing wells with existing equipment and operating methods.
“Proved reserves” are estimated quantities of crude oil, natural gas and natural gas liquids, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.
“Proved undeveloped reserves” are those reserves which are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.
“Unpatented Mining Claim” is a mining claim which has been staked or marked out in accordance with federal and state mining laws to acquire the exclusive rights to explore for and exploit the minerals which may occur on such lands. The title to the property has not been conveyed to the holder of an unpatented mining claim.
Unless otherwise indicated herein, natural gas volumes are stated at the legal pressure base of the state or area in which the reserves are located and at 60 degrees Fahrenheit. Natural gas equivalents are determined using the ratio of six Mcf of natural gas to one Bbl of crude oil
The Company
Imperial Petroleum, Inc., a Nevada corporation (“the Company”), is a diversified energy, and mineral mining company headquartered in Evansville, Indiana. The Company has historically been engaged in the production and exploration of crude oil and natural gas in Oklahoma and Texas and had diversified its business activities to include mineral mining, with a particular emphasis on gold mining. The Company re-focused its efforts in the oil and natural gas business with the acquisitions of assets from Warrior and Hillside Oil & Gas LLC (“Hillside”) in 2004 and is seeking to sell or develop through partnerships or joint ventures, its mining assets.
At July 31, 2007, the Company operated 76 oil and gas wells in Texas and Louisiana and owned an interest in an additional approximately 280 wells operated by others. In addition the Company owns an inactive gathering system comprised of approximately 15 miles of buried steel line in Kentucky as well as the rights to 24 inactive gas wells as part of its New Albany Shale play. Net daily production from the Company’s oil and gas properties was approximately 25 Bopd and 360 Mcfpd at year end. The Company’s estimated net proven oil and gas reserves as of July 31, 2007 were 424 MBO and 3,533 MMCFG. The Company is the operator and owner of the Duke Gold Mine in Utah, although no significant operations occurred during the fiscal year.
Historical Background
The Company was incorporated on January 16, 1981 and is the surviving member of a merger between itself, Imperial Petroleum, Inc., a Utah corporation incorporated on June 4, 1979 (“Imperial-Utah”), and Calico Exploration Corp., a Utah corporation incorporated on September 27, 1979 (“Calico”). The Company was reorganized under a Reorganization Agreement and Plan and Article of Merger dated August 31, 1981 resulting in the Company being domiciled in Nevada.
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On August 11, 1982, Petro Minerals Technology, Inc. (“Petro”), a 94% -owned subsidiary of Commercial Technology Inc. (“Comtec”) acquired 58% of the Company’s common stock. Petro assigned to the Company its interests in two producing oil and gas properties in consideration for 5,000,000 shares of previously authorized but unissued shares of common stock of the Company and for a $500,000 line of credit to develop these properties. Petro has since undergone a corporate reorganization and is now known as Petro Imperial Corporation. On August 1, 1988 in an assumption of assets and liabilities agreement, 58% of the Company's common stock was acquired from Petro by Glauber Management Co., a Texas corporation, (“Glauber Management”), a 100% owned subsidiary of Glauber Valve Co., Inc., a Nebraska corporation (“Glauber Valve”).
Change of Control
Pursuant to an Agreement to Exchange Stock and Plan of Reorganization dated August 27, 1993 (the “Stock Exchange Agreement”), as amended by that certain First Amendment to Agreement to Exchange Stock and Plan of Reorganization dated as of August 27, 1993, (the “First Amendment”), between the Company, Glauber Management, Glauber Valve, Jeffrey T. Wilson (“Wilson”), James G. Borem (“Borem”) and those persons listed on Exhibit A attached to the Stock Exchange Agreement and First Amendment (the “Ridgepointe Stockholders”). The Ridgepointe Stockholders agreed to exchange (the “Ridgepointe Exchange Transaction”) a total of 12,560,730 shares of the common stock of Ridgepointe, representing 100% of the issued and outstanding common stock of Ridgepointe, for a total of 12,560,730 newly issued shares of the Company’s common stock, representing 59.59% of the Company’s resulting issued and outstanding common stock. Under the terms of the Stock Exchange Agreement, (i) Wilson exchanged 5,200,000 shares of Ridgepointe common stock for 5,200,000 shares of the Company's common stock representing 24.67% of the Company’s issued and outstanding common stock, (ii) Borem exchanged 1,500,000 shares of Ridgepointe common stock for 1,500,000 shares of the Company’s common stock representing 7.12% of the Company’s issued and outstanding common stock, and (iii) the remaining Ridgepointe Stockholders in the aggregate exchanged 5,860,730 shares of Ridgepointe common stock for 5,860,730 of the Company’s issued and outstanding common stock, representing, in the aggregate, 27.81% of the Company’s issued and outstanding common stock. The one-for-one ratio of the number of shares of the Company’s common stock exchanged for each share of Ridgepointe common stock was determined through arms length negotiations between the Company, Wilson and Borem.
The Ridgepointe Exchange Transaction was closed on August 27, 1993. As a result, Ridgepointe is now a wholly, owned subsidiary of the Company. At the time of acquisition, Ridgepointe was engaged in the development of a copper ore mining operation in Yavapai County, Arizona and, through its wholly owned subsidiary, I.B. Energy, in the exploration for and production of oil and gas in the Mid-continent and Gulf Coast regions of the United States.
In connection with the closing of the Ridgepointe Exchange Transaction, each member of the Board of Directors of the Company resigned and Wilson, Borem and Dewitt C. Shreve (“Shreve”) were elected Directors of the Company. In addition, each officer of the Company resigned and the Company’s new Board of Directors elected Wilson as Chairman of the Board, President and Chief Executive Officer, Borem as Vice President and Cynthia A. Helms as Secretary of the Company. Ms. Helms subsequently resigned and Kathryn H. Shepherd was elected Secretary. Mr. Borem, Mr. Shreve and Ms. Shepherd subsequently resigned and Mr. Malcolm W. Henley and Mrs. Stacey D. Smethers were elected to the Board. The Board of Directors further authorized the move of the Company’s principal executive offices from Dallas, Texas to its current offices in Evansville, Indiana.
As a condition to closing the Ridgepointe Exchange Transaction, the Company received and canceled 7,232,500 shares of the Company’s common stock from the Company’s former partner, Glauber Management, and 100,000 shares of the common stock of Tech-Electro Technologies, Inc from an affiliate of Glauber Management and Glauber Valve. In addition, pursuant to the terms of the First Amendment, Glauber Management or Glauber Valve, or their affiliates, were to transfer to the Company 75,000 shares of common stock of Wexford Technology, Inc. (formerly Chelsea Street Financial Holding Corp.) no later than October 31, 1993, which such transfer subsequently occurred.
On August 15, 2001, Mr. Malcolm W. Henley and Mrs. Stacey D. Smethers resigned their positions as directors of the Company to pursue other interests. Their vacancies have been filled with Mrs. Annalee C. Wilson
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and Mr. Aaron M. Wilson, both family members of the Company’s President and Chairman, until new directors are elected at the next shareholder's meeting.
The Company entered into and closed the acquisition of 29,484,572 shares of the common stock of Warrior Resources, Inc. (formerly Comanche Energy, Inc.), representing approximately 30.8% of the issued and outstanding shares of Warrior on February 13, 2002 in connection with an Exchange Agreement (see “Exchange Agreement” included herein) between the Company and the management of Warrior, Messers. Luther Henderson and John Bailey. In connection with the Exchange Agreement, the Company issued 2,266,457 shares of its restricted common stock to Mr. Henderson, representing 12.9 % of the issued and outstanding shares of Registrant in exchange for 22,664,572 shares of the common stock of Warrior and 682,000 shares of its restricted common stock to Mr. John Bailey, representing 3.9 % of the issued and outstanding shares of the Company in exchange for 6,820,000 shares of the common stock of Warrior. Mr. Bailey and Mr. Henderson resigned as officers and directors of Warrior and Mr. Jeffrey Wilson, president of the Company, was appointed president and sole director of Warrior. Simultaneously with the closing of the Exchange Agreement with Messrs. Henderson and Bailey and the change of control of Warrior, the Company entered into an Agreement and Plan of Merger, subject to certain conditions, to offer to acquire the remaining issued and outstanding capital stock of Warrior through a subsequent offering to be registered with the Securities & Exchange Commission. The terms of the proposed exchange of shares with the remaining shareholders of Warrior was on the basis of one share of Imperial common stock in exchange for ten shares of Warrior common stock. Completion of the Agreement and Plan of Merger was subject to a number of conditions, including the completion of audited financials for Warrior, approval of the Warrior stockholders, the filing and effectiveness of a registration statement by Registrant for the shares to be offered, the satisfactory completion of due diligence and other customary closing conditions. Due to breaches of the agreements by the former management of Warrior, the Company terminated the proposed merger in August 2002. As a result of the termination of the merger agreement, the Company had the right to receive $200,000 or an equivalent value in shares of Warrior valued at $0.02 per share.
On July 15, 2003, the Company and Warrior signed an Agreement wherein the Company would acquire the assets and certain liabilities of Warrior and its subsidiaries in exchange for payment or assumption of the Warrior senior bank debt in the approximate amount of $3.65 million; (2) extinguishment of the note payable from Warrior to the Company in the amount of $1.7 million; (3) assumption of certain trade vendor liabilities in the approximate amount of $0.58 million and the issuance to Warrior of 2 million shares of the Company’s common stock. Closing of the transaction was subject to, among other things, approval of Warrior’s shareholders, which was received on August 29, 2003. The Company closed the Warrior asset acquisition in January 2004. (See Form 8-K filed January 29, 2004.)
In April 2003, the Company agreed to acquire certain oil and natural gas interests owned by Renovared Resources, Inc. (“Renovared”) located in Kentucky for $30,000. The properties comprise interests in approximately 44 wells and a pipeline and gathering system located in the New Albany Shale Gas play. The Company completed the Renovared acquisition in December 2004.
In May 2003, the Company acquired approximately 54% control of the stock of Powder River in an Exchange Agreement with the former management and control shareholders of Powder River. (See Form 8-K dated May 2003.) The Company issued a total of 2.65 million shares of its restricted common stock and a note payable in the amount of $200,000 in the transaction. As a result of the Exchange Transaction, Powder River became a consolidated subsidiary of the Company. Powder River owns some 7,000 net acres of leases in the Powder River Basin coal bed methane gas play in Wyoming. In October 2003, the Company entered into a letter of understanding and a subsequent stock sale agreement to sell 23,885,000 shares of the common stock of Powder River of the 25,385,000 shares it presently owns. Under the terms of the sale, the Company received $175,000 in cash (less broker’s fees of 10%); a secured note in the amount of $47,884.47; and a 12.5% carried working interest in the development of the leases owned by Powder River. The purchaser is required to purchase the convertible notes of Powder River in the approximate amount of $315,000 and to commit a minimum of $750,000 to the development of the leases owned by Powder River. The Powder River sale was closed December 17, 2003. (See Form 8-K filed December 29, 2003 and amended Form 8-K filed February 23, 2004 with financial information.)
On July 7, 2003 the Company agreed to acquire the assets of Hillside. The transaction was closed on January 16, 2004. Under the terms of the agreement and amendments thereto, the Company acquired the oil and gas
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properties of Hillside for (1) the payment of its senior debt of approximately $4.6 million; (2) the assumption of an equipment note payable of $0.3 million; (3) the payment of certain obligations of Hillside at closing of $168,000; (4) the assumption of approximately $348,000 in accounts payable of Hillside and (5) issuance of a note payable to Hillside in the amount of $324,000 and secured by 1 million shares of the Company’s common stock. Hillside operated some 113 wells in Texas, New Mexico and Louisiana and as a result of the transaction, operations were assumed by the Company. (See Form 8-K filed January 29, 2004.)
In October 2003 the Company sold 2,000,000 shares of restricted common stock to RAB Special Situations LP for $200,000 and a common stock purchase warrant in the amount of 2,000,000 shares exercisable at $0.12 per share. Demand rights were granted in connection with the issuance. The term of the warrant was one year. The warrant was subsequently exercised in October 2004. The proceeds of the sale were used to fund the ongoing expense of the acquisition effort of the Company and for working capital purposes.
In October 2003 the Company retired the note payable of $200,000 which had resulted from the acquisition of Powder River with the issuance of 2,000,000 shares of restricted common stock and a common stock purchase warrant in the amount of 2,000,000 shares at an exercise price of $0.14 per share. Demand rights were granted with the issuance. The term of the warrant was one year and expired without being exercised.
On January 16, 2004 the Company completed the above-mentioned acquisitions of the assets of Hillside and Warrior for a total consideration of approximately $12.6 million including broker and financing fees. As a result of the closing, the Company incurred long term debt in the amount of approximately $11.0 million, including approximately $0.25 million in working capital and $0.6 million in capital available for workovers. The total debt facility is an $18.0 million revolving loan and is based upon a periodic evaluation of the Company’s reserves by the lender. (See Form 8-K dated January 29, 2004.) (Refer to Capital Resources and Liquidity below for more details about the terms of the debt financing.)
The Company completed the acquisition of a 16% non-operated working interest in the Coquille Bay Field of south Louisiana in May 2004 from Royal-T Oil Company (“Royal-T”) for $800,000 which was funded out of additional borrowings from the Company’s revolving line of credit. The properties are located in Plaquemines Parish, Louisiana. Subsequent to year end July 31, 2004, the Company acquired the remaining interests owned by Royal-T and became the operator of the project. The Company’s interest in the project increased to a 22% working interest, however as a result of certain non-consenting partners, the Company presently carries 50% of the capital investment. Natural gas production from the project began on one well in February 2005. The Company established a total of six producing completions prior to damage caused by hurricane Katrina. Production rates were approximately 75 Bopd and 800 mcfpd immediately prior to the storm. Coquille Bay was shut in after hurricane Katrina awaiting repairs to the Company’s platform and facilities as well as the platform operated by Martin Marks which delivers the Company’s gas to market. As of July 31, 2007, the Company had returned six completions to production and was averaging approximately 40 Bopd and 750 mcfpd. Additional workover operations are planned.
The Company completed the purchase of the rights to 31 wells and associated leases in Guadalupe County, Texas for the development of proved behind pipe reserves of approximately 300,000 bbls from Caltex Operating Company and Apache Energy in June 2004. The proposed formation is the Pecan Gap at 1900 feet and has been logged and cored in most of the wells on the leases. The Company issued a total of 1.375 million shares of its restricted common stock in connection with the acquisition and closing fees and paid $300,000 in cash. The Company has not completed any workovers on the wells to date, however construction of tank batteries and installation of infrastructure has begun.
On October 14, 2004 the Company signed a Merger Agreement with United Heritage Corporation (“UHCP”) wherein the Company would merge with and become a wholly-owned subsidiary of UHPC on the basis of 1 share of UHCP common stock for each 3 shares of IPTM common stock. The Company and UHPC extended the original time to complete the merger through May 2005. The Merger Agreement was subsequently terminated by the Company in August 2005.
In November 2004, the Company completed the change of control of Warrior to Universal Wireline Equipment LLC, a company based in Tulsa, OK. The Company retained 5 million shares of its previously owned Warrior common stock in connection with the change of control and received 720,000 shares of Imperial common
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stock which was previously held by Warrior. With the change of control, the Company sold certain rights to its Duke Gold Mine and received an additional 5 million shares of Warrior common stock and retained a 5% net smelter royalty in any proceeds from mining and processing of the Duke Mine claims in the future. Subsequent to closing, Warrior advised the Company that it would be unable to fulfill the obligations relating to the Duke Mine acquisition and the Company received a re-assignment of the mining claims and retained the shares of Warrior stock as liquidated damages. The result of the failed transaction was that the Company reduced its ownership of Warrior to 7.6% of its common stock. The Company subsequently completed a new joint venture arrangement of its Duke Gold Mine in April 2006 with ATLCC, wherein the company acquired a 5% equity interest in ATLCC and retained a 5% net smelter royalty. No operations have been conducted by ATLCC through July 31, 2006.
The Company engaged Macquarie Securities in November 2005 to assist the Company in completing a sale of assets or otherwise to re-structure its senior debt. In connection with that effort, the Company signed a definitive agreement with Whittier Energy Company (“Whittier”) and Premier Natural Resources, LLC (“Premier Natural”) to sell certain oil and gas assets comprising of 69% of the Company’s total assets for $15.4 million. The sale was subject to normal and customary due diligence and title verification by Whittier and Premier Natural and also subject to the approval of the Company’s shareholders, which was obtained on August 1, 2006 at the Annual Meeting of Shareholders. Phase I closing of the sale was completed on August 9, 2006 and as a result the Company retired approximately $11.3 million in senior debt and paid an additional $0.7 million in payables from the proceeds. Phase II closing of the sale was completed on November 9, 2006, and as a result retired approximately $1.7 million in senior debt with an additional $0.15 million in proceeds used to pay trade payables.
The Company signed a Forbearance Agreement (and several amendments thereto) with its senior lender in connection with its plan to re-structure its senior debt. The Company incurred additional fees as a result of these amendments in the amount of $750,000 due to its senior lender as a result of these agreements. In April 2007, the Company re-structured its senior debt under a new debt facility with its lender in the form of a $15.0 million line of credit and $0.4 million in subordinated debt. The new facility provided the Company with additional workover capital to being workover operations on its properties as well as the completion of the Caltex acquisition. (See Capital Resources and Liquidity: Long Term Debt).
The Company completed a reverse split of its common stock in the ratio of four for one effective September 11, 2006 in connection with obtaining shareholder approval of the sale of assets discussed earlier. As a result of the reverse split the Company’s issued and outstanding common stock was reduced to 11,115,807 shares and the authorized capital was increased to 150,000,000 shares of common stock. (See Submission of Matters to Security Holders).
The Company signed a Purchase and Sales Agreement with Apollo Resources International, Inc. and subsidiaries (“Apollo”) on June 19, 2007 to acquire certain oil and gas assets located in New Mexico, Arizona and Utah for a total consideration of approximately $6.8 million, including 5 million shares of the Company’s restricted common stock. The Agreement was terminated by the Company after considerable due diligence due to Apollo’s inability to provide clear title to its assets.
Business Strategy
The Company’s management has focused its efforts entirely on the acquisition and exploitation of oil and gas assets. With over 30 years experience in evaluating, acquiring and exploiting oil and gas reserves, the Company’s senior management believes that quality acquisition and exploitation opportunities continue to exist today. The Company has begun acquiring a significant leasehold position in and around its pipeline and gathering system in the New Albany shale play in Kentucky to begin a development program in that area to further its belief that natural gas prices and reserves will continue to remain in high demand.
Oil and Natural Gas Reserves
The following table is a summary, as of July 31, 2007, of the proved reserves of oil and natural gas net to the Company’s interest based upon estimates prepared by the Company. These estimates are based on assumptions the Company believes are reasonable regarding production costs, future production rates and declines. These estimates are based upon constant prices and costs as of July 31, 2007, of $68.38/Bbl and $7.22/Mmbtu adjusted for
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differentials. There are numerous uncertainties inherent in the preparation of estimates of reserves, including many factors beyond the Company’s control. The accuracy of any such estimates is a function of the quality of available data and of engineering and geological interpretation and judgment. It can be expected as the Company conducts additional evaluation, drilling and testing with respect to its properties that these estimates will be adjusted and could be revised. Estimates have been filed with the Energy Information Agency as part of its annual survey of oil and gas operators for 2006 based on the Company’s reserves as of July 31, 2006 in addition to reports filed with the Securities and Exchange Commission (“SEC”). The Company has no reserves outside the United States.
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As of July 31, 2007
| | | | | | | | |
Category | | Oil (MBO) | | Natural Gas (MMCF) | | Future Net Revenue (M$) | | Present Value Discounted @10%(M$) |
Producing | | 58 | | 1,598 | | 12,672 | | 9,685 |
Non-Producing | | 323 | | 1,022 | | 20,153 | | 14,071 |
Undeveloped | | 43 | | 913 | | 7,302 | | 4,490 |
Total Proved | | 424 | | 3,533 | | 40,127 | | 28,246 |
Note: Included in the reserve estimates are 7 MBO and 58 MMCF net to the Company’s interest for approximately 280 properties included in various states. Projections for these properties are based on net revenues received on a monthly basis and allocated to oil and gas sales and reserves. As a result, actual volumes of oil and gas produced in the future may vary significantly for these properties.
Reserves by State
The following table illustrates the Company’s reserve summaries by State as of July 31, 2007:
As of July 31, 2007
| | | | |
| | Oil (MBO) | | Natural Gas (MMCF) |
Texas | | 232 | | 791 |
Louisiana | | 185 | | 2,684 |
Other | | 7 | | 58 |
| | | | |
Total | | 424 | | 3,533 |
Note: Other reserves included in this table reflect estimated reserves attributable to approximately 280 properties as noted above.
Acreage - The following table shows the developed and undeveloped leasehold acreage held by the Company as of July 31, 2007:
| | | | | | | | |
| | Developed Acreage | | Undeveloped Acreage |
| | (1) Gross | | (2) Net | | (1) Gross | | (2) Net |
Texas | | 1,106 | | 526 | | 0 | | 0 |
Louisiana | | 1,600 | | 1,196 | | 0 | | 0 |
Kentucky | | 3,000 | | 2,900 | | 0 | | 0 |
| | | | | | | | |
Various | | 82,984 | | 996 | | 0 | | 0 |
| | | | | | | | |
Total | | 85,690 | | 5,618 | | 0 | | 0 |
Productive Wells - The following table summarizes the productive oil and gas wells in which the Company had an interest at July 31, 2007:
| | | | | | | | | | | | |
| | Oil Wells | | Gas Wells | | Total |
| | (1) Gross | | (2) Net | | (1) Gross | | (2) Net | | (1) Gross | | (2) Net |
Texas | | 30 | | 30 | | 6 | | 6 | | 36 | | 36 |
Louisiana | | 21 | | 21 | | 19 | | 4.7 | | 40 | | 25.7 |
Other | | 110 | | 0.55 | | 198 | | 28.85 | | 308 | | 29.40 |
| | | | | | | | | | | | |
Total | | 161 | | 51.55 | | 223 | | 33.55 | | 384 | | 91.10 |
(1) | A “gross acre” or a “gross well” is an acre or well in which a working interest is owned by the Company and the number of gross acres or gross wells is the total number of acres or wells in which a working interest is owned by the Company. |
(2) | A “net acre” or a “net well” exists when the sum of the Company‘s fractional ownership interests in gross acres or gross wells equals one. The number of net acres or net wells is the sum of the |
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| fractional interests owned in gross acres or gross wells, and does not include any royalty, overriding royalty or reversionary interests. |
Production, Price and Cost Data - The following table summarizes certain information relating to the production, price and cost data for the Company for the fiscal years ended, July 31, 2007, 2006, 2005.
Year Ended July 31, 2007
| | | | | | | | |
| | 2007 | | 2006 | | 2005 |
Oil: | | | | | | | | |
Production (Bbls) | | | 10,220 | | | 31,375 | | 32,527 |
Revenue | | $ | 619,074 | | $ | 1,668,945 | | 1,330,668 |
Average barrels per day | | | 28 | | | 86 | | 89 |
Average sales price per barrel | | $ | 60.57 | | $ | 53.19 | | 40.91 |
Natural Gas: | | | | | | | | |
Production (Mcf) | | | 69,157 | | | 242,745 | | 307,948 |
Revenue | | $ | 418,975 | | $ | 1,766,061 | | 1,632,983 |
Average Mcf per day | | | 189 | | | 665 | | 844 |
Average sales price per Mcf | | $ | 6.06 | | $ | 7.28 | | 5.30 |
Production costs (1) | | $ | 729,293 | | $ | 1,289,074 | | 1,429,587 |
Equivalent (Bbls) (2) | | | 21,746 | | | 71,833 | | 83,852 |
Production costs per equivalent bbl (3) | | $ | 33.53 | | $ | 17.95 | | 17.05 |
| | | | | | | | |
Total oil and gas revenues | | $ | 1,143,194 | | $ | 3,435,006 | | 2,963,651 |
(1) | Includes expense workovers. |
(2) | Gas production is converted to barrel equivalents at the rate of six Mcf per barrel representing the estimated relative energy content of natural gas to oil. |
(3) | Historical costs and expenses differ from projections included in the reserve estimates presented above as a result of remedial costs associated with repairs of the Hillside acquisition properties and repairs to the Coquille Bay platform included in historical costs and considered to be non-recurring expenses. To the extent that continued remedial costs are incurred in the future, the economic limit of the producing properties will be affected and will reduce our reserve estimates substantially. |
Drilling Activity
The following table illustrates the results of the drilling activity during each of the three most recent fiscal years:
| | | | | | | | | | | | |
| | July 31, 2007 | | July 31, 2006 | | July 31, 2005 |
| | Gross | | Net | | Gross | | Net | | Gross | | Net |
Texas | | 4.0 | | 0.1 | | 8.0 | | 0.2 | | 3.0 | | 0.1 |
New Mexico | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 |
Louisiana | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 |
Mississippi | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 |
Other | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 |
| | | | | | | | | | | | |
Total | | 4.0 | | 0.1 | | 8.0 | | 0.2 | | 3.0 | | 0.1 |
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Mining
The availability of a market for the Company’s mineral and metal production will be influenced by the proximity of the Company’s operations to refiners and smelting plants. In general the Company will sell its mined product to local refineries and smelters. The price received for such products will be dependent upon the Company’s ability to provide primary separation to ensure fineness or quality. The price of gold has been relatively stable in recent years reflecting a period of relatively low inflation. Copper prices have generally been more volatile, in part due to increased demand of developing economies for electrical wire and other copper related products.
Changes in the price of gold and copper will significantly affect the Company’s future cash flows and the value of its mineral properties. The Company is unable to predict whether prices for these commodities will increase, decrease or remain constant in future periods.
The Company does not currently classify any of its mineral properties as having reserves as that term is defined by the SEC.
In addition to the other information set forth elsewhere in this Form 10-K, you should carefully consider the following factors when evaluating the Company. An investment in the Company is subject to risks inherent in our business. The trading price of the shares of the Company is affected by the performance of our business relative to, among other things, competition, market conditions and general economic and industry conditions. The value of an investment in the Company may decrease, resulting in a loss. The risk factors listed below are not all inclusive.
We have a history of losses.
We have had a history of net losses for at least the past three years.
Natural gas and oil prices fluctuate widely, and low prices would have a material adverse effect on our revenues, profitability and growth.
Our revenues, profitability and future growth will depend significantly on natural gas and crude oil prices. Prices received also will affect the amount of future cash flow available for capital expenditures and repayment of indebtedness and will affect our ability to raise additional capital. Lower prices may also affect the amount of natural gas and oil that we can economically produce. Factors that can cause price fluctuations include:
| • | | The domestic and foreign supply of natural gas and oil. |
| • | | Overall economic conditions. |
| • | | The level of consumer product demand. |
| • | | Adverse weather conditions and natural disasters. |
| • | | The price and availability of competitive fuels such as heating oil and coal. |
| • | | Political conditions in the Middle East and other natural gas and oil producing regions. |
| • | | The level of LNG imports. |
| • | | Domestic and foreign governmental regulations. |
| • | | Potential price controls and special taxes. |
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We depend on the services of our chairman, chief executive officer and chief financial officer, and implementation of our business plan could be seriously harmed if we lost his services.
We depend heavily on the services of Jeffrey T. Wilson, our chairman, chief executive officer, and chief financial officer. We do not have an employment agreement with Mr. Wilson, and we do not presently have a “key person” life insurance policy on Mr. Wilson to offset our losses in the event of Mr. Wilson’s death.
Our ability to successfully execute our business plan is dependent on our ability to obtain adequate financing.
Our business plan, which includes participation in 3-D seismic shoots, lease acquisitions, the drilling of exploration prospects and producing property acquisitions, has required and will require substantial capital expenditures. We may require additional financing to fund our planned growth. Our ability to raise additional capital will depend on the results of our operations and the status of various capital and industry markets at the time we seek such capital. Accordingly, we cannot be certain that additional financing will be available to us on acceptable terms, if at all. In particular, our credit facility imposes limits on our ability to borrow under the facility based on adjustments to the value of our hydrocarbon reserves, and our credit facility limits our ability to incur additional indebtedness. In the event additional capital resources are unavailable, we may be required to curtail our exploration and development activities or be forced to sell some of our assets in an untimely fashion or on less than favorable terms.
Natural gas and oil reserves are depleting assets and the failure to replace our reserves would adversely affect our production and cash flows.
Our future natural gas and oil production depends on our success in finding or acquiring new reserves. If we fail to replace reserves, our level of production and cash flows would be adversely impacted. Production from natural gas and oil properties decline as reserves are depleted, with the rate of decline depending on reservoir characteristics. Our total proved reserves will decline as reserves are produced unless we conduct other successful exploration and development activities or acquire properties containing proved reserves, or both. Further, the majority of our reserves are proved developed producing. Accordingly, we do not have significant opportunities to increase our production from our existing proved reserves. Our ability to make the necessary capital investment to maintain or expand our asset base of natural gas and oil reserves would be impaired to the extent cash flow from operations is reduced and external sources of capital become limited or unavailable. We may not be successful in exploring for, developing or acquiring additional reserves. If we are not successful, our future production and revenues will be adversely affected.
Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions could materially affect the quantities and present values of our reserves.
The process of estimating natural gas and oil reserves is complex. It requires interpretations of available technical data and various assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of reserves shown in this report.
In order to prepare these estimates, our independent third party petroleum engineer must project production rates and timing of development expenditures as well as analyze available geological, geophysical, production and engineering data, and the extent, quality and reliability of this data can vary. The process also requires economic assumptions relating to matters such as natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Therefore, estimates of natural gas and oil reserves are inherently imprecise.
Actual future production, natural gas and oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas and oil reserves most likely will vary from our estimates. Any significant variance could materially affect the estimated quantities and pre-tax net present value of reserves shown in this report. In addition, estimates of our proved reserves may be adjusted to reflect production history, results of
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exploration and development, prevailing natural gas and oil prices and other factors, many of which are beyond our control. Some of the producing wells included in our reserve report have produced for a relatively short period of time. Because some of our reserve estimates are not based on a lengthy production history and are calculated using volumetric analysis, these estimates are less reliable than estimates based on a more lengthy production history.
You should not assume that the pre-tax net present value of our proved reserves prepared in accordance with SEC guidelines referred to in this report is the current market value of our estimated natural gas and oil reserves. We base the pre-tax net present value of future net cash flows from our proved reserves on prices and costs on the date of the estimate. Actual future prices, costs, taxes and the volume of produced reserves may differ materially from those used in the pre-tax net present value estimate.
Exploration is a high risk activity, and our participation in drilling activities may not be successful.
Our future success will largely depend on the success of our exploration drilling program. Participation in exploration drilling activities involves numerous risks, including the risk that no commercially productive natural gas or oil reservoirs will be discovered. The cost of drilling, completing and operating wells is often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including:
| • | | Unexpected drilling conditions. |
| • | | Blowouts, fires or explosions with resultant injury, death or environmental damage. |
| • | | Pressure or irregularities in formations. |
| • | | Equipment failures or accidents. |
| • | | Tropical storms, hurricanes and other adverse weather conditions. |
| • | | Compliance with governmental requirements and laws, present and future. |
| • | | Shortages or delays in the availability of drilling rigs and the delivery of equipment. |
Even when properly used and interpreted, 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators. They do not allow the interpreter to know conclusively if hydrocarbons are present or economically producible. Poor results from our drilling activities would materially and adversely affect our future cash flows and results of operations.
In addition, as a “successful efforts” company, we choose to account for unsuccessful exploration efforts (the drilling of “dry holes”) and seismic costs as a current expense of operations, which immediately impacts our earnings. Significant expensed exploration charges in any period would materially adversely affect our earnings for that period and cause our earnings to be volatile from period to period.
The natural gas and oil business involves many operating risks that can cause substantial losses.
The natural gas and oil business involves a variety of operating risks, including:
| • | | Blowouts, fires and explosions. |
| • | | Uncontrollable flows of underground natural gas, oil or formation water. |
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| • | | Pipe and cement failures. |
| • | | Stuck drilling and service tools. |
| • | | Abnormal pressure formations. |
| • | | Environmental hazards such as natural gas leaks, oil spills, pipeline ruptures or discharges of toxic gases. |
If any of these events occur, we could incur substantial losses as a result of:
| • | | Injury or loss of life. |
| • | | Severe damage to and destruction of property, natural resources or equipment. |
| • | | Pollution and other environmental damage. |
| • | | Clean-up responsibilities. |
| • | | Regulatory investigations and penalties. |
| • | | Suspension of our operations or repairs necessary to resume operations. |
Offshore operations are subject to a variety of operating risks peculiar to the marine environment, such as capsizing and collisions. In addition, offshore operations, and in some instances, operations along the Gulf Coast, are subject to damage or loss from hurricanes or other adverse weather conditions. These conditions can cause substantial damage to facilities and interrupt production. As a result, we could incur substantial liabilities that could reduce the funds available for exploration, development or leasehold acquisitions, or result in loss of properties.
If we were to experience any of these problems, it could affect well bores, platforms, gathering systems and processing facilities, any one of which could adversely affect our ability to conduct operations. In accordance with customary industry practices, we maintain insurance against some, but not all, of these risks. Losses could occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. We may not be able to maintain adequate insurance in the future at rates we consider reasonable, and particular types of coverage may not be available. An event that is not fully covered by insurance could have a material adverse effect on our financial position and results of operations.
Not hedging our production may result in losses.
Due to the significant volatility in natural gas prices and the potential risk of significant hedging losses if NYMEX natural gas prices spike on the date options settle, our production is not currently hedged. By not hedging our production, we may be more adversely affected by declines in natural gas and oil prices than our competitors who engage in hedging arrangements.
Our ability to market our natural gas and oil may be impaired by capacity constraints on the gathering systems and pipelines that transport our natural gas and oil.
All of our natural gas and oil is transported through gathering systems and pipelines, which we do not own. Transportation capacity on gathering systems and pipelines is occasionally limited and at times unavailable due to repairs or improvements being made to these facilities or due to capacity being utilized by other natural gas or oil shippers that may have priority transportation agreements. If the gathering systems or our transportation capacity is materially restricted or is unavailable in the future, our ability to market our natural gas or oil could be impaired and cash flow from the affected properties could be reduced, which could have a material adverse effect on our financial condition and results of operations.
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We have no assurance of title to our leased interests.
Our practice in acquiring exploration leases or undivided interests in natural gas and oil leases is to not incur the expense of retaining title lawyers to examine the title to the mineral interest prior to executing the lease. Instead, we rely upon the judgment of third party landmen to perform the field work in examining records in the appropriate governmental, county or parish clerk’s office before leasing a specific mineral interest. This practice is widely followed in the industry. Prior to the drilling of an exploration well the operator of the well will typically obtain a preliminary title review of the drillsite lease and/or spacing unit within which the proposed well is to be drilled to identify any obvious deficiencies in title to the well and, if there are deficiencies, to identify measures necessary to cure those defects to the extent reasonably possible. We have no assurance, however, that any such deficiencies have been cured by the operator of any such wells. It does happen, from time to time, that the examination made by title lawyers reveals that the lease or leases are invalid, having been purchased in error from a person who is not the rightful owner of the mineral interest desired. In these circumstances, we may not be able to proceed with our exploration and development of the lease site or may incur costs to remedy a defect. It may also happen, from time to time, that the operator may elect to proceed with a well despite defects to the title identified in the preliminary title opinion.
Competition in the natural gas and oil industry is intense, and we are smaller and have a more limited operating history than most of our competitors.
We compete with a broad range of natural gas and oil companies in our exploration and property acquisition activities. We also compete for the equipment and labor required to operate and to develop these properties. Most of our competitors have substantially greater financial resources than we do. These competitors may be able to pay more for exploratory prospects and productive natural gas and oil properties. Further, they may be able to evaluate, bid for and purchase a greater number of properties and prospects than we can. Our ability to explore for natural gas and oil and to acquire additional properties in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in this highly competitive environment. In addition, most of our competitors have been operating for a much longer time than we have and have substantially larger staffs. We may not be able to compete effectively with these companies or in such a highly competitive environment.
We are subject to complex laws and regulations, including environmental regulations that can adversely affect the cost, manner or feasibility of doing business.
Our operations are subject to numerous laws and regulations governing the operation and maintenance of our facilities and the discharge of materials into the environment. Failure to comply with such rules and regulations could result in substantial penalties and have an adverse effect on us. These laws and regulations may:
| • | | Require that we obtain permits before commencing drilling. |
| • | | Restrict the substances that can be released into the environment in connection with drilling and production activities. |
| • | | Limit or prohibit drilling activities on protected areas, such as wetlands or wilderness areas. |
| • | | Require remedial measures to mitigate pollution from former operations, such as plugging abandoned wells. |
Under these laws and regulations, we could be liable for personal injury and clean-up costs and other environmental and property damages, as well as administrative, civil and criminal penalties. We maintain only limited insurance coverage for sudden and accidental environmental damages. Accordingly, we may be subject to liability, or we may be required to cease production from properties in the event of environmental damages. These
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laws and regulations have been changed frequently in the past. In general, these changes have imposed more stringent requirements that increase operating costs or require capital expenditures in order to remain in compliance. It is also possible that unanticipated factual developments could cause us to make environmental expenditures that are significantly different from those we currently expect. Existing laws and regulations could be changed and any such changes could have an adverse effect on our business and results of operations.
We cannot control the activities on properties we do not operate.
Other companies currently operate properties in which we have an interest. As a result, we have a limited ability to exercise influence over operations for these properties or their associated costs. Our dependence on the operator and other working interest owners for these projects and our limited ability to influence operations and associated costs could materially adversely affect the realization of our targeted returns on capital in drilling or acquisition activities. The success and timing of our drilling and development activities on properties operated by others therefore depend upon a number of factors that are outside of our control, including:
| • | | Timing and amount of capital expenditures. |
| • | | The operator’s expertise and financial resources. |
| • | | Approval of other participants in drilling wells. |
| • | | Selection of technology. |
Acquisition prospects are difficult to assess and may pose additional risks to our operations.
We expect to evaluate and, where appropriate, pursue acquisition opportunities on terms our management considers favorable. In particular, we expect to pursue acquisitions that have the potential to increase our domestic natural gas and oil reserves. The successful acquisition of natural gas and oil properties requires an assessment of:
| • | | Future natural gas and oil prices. |
| • | | Potential environmental and other liabilities and other factors. |
| • | | Permitting and other environmental authorizations required for our operations. |
In connection with such an assessment, we would expect to perform a review of the subject properties that we believe to be generally consistent with industry practices. Nonetheless, the resulting conclusions are necessarily inexact and their accuracy inherently uncertain, and such an assessment may not reveal all existing or potential problems, nor will it necessarily permit a buyer to become sufficiently familiar with the properties to fully assess their merits and deficiencies. Inspections may not always be performed on every platform or well, and structural and environmental problems are not necessarily observable even when an inspection is undertaken.
Future acquisitions could pose additional risks to our operations and financial results, including:
| • | | Problems integrating the purchased operations, personnel or technologies. |
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| • | | Diversion of resources and management attention from our exploration business. |
| • | | Entry into regions or markets in which we have limited or no prior experience. |
| • | | Potential loss of key employees, particularly those of the acquired organizations. |
We do not currently intend to pay dividends on our common stock.
We have never declared or paid a dividend on our common stock and do not expect to do so in the foreseeable future. Our current plan is to retain any future earnings for funding growth, and, therefore, holders of our common stock will not be able to receive a return on their investment unless they sell their shares.
Anti-takeover provisions of our certificate of incorporation, bylaws and Nevada law could adversely effect a potential acquisition by third parties that may ultimately be in the financial interests of our stockholders.
Our certificate of incorporation, bylaws and the Nevada General Corporation Law contain provisions that may discourage unsolicited takeover proposals. These provisions could have the effect of inhibiting fluctuations in the market price of our common stock that could result from actual or rumored takeover attempts, preventing changes in our management or limiting the price that investors may be willing to pay for shares of common stock. These provisions, among other things, authorize the board of directors to:
| • | | Designate the terms of and issue new series of preferred stock. |
| • | | Limit the personal liability of directors. |
| • | | Limit the persons who may call special meetings of stockholders. |
| • | | Prohibit stockholder action by written consent. |
| • | | Establish advance notice requirements for nominations for election of the board of directors and for proposing matters to be acted on by stockholders at stockholder meetings. |
| • | | Require us to indemnify directors and officers to the fullest extent permitted by applicable law. |
| • | | Impose restrictions on business combinations with some interested parties. |
Our common stock is thinly traded.
Imperial has approximately 14.9 million shares of common stock outstanding, held by approximately 603 holders of record. Directors and officers own or have voting control over approximately 3.8 million shares. Since our common stock is thinly traded, the purchase or sale of relatively small common stock positions may result in disproportionately large increases or decreases in the price of our common stock.
ITEM 2. | Description of Properties |
Oil and Natural Gas Development, Major Properties
Coquille Bay Field
The Company assumed operations of the Coquille Bay field in January 2005 from Royal-T. The field is located in Plaqumines Parish, Louisiana in approximately 4-6 feet of water. Seventeen wells produce oil and natural gas at depths ranging from 8,000 ft. to 11,000 feet. The Company manages the field under an Operating Agreement with the State of Louisiana and owns a 22% working interest and a 21.4% net revenue interest. Through non-consent provisions of the Operating Agreement, the Company currently has a 49.5 % working interest and a 41.2% net
16
revenue interest. Prior to hurricane Katrina, the Company had the field producing at approximately 75 Bopd and 800 mcfpd from six completions, however production has been plagued by continuous repair and maintenance problems and over-sized equipment at the central facility and by the lack of sufficient gas for gas lifting of the oil wells. The Company had completed work on two additional wells that had sufficient gas flow rates to supply the necessary gas lift gas immediately prior to shutting down for the hurricane. The Company completed a majority of the repairs caused by the hurricane and began producing on a limited basis in September 2006, however continuous operations were not maintained until replacement of the over-sized rental compressor in April 2007. The Company was producing at approximately 40-45 Bopd and 600 mcfpd (net sales 350 mcfpd) at year end and is currently limited by its ability to dispose of salt water produced in the field. Currently oil production is around 85 Bopd with gas sales at approximately 100-200 mcfpd. Coquille Bay field has numerous workover opportunities available to increase production and reserves.
Haynesville Field
The Haynesville field is located in Claiborne and Webster Parishes in north Louisiana and the leases owned by Imperial have produced from the shallow Tokio sand at depths of approximately 3,500 feet. The Company owns an interest and operates some 21 wells in the field capable of producing approximately 128 Bopd. Current production from six completions is approximately 40 Bopd. A typical Tokio completion produces approximately 5-6 Bopd and 100-150 Bwpd. Presently the Company is waiting on a pulling unit to complete its remedial work program to repair rod parts and tubing leaks and return the remaining wells to production. All of the leases are held by deeper Cotton Valley gas production owned by other companies. The Company owns and operates its own salt water disposal facilities on the leases. High volume lift equipment could significantly enhance production.
Bastian Bay Field
The Company has assumed the operations of the Bastian Bay State Lease 16152 #1 well located in Plaquemines parish, Louisiana and owns an 82.62 % working interest and a 62.95% net revenue interest before 150% payout of all costs and a 44.115% and a 33.611% net revenue interest after payout. The well was originally drilled by Weaver Exploration in 1982 and discovered gas in a new fault block on the southeast side of the Bastian Bay field. The well tested 2.5 million cubic feet of gas per day from a reservoir at 15,300 feet with 4,500 # flowing tubing pressure on 12/64ths choke. The well was shut in pending installation of the pipeline. Unfortunately the proposed line was scheduled to be laid through existing oyster leases and a lawsuit arose that delayed the laying of the line for several years. During this time, Weaver Exploration filed for bankruptcy and the leases were returned to the Louisiana Resource Development Corporation.
Royal-T Oil Co., Inc. acquired the rights from the LRDC in 1999 and settled the lawsuit with the oyster farmer and laid the flowline to a nearby Hilcorp platform. Royal-T opened the well for production and tested the well at 2.5 mmcfpd with 4,500# flowing tubing pressure on a 12/64ths choke when a wellhead leak forced Royal-T to kill the well in order to repair the leak. Royal-T perforated the well at 4,000 feet and circulated and pumped bay water into the well and eventually killed the well. After repairing the wellhead, royal-T was unable to swab the well on for production. Subsequently Royal-T re-perforated the well but ran out of funds before it could swab the well online. The well presently builds up surface pressure to 2,500# and the produces gas for several hours before loading up. The Company jetted the well with a coiled tugging unit in March 2006 after a failed attempt to run a TDT-P log due to being unable to reach bottom as a result of the tite spots in the tubing. The well did not sustain flow after the coiled tubing work and appears to have formation damage as the most recent tests indicate. The Company intends to re-perforate the well to attempt to re-establish communication with the reservoir.
LulingField
The Company owns the lease rights to the Pecan Gap formation and has acquired a 100% working interest and a 75% net revenue interest in 31 wells located in Guadalupe county, Texas that are productive in the Pecan Gap formation based on sidewall core and conventional core information. The Pecan Gap occurs at about 1,900 feet in these wellbores and is located above the Austin Chalk, which is the primary target in this field. It is expected that an average well will produce at a 30 Bopd rate and recover about 17.4 MBO after fracture stimulation in the Pecan Gap. The formation is approximately 100 feet in thickness. The Company is considering using coiled tubing to drill multiple short laterals in existing wellbores to develop the Pecan Gap formation. Infrastructure work is underway to begin workover operations.
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Kentucky Properties
The Kentucky properties are located in two fields in western Kentucky, the Shrewsbury field, in Grayson County and the Claymour field, in Todd County. Both properties required new leases be obtained, and that effort has been underway by the Company. At present the Company has acquired a total of approximately 3,500 acres in the Claymour area. The Claymour field has approximately 29 wells tied into the 15 mile pipeline and gathering system that was purchased with the properties. The leases had lapsed and the Company has obtained approximately 3,500 acres of new leases. The primary producing zone is the New Albany Shale zone at 1,600 feet. The Company plans rework the existing vertical wells for production and to drill new horizontal wells to determine the benefit that may be gained in production rates by horizontal drilling. The Company believes that significant economic benefit can be obtained by horizontal drilling in the New Albany Shale in this area. In the Shrewsbury field, the Company has not completed any new leasing yet. No proved reserves are included in the reserve report for these properties at this time.
Principal Exploration and Development Projects: Mining Ventures
The Company considers its mining activities to be in the exploration stage at this time.
United States Mines
UFO Mine
Until the formation of the Joint Venture, subsequent to year-end 1998, the Company owned the UFO Mine and Rumico Millsite located in Yavapai County, Arizona comprising some 400 acres of unpatented mining claims. The principal resource discovered to date is copper. Working capital limitations had limited the Company’s exploration of the mining property, in favor of other projects. As a result, the Company entered into a Mining Joint Venture in November 1997. The property, was subject to an acquisition note with the former owners requiring the payment of $1,000,000. The note had been extended several times by the holder and the mining claims served as collateral for the note. The Company negotiated a Mining Joint Venture with Mr. Zane Pasma in November 1997 that retired the note payable and secured the return of 1,000,000 shares of the Company’s common stock (pre-split) for the assignment of the Company’s interest in the Lone Star claims and a contribution of the Company’s interest in the Congress Mill Site facility. The Company retained a 5% carried interest in the Mining Joint Venture through the initial $6.0 million spent by the Joint Venture to develop the property. Mr. Pasma manages the Mining Joint Venture and began initial exploration activities in 1998. The results of initial recovery tests for platinum group metals were disappointing and the Joint Venture Manager suspended exploration activities to seek an industry partner or other financing for the development of the copper and gold. The Company does not expect any activity during the current fiscal year.
Duke Mine
The focus of the Company’s exploration activity related to the Duke Mine during fiscal 2004 has been to seek a partner to finance or joint venture the operations on the Duke Mine located in San Juan County, Utah. The property comprises some 2,240 acres of unpatented mining claims in the Dry Valley Gold Claim area. Access to the property is excellent via blacktop roads adjacent to the claims. The property is located some 20 miles south of Moab, Utah. The primary mineralization at the Duke Mine occurs as microscopic gold located in very fine grain placer material. Sieve analysis of the sand indicates that about 71% of the material are larger than 200 mesh. Recovery tests have been conducted on a grid sampling pattern throughout the claim area utilizing the Cosmos Concentrator. Because of the nature of the placer material and in particular its size, mining and process recovery activities will be significantly simplified, thereby reducing costs. The Company has conducted additional recovery tests utilizing other equipment in addition to the Cosmos Concentrator. Water is readily available, however, drilling is required.
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The Company constructed a pilot plant in 1998 at the Duke Mine and moved portable Cosmos Concentrator on site. The Company spent approximately $185,000 to conduct pilot recovery tests under a small miner’s permit exemption. Pilot plant results were encouraging despite mechanical start-up problems. Upon completion of its pilot tests, the Company suspended any further exploration until construction of a full-scale modular facility can be completed. Subject to capital availability, permitting and construction schedules, the cost to construct a full scale facility is approximately $8.0 million to achieve a capacity of 10,000 tons per day. Presently there are 5 other companies active in the development of claims in the vicinity of the Duke Mine. The Company entered into discussions with a mining company to provide the capital and manage the development of the mine and completed an agreement in connection with the change of control of Warrior in which the Company would retain a 5% net smelter royalty. The mining company was unable to complete its capital efforts in relation to the Duke Mine and as a result the Company re-assumed control of the claims and the mine.
Competition
There are many companies and individuals engaged in the oil and gas business. Some are very large and well established with substantial capabilities and long earnings records. The Company is at a competitive disadvantage with some other firms and individuals in acquiring and disposing of oil and gas properties, since they have greater financial resources and larger technical staffs than the Company. In addition, in recent years a number of new small companies have been formed which have objectives similar to those of the Company and which present substantial competition to the Company.
A number of factors, beyond the Company’s control and the effect of which cannot be accurately predicted, affect the production and marketing of oil and gas and the profitability of the Company. These factors include crude oil imports, actions by foreign oil producing nations, the availability of adequate pipeline and other transportation facilities, the marketing of competitive fuels and other matters affecting the availability of ready market, such as fluctuating supply and demand.
The Company currently sells a substantial portion of its oil and gas production on “spot” market or short term contracts. During the year ended July 31, 2007, the Company sold approximately 42.9% and 21.0% of its oil and gas to Plains Marketing and Mideast Gas Systems respectively. The Company does not believe that the loss of any of these purchasers would significantly impair its operation.
The acquisition of mining claims prospective for precious metals or other minerals or oil and natural gas leases is subject to intense competition from a large number of companies and individuals. The ability of the Company to acquire additional leases or additional mining claims could be curtailed severely as a result of this competition.
The principal methods of competition in the industry for the acquisition of mineral leases is the payment of bonus payments at the time of acquisition of leases, delay rentals, advance royalties, the use of differential royalty rates, the amount of annual rental payments and stipulations requiring exploration and production commitments by the lessee. Companies with far greater financial resources, existing staff and labor forces, equipment for exploration and mining, and vast experience will be in a better position than the Company to compete for such leases.
Government Contracts
No portion of the Company’s business is subject to re-negotiation of profits or termination of contracts or subcontracts at the election of the Government. The Company has assumed operations of the Coquille Bay facility which is subject to an Operating Agreement negotiated by the Company’s predecessor with the State of Louisiana.
Regulation
Federal, state and local authorities extensively regulate the oil and natural gas and mining industry. Legislation affecting these industries is under constant review for amendment or expansion. Numerous departments and agencies, both federal and state, have issued rules and regulations binding on the oil and natural gas and mining industry and their individual members some of which carry substantial penalties for the failure to comply. The
19
regulatory burden on these industries increases their cost of doing business and consequently, affects their profitability. Inasmuch as such laws and regulations are frequently amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations.
The Company’s operations are subject to extensive federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. Permits are required for various of the Company operations, and these permits are subject to revocation, modification and renewal by issuing authorities. Governmental authorities have the power to enforce compliance with their regulations and violations are subject to fines, injunctions or both. It is possible that increasingly strict requirements will be imposed by environmental laws and enforcement policies hereunder. The Company is also subject to laws and regulations concerning occupational safety and health. It is not anticipated that the Company will be required in the near future to expend amounts that are material in the aggregate to the Company's overall operations by reason of environmental or occupational safety and health laws and regulations but inasmuch as such laws and regulations are frequently changed, the Company is unable to predict the ultimate cost of compliance.
Title to Properties
Oil and Natural Gas
In general, limited or only old title opinions exist on the leases, however, title surveys have been conducted by landmen and title lawyers in the normal course of the Company’s acquisition and financing efforts. The Company has reviewed the validity and recording of the leases at the county courthouses in which the properties are located and believes that it holds valid title to its properties.
Mining
The Company does not have title opinions on its mining claims or leases and, therefore, has not identified potential adverse claimants nor has it quantified the risk that any adverse claims may successfully contest all or a portion of its title to the claims. Furthermore, the validity of all unpatented mining claims is dependent upon inherent uncertainties such as the sufficiency of the discovery of minerals, proper posting and marking of boundaries, and possible conflicts with other claims not determinable from descriptions of record. In the absence of a discovery of valuable minerals, a mining claim is open to location by others unless the claimant is in actual possession of and diligently working the claim (pedis possessio) No assurance can be given with respect to unpatented mining claims in the exploratory stage that a discovery of a valuable mineral deposit will be made.
To maintain ownership of the possessory title created by an unpatented mining claim against subsequent locators, the locator or his successor in interest must pay an annual fee of $200 per claim.
Operational Hazards and Insurance
The operations of the Company are subject to all risks inherent in the exploration for and operation of oil and natural gas properties, wells and facilities and mines and mining equipment, including such natural hazards as blowouts, cratering and fires, which could result in damage or injury to, or destruction of, drilling rigs and equipment, mines, producing facilities or other property or could result in personal injury, loss of life or pollution of the environment. In addition, weather related hazards, such as tornados and hurricanes may pose a threat to certain of the Company’s wells and facilities from time-to-time. Any such event could result in substantial expense to the Company which could have a material adverse effect upon the financial condition of the Company to the extent it is not fully insured against such risk. The Company carries insurance against certain of these risks but, in accordance with standard industry practices, the Company is not fully insured for all risks either because such insurance is unavailable or because the Company elects not to obtain insurance coverage because of cost, although such operational risks and hazards may to some extent be minimized. No combination of experience, knowledge and scientific evaluation can eliminate the risk of investment or assure a profit to any company engaged in oil and gas or mining operations.
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Employees
The Company employs one person in its Evansville, Indiana office whose functions are associated with management, operations and accounting. The Company uses independent contractors to assist in its land and accounting functions and to supervise its oil, gas and mining business.
ITEM 3. | Legal Proceedings. |
Imperial Petroleum, Inc. v. Ravello Capital LLC
The Company filed suit in Federal District Court in Tulsa County, Oklahoma against Ravello Capital LLC (“Ravello”) on November 20, 2000. The suit alleged breach of contract and sought to have the contract declared partially performed in the amount of $74,800 and sought relief in the amount of $488,390 for the unpaid consideration and punitive damages and attorneys fees. The Company received a judgment award against Ravello in the amount of $488,390 and subsequently collected and credited the judgment in the amount of $85,638.02 as a result of the re-issuance of certain of its shares in Warrior, held by Ravello in escrow and not released. The Company does not believe it will be successful in collecting the balance of the judgment against Ravello.
The Company, through its predecessor in interest, was named with others in a breach of its duties to act as a reasonably prudent operator in the development of the Crump Gas Unit in Panola County, Texas. The Crump Unit encompasses the Company’s Mittie Horton well. The Plaintiff is seeking a cancellation of the lease for failure to produce hydrocarbons in paying quantities or alternatively to establish a lien against the leasehold to secure payment of plaintiff's damages resulting from the Company's failure to develop the property. The Company executed a farm out agreement with Burke Royalty (“Burke”), a co-defendant in the suit, regarding the acreage in question. Burke negotiated a settlement under which the Plaintiffs would arrange to drill additional wells. The Company has a 12.5% carried working interest in the first well drilled in the unit and the right to participate for a 12.5% working interest in subsequent wells. Chesapeake is the operator of the exploration agreement and has not recognized the Company’s interest in these wells to date. The Company has contacted Chesapeake and has provided documentation to Chesapeake which the Company believes demonstrates its ownership. No response from Chesapeake has been received yet.
ITEM 4. | Submission of Matters to a Vote of Security Holders. |
The Company held its Annual Meeting of Shareholders on August 1, 2006. At that meeting, the shareholders approved the following corporate actions: (1) approved the election of five Board members, including Jeffrey T. Wilson, Annalee C. Wilson, Aaron M. Wilson, Malcolm W. Henley and James M. Clements; (2) approved the appointment of Briscoe Burke & Grigsby LP as the Company’s auditors for 2006; (3) approved a four for one (4 for 1) reverse split of the Company’s common stock; (4) approved an increase in capitalization of the Company’s common stock from 50,000,000 shares to 150,000,000 shares; and (5) approved the sale of 151 wells to Whittier and Premier Natural. (See Proxy dated July 11, 2006.)
PART II
ITEM 5. | Market For Registrant’s Common Stock; and Related Stockholder Matters. |
The Company’s common stock is traded in the over-the-counter market. From 1984 to 1997 trading had been so limited and sporadic that it was not possible to obtain a continuing quarterly history of high and low bid quotations. Stock information is received from registered securities dealers and reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The Company was advised that trading in its shares resumed in September 1997 and the Company’s stock was quoted at approximately $0.25 per share in sporadic trading. At July 31, 2007, the approximate bid price for the Company’s common stock was $0. 20 per share and the approximate asked price was $0.25 per share.
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No dividends have ever been paid by the Company on its common stock and it is not anticipated that dividends will be paid in the foreseeable future.
There are approximately 603 holders of record of the Company’s common stock.
ITEM 6. | Selected Financial Data. |
| | | | | | | | | | | | | | | |
| | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
Operating Revenue | | 1,143,194 | | | 3,435,006 | | | 2,963,651 | | | 1,931,593 | | | 0 | |
Income (loss) from continuing opns | | (1,655,802 | ) | | 372,878 | | | 73,783 | | | 223,678 | | | (1,342,321 | ) |
Net Income (loss) | | (3,243,996 | ) | | (3,426,724 | ) | | (2,695,812 | ) | | (1,450,822 | ) | | (1,321,597 | ) |
Net Income (loss) per share | | (0.28 | ) | | (0.31 | ) | | (0.26 | ) | | (0.16 | ) | | (0.21 | ) |
Total Assets | | 6,101,286 | | | 18,085,079 | | | 17,082,279 | | | 16,502,317 | | | 2,535,734 | |
Stockholder’s Equity | | (7,354,022 | ) | | (5,428,118 | ) | | (2,198,762 | ) | | 28,340 | | | 67,934 | |
Cash Dividends Paid per Common Share | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Number of Outstanding Shares (weighted) | | 11,487,701 | | | 10,949,465 | | | 10,465,050 | | | 8,912,026 | | | 6,194,264 | |
ITEM 7. | Management’s Discussion and Analysis of the Financial Condition and Results of Operations. |
Results of Operations
The factors which most significantly affect the Company’s results of operations are (i) the sale prices of crude oil and natural gas, (ii) the level of oil and gas sales, (iii) the level of lease operating expenses, and (iv) the level of and interest rates on borrowings. The Company will need to rely on the initiation operations on its mining ventures and its oil and natural gas operations to generate cash flow and future profits. The same factors listed above will apply to the sale of minerals and metals mined by the Company as well as oil and natural gas produced by the Company. As the Company initiates production on its mining properties, results of operations will be affected by: (i) commodity prices for copper and gold, (ii) the quantity and quality of the ores recovered and processed, and (iii) the level of operating expenses associated with the mining operations.
Crude oil and natural gas prices increased significantly during fiscal 2007 with New York Mercantile Exchange (“NYMEX”) prices quoted at approximately $68.38/Bbl for oil and $7.22 per Mmbtu for natural gas at July 31, 2007. Since that time prices have continued to remain high. The forward “strip” price for oil and natural gas as posted by the NYMEX representing the average of the next 24 months was approximately $76.21/Bbl and $7.61/Mmbtu beginning with November 2007 delivery month. The impact of continued high prices will be positive on cash flow and the exploitation of existing properties owned by the Company, however, continued high prices will reduce the availability of quality acquisitions and could change the Company’s future growth strategy. At the present time the Company believes it has a substantial inventory of quality development opportunities to sustain its growth strategy without additional acquisitions. The Company expects oil and gas prices to continue to fluctuate and to be influenced by Asian economies and potential disruptions in supplies, in particular events in the Middle East and North Korea.
Prices for gold had remained relatively stable during the past several years and had generally reflected the relatively low inflation rates predominate in the economies of the industrialized nations. Recently, gold prices began a significant upward price adjustment, which may reflect a shift from the traditional dependence upon gold as a financial hedge against inflation. Current spot prices for gold are $725.00 per ounce and are expected to continue to remain at or near those levels. The Company does not expect to realize any substantial increase in the price of gold in the future.
Copper prices have fluctuated dramatically since the Company’s acquisition of its copper property with prices ranging from a low of about $0.65 per pound in August 1993 to a high of $3.40 per pound today. Wide variations in copper prices have resulted from the increased demand for electrical wire and copper related products as a result of the continued high growth rate of the economies of the industrialized nations and as a result of periodic reductions in the availability of scrap copper for recycling. Continued fluctuations in the spot price for copper are expected to result from variations in the availability of scrap copper and the continued strong demand from emerging nations.
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Year ended July 31, 2007 compared to year ended July 31, 2006
Total revenues for the Company for the year ended July 31, 2007 were $1,143,194 compared to $3,435,006 for the prior year and represent a 67% decrease due to the sale of assets in 2006. Continuous production at Coquille Bay was not achieved until April 2007 and had only a small impact on revenues from the remaining properties after the sale during fiscal 2007. The Company expects its revenues to increase as a result of the continuous production from its Coquille Bay field in 2008.
Total operating expenses for the year ended July 31, 2007 were $2,798,996 compared to $3,062,128 for the year earlier. Operating expenses increased due to charges incurred for the issuance of warrants to consultants and as a result of fees associated with the sale of assets and the refinancing of the Company’s senior debt. Direct oil and gas operating expenses decreased from $1,289,074 in fiscal 2006 to $729,293 as of July 31, 2007 and remained high due to the remaining repairs in south Louisiana. General and administrative costs (“G&A”) for the year ended July 31, 2007 were $1,905,298 compared to $989,514 for the year ended July 31, 2006 and reflect additional expenses associated with the issuance of warrants, the sale of assets and refinancing of the Company’s senior debt. G&A costs are expected to decrease significantly in fiscal 2008. Interest costs decreased to $1,716,183 for the year ended July 31, 2007 compared to $2,792,962 for the prior year as a result of decreased borrowings. Interest costs are expected to remain at about this level in fiscal 2008.
The Company incurred an after tax loss of $3,243,996 ($0.28 per share) for the fiscal year ended July 31, 2007 compared to a loss of $3,426,724 ($0.31 per share) for the prior year. The reduction in the net loss is primarily the result of a gain from the sale of properties of approximately $865,190 The largest component of the net loss is interest expense. Depreciation, depletion and amortization costs decreased from a total of $1,788,350 last year to $914,878 in the current year due to the sale of assets. The Company expects to continue to incur losses until its workover program is completed and its production is maximized.
Year ended July 31, 2006 compared to year ended July 31, 2005
Total revenues for the Company for the year ended July 31, 2006 were $3,435,006 compared to $2,963,651 for the prior year and represent a 16% increase. The increase in revenues is a result of increased commodity prices during the year. Production volumes decreased by 10% primarily due to losses associated with hurricanes Rita and Katrina in Louisiana. As a result of the sale of assets, the Company expects its oil and gas revenues to decrease significantly during the first quarter of fiscal 2006 but should rebound as production is increased at Coquille Bay and North Louisiana in the late first quarter.
Total operating expenses for the year ended July 31, 2006 were $3,062,128 compared to $2,889,868 for the year earlier. Operating expenses increased due to increased activity at Coquille Bay. General and administrative costs (“G&A”) for the year ended July 31, 2006 were $989,514 compared to $577,651 for the year ended July 31, 2005 and reflect additional expenses associated with the engagement of Macquarie Securities as the Company’s investment banker in the sale of assets. G&A costs will continue to increase in the first quarter due to costs associated with the Proxy solicitation related to the Company’s August 1, 2006 Annual meeting of the Shareholders and the resulting sale of assets. Interest costs increased to $2,792,872 for the year ended July 31, 2006 compared to $2,163,180 for the prior year as a result of the increase in rates associated with the Company credit facility and increased borrowings. Interest costs will decrease with the repayment of approximately $13.0 million in debt as a result of the asset sale.
The Company incurred an after tax loss of $3,426,724 ($0.31 per share) for the fiscal year ended July 31, 2006 compared to a loss of $2,695,812 ($0.26 per share) for the prior year. The largest component of the net loss is interest expense, representing 82%. Depreciation, depletion and amortization costs increased from a total of $1,495,074 last year to $1,788,350 in the current year as a result of additional fees associated with the Company’s Forbearance Agreement and amendments thereto. The Company expects to continue to incur losses until its operations in Coquille Bay are producing.
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Capital Resources and Liquidity
Because of the closing of the Hillside, Warrior and Coquille Bay asset acquisitions in 2004, the Company’s capital requirements relate primarily to the remedial efforts to return wells to production and to workover and repair operations on various wells to increase production, including the repairs required at Coquille Bay after hurricane Katrina. Now that the repairs at Coquille Bay are completed and production has been re-established, the Company has a great deal of flexibility in the timing and amount of these expenditures. Capital expenditures for the most recent year totaled $652,306 which was funded from borrowings under the Company’s credit facility and out of cash flow generated by the properties.
As a result of the inability of the Company to raise capital for its mining operations, Management decided to terminate all of the Company’s mining lease commitments except the Duke Gold Mine in Utah during fiscal 2000. As a result, the Company is active in only one mine that will require significant capital expenditures. The Company has a wide degree of discretion in the level of capital expenditures it must devote to the mining project on an annual basis and the timing of its development. The Company has primarily been engaged, in its recent past, in the acquisition and testing of mineral properties to be inventoried for future development. Because of the relative magnitude of the capital expenditures that may ultimately be required for any single mining venture as operations are achieved, management has pursued a strategy of acquiring properties with significant mineral potential in an effort to create a mineral property base sufficient to allow the Company to access capital from external sources, either through debt or equity placements. Management decided to seek a partner for the Duke Mine during 2005 and focus its management resources and limited capital on the oil and natural gas properties acquired from Hillside and Warrior and to focus on additional acquisitions in the oil and gas sector. The Company completed a joint venture arrangement with ATLCC during the year that, however ATLCC failed to provide the development capital and the Company re-assumed operations of the property.
As a result of the impact of hurricane Katrina to the Company’s south Louisiana operations and facilities, the Company became non-compliant with the terms of its original credit agreements which had been put in place in early 2004. The Company decided to pursue the sale of assets to reduce bank debt and negotiated a Forbearance Agreement with its lenders in February 2006 to allow it sufficient time to complete a sale of assets The Company signed a Definitive Purchase and Sales Agreement with Whittier Energy Company and Premier Natural Resources LLC that was closed on August 9, 2006. The proceeds of the initial closing (also referred to as Phase I) of approximately $12.0 million were used to reduce senior debt by $11.3 million and to pay vendor payables. A second closing (also referred to as Post-Closing or Phase II Closing) of the asset sale to Whittier and Premier occurred on November 9, 2006 and resulted in approximately $1.85 million in additional proceeds to the Company that were used to further retire senior debt ($1.7 million) and to reduce vendor payables ($0.15 million).
In April 2007, the Company completed a re-financing of its senior and subordinated debt facility with its current lenders consisting of a $15.0 million Revolving Loan facility and a $0.35 million subordinated debt facility. The total amount borrowed under the re-financing was approximately $10.2 million under the combined credit facility and included approximately $0.3 million for the acquisition of the Caltex properties and $0.85 million for workovers and working capital. The availability under the Revolving Loan is subject to semi-annual evaluations of the Company’s oil and gas reserve base as determined by the Lender and is reduced monthly based upon re-determinations by the Company after taking into effect price changes and net production. As of the closing date of April 2007, the Company had available borrowing capacity of approximately $10.5 million based upon the current oil and gas properties evaluation. The Revolving Loan has a term of 2 years (April 14, 2009) and an interest rate of LIBOR plus 1,100 basis points and subject to a LIBOR floor of 5%. (The LIBOR Rate for July 2007 was 5.37%). The Revolving Loan is subject to the normal and customary financial covenants and is secured by a first mortgage and lien right to all of the Company’s operations and assets. In addition the Lender is granted a 2.5 % over-riding royalty interest payable from the monthly production of the Company. As of July 31, 2007 the Company was in compliance with the covenants of credit agreements. In connection with the Revolving Loan, the Company also completed a subordinated financing of approximately $350,000 with a Bank of Oklahoma. The terms of the Subordinated Financing are a term of 2 years from the closing date (April 14, 2009) and an interest rate of 8% per annum paid in kind and accrued to the loan balance due at maturity. The Company can retire the Subordinated debt only after payment of the Revolving Loan.
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The timing of expenditures for the Company’s oil and natural gas and mining activities are generally distributed over several months, and as such, the Company anticipates its current working capital will be sufficient to meet its capital expenditures. The Company has no immediate plans to spend any capital on the Duke Mine during the present fiscal year. The Company believes it will be required to access outside capital either through debt or equity placements or through joint venture operations with other mining companies to develop the Duke Mine. There can be no assurance that the Company will be successful in its efforts to locate outside capital and as a result the level of the Company’s mining activities may need to be curtailed, deferred or abandoned entirely.
The level of the Company’s capital expenditures will vary in the future depending on commodity market conditions and upon the level of oil and gas activity achieved by the Company and the success of its remedial workover operations. The Company anticipates that its cash flow will be sufficient to fund its operations at their current levels and that additional funds or borrowings will be required for expansion. Because the timing of acquisitions of additional oil and gas properties is uncertain, additional borrowings will be required to fund new acquisitions and the timing of those borrowings is uncertain. the Company has unused availability under its existing credit facility that can be used to complete some additional acquisitions, subject to lender approval. Depending upon the size of a potential new acquisition, the Company believes it may be necessary to raise equity, either through the issuance of additional shares to new investors or the sale of certain of its remaining oil and gas properties. The Company is pursuing additional acquisitions at the present time. The Company has obtained certain unsecured loans from its Chairman and President, Jeffrey T. Wilson, which total in principal approximately $483,918 as of July 31, 2007. These funds have been used to initiate the Company’s oil and gas and mining activities and fund its overhead requirements. Management believes that the Company will not need to borrow additional funds from these sources in the future.
At July 31, 2007, the Company had current assets of $1,212,002 and current liabilities of $2,607,626, which resulted in negative working capital of $1,395,624. The negative working capital position is comprised of trade accounts payable of $1,108,977, of accrued expenses payable of $430,962 consisting primarily of interest and accrued salaries payable to the Company’s President, notes payable to the Company’s President of $483,918, and third party notes payable of $115,955. As of July 31, 2007 the Company had cash and cash equivalents of $588,658.
Oil and Gas Hedging
The Company’s production is currently not hedged.
Seasonality
The results of operations of the Company are seasonal due to seasonal fluctuations in the market prices for crude oil and natural gas. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of results, which may be realized on an annual basis.
Inflation and Prices
The Company’s revenues and the value of its oil and natural gas and mining properties have been and will be affected by changes in the prices for crude oil, natural gas and gold prices. The Company’s ability to obtain additional capital on attractive terms is also substantially dependent on the price of these commodities. Prices for these commodities are subject to significant fluctuations that are beyond the Company’s ability to control or predict.
Off Balance Sheet Arrangements
None.
Contractual Obligations
See above, Capital Resources and Liquidity.
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Long-Term Debt
(See above, Capital Resources and Liquidity.) The Company has two credit facilities in place in connection with its oil and gas operations: (a.) an $15,000,000 Revolving Loan that expires on April 14, 2009 and (b.) a $350,000 subordinated note payable to Bank of Oklahoma that expires on Apri114, 2009.
Revolving Loan
The Company completed the Revolving Loan, an $15 million revolving financing of which approximately $9.6 million was required at closing, including approximately $0.25 million in working capital, $0.3 million for the Caltex acquisition and $0.6 million in development capital for workovers. The availability under the Revolving Loan is subject to semi-annual evaluations of the Company's oil and gas reserve base as determined by the Lender and is reduced monthly based upon re-determinations by the Company after taking into effect price changes and net production. As of the closing date of April 2007, the Company had available borrowing capacity of approximately $10.5 million based upon the current oil and gas properties evaluation. The Revolving Loan has a term of 2 years (April 14, 2009) and an interest rate of LIBOR plus 1,100 basis points and subject to a LIBOR floor of 5%. (The LIBOR Rate for July 2007 was 5.37%). The Revolving Loan is subject to the normal and customary financial covenants and is secured by a first mortgage and lien right to all of the Company’s operations and assets. In addition the Lender is granted a 2.5 % over-riding royalty interest payable from the monthly production of the Company. As of July 31, 2007 the Company was in compliance with the covenants of credit agreements
Subordinated Debt
In connection with the Revolving Loan, the Company also completed a subordinated financing of approximately $350,000 with a Bank of Oklahoma. The terms of the Subordinated Financing are a term of 2 years from the closing date (April 14, 2009) and an interest rate of 8% per annum paid in kind and accrued to the loan balance due at maturity. The Company can retire the Subordinated debt only after payment of the Revolving Loan.
ITEM 7A. | Quantitative and Qualitative Disclosure about Market Risk. |
Commodity Risk
Our major commodity price risk exposure is to the prices received for our natural gas and oil production. Realized prices for our production are the spot prices applicable to natural gas and crude oil. Prices received for natural gas and oil are volatile and unpredictable and are beyond our control.
Interest Rate Risk
We have long-term debt subject to risk of loss associated with movements in interest rates.
ITEM 8. | Financial Statements and Supplementary Data. |
Our consolidated financial statements are included in this report beginning of page F-1.
ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
ITEM 9A. | Controls and Procedures. |
In connection with the preparation of this annual report on Form 10-K/A, our President and Chief Executive Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2007, pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our President and Chief Executive Officer concluded that as of July 31, 2007 our disclosure controls and procedures were effective to provide reasonable assurance that information required to be
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disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Security and Exchange Commission’s rules and forms; and to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to management, including our certifying officers, as appropriate, to allow timely decisions regarding required disclosures.
Weaver & Martin, the Company’s auditors for the year ended July 31, 2006, notified the Audit Committee that a material weakness existed in the Company’s internal controls such that in its belief the accounting personnel of the Company did not possess the necessary skills to achieve accurate financial reporting in accordance with U.S. generally accepted accounting principals nor the requirements of the Exchange Act Rules 13a-14 and 15d-14. Furthermore, Briscoe advised the Audit Committee that a reportable condition was also noted in the Company’s internal controls in regards to segregation of duties and that the Company should take steps to segregate duties in the accounting function to assist in alleviating these control deficiencies. So as to rectify these material weaknesses, the Company determined that, as a matter of its regular business practice, it would engage third party accountants to assist the Company in compiling its financial information for all subsequent years until such time as the Company may retain additional internal accounting staff. The Company immediately engaged a third party accounting firm, Davis, Kinard & Co, P.C., to assist and review its accounting functions and as a result, the prior material weaknesses did not have a significant impact on the financial statements for the year 2007 period being reported on this Form 10-K.
The Company’s Certifying Officers believe that the engagement of additional accounting expertise to assist in book keeping and the compilation of its financial information will ensure that its accounting processes will be more streamlined and effective. As of the end of the period covered by this report, the Company’s Certifying Officers believe that the steps taken by the Company have remediated any and all material weaknesses in internal controls and in disclosure controls and weaknesses. As of the date of this report the Company’s Certifying Officers believe that the steps taken by the Company have remediated any and all material weaknesses in internal controls and disclosure controls and weaknesses and conclude that in going forward, the disclosure controls and procedures will be effective.
Changes in Internal Controls
The Company changed its system of internal controls in 2005 to include the review and compilation of its financial information by independent accountants in cooperation with the Company’s own internal staff. No additional changes in internal controls were made during 2007. The Company’s Certifying Officers believe that these previous changes to the Company’s system of internal control over financial reporting has materially affected, and is reasonably likely to materially affect, the Company’s system of controls over financial reporting in the future.
ITEM 9B. | Other Information. |
None.
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PART III
ITEM 10. | Directors and Executive Officers of Registrant. |
Directors and Executive Officers
The following table sets forth certain information regarding the directors, executive officers and key employees of the Company.
| | | | |
Name | | Age | | Position |
Jeffrey T. Wilson | | 54 | | Director, Chairman of the Board, President and Chief Executive Officer |
Annalee C. Wilson | | 51 | | Director |
Aaron M. Wilson | | 28 | | Director |
Malcolm W. Henley | | 55 | | Director |
J. Gregory Thagard | | 44 | | Director |
Note: Mr. James M. Clements resigned effective August 2, 2007 citing personal reasons.
Biographical Information
Jeffrey T. Wilson has been Director, Chairman of the Board, President and Chief Executive Officer of the Company since August 1993. Mr. Wilson was a Director, Chairman and President of LaTex Resources, Inc., an affiliate of the Company, and was the founder of its principal operating subsidiary, LaTex Petroleum Corporation. Prior to his efforts with LaTex, Mr. Wilson was Director and Executive Vice President of Vintage Petroleum, Inc. and was employed by Vintage in various engineering and acquisition assignments from 1983 to 1991. From August 1980 to May 1983 Mr. Wilson was employed by Netherland, Sewell & Associates Inc., a petroleum consulting firm. Mr. Wilson began his career in the oil and gas business in June 1975 with Exxon Company USA in various assignments in the Louisiana and South Texas areas. Mr. Wilson holds a Bachelor of Science Degree in Mechanical Engineering from Rose-Hulman Institute of Technology.
Annalee C. Wilson has been a Director of the Company since August 2001. Mrs. Wilson is the President of HN Corporation, an affiliate of the Company engaged in the operation of retail franchise outlets in malls selling motivation and inspiration material developed by Successories, Inc. and others and in the operation of a Christian restaurant and gift shop. Mrs. Wilson has an Associate Degree in Nursing from the University of Evansville.
Aaron M. Wilson has been a Director of the Company since August 2001. Mr. Wilson is a Vice president of HN Corporation and is the Manager of the Successories franchise store located at Castleton Square Mall owned by HN Corporation. Mr. Wilson received a dual degree in Business Economics and Political Science from the University of Kentucky in 2002.
Malcolm W. Henley has been a Director of the Company since August, 2006. Mr. Henley was a former officer of the Company and previously served as a Director from 1996 through 1999. Mr. Henley has over 25 years of experience in the petroleum industry and has been involved in many varied aspects of the industry. He holds a Bachelor of Arts Degree in Business Administration from Oklahoma State University and an Associate Degree in Petroleum Land Technology from Tulsa Junior College.
J. Gregory Thagardbecame a Director of the Company upon the resignation of Mr. Clements in August 2007. Mr. Thagard has extensive oil and gas experience as a landman and has recently been the managing partner of Hillside Oil and Gas LLC. Mr. Thagard is a 1978 graduate of the University of Texas and holds a Bachelor of Science degree.
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James M. Clements was a Director of the Company from August, 2006 to August 2007. Mr. Clements has extensive experience in financial planning and securities. He is certified as a financial planner and previously held a broker-dealer license issued by the NASD from 1995-2003. He holds a Bachelor of Science degree in financial services from San Diego State University. Mr. Clements announced his resignation in August 2007 for personal reasons.
Section 16(a) Reporting Deficiencies
Section 16(a) of the Exchange Act requires the Company’s directors and officers and persons who own more than 10% of a registered class of the Company’s equity securities, to file initial reports of ownership on Form 3 and reports of changes in ownership on Forms 4 and 5 with the SEC and the National Association of Securities Dealers (“NASD”). Such persons are required by SEC regulation to furnish the company with copies of all Section 16(a) forms they file.
Based upon a review of From 3, 4 and 5 filings made by the Company’s officers and directors during the past fiscal year ended July 31, 2007 under Section 16(a) of the Exchange Act, the Company believes that all requisite filings have been made timely.
ITEM 11. | Executive Compensation. |
The table below sets forth, in summary form, (1) compensation paid to Jeffrey T. Wilson, the Company’s Chairman of the Board, President and Chief Executive Officer and (2) other compensation paid to officers and directors of the Company. Except as provided in the table below, during the three fiscal years ended July 31, 2007, 2006 and 2005 (i) no restricted stock awards were granted, (ii) no stock appreciation or stock options were granted, (iii) no options, stock appreciation rights or restricted stock awards were exercised, and (iv) except as provided below, no awards under any long term incentive plan were made to any officer or director of the Company.
SUMMARY COMPENSATION TABLE
| | | | | | | | | |
| | Annual Compensation | | Long Term Awards Warrants |
Name and Principal Position | | Year | | Salary | | Bonus | | # shares |
Jeffrey T. Wilson | | 2007 | | $ | 140,000 | | | | 1,533,000 |
| | 2006 | | $ | 111,667 | | | | |
| | 2005 | | $ | 125,000 | | | | |
Annalee C. Wilson | | 2007 | | | | | | | 667,000 |
| | 2006 | | | | | | | |
| | 2005 | | | | | | | |
Aaron M. Wilson | | 2007 | | | | | | | |
| | 2006 | | | | | | | |
| | 2005 | | | | | | | |
Malcolm W. Henley | | 2007 | | | | | | | |
| | 2006 | | | | | | | |
| | 2005 | | | | | | | |
James M. Clements | | 2007 | | | | | | | 1,300,000 |
| | 2006 | | | | | | | |
| | 2005 | | | | | | | |
None of the executive officers listed received prerequisites or other personal benefits that exceeded the lesser of $50,000 or 10% of the salary and bonus for such officers. Directors are currently not paid for their service to the Company.
Mr. Thagard , and Mr. Malcolm Henley have received compensation as consultants to the Company in the current fiscal year ending July 31, 2007 in the amounts of $84,000 and $26,100 respectively.
29
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management. |
As of July 31, 2007, the Company has 14,622,202 issued and outstanding shares of common stock. The following table sets forth, as of July 31, 2007, the number and percentage of shares of common stock of the Company owned beneficially by (i) each director of the Company, (ii) each executive officer of the Company, (iii) all directors and officers as a group, and (iv) each person known to the Company to own of record or beneficially own more than 5% of the Company's common stock. Except as otherwise listed, the stockholders listed in the table have sole voting and investment power with respect to the shares listed. As of July 31,2007, the Company had approximately 603 holders of common stock of record.
| | | | | |
Name of Beneficial Owner | | Number of Shares Beneficially Owned | | Percent of Class | |
Jeffrey T. Wilson (1)(4) | | 2,608,461 | | 17.9 | % |
Annalee C. Wilson (2)(4) | | 980,154 | | 6.7 | % |
Aaron M. Wilson (3)(4) | | 50,808 | | 0.3 | % |
All officers and directors as a Group (3 people) at 7/31/2007 | | 3,639,423 | | 24.9 | % |
Taghmen Ventures Ltd (5) | | 1,200,000 | | 8.2 | % |
RAB Special Situations LP (6) | | 1,500,000 | | 10.3 | % |
James M. Clements (7) | | 1,682,190 | | 11.5 | % |
Total officers, directors and 5% shareholders | | 5,281,683 | | 54.9 | % |
(1) | The mailing address of Mr. Jeffrey Wilson is 11600 German Pines, Evansville, IN 47725. Includes 147,396 shares held jointly with Mrs. Wilson; includes 416,379 shares owned by HN Corporation in which Mr. Wilson owns 33.3%. Does not include 75,000 shares held in Trust by Old National Bank for Mr. Wilson’s children |
(2) | The mailing address of Mrs. Annalee Wilson is 11600 German Pines, Evansville, IN 47725. Includes 147,396 shares held jointly with Mr. Wilson; includes 832,758 shares owned by HN Corporation in which Mrs. Wilson owns 66.7%. Does not include 75,000 shares held in Trust by Old National Bank for Mrs. Wilson’s children. |
(3) | The mailing address for Mr. Aaron Wilson is 11600 German Pines Drive, Evansville, IN 47725. Includes 50,808 shares held in Trust by Old National Bank. |
(4) | The mailing address of HN Corporation is 3117 N First Ave., Evansville, IN 47710. Mrs. Annalee Wilson is the President of HN Corporation, Jeffrey T. Wilson is the Vice President of HN Corporation and Aaron M. Wilson is a Vice President of HN Corporation. |
(5) | The address of Taghmen Ventures Ltd. is EFG House, St Julian’s Avenue, St Peter Port Guernsey. |
(6) | The mailing address of RAB Special Situations LP is C/O Morgan Stanley 25 Cabot Square, 3rd Floor, Canary Wharf, London, E144QA. |
(7) | The mailing address of Mr. Clements is 3643 Baker Street, San Diego, CA 92117 |
ITEM 13. | Certain Relationships and Related Transactions. |
Jeffrey T. Wilson, Chairman, President and Chief Executive Officer of the Company has made unsecured loans to the Company which total $483,918 in principal as of July 31, 2007.
30
HN Corporation, a private retail company owned by Mr. Wilson and his wife, has made unsecured loans to the Company from time-to-time which total $0 in principal as of July 31, 2007. Annalee Wilson serves as the President of HN Corporation and owns 66.7% of its common stock, Jeffrey T. Wilson serves as the Vice President and Secretary of HN Corporation and owns 33.3% of its stock and Aaron M. Wilson serves as a Vice President of HN Corporation.
ITEM 14. | Principal Accountant Fees and Services. |
The following table presents the fees for professional audit services rendered by Weaver for the audit of the Company’s annual consolidated financial statements for the fiscal year ended July 31, 2007 and for the fiscal year ended July 31, 2006, and fees for other services rendered by each during those periods:
| | | | | | |
Fee Category | | Fiscal 2007 | | Fiscal 2006 |
Audit Fees | | $ | 30,000 | | $ | 30,000 |
Audit-Related Fees | | $ | 9,750 | | $ | 0 |
Tax Fees | | $ | 0 | | $ | 0 |
All Other Fees | | $ | 0 | | $ | 0 |
Total Fees | | $ | 39,750 | | $ | 30,000 |
Audit fees include fees related to the services rendered in connection with the annual audit of the Company’s consolidated financial statements, the quarterly reviews of the Company’s quarterly reports on Form 10-Q and the reviews of and other services related to registration statements and other offering memoranda. The audit fees in 2007 were comparable to those incurred in 2006.
Audit-related fees are for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of the Company’s financial statements.
Tax Fees include (i) tax compliance, (ii) tax advice, (iii) tax planning, and (iv) tax reporting.
All Other Fees includes fees for all other services provided by the principal accountants not covered in the other categories such as litigation support, etc.
All of the services for 2007 and 2006 were performed by the full-time, permanent employees of Weaver and Martin, LLC
All of the 2007 services described above were approved by the Audit Committee pursuant to the SEC rule that requires audit committee pre-approval of audit and non-audit services provided by the Company’s independent auditors to the extent that rule was applicable during fiscal year 2007. Weaver has not provided any services un-related to the audit during 2007.
PART IV
ITEM 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K. |
(a) | Financial Statements and Schedules |
Financial Statements of Imperial Petroleum, Inc.
Reports of Independent Public Accountants;
Consolidated Balance Sheets as of July 31, 2007 and 2006;
31
Consolidated Statements of Operations for the years ended July 31, 2007, 2006, and 2005;
Consolidated Statements of Stockholder Equity for the years ended July 31, 2007, 2006, and 2005;
Consolidated Statements of Cash Flows for the years ended July 31, 2007, 2006, and 2005;
Notes to Consolidated Financial Statements.
Supplemental Financial Information
Schedule II - Amounts Receivable from Related Parties. Other Schedules are omitted as they are not required.
The following reports were filed with the SEC on the dates shown and are included herein by reference:
8/15/05 8-K: Change of Auditors to Briscoe, Burke & Grigsby LLP
8/31/05 8-K: Termination of Merger Agreement with United Heritage Corporation.
12/7/05 8-K: Amendment #3 to Credit Facility and Forbearance Agreement.
2/24/06 8-K: Waiver Agreement with Senior Lender
5/9/06 8-K: Purchase and Sale Agreement with Whittier Energy Company and Premier Natural Resources LLC
7/6/06 DEF 14A: Definitive Proxy
8/4/06: 8-K: Notice of results of Annual Meeting
8/22/06: 8-K: Closing of sale of assets to Whittier & Premier
10/16/06 Change of auditors to Weaver & Martin LLC.
4/18/07: 8-K: Refinance of Senior and Subordinated Debt.
6/22/07: 8-K: Definitive Agreement to acquire assets from Apollo Resources International Inc.
8/07/07: 8-K: Termination of Apollo acquisition.
| | |
Exhibit Number | | Description |
| |
3.1 | | Certificate of Incorporation of the Registrant incorporated herein by reference to exhibit B of the Form 10. |
| |
3.2 | | Bylaws of the Registrant incorporated herein by reference to Exhibit B of the Form 10. |
| |
16.1 | | Letter re: change in certifying accountant. Included by reference to exhibit of Form 8-K, as filed with the SEC on August 16, 2006. |
| |
31.1 | | Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
| |
32.1 | | Certification of president and Chief Financial Officer as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
| |
99 | | Additional Exhibits: Not applicable. |
32
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. Imperial Petroleum, Inc.
| | | | | | | | |
IMPERIAL PETROLEUM, INC. | | | | |
| | | |
Date: November 8, 2007 | | | | | | /s/ Jeffrey T. Wilson |
| | | | | | | | Jeffrey T. Wilson, President |
| | | | | | | | and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| | | | |
Signature | | Title | | Date |
| | |
/s/ Jeffrey T. Wilson | | President and Chief Executive Officer | | November 8, 2007 |
Jeffrey T. Wilson | | (Principal Executive Officer) and | | |
| | Director | | |
33
IMPERIAL PETROLEUM, INC.
Index to Consolidated Financial Statements
Audited Financial Statements of Imperial Petroleum, Inc.
(See Item 15: Exhibits, Financial Statements and Reports on Form 8-K)
34
IMPERIAL PETROLEUM, INC.
INDEPENDENT AUDITORS’ REPORTS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Directors
Imperial Petroleum, Inc. and Subsidiaries
Evansville, Indiana
We have audited the accompanying consolidated balance sheet of Imperial Petroleum, Inc. and Subsidiaries as of July 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 Imperial Petroleum, Inc. and Subsidiaries as of July 31, 2007 and 2006 and the consolidated results of its operations and cash flows for the years then ended in conformity with U. S. generally accepted accounting principles.
The accompanying consolidated 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 suffered recurring losses from operations and is dependent upon obtaining debt financing for funds to meet its cash requirements. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with regard to these matters are also described in Note 2. The financial statements do no include any adjustments that might result from the outcome of this uncertainty.
|
/s/ Weaver & Martin, LLC |
Weaver & Martin, LLC |
Kansas City Missouri |
November 8, 2007 |
F-1
IMPERIAL PETROLEUM, INC.
INDEPENDENT AUDITORS’ REPORTS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Imperial Petroleum, Inc. and Subsidiaries
Evansville, Indiana
We have audited the accompanying consolidated balance sheet of Imperial Petroleum, Inc. and Subsidiaries as of July 31, 2005, and the related consolidated statements of operations, stockholders’ deficit, 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 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 Imperial Petroleum, Inc. and Subsidiaries as of July 31, 2005, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U. S. generally accepted accounting principles.
|
/s/ |
Briscoe, Burke & Grigsby, LLP |
Tulsa, Oklahoma |
November 11, 2005 |
F-2
IMPERIAL PETROLEUM, INC.
Consolidated Balance Sheet
July 31, 2007 and 2006
| | | | | | | | |
| | 2007 | | | 2006 | |
ASSETS | | | | | | | | |
| | |
Current Assets: | | | | | | | | |
Cash | | $ | 588,658 | | | $ | — | |
Certificates of Deposit | | | 200,386 | | | | 172,346 | |
Accounts Receivable | | | 422,958 | | | | 498,899 | |
| | | | | | | | |
Total current assets | | | 1,212,002 | | | | 671,245 | |
Property, plant and equipment: | | | | | | | | |
Mining claims, options, and development costs | | | 50,620 | | | | 41,760 | |
Oil and gas properties (full cost method) | | | 4,866,989 | | | | 18,878,786 | |
| | | | | | | | |
| | | 4,917,609 | | | | 18,920,546 | |
Less: accumulated depreciation, depletion and amortization | | | (621,971 | ) | | | (2,170,630 | ) |
| | | | | | | | |
Net property, plant and equipment | | | 4,295,638 | | | | 16,749,916 | |
Other assets: | | | | | | | | |
Deferred financing expense—net of accumulated amortization of $2,618,687 and $1,853,415, respectively | | | 593,646 | | | | 663,918 | |
| | | | | | | | |
Total assets | | $ | 6,101,286 | | | $ | 18,085,079 | |
| | | | | | | | |
F-3
IMPERIAL PETROLEUM, INC.
Consolidated Balance Sheet
July 31, 2007 and 2006
| | | | | | | | |
| | 2007 | | | 2006 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 1,108,977 | | | $ | 2,153,531 | |
Accrued expenses | | | 430,962 | | | | 323,612 | |
Notes payable – current portion | | | 115,955 | | | | 157,202 | |
Notes payable – related parties | | | 483,918 | | | | 620,530 | |
Line of Credit | | | — | | | | 19,247,014 | |
Other Current Liabilities | | | 467,814 | | | | 75,701 | |
| | | | | | | | |
Total current liabilities | | | 2,607,626 | | | | 22,577,590 | |
Long-term liabilities: | | | | | | | | |
Asset retirement obligation | | | 150,682 | | | | 285,607 | |
Notes payable | | | 350,000 | | | | 650,000 | |
Line of credit | | | 10,347,000 | | | | — | |
| | | | | | | | |
Total long-term liabilities | | | 10,847,682 | | | | 935,607 | |
STOCKHOLDERS’ EQUITY: | | | | | | | | |
Common stock of $.006 par value; authorized 150,000,000 shares; 14,964,441 and 11,241,126 issued, respectively | | | 89,788 | | | | 67,447 | |
Common stock owed but not issued, 1,000,000 shares at July 31, 2007 | | | 6,000 | | | | — | |
Paid-in capital | | | 11,467,265 | | | | 10,247,264 | |
Unamortized cost of stock issued for services | | | — | | | | (69,750 | ) |
Retained deficit | | | (18,209,771 | ) | | | (14,965,775 | ) |
Treasury stock, at cost (342,239 shares) | | | (707,304 | ) | | | (707,304 | ) |
| | | | | | | | |
Total stockholders’ equity | | | (7,354,022 | ) | | | (5,428,118 | ) |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 6,101,286 | | | $ | 18,085,079 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
IMPERIAL PETROLEUM, INC.
Consolidated Statements of Operations
For the Years Ended July 31, 2007, 2006 and 2005
| | | | | | | | | | | | |
| | 2007 | | | 2006 | | | 2005 | |
Revenues and other income: | | | | | | | | | | | | |
Oil and gas | | $ | 1,143,194 | | | $ | 3,435,006 | | | $ | 2,963,651 | |
| | | | | | | | | | | | |
Total operating income | | | 1,143,194 | | | | 3,435,006 | | | | 2,963,651 | |
Costs and expenses: | | | | | | | | | | | | |
Production costs and taxes | | | 729,293 | | | | 1,289,074 | | | | 1,429,587 | |
Mining lease expense | | | 14,768 | | | | 1,920 | | | | — | |
General and administrative | | | 1,905,298 | | | | 989,514 | | | | 577,651 | |
Depreciation, depletion and amortization | | | 149,607 | | | | 781,620 | | | | 882,630 | |
| | | | | | | | | | | | |
Total costs and expenses | | | 2,798,996 | | | | 3,062,128 | | | | 2,889,868 | |
| | | | | | | | | | | | |
Net Income (Loss) from operations | | | (1,655,802 | ) | | | 372,878 | | | | 73,783 | |
Other income and (expense): | | | | | | | | | | | | |
Interest expense | | | (1,716,183 | ) | | | (2,792,872 | ) | | | (2,163,180 | ) |
Interest income | | | 28,040 | | | | — | | | | 9,443 | |
Amortization of loan fees | | | (765,271 | ) | | | (1,006,730 | ) | | | (612,444 | ) |
Other income (expense) | | | — | | | | — | | | | (3,414 | ) |
Gain (loss) on sale of assets | | | 865,190 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total other income and (expense) | | | (1,588,224 | ) | | | (3,799,602 | ) | | | (2,769,595 | ) |
| | | | | | | | | | | | |
Net loss before income tax | | | (3,243,996 | ) | | | (3,426,724 | ) | | | (2,695,812 | ) |
Provision for income taxes: | | | | | | | | | | | | |
Current | | | — | | | | — | | | | — | |
Deferred | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Total benefit from income taxes | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
NET LOSS | | $ | (3,243,996 | ) | | $ | (3,426,724 | ) | | $ | (2,695,812 | ) |
| | | | | | | | | | | | |
NET LOSS PER SHARE | | $ | (0.28 | ) | | $ | (0.31 | ) | | $ | (0.26 | ) |
| | | | | | | | | | | | |
WEIGHTED AVERAGE SHARES OUTSTANDING | | | 11,487,701 | | | | 10,946,960 | | | | 10,465,050 | |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
IMPERIAL PETROLEUM, INC.
Consolidated Statements of Stockholders’ Equity
For the Years Ended July 31, 2007, 2006 and 2005
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | Additional Paid-In Capital | | Unamortized Cost of Stock Issued | | | Retained Deficit | | | Treasury Stock | | | Total Stockholder’s Equity | |
| | Shares | | | Par Value | | | | | | |
BALANCE, July 31, 2004 | | 9,968,276 | | | $ | 59,810 | | | $ | 9,519,073 | | | — | | | $ | (8,843,239 | ) | | $ | (707,304 | ) | | $ | 28,340 | |
Exercise of warrants by RAB | | 500,000 | | | | 3,000 | | | | 237,000 | | | — | | | | — | | | | — | | | | 240,000 | |
Stock issued for services | | 175,000 | | | | 1,050 | | | | 93,950 | | | — | | | | — | | | | — | | | | 95,000 | |
Stock issued for acquisition | | 222,850 | | | | 1,337 | | | | 132,373 | | | — | | | | — | | | | — | | | | 133,710 | |
Net loss for the period | | — | | | | — | | | | — | | | — | | | | (2,695,812 | ) | | | — | | | | (2,695,812 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, July 31, 2005 | | 10,866,126 | | | $ | 65,197 | | | $ | 9,982,396 | | | — | | | $ | (11,539,051 | ) | | $ | (707,304 | ) | | $ | (2,198,762 | ) |
Stock issued for services | | 375,000 | | | | 2,250 | | | | 125,250 | | | (69,750 | ) | | | — | | | | — | | | | 57,750 | |
Debt converted to stock | | — | | | | — | | | | 139,618 | | | — | | | | — | | | | — | | | | 139,618 | |
Net loss for the period | | — | | | | — | | | | — | | | — | | | | (3,426,724 | ) | | | — | | | | (3,426,724 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, July 31, 2006 | | 11,241,126 | | | $ | 67,447 | | | | 10,247,264 | | | (69,750 | ) | | $ | (14,965,775 | ) | | $ | (707,304 | ) | | $ | (5,428,118 | ) |
Options issued for services | | — | | | | — | | | | 1,042,852 | | | — | | | | — | | | | — | | | | 1,042,852 | |
Stock cancelled | | (125,000 | ) | | | (750 | ) | | | 750 | | | — | | | | — | | | | — | | | | — | |
Stock issued for services | | 468,616 | | | | 2,812 | | | | 34,988 | | | — | | | | — | | | | — | | | | 37,800 | |
Stock issued for assets | | 220,000 | | | | 1,320 | | | | 24,860 | | | — | | | | — | | | | — | | | | 26,180 | |
Options exercised | | 4,160,000 | | | | 24,960 | | | | 115,040 | | | — | | | | — | | | | — | | | | 140,000 | |
Amortization of prior | | — | | | | — | | | | — | | | 69,750 | | | | — | | | | — | | | | 69,750 | |
Capital contributed | | — | | | | — | | | | 500 | | | — | | | | — | | | | — | | | | 500 | |
Net loss for the period | | — | | | | — | | | | — | | | — | | | | (3,243,996 | ) | | | — | | | | (3,243,996 | ) |
Rounding | | (301 | ) | | | (1 | ) | | | 1,011 | | | — | | | | — | | | | — | | | | 1,010 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, July 31, 2007 | | 15,964,441 | | | $ | 95,788 | | | $ | 11,467,265 | | $ | — | | | $ | (18,209,771 | ) | | $ | (707,304 | ) | | | (7,354,022 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
IMPERIAL PETROLEUM, INC.
Consolidated Statements of Cash Flows
For the Years Ended July 31, 2007, 2006 and 2005
| | | | | | | | | | | | |
| | 2007 | | | 2006 | | | 2005 | |
Operating activities: | | | | | | | | | | | | |
Net loss | | $ | (3,243,996 | ) | | $ | (3,426,724 | ) | | $ | (2,695,812 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | | | | |
Depreciation, depletion and amortization | | | 914,878 | | | | 1,788,350 | | | | 1,465,074 | |
Expenses paid with common stock and warrants | | | 1,107,842 | | | | 57,500 | | | | 95,500 | |
Amortization of stock issued for services | | | 69,750 | | | | — | | | | — | |
Gain on sale and disposal of assets | | | (865,190 | ) | | | — | | | | — | |
Change in accounts receivable | | | 75,941 | | | | 263,145 | | | | (350,252 | ) |
Change in other assets | | | — | | | | 36,506 | | | | — | |
Change in accounts payable | | | (1,044,554 | ) | | | 704,901 | | | | 140,573 | |
Change in other liabilities | | | 392,113 | | | | 22,580 | | | | 100,562 | |
Change in accrued expenses | | | 107,350 | | | | (101,577 | ) | | | (121,349 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (2,485,866 | ) | | | (655,319 | ) | | | (1,336,204 | ) |
Investing activities: | | | | | | | | | | | | |
Purchase of oil and gas | | | (652,306 | ) | | | (2,110,685 | ) | | | (1,692,448 | ) |
Purchase of mining claims | | | (8,860 | ) | | | | | | | | |
Reinvestment in certificates of deposit | | | (28,040 | ) | | | (120,116 | ) | | | — | |
Proceeds from certificates of deposit | | | — | | | | — | | | | 322,770 | |
Proceeds of sale of assets | | | 13,696,102 | | | | | | | | 145,977 | |
| | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 13,006,896 | | | $ | (2,230,801 | ) | | $ | (1,223,701 | ) |
| | | | | | | | | | | | |
Financing activities: | | | | | | | | | | | | |
Proceeds from notes payable | | | 10,347,000 | | | | 3,824,022 | | | | 2,752,342 | |
Payments on notes payable | | | (19,588,261 | ) | | | (76,902 | ) | | | (159,970 | ) |
Proceeds from notes payable-related party | | | — | | | | 3,000 | | | | 124,033 | |
Payments to notes payable-related party | | | (136,611 | ) | | | (4,000 | ) | | | (36,500 | ) |
Payment of financing cost | | | (695,000 | ) | | | (860,000 | ) | | | (360,000 | ) |
Contributed capital | | | 500 | | | | — | | | | — | |
Proceeds from stock warrants exercised | | | 140,000 | | | | — | | | | 240,000 | |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (9,932,372 | ) | | | 2,886,120 | | | | 2,559,905 | |
| | | | | | | | | | | | |
Net change in cash and cash equivalents | | | 588,658 | | | | — | | | | — | |
Cash and cash equivalents, beginning of year | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Cash and cash equivalents, end of year | | $ | 588,658 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
Supplemental disclosures for cash flow information: | | | | | | | | | | | | |
Cash paid during the period for | | | | | | | | | | | | |
Interest | | $ | 6,380,786 | | | $ | 13,330 | | | $ | 69,757 | |
Income taxes | | | — | | | | — | | | | — | |
Supplemental schedule of non-cash investing and financing: | | | | | | | | | | | | |
Stock issued for fixed assets | | $ | 26,180 | | | $ | — | | | $ | 133,710 | |
Stock issued for services and interest | | | 37,800 | | | | 127,500 | | | | 95,000 | |
Options issued for services | | | 1,043,862 | | | | — | | | | — | |
Stock issued to extinguish debt | | | — | | | | 139,618 | | | | — | |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
IMPERIAL PETROLEUM, INC.
Notes to Consolidated Financial Statements
For the Years Ended July 31, 2007, 2006 and 2005
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Organization
Imperial Petroleum, Inc. (the “Company”), a publicly held corporation, was organized under the laws of the state of Nevada.
The Company’s principal business consists of oil and gas exploration and production in the United States. The Company, through its wholly owned subsidiary, Ridgepointe Mining Company is attempting to obtain capital, continue testing, defining and developing mineral reserves on mining claims it owns or operates in the southwestern and western United States. At July 31, 2007, the Company had not begun mining activities.
Reverse Split
On August 1, 2006 stockholders approved a 1 for 4 reverse stock split which became effective as of September 6, 2007. All share numbers in these financial statements and footnotes have been retroactively adjusted to account for the reverse split.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Ridgepointe Mining Company, Premier Operating Company, I. B. Energy, Inc., LaTex Resources International, Inc., Imperial Environmental Company (formerly Phoenix Metals, Inc.) and Hoosier Biodiesel Company (formerly Global-Imperial Joint Venture, Inc.). All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The presentation of financial statements in conformity with generally accepted U.S. 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable
Bad debts on receivables are evaluated periodically and charged to expense in the year the receivable is determined uncollectible, therefore, no allowance for doubtful accounts is included in the financial statements. During 2007, 2006 and 2005 the Company charged off $0.
Fair Value of Financial Instruments
Fair values of cash and cash equivalents, investments and short-term debt approximate their carrying values due to the short period of time to maturity. Fair values of long-term debt are based on quoted market prices or pricing models using current market rates, which approximate carrying values.
F-8
IMPERIAL PETROLEUM, INC.
Notes to Consolidated Financial Statements (continued)
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable.
The Company’s cash is deposited in two financial institutions. Cash and certificates of deposit at banks are insured by the FDIC up to $100,000. At times, the balances in these accounts may be in excess of federally insured limits. The Company currently operates in the oil and gas industry. The concentration of credit risk in a single industry affects the Company’s overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions. The Company’s major purchasers of its oil and gas during 2007 were Plains Marketing and Mideast Gas Systems, Inc. accounting for 42.9% and 21.0 % revenues respectively. The Company’s major purchasers of its oil and gas during 2006 were Plains Marketing, Duke Energy and Navajo Refining accounting for 16.6%, 21.9% and 24.7% revenues, respectively. The Company’s major purchasers of its oil and gas during 2005 were Plains Marketing, Duke Energy and Navajo Refining accounting for 18.9%, 19.0% and 19.4% revenues, respectively.
Revenue Recognition
The Company’s consolidated financial statements are prepared using the accrual method of accounting. The Company recognizes revenues based on actual volumes of oil and gas sold based on the month of production.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs, are capitalized. All capitalized costs of oil and gas properties, 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 are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.
In addition, the capitalized costs are subject to a “ceiling test,” which basically limits such costs to the aggregate of the “estimated present value,” discounted at a 10-percent interest rate of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income.
Other Property and Equipment
Property and equipment are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of assets. Expenditures that significantly increase values or extend useful lives are capitalized. Expenditures for maintenance and repairs are charged to expenses as incurred. Upon sale or retirement of property and equipment, the cost and related accumulated depreciation and depletion are eliminated from the respective accounts and the resulting gain or loss is included in current earnings.
Mining exploration costs are expensed as incurred. Development costs are capitalized. Depletion of capitalized mining costs will be calculated on the units of production method based upon current production and reserve estimates when placed in service.
F-9
IMPERIAL PETROLEUM, INC.
Notes to Consolidated Financial Statements (continued)
Long-Lived Assets
Long-lived assets to be held and used or disposed of other than by sale are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When required, impairment losses on assets to be held and used or disposed of other than by sale are recognized based on the fair value of the asset. Long-lived assets to be disposed of by sale are reported at the lower of its carrying amount of fair value less cost to sell.
Amortization of Financing Fees
Deferred financing fees are amortized ratably over the term of the related debt. Amortization expense for the years ended July 31, 2007, 2006 and 2005 was 765,271, $ 1,006,730 and $ 612,444 respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of change in tax rates is recognized in income in the period that includes the enactment date.
Loss Per Common Share
Loss per common share is computed based upon the weighted average common shares outstanding. Outstanding warrants are excluded from the weighted average shares outstanding since their effect on the earnings per share calculation is anti-dilutive.
Reclassification
Certain reclassifications have been made to prior periods to conform to the current presentation.
Recent Accounting Pronouncements
In September 2006, the Securities and Exchange Commission staff (“SEC”) issued SAB 108. SAB 108 was issued to provide consistency to how companies quantify financial statement misstatements. SAB 108 establishes an approach that requires companies to quantify misstatements in financial statements based on effects of the misstatement on both the consolidated balance sheet and statement of operations and the related financial statement disclosures. Additionally, companies must evaluate the cumulative effect of errors existing in prior years that previously had been considered immaterial. We adopted SAB 108 in connection with the preparation of our annual financial statements for the year ended July 31, 2007 and found no adjustments necessary.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, rather, its application will be made pursuant to other accounting pronouncements that require or permit fair value measurements. SFAS No.157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. The provisions of SFAS No. 157 are to be applied prospectively upon adoption, except for limited specified exceptions. We are evaluating the requirements of SFAS No. 157 and do not expect the adoption to have a material impact on our consolidated balance sheet or statement of operations.
F-10
IMPERIAL PETROLEUM, INC.
Notes to Consolidated Financial Statements (continued)
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 and will be adopted by us on August 1, 2007. We do not expect the adoption of FIN 48 to have a material impact on our consolidated balance sheet or statement of operations.
Financial Condition
The Company’s financial statements for the year ended July 31, 2007 have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company incurred net losses of $3,243,996, $3,426,724, and $2,695,812 for the years ended July 31, 2007, 2006 and 2005, respectively, and as of July 31, 2007 has an accumulated deficit of $18,209,771.
Management Plans to Continue as a Going Concern
The Company completed a portion of the sale of certain oil and gas properties in August 2006 and paid down its senior debt by $11.3 million and an additional $1.7 million in November 2006. The Company completed the re-financing of its credit facilities in April 2007 under a new revolving facility in the amount of $15 million. With the start-up of its facilities damaged by hurricanes in Louisiana in April 2007, the Company expects its remaining properties to provide sufficient cash flow to service the new facility that is in place. At July 31, 2007, the company had approximately $4 million in additional funds available under the new credit facility for additional acquisitions, subject to lender approval.
3. | PROPERTY, PLANT and EQUIPMENT |
The Company's property, plant and equipment consist of the following:
| | | | | | | | |
| | 2007 | | | 2006 | |
Oil and gas properties | | $ | 4,570,379 | | | $ | 18,582,176 | |
Mining claims | | | 125,420 | | | | 116,560 | |
Oil and gas equipment | | | 254,850 | | | | 254,850 | |
Mine development costs | | | 32,634 | | | | 32,634 | |
Impairment reserve | | | (65,674 | ) | | | (65,674 | ) |
| | | | | | | | |
Total | | $ | 4,917,609 | | | $ | 18,920,546 | |
| | | | | | | | |
The Company has not completed or updated the necessary reserve studies of its mining claims to determine the metal content of the reserves and the related future production costs which affect the recoverability of the capitalized costs. In addition, the Company’s going concern issues in the past, lack of capital for mining and other factors led management to recognize an impairment reserve to reduce the carrying value to management’s estimate of the amount recoverable upon ultimate disposition. The Company intends to continue to hold and use the impaired mining assets.
The Company accounts for its oil and gas properties under the full cost method. The Company’s capitalized costs for oil and gas properties result from its acquisitions of an interest in the Bovina field in Warren County, Mississippi and its 2004 acquisitions of the Warrior Resources, Inc., Hillside Oil & Gas LLC, Caltex/ Apache and Coquille Bay acquisitions.
F-11
IMPERIAL PETROLEUM, INC.
Notes to Consolidated Financial Statements (continued)
Provisions for income taxes are as follows:
| | | | | | | | | |
| | 2007 | | 2006 | | 2005 |
| | (in thousands) |
Current: | | | | | | | | | |
Federal | | | — | | | — | | | — |
State | | | — | | | — | | | — |
| | | — | | | — | | | — |
| | | | | | | | | |
Deferred: | | | | | | | | | |
Federal | | | — | | | — | | | — |
State | | | — | | | — | | | — |
| | $ | — | | $ | — | | $ | — |
| | | | | | | | | |
Income taxes differed from the amounts computed by applying the U.S. federal tax rate as a result of the following:
| | | | | | | | | | | |
| | 2007 | | | 2006 | | | 2005 | |
| | (in thousands) | |
Computed “expected” tax expense (benefit) | | (229 | ) | | $ | (611 | ) | | $ | (534 | ) |
State income taxes net of federal benefit | | — | | | | — | | | | — | |
Increase (Decrease) in valuation allowance for deferred tax assets | | 229 | | | | 611 | | | | 534 | |
Other | | — | | | | — | | | | — | |
| | | | | | | | | | | |
Actual income tax expense | | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
While the Company has not filed its tax returns for the most recent fiscal year, following are the estimated tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities:
| | | | | | | | | | | | |
| | 2007 | | | 2006 | | | 2005 | |
| | (in thousands) | |
Deferred tax liabilities: | | | | | | | | | | | | |
Other | | $ | — | | | $ | — | | | $ | — | |
Total deferred tax liabilities | | $ | — | | | $ | — | | | $ | — | |
Deferred tax assets: | | | | | | | | | | | | |
Unrealized loss on securities | | $ | 312 | | | $ | 312 | | | $ | 312 | |
Property, plant and equipment | | | 71 | | | | 138 | | | | 98 | |
Net operating losses | | | 2,451 | | | | 2,132 | | | | 1,564 | |
Other | | | 18 | | | | 41 | | | | 39 | |
| | | | | | | | | | | | |
Total deferred tax assets | | | 2,852 | | | | 2,623 | | | | 2,012 | |
| | | | | | | | | | | | |
Valuation allowance | | | (2,852 | ) | | | (2,623 | ) | | | (2,012 | ) |
| | | | | | | | | | | | |
Net deferred tax assets | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Net deferred tax asset (liability) | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
A valuation allowance is required when it is more likely than not that all or a portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon future profitability. Accordingly, a valuation allowance has been established to reduce the deferred tax assets to a level which, more likely than not, will be realized.
The Company has net operating loss (NOL) carryforwards to offset its earnings of approximately $12,700,000. If not utilized, the net operating losses will expire in varying amounts from 2007 to 2027. Due to recurring losses and a lack of funding the Company has not been filing its tax returns. Provisions for current and deferred taxes are estimated using known facts. The Company believes its net operating losses are sufficient to offset any potential income tax liability.
F-12
IMPERIAL PETROLEUM, INC.
Notes to Consolidated Financial Statements (continued)
5. | NOTES PAYABLE AND LINE OF CREDIT |
| | | | | | |
| | 2007 | | 2006 |
Gary S. Williky, unsecured promissory note, dated November 24, 1997, principal due on demand plus interest at 9.0% | | $ | 5,243 | | $ | 5,243 |
Hillside promissory note, dated January 16, 2004, principal due on demand plus interest at 8%. Collateralized by 1,000,000 shares of the Company’s common stock held. | | | — | | | 20,000 |
Equipment note due a Bank, dated 03/01/01, payments assumed 1/16/04, principal due on demand plus interest at a variable rate at 5.5% as of 7/31/04. Collateralized by a workover rig and certain vehicles. | | | 110,712 | | | 131,959 |
Note Payable to a Bank, subordinated debt due 1/16/08, monthly. Interest due in-kind at 8.5%. Collateralized by the oil and gas properties and certain assets of the Company on a 2nd mortgage. | | | 350,000 | | | 650,000 |
| | | | | | |
Total | | | 465,955 | | | 807,202 |
| | | | | | |
Less: current portion | | | 115,955 | | | 157,202 |
| | | | | | |
Long-term notes payable | | $ | 350,000 | | $ | 650,000 |
| | | | | | |
Current maturities of notes payable are as follows:
| | | |
7/31/08 | | $ | 115,955 |
7/31/09 | | | 350,000 |
7/31/10 | | | — |
7/31/11 | | | — |
7/31/12 | | | — |
Thereafter | | | — |
| | | |
Total | | $ | 465,955 |
| | | |
Notes Payable – Related Party
| | | | | | |
| | 2007 | | 2006 |
Officer – 10.0% demand note | | $ | — | | $ | 106,462 |
Officer – 7.5% demand note | | | 27,036 | | | 72,850 |
Officer – 9.0% demand note | | | 456,882 | | | 441,218 |
| | | | | | |
| | $ | 483,918 | | $ | 620,530 |
| | | | | | |
LINE OF CREDIT
The Company maintains a revolving line of credit agreement with a lending institution totaling $15 million. The Company had $9,825,511 and $521,489 in outstanding advances and accrued interest as of July 31, 2007, respectively. The line of credit provides for interest at the rate of the LIBOR plus 11% due April 14, 2009, secured by the oil and gas properties and certain assets of the Company.
6. | RELATED PARTY TRANSACTIONS |
The Company has entered into transactions with its chief executive officer, Jeffrey T. Wilson and a Company owned and controlled by Mr. Wilson, H.N. Corporation. There are no outstanding amounts owed to HN Corporation as of July 31, 2007. The Company, had accrued salaries payable to Mr. Wilson of $0 and $35,389 as of July 31, 2007 and 2006 respectively.
The Company owes its Chairman and Chief Executive Officer, Jeffrey T. Wilson, as a result of loans to the Company, a total of $483,918 in principal as of July 31, 2007. Interest rates on the loans are fixed at 7.5% and 9% as shown in Note 5. All of the loans are secured by a third mortgage granted by the Company to Wilson on the oil and gas assets.
F-13
IMPERIAL PETROLEUM, INC.
Notes to Consolidated Financial Statements (continued)
In August of 2006, the Company issued 6,000,000 warrants to purchase 6,000,000 shares of common stock for services. The warrants have a term of one year and a strike price of $0.07. The warrants were valued at $733,659 using the Black Scholes valuation method using the following factors; risk free interest rate of 5.11%, strike price of $0.07, market price of $0.16, volatility of 191.35%, and no yield. The value of the warrants was expensed as consulting expense in the year ended July 31, 2007. As of July 31, 2007, 2,000,000 warrants were exercised for 2,000,000 shares of common stock for a total of $140,000; 3,000,000 warrants were exercised in a cashless exercise for 2,160,000 shares of common stock; and 1,000,000 warrants were still outstanding. Those 1,000,000 warrants expired on August 2, 2007. Of the 6,000,000 warrants, 1,000,000 were issued to the president of the Company , 1,000,000 were issued to a director in the Company, and 1,000,000 were issued to an entity owned by the president and a director in the Company.
In June of 2007, the Company issued a total of 300,000 shares and $10,000 to a director of the Company for public relation services provided on behalf of the Company.
In July of 2007, the Company issued 1,000,000 warrants to purchase 1,000,000 shares of common stock to its directors (200,000 each) for compensation for their services. The warrants have a term of one year and a strike price of $0.18. The warrants were valued at $309,193 using the Black Scholes valuation method using the following factors; risk free interest rate of 5.00%, strike price of $0.18, market price of $0.40, volatility of 180.72%, and no yield. The value of the warrants was expensed as compensation expense in the year ended July 31, 2007. As of July 31, 2007, 1,000,000 warrants were still outstanding.
7. | ASSET RETIREMENT OBLIGATION |
Effective January 1, 2003, the Company implemented the requirements of SFAS 143. Among other things, SFAS 143 requires entities to record a liability and corresponding increase in long-lived assets for the present value of material obligations associated with the retirement of tangible long-lived assets. Over the passage of time, accretion of the liability is recognized as an operation expense and the capitalized cost is depleted over the estimated useful life of the related asset. Additionally, SFAS No. 143 requires that upon initial application of these standards, the Company must recognize a cumulative effect of a change in accounting principle corresponding to the accumulated accretion and depletion expense that would have been recognized had this standard been applied at the time the long-lived assets were acquired or constructed. The Company’s asset retirement obligations relate primarily to the plugging, dismantling and removal of wells drilled to date.
Using a credit-adjusted risk free rate of 8%, and estimated useful life of wells ranging from 30-40 years, and estimated plugging and abandonment cost ranging from $2,500 per well to $27,666 per well, the Company has recorded a non-cash fixed asset addition and associated liability related to its property acquisitions of $230,793. Oil and gas properties were increased by $230,793, which represents the present value of all future obligations to retire the wells at January 16, 2004. A corresponding obligation totaling $230,793 has also been recorded as of January, 2004. At July 31, 2007 the obligation was decreased to $150,682 as a result of the sale of properties. For the periods ended July 31, 2007 and 2006, respectively, the Company recorded accretion expenses of $14,739 and $47,441 associated with this liability. These expenses are included in interest expense in the consolidated statements of operations.
8. | LITIGATION, COMMITMENTS AND CONTINGENCIES |
The Company is a named defendant in lawsuits, is a party in governmental proceedings, and is subject to claims of third parties from time to time arising in the ordinary course of business. While the outcome of lawsuits or other proceedings and claims against the Company cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial position of the Company.
F-14
IMPERIAL PETROLEUM, INC.
Notes to Consolidated Financial Statements (continued)
The Company acquired certain accounts payable from Warrior in the amount of $313,607 and Hillside in the amount of $378,861 as a result of the acquisitions of the assets of each. Nearly all of the trade accounts payable were delinquent when acquired. During 2004, the Company reduced the trade accounts payable of Warrior and Hillside to $22,221 and $142,603 respectively through payments and settlements of accounts. During 2005, the Company completed the settlements with vendors on these old accounts.
The Company has accrued revenue payable in legal and petty suspense accounts in the amount of $173,907 and $7,165, respectively, as of July 31, 2007. The Company has continued to research owner account information in order to properly distribute legal suspense accounts in the normal course of business. Subsequent to year-end and in connection with the sale of assets, a substantial portion of the legal suspense funds were paid to the purchasers of the assets for their further handling in connection with the properties. Suspense accounts are cleared out annually and paid to the owners. The Company has a plugging liability for oil and gas operations in the various states in the amount of $150,682. The Company has plugging bonds posted with the state regulatory agencies in the amount of $1,281,456 to offset the cost of plugging wells in the future.
Imperial Petroleum, Inc. versus Ravello Capital LLC
The Company filed suit in Federal District Court in Tulsa County, Oklahoma against Ravello Capital LLC (“Ravello”) on November 20, 2000. The suit alleged branch of contract and sought to have the contract declared partially performed in the amount of $474,900 and sought relief in the amount of $488,390 for the unpaid consideration and punitive damages and attorney fees. The Company received a judgment award against Ravello in the amount of $488,390 and subsequently collected and credited the judgment award against Ravello in the amount of $85,638 as a result of the re-issuance of certain of its shares in Warrior, held by Ravello in escrow and not released. The Company does not believe it will be successful in collecting the balance of the judgment against Ravello.
The Company, through its predecessor in interest, was named with others in a breach of its duties to act as a reasonably prudent operator in the development of the Crump Gas Unit in Panola county, Texas. The Crump Unit encompasses the Company’s Mittie Horton well. The Plaintiff is seeking a cancellation of the lease for failure to produce hydrocarbons in paying quantities or alternatively to establish a lien against the leasehold to secure payment of plaintiff's damages resulting from the Company’s failure to develop the property. The damages are unspecified. The Company executed a farm out agreement with Burke Royalty, a co-defendant in the suit, regarding the acreage in question. Burke negotiated a settlement under which the Plaintiffs would arrange to drill additional wells. The Company has a 12.5% carried working interest in the first well drilled in the unit and the right to participate for a 12.5% working interest in subsequent wells. The Company’s interests in the new wells drilled under the farm out are currently not in pay and have not been recognized by the Farmee. The Company is seeking a resolution of the matter with the Farmee.
F-15
IMPERIAL PETROLEUM, INC.
Notes to Consolidated Financial Statements (continued)
During the year ended July 31, 2007, the Company issued 7,000,000 warrants for common stock as detailed in Note 10 below. The following schedule summarizes pertinent information with regard to the stock warrants for the years ended July 31, 2007, 2006 and 2005:
| | | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | 2005 |
| | Weighted Average Shares-Exercise Outstanding-Price | | Weighted Average Shares-Exercise Outstanding-Price | | Weighted Average Shares-Exercise Outstanding-Price |
Beginning of year | | 1,348,662 | | | $ | 0.01 | | 1,348,662 | | $ | .01 | | 2,202,592 | | | $ | .24 |
Granted | | 7,000,000 | | | | 0.085 | | 0 | | | | | 146,070 | | | | .04 |
Exercised | | (5,000,000 | )* | | | 0.070 | | 0 | | | | | (500,000 | ) | | | .48 |
Forfeited | | — | | | | | | — | | | — | | — | | | | — |
Expired | | — | | | | | | 0 | | | | | (500.000 | ) | | $ | .56 |
| | | | | | | | | | | | | | | | | |
End of year | | 3,348,662 | | | $ | 0.078 | | 1,348,662 | | $ | 0.01 | | 1,348,662 | | | $ | 0.01 |
| | | | | | | | | | | | | | | | | |
Exercisable | | 3,348,662 | | | $ | 0.078 | | 1,348,662 | | $ | 0.01 | | 1,348,662 | | | $ | 0.01 |
| | | | | | | | | | | | | | | | | |
As of July 31, 2007 , the Company has 3,348,662 warrants exercisable at $.01, $0.07 and $0.18, expiring on various dates on or after 8/02/07. Warrants representing 1,000,000 shares exercisable at $0.07 per share expired on August 2, 2007.
* | 3,000,000 of these warrants were exercised cashless for 2,160,000 shares, therefore 4,160,000 shares were issued for the 5,000,000 warrants exercised during the year ended July 31, 2007. |
10. | SHAREHOLDER EQUITY TRANSACTIONS |
In August of 2006, the Company issued 6,000,000 warrants to purchase 6,000,000 shares of common stock for services. The warrants have a term of one year and a strike price of $0.07. The warrants were valued at $733,659 using the Black Scholes valuation method using the following factors; risk free interest rate of 5.11%, strike price of $0.07, market price of $0.16, volatility of 191.35%, and no yield. The value of the warrants was expensed as consulting expense in the year ended July 31, 2007. As of July 31, 2007, 2,000,000 warrants were exercised for 2,000,000 shares of common stock for a total of $140,000; 3,000,000 warrants were exercised in a cashless exercise for 2,160,000 shares of common stock; and 1,000,000 warrants were still outstanding. Those 1,000,000 warrants expired on August 2, 2007. Of the 6,000,000 warrants, 1,000,000 were issued to the president of the Company , 1,000,000 were issued to a director in the Company, and 1,000,000 were issued to an entity owned by the president and a director in the Company.
In August of 2006, 125,000 shares issued in a previous period were cancelled.
In October of 2006, 168,616 shares were issued for services. The services were never performed and the shares are currently in the process of being cancelled.
In March of 2007, 220,000 shares were issued as part of an asset purchase agreement. The shares were valued at $26,180, which was their market value on that date.
In June of 2007, the Company issued a total of 300,000 shares and $10,000 to a director of the Company for public relation services provided on behalf of the Company.
In July of 2007, the Company issued 1,000,000 warrants to purchase 1,000,000 shares of common stock to its directors (200,000 each) for compensation for their services. The warrants have a term of one year and a strike price of $0.18. The warrants were valued at $309,193 using the Black Scholes valuation method using the following factors; risk free interest rate of 5.00%, strike price of $0.18, market price of $0.40, volatility of 180.72%, and no
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IMPERIAL PETROLEUM, INC.
Notes to Consolidated Financial Statements (continued)
yield. The value of the warrants was expensed as compensation expense in the year ended July 31, 2007. As of July 31, 2007, 1,000,000 of these $0.18 warrants were still outstanding.
The Company maintains office space at its headquarters at 329 Main Street, Suite 801, Evansville, IN. The Company maintains its current office space on a month-to-month basis with monthly rent of $941. Total rental expense was $11,294 for each of the years ended July 31, 2007, 2006 and 2005.
The Company has accrued expenses as of July 31 as follows:
| | | | | | |
| | 2007 | | 2006 |
Revenue in suspense | | $ | 312,303 | | $ | 0 |
Accrued officer salary – CEO | | | 0 | | | 35,389 |
Accrued interest on notes | | | 91,212 | | | 196,764 |
Accrued Payroll Taxes | | | 3,525 | | | 91,459 |
| | | | | | |
Other | | | 23,922 | | | 0 |
| | | | | | |
| | $ | 430,962 | | $ | 323,612 |
| | | | | | |
Subsequent to July 31, 2007, The Company terminated its acquisition of the Apollo assets as provided in our Form 8-K.
Mr. Mike Clements resigned as a director August 2, 2007 for personal reasons. The Board of Directors appointed J. Gregory Thagard as his replacement. Mr. Thagard has been employed by the Company as a third party contractor since 2004.
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IMPERIAL PETROLEUM, INC.
Supplemental Information
(Unaudited)
For the Years Ended July 31, 2006, 2005 and 2004
| | | | | | | | | | |
Capitalized Costs Relating to Oil and Gas | | 2007 | | | 2006 | | 2005 | |
Property acquisitions | | 300,000 | | | | — | | | — | |
Proved | | 652,306 | | | $ | 2,002,008 | | $ | 1,826,658 | |
Unproved | | — | | | | — | | | — | |
Less – proceeds from sales of properties | | (13,696,102 | ) | | | — | | | (130,977 | ) |
Support equipment and facilities | | — | | | | 108,677 | | | — | |
| | | | | | | | | | |
Oil and gas related costs | | (12,743,796 | ) | | | 2,110,685 | | | 1,695,681 | |
| | | | | | | | | | |
During fiscal 2007 the Company acquired certain interests in the Luling field located in Texas as a workover project.
| | | | | | | | | | | | |
Results of Operations for Oil and Gas Producing Activities | | 2007 | | | 2006 | | | 2005 | |
Revenues | | $ | 1,143,194 | | | $ | 3,435,006 | | | $ | 2,963,651 | |
Production costs and taxes | | | (729,293 | ) | | | (1,289,074 | ) | | | (1,429,587 | ) |
Depreciation, depletion and amortization | | | (149,607 | ) | | | (781,620 | ) | | | (882,630 | ) |
| | | | | | | | | | | | |
Income from oil and gas producing activities | | $ | 264,294 | | | $ | 1,364,312 | | | $ | 651,434 | |
| | | | | | | | | | | | |
The following table sets forth the Company’s net proved oil and gas reserves at July 31, 2007 and the changes in net proved oil and gas reserves for the years then ended. Proved reserves represent the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in the future years from known reservoirs under existing economic and operating conditions. The reserve information indicated below requires substantial judgment on the part of the reserve engineers, resulting in estimates which are not subject to precise determination. Accordingly, it is expected that the estimates of estimates of reserves will change as future production and development information becomes available and that revisions in these estimates could be significant. Reserves are measured in barrels (bbls) in the case of oil, and units of one thousand cubic feet (MCF) in the case of gas.
| | | | | | |
| | Oil (bbls) | | | Gas (MCF) | |
Proved reserves: | | | | | | |
Balance at July 31, 2005 | | 823,000 | | | 11,541,000 | |
Discoveries and extensions | | — | | | — | |
Acquisitions | | — | | | 793,330 | |
Sales and dispositions | | — | | | — | |
Revisions of previous estimates | | 212,759 | | | 4,644,382 | |
Production | | (31,759 | ) | | (245,712 | ) |
| | | | | | |
Proved reserves: | | | | | | |
Balance at July 31, 2006 | | 1,004,000 | | | 16,733,000 | |
Discoveries and extensions | | — | | | — | |
Acquisitions | | — | | | — | |
Sales and dispositions | | (570,150 | ) | | (13,031,423 | ) |
Revisions of previous estimates | | — | | | — | |
Production | | (10,220 | ) | | (69,157 | ) |
Proved reserves at July 31, 2007 | | 423,630 | | | 3,533,000 | |
Proved developed July 31, 2005 | | 709,000 | | | 5,766,000 | |
| | | | | | |
Proved developed July 31, 2006 | | 604,000 | | | 6,248,000 | |
Proved developed July 31, 2007 | | 380,930 | | | 2,620,060 | |
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All of the Company’s reserves are located in the continental United States. The natural gas sales and dispositions in 2005 (2,150,000) mcf resulted primarily from the farm out of acreage relating to proved undeveloped reserves in East Texas to third parties in connection with the settlement of certain litigation (Note 7. Litigation). The result of these farm outs is that our net interests in the wells was reduced and as a consequence, both our future capital costs and our net proved reserves were also reduced. In 2006, the Company acquired an interest in the Bastian Bay field in Louisiana.
Standardized Measure of Discounted Future Net Cash Flows
| | | | | | | | | | | | |
| | July 31, 2007 | | | July 31, 2006 | | | July 31, 2005 | |
Future Cash Inflows | | $ | 40,126,710 | | | $ | 200,428,000 | | | $ | 143,528,000 | |
Future production costs and taxes | | | 10,758,460 | | | | 40,888,000 | | | | 27,261,000 | |
Future development costs | | | 2,729,500 | | | | 16,073,000 | | | | 11,445,000 | |
Future income tax expenses | | | 9,323,563 | | | | 37,588,000 | | | | 27,463,000 | |
Net future cash flows | | | 17,315,187 | | | | 105,879,000 | | | | 77,359,000 | |
Discount at 10% | | | (8,432,484 | ) | | | (54,316,000 | ) | | | (39,685,000 | ) |
Discounted future net cash flows from proved reserves | | $ | 8,882,703 | | | $ | 51,563,000 | | | $ | 37,674,000 | |
Balance, beginning of year | | $ | 51,563,000 | | | $ | 37,674,000 | | | $ | 33,607,640 | |
Acquisitions | | | — | | | | — | | | | 4,134,240 | |
Sales of oil and gas net of production costs | | | (308,756 | ) | | | (2,145,932 | ) | | | (1,391,400 | ) |
Discoveries and extensions | | | — | | | | — | | | | — | |
Changes in prices and production costs | | | (674,882 | ) | | | (10,908,767 | ) | | | 69,801,594 | |
Extensions, additions and discoveries | | | — | | | | — | | | | — | |
Revision of quantity estimates | | | — | | | | 24,040,514 | | | | (10,846,700 | ) |
Sales and dispositions | | | (79,696,715 | ) | | | — | | | | (1,330,000 | ) |
Development costs incurred | | | 652,306 | | | | 2,110,685 | | | | 1,612,000 | |
Interest factor accretion of discount | | | 1,083,313 | | | | 6,289,500 | | | | 4,283,111 | |
Net change in income taxes | | | 28,264,437 | | | | (10,125,000 | ) | | | 1,520,019 | |
Changes in future development costs | | | (13,343,500 | ) | | | 4,628,000 | | | | (5,904,973 | ) |
Changes in production rates and other | | | | | | | — | | | | (57,811,637 | ) |
| | | | | | | | | | | | |
Balance, end of year | | $ | 8,882,703 | | | $ | 51,563,000 | | | $ | 33,674,000 | |
Estimated future net cash flows represent an estimate of the net revenues from the production of proved reserves using current sales prices, along with estimates of the operating costs, production taxes and future development and abandonment costs (less salvage value) necessary to produce such reserves. The average prices used at July 31, 2007 were $68.38 per barrel of oil and $7.22 per MMBTU of gas respectively. No deduction has been made for depreciation, depletion or any indirect costs such as general corporate overhead or interest expense.
Operating costs and production taxes are estimated based on current costs with respect to producing gas properties. Future development costs are based on the best estimate of such costs assuming current economic and operating conditions. The estimates of reserve values include estimated future development costs that the Company does not currently have the ability to fund. If the Company is unable to obtain additional funds, it may not be able to develop its oil and natural gas properties as estimated in its July 31, 2007 reserve report.
The future net revenue information assumes no escalation of costs or prices. Future costs and prices could significantly vary from current amounts and, accordingly, revisions in the future could be significant.
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