UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2010
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________to _______________
Commission file number 333-146627
BARON ENERGY INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization)
26-0582528
IRS Identification Number
3327 W. Wadley Ave.
Suite 3-267
Midland, TX 79707
(Address of principal executive offices, including zip code)
(432) 685-1307
(Telephone number, including area code)
Indicate by check whether the issuer (1) 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 last 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer, "accelerated filer,"
"non-accelerated filer," and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [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]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 40,127,650 shares as of March 17,
2010.
BARON ENERGY INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Balance Sheets 3
Statements of Operations 4
Statement of Changes in Stockholders' Equity 5
Statements of Cash Flows 6
Notes to the Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4T. Controls and Procedures 17
Part II Other Information
Item 1. Legal Proceedings 18
Item 1A. Risk Factors 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 19
Signatures 20
2
BARON ENERGY INC.
(An Exploration Stage Company)
BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
As of As of
January 31, July 31,
2010 2009
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 5,630 $ 12,217
Prepaid expenses 103,305 5,000
----------- -----------
TOTAL CURRENT ASSETS 108,935 17,217
OIL AND GAS PROPERTIES (FULL COST METHOD),
Unevaluated, net of impairment of $1,372,937 -- --
----------- -----------
TOTAL ASSETS $ 108,935 $ 17,217
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable & accrued expenses $ 18,910 $ 2,263
----------- -----------
TOTAL CURRENT LIABILITIES 18,910 2,263
LONG-TERM LIABILITIES
Asset retirement obligation 5,121 4,880
----------- -----------
TOTAL LONG-TERM LIABILITIES 5,121 4,880
COMMITMENTS & CONTINGENCIES (NOTE 7) -- --
TOTAL STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 75,000,000
shares authorized; 23,350,000 and 22,200,000
shares issued and outstanding as of
January 31, 2010 and July 31,2009 23,350 22,200
Additional paid-in capital 5,396,650 5,152,800
Deficit accumulated during the exploration stage (5,335,096) (5,164,926)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 84,904 10,074
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 108,935 $ 17,217
=========== ===========
See notes to the financial statements.
3
BARON ENERGY INC.
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------
July 24, 2007
Three Months Ended Six Months Ended (inception)
January 31, January 31, through
----------------------------- ------------------------------ January 31,
2010 2009 2010 2009 2010
------------ ------------ ------------ ------------ ------------
Oil Revenues $ -- $ -- $ -- $ -- $ 5,092
Costs and Expenses:
General & administrative expenses 119,230 32,065 163,276 93,025 358,267
Lease operating expense -- -- 6,653 -- 52,648
Impairment of goodwill and oil
and gas properties -- -- -- -- 4,911,340
Accretion expense 122 110 241 217 683
------------ ------------ ------------ ------------ ------------
Loss from Continuing Operations (119,352) (32,175) (170,170) (93,242) (5,317,846)
Discontinued Operations
Loss from discontinued operations -- -- -- (9,500) (17,250)
------------ ------------ ------------ ------------ ------------
Net Loss $ (119,352) $ (32,175) $ (170,170) $ (102,742) $ (5,335,096)
============ ============ ============ ============ ============
Basic and diluted:
Net loss per share $ (0.01) $ (0.00) $ (0.01) $ (0.01)
Loss per share from continuing
operations $ (0.01) $ (0.00) $ (0.01) $ (0.01)
Loss per share from discontinued
operations $ (0.00) $ (0.00) $ (0.00) $ (0.00)
Weighted average number of common shares
outstanding, basic and diluted 22,398,370 13,001,087 22,301,630 12,815,217
------------ ------------ ------------ ------------
See notes to the financial statements.
4
BARON ENERGY INC.
(An Exploration Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM JULY 24, 2007 (INCEPTION) THROUGH JANUARY 31, 2010
(Unaudited)
- --------------------------------------------------------------------------------
Deficit
Accumulated
Common Stock Additional During the
--------------------- Paid-in Exploration
Shares Amount Capital Stage Total
------ ------ ------- ----- -----
BALANCE, JULY 24, 2007 -- $ -- $ -- $ -- $ --
----------- ------- ---------- ----------- -----------
Stock issued for cash 6,000,000 6,000 9,000 -- 15,000
Net loss -- -- -- (590) (590)
----------- ------- ---------- ----------- -----------
BALANCE, JULY 31, 2007 6,000,000 6,000 9,000 (590) 14,410
Stock issued for cash 6,000,000 12,000 48,000 -- 60,000
Net loss -- -- -- (19,906) (19,906)
----------- ------- ---------- ----------- -----------
BALANCE, JULY 31, 2008 12,000,000 12,000 63,000 (20,496) 54,504
Stock issued for cash 1,200,000 1,200 598,800 -- 600,000
Stock issued to TMG Members 9,000,000 9,000 4,491,000 -- 4,500,000
Net loss -- -- -- (5,144,430) (5,144,430)
----------- ------- ---------- ----------- -----------
BALANCE, JULY 31, 2009 22,200,000 22,200 5,152,800 (5,164,926) 10,074
Stock issued for cash 1,150,000 1,150 243,850 -- 245,000
Net loss -- -- -- (170,170) (170,170)
----------- ------- ---------- ----------- -----------
BALANCE, JANUARY 31, 2010 23,350,000 $23,350 $5,396,650 $(5,335,096) $ 84,904
=========== ======= ========== =========== ===========
See notes to the financial statements.
5
BARON ENERGY INC.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
July 24, 2007
Six Months Ended (inception)
January 31, through
-------------------------- January 31,
2010 2009 2010
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (170,170) $ (102,742) $(5,335,096)
Adjustments to reconcile net loss to net
cash used in operating activities:
Accretion expense 241 217 684
Impairment -- -- 4,911,340
Changes in operating assets and liabilities:
Accounts receivable -- (29,571) 99,969
Prepaid expenses (98,305) -- (103,305)
Inventory -- -- 9,389
Accounts payable & accrued expenses 16,647 5,186 (15,366)
Deposits -- 2,750 --
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (251,587) (124,160) (432,385)
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash -- (1,156) --
Acquisition of oil and gas properties -- (413,500) (481,985)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES -- (414,656) (481,985)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of common stock 245,000 489,571 920,000
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 245,000 489,571 920,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (6,587) (49,245) 5,630
CASH AT BEGINNING OF PERIOD 12,217 49,754 --
----------- ----------- -----------
CASH AT END OF PERIOD $ 5,630 $ 509 $ 5,630
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for:
Interest $ -- $ -- $ --
Income Taxes $ -- $ -- $ --
NON-CASH TRANSACTIONS
Asset retirement obligations $ -- $ 4,437 $ 4,437
Stock issued for business combination $ -- $ -- $ 4,500,000
See notes to the financial statements.
6
BARON ENERGY INC.
(An Exploration Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Baron Energy Inc.
("Baron" or the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America and the rules of
the Securities and Exchange Commission, and should be read in conjunction with
the audited financial statements and notes thereto contained in Baron's annual
report filed with the SEC on Form 10-K for the year ended July 31, 2009. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position and the
results of operations for the interim periods presented have been reflected
herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the
financial statements which would substantially duplicate the disclosures
contained in the audited financial statements for the most recent fiscal year
2009 as reported in the Form 10-K have been omitted.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
("SFAS 168" or ASC 105-10). SFAS 168 (ASC 105-10) establishes the Codification
as the sole source of authoritative accounting principles recognized by the FASB
to be applied by all nongovernmental entities in the preparation of financial
statements in conformity with GAAP. SFAS 168 (ASC 105) was prospectively
effective for financial statements issued for fiscal years ending on or after
September 15, 2009, and interim periods within those fiscal years. The adoption
of SFAS 168 (ASC 105) on August 1, 2009 did not impact the Company's results of
operations or financial condition. The Codification did not change GAAP;
however, it did change the way GAAP is organized and presented. As a result,
these changes impact how companies reference GAAP in their financial statements
and in their significant accounting policies. The Company implemented the
Codification in this Report by providing references to the Codification topics
alongside references to the corresponding standards.
On December 31, 2008, the SEC published the final rules and interpretations
updating its oil and gas reporting requirements. Many of the revisions are
updates to definitions in the existing oil and gas rules to make them consistent
with the petroleum resource management system, which is a widely accepted
standard for the management of petroleum resources that was developed by several
industry organizations. Key revisions include changes to the pricing used to
estimate reserves to the utilization of a 12-month average price rather than a
single day spot price which eliminates the ability to utilize prices subsequent
to the end of a reporting period in those instances where the full cost ceiling
was exceeded and subsequent pricing exceeds pricing at the end of a reporting
period, the ability to include nontraditional resources in reserves, the use of
new technology for determining reserves, and permitting disclosure of probable
and possible reserves. The SEC will require companies to comply with the amended
disclosure requirements for registration statements filed after January 1, 2010,
and for annual reports on Form 10-K for fiscal years ending on or after December
15, 2009. Early adoption is not permitted. The Company is currently assessing
the impact that the adoption will have on the Company's disclosures, operating
results, financial position and cash flows.
With the exception of the pronouncements noted above, no other accounting
standards or interpretations issued or recently adopted are expected to a have a
material impact on the Company's financial position, operations or cash flows.
7
NOTE 2. GOING CONCERN
As shown in the accompanying financial statements, we incurred a net loss of
$119,352 and $170,170 for the three and six months ended January 31, 2010,
respectively, and had an accumulated deficit of $5,335,096 as of January 31,
2010. These conditions raise substantial doubt as to our ability to continue as
a going concern. The financial statements do not include any adjustments that
might be necessary if we are unable to continue as a going concern.
Our financial statements are prepared using accounting principles generally
accepted in the United States of America applicable to a going concern which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business. The Company is in the process of establishing a
sufficient ongoing source of revenues to cover its operating costs.
As part of the merger between Baron Energy, Inc. and the Pertex LP companies,
Baron intends to focus its efforts on the development and exploitation of its
South Texas property primarily through joint ventures with industry partners.In
addition the company will continue taking advantage of low-risk opportunities on
its existing acreage while continuing to consider exploratory opportunities by
applying technology and capital to deeper ones with significant upside
potential. In conjunction, Baron will pursue accretive acquisitions in core
areas.
On March 10, 2010, the Company signed a non-binding term sheet for up to a $10
million equity line with Kodiak Capital Group, LLC of New York City, facilitated
by Starlight Investments, LLC ("Starlight"), a Houston based investment bank.
Under the terms of the term sheet, Baron Energy may elect to receive as much as
$10 million from Kodiak in common stock purchases over the next three years,
subject to the parties entering into mutually acceptable investment agreements.
NOTE 3. EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Basic and diluted net income (loss) per share calculations are calculated on the
basis of the weighted average number of common shares outstanding during the
year. Purchases of treasury stock reduce the outstanding shares commencing on
the date that the stock is purchased. Common stock equivalents are excluded from
the calculation when a loss is incurred as their effect would be anti-dilutive.
Three Months Ended Six Months Ended
January 31, January 31,
------------------------------ ------------------------------
2010 2009 2010 2009
------------ ------------ ------------ ------------
Numerator - Net Income (Loss) (A) $ (119,352) $ (32,175) $ (170,170) $ (102,742)
Basic Income (Loss) Per Share (A/B) $ (0.01) $ (0.00) $ (0.01) $ (0.01)
Denominator - weighted average shares (B) 22,398,370 13,001,087 22,301,630 12,815,217
Fully Diluted Income (Loss) Per Share (A)/(B+C) $ (0.01) $ (0.00) $ (0.01) $ (0.01)
Dilutive effect of common stock equivalents (C) -- -- -- --
Denominator - fully diluted weighted average
shares (B+C) 22,398,370 13,001,087 22,301,630 12,815,217
8
NOTE 4. DISCONTINUED OPERATIONS
On July 31, 2008, we discontinued our business plan to invest in minerals and
changed our business plan to the acquisition, exploration, development and
production of oil and gas.
There were no assets associated with these operations, no remaining liabilities
as of January 31, 2010, and there was no gain or loss associated with the
discontinuation of the minerals operations. Prior period amounts applicable to
the mineral operations were reclassified and included under "Loss from
discontinued operations."
The following table presents the loss for the interim periods shown and from
Inception.
July 24, 2007
Three Months Ended Six Months Ended (inception)
January 31, January 31, through
-------------------------- ------------------------------ January 31,
2010 2009 2010 2009 2010
-------- -------- ------- -------- --------
Costs and expenses $ -- $ -- $ -- $ (9,500) $(17,250)
-------- -------- ------- -------- --------
Loss from discontinued
operations $ -- $ -- $ -- $ (9,500) $(17,250)
======== ======== ======= ======== ========
Discontinued operations have not been segregated in the statement of cash flows.
Therefore, amounts for certain captions will not agree with respective data in
the statement of operations.
NOTE 5. ACQUISITIONS
On April 6, 2009, Baron acquired 100% of the issued and outstanding membership
interests of TMG Partners, LLC, a Nevada limited liability company ("TMG") in
exchange for 9,000,000 restricted shares of common stock of the Company, valued
at $4,500,000. The following table presents the unaudited pro forma condensed
combined statement of expenses as if TMG Partners, LLC had been acquired at the
beginning of each period presented. The pro forma results do not purport to
represent what the Company's results of operations or financial position would
have been if such transactions had occurred on the date indicated.
9
July 24, 2007
Three Months Ended Six Months Ended (inception)
January 31, January 31, through
----------------------------- ------------------------------ January 31,
2010 2009 2010 2009 2010
------------ ------------ ------------ ------------ ------------
Oil Revenues $ -- $ -- $ -- $ -- $ 5,092
Costs and Expenses:
General & administrative
expenses 119,230 125,245 163,276 259,910 525,152
Lease operating expense -- -- 6,653 -- 52,648
Impairment of goodwill and
oil and gas properties -- -- -- -- 4,911,340
Write down of oil inventory -- -- -- 20,182 20,182
Accretion expense 122 110 241 217 683
------------ ------------ ------------ ------------ ------------
Loss from Continuing Operations (119,352) (125,355) (170,170) (280,309) (5,504,913)
Discontinued Operations
Loss from discontinued
operations -- -- -- (9,500) (17,250)
------------ ------------ ------------ ------------ ------------
Net Loss $ (119,352) $ (125,355) $ (170,170) $ (289,809) $ (5,522,163)
============ ============ ============ ============ ============
Basic and diluted:
Net loss per share $ (0.00) $ (0.01) $ (0.01) $ (0.01)
Loss per share from
continuing operations $ (0.00) $ (0.01) $ (0.01) $ (0.01)
Loss per share from
discontinued operations $ (0.00) $ (0.00) $ (0.00) $ (0.00)
Weighted average number of
common shares outstanding, basic
and diluted 22,398,370 22,001,087 22,301,630 21,815,217
------------ ------------ ------------ ------------
NOTE 6. COMMON STOCK
All references in the financial statements to the number of common shares and
related per share amounts reflect the effect of both the September 2008 and
February 2009 stock splits and the March 2010 reverse stock split.
On September 2, 2008, we effected a two (2) for one (1) forward stock split of
our issued and outstanding common stock. As a result, our authorized capital was
not increased and remained at 75,000,000 shares of common stock with a par value
of $0.001 and our issued and outstanding shares increased from 6,000,000 shares
of common stock to 12,000,000 shares of common stock.
10
On November 5, 2008, we effected a two (2) for one (1) forward stock split of
our authorized, issued and outstanding common stock; however, this stock split
was not effective until February 24, 2009. As a result, our authorized capital
was increased from 75,000,000 to 150,000,000 shares of common stock with a par
value of $0.001 and our issued and outstanding shares increased from 13,100,000
shares of common stock to 26,200,000 shares of common stock.
On March 4, 2010, we effected a two (2) for one (1) reverse stock split of our
issued and outstanding common stock As a result, our authorized capital was
decreased from 150,000,000 to 75,000,000 shares of common stock with a par value
of $0.001 and our issued and outstanding shares decreased from 80,100,000 to
40,050,000.
On October 22, 2009, we sold 50,000 shares of common stock for $25,000.
On December 11, 2009, we sold 150,000 shares of common stock for $30,000.
On January 7, 2010, we sold 100,000 shares of common stock for $20,000.
On January 13, 2010, we sold 50,000 shares of common stock for $10,000.
On January 27, 2010, we sold 300,000 shares of common stock for $60,000.
On January 28, 2010, we sold 500,000 shares of common stock for $100,000.
NOTE 7. COMMITMENTS & CONTINGENCIES
On January 29, 2010, we entered into an agreement with a consultant for various
investor relations, public relations, direct marketing and other related
services, for a one-year period. The Company paid $150,000 of cash during
January 2010 and issued 2,000,000 shares of common stock subsequent to January
2010. $50,000 of the cash paid was for a non-refundable deposit and recognized
as an expense in the statement of operations for the six month period ended
January 31, 2010. $100,000 of the cash paid was for future services to be
provided by the consultant, was recognized as a prepaid expense in the balance
sheet as of January 31, 2010 and will be amortized to expense over the requisite
service period.
Upon the acquisition of TMG Partners, LLC, the Company assumed an agreement to
acquire certain leases. Under the terms of the agreement, the Company is
committed to fund approximately $1,055,000 for leases; the Company had paid
$955,000 and owed $100,000 of the remaining commitment and is obligated to pay
the remaining upon request.
The Company completed an acquisition, effective on February 22, 2010, of Esconde
Resources, Inc. ("Esconde") and Permian Legend Petroleum, Inc., ("Permian" and
together with Esconde, the "Acquired Entities") pursuant to an Agreement and
Plan of Merger, dated February 19, 2010, by and among the Company, Pertex
Acquisition, Inc., a Texas corporation and wholly-owned subsidiary of the
Company ("Merger Sub") and the Acquired Entities (the "Merger Agreement").
As a result of the Merger Agreement, the Company assumed the following
obligations:
(1) Obligations of Permian under certain debt agreements by and between Permian
and American State Bank of Odessa, Texas ("ASB") dated August 1, 2008, as
amended ("Permian Loan Agreement"); and
(2) Obligations of Esconde under certain debt agreements by and between Esconde
and ASB dated December 15, 2009 ("Esconde Note" and together with the Permian
Loan Agreement, the "Assumed Loans").
11
On March 4, 2010 the Acquired Entities received notice ("Default Notice") from
ASB that they were in default of the Assumed Loans because amounts were owed
under each of the Assumed Loans, which matured on March 1, 2010. Specifically,
the Acquired Entities were notified that $688,724 plus accrued interest was owed
under the Permian Loan Agreement and $299,282 plus accrued interest was owed
under the Esconde Note.
In the Default Notice, ASB notified the Company that if all amounts due, plus
accrued interest, late charges and attorney's fees were not paid to ASB within
10 days receipt of the Default Notice, ASB would proceed to foreclose on (1)
with respect to the Permian Loan Agreement, certain oil and gas properties
located in Haskel, Jones, Nolan, Reagan, Runnels and Taylor County, Texas, and
(2) with respect to the Esconde Note, certain oil and gas properties located in
Borden, Garza and Scurry County, Texas. Moreover, ASB asserted that if the
foreclosure process resulted in any deficiency, it would pursue a deficiency
judgment against the Acquired Entities. These properties represent a substantial
portion of the assets of the Acquired Entities. The Company is currently in
negotiations with ASB for an extension of time to pay all amounts due.
NOTE 8. SUBSEQUENT EVENTS
On February 8, 2010, we issued 1,000,000 shares of Common Stock pursuant to the
terms of an agreement between us and a consultant for various investor
relations, public relations, direct marketing and other related services, dated
January 29, 2010, as previously disclosed by us on Form 8-K filed on February 4,
2010.
On February 22, 2010, the Company redeemed 4,300,000 shares of its common stock
from its founder for no consideration, Albert Abah, reducing the number of its
issued and outstanding shares to 20,050,000.
On February 22, 2010, the Company issued an aggregate of 20,000,000 shares of
its common stock in the acquisition of Esconde and Permian, both of which were
privately held companies incorporated in the State of Texas, pursuant to the
Merger Agreement. The Merger Agreement provides for the merger of the Acquired
Entities with and into the Merger Sub, with the Merger Sub continuing as the
surviving entity in the merger and a wholly-owned subsidiary of the Company (the
"Merger"). As a result of the Merger, the Company is now headquartered in
Midland, Texas. In connection with the Merger: (1) Mr. Michael Maguire resigned
as the Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, President, Treasurer, and Secretary of the Company effective as of
February 19, 2010, and as a director of the Company effective as of February 28,
2010; (2) Mr. Lou Schiliro resigned as a director of the Company effective as of
February 28, 2010; (3) Mr. Ronnie L. Steinocher was elected and appointed the
Chief Executive Officer, President, a director and Chairman of the board of
directors of the Company effective as of February 22, 2010; and (4) Ms. Lisa P.
Hamilton was elected and appointed the Executive Vice President, Chief Financial
Officer, Treasurer, Secretary, and a member of the Board effective as of
February 22, 2010.
On March 4, 2010, we effected a two (2) for one (1) reverse stock split of our
issued and outstanding common stock. As a result, our authorized capital was
decreased from 150,000,000 to 75,000,000 shares of common stock with a par value
of $0.001 and our issued and outstanding shares decreased from 80,100,000 to
40,050,000.
On March 10, 2010, the Company signed a non-binding term sheet for up to a $10
million equity line with Kodiak Capital Group, LLC of New York City, facilitated
by Starlight Investments, LLC ("Starlight"), a Houston based investment bank.
Under the terms of the term sheet, Baron Energy may elect to receive as much as
$10 million from Kodiak in common stock purchases over the next three years,
subject to the parties entering into mutually acceptable investment agreements.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This quarterly report contains forward-looking statements that involve risk and
uncertainties. We use words such as "anticipate", "believe", "plan", "expect",
"future", "intend", and similar expressions to identify such forward-looking
statements. Investors should be aware that all forward-looking statements
contained within this filing are good faith estimates of management as of the
date of this filing. Our actual results could differ materially from those
anticipated in these forward-looking statements.
GENERAL INFORMATION
You should read the following summary together with the financial statements and
related notes that appear elsewhere in this report. In this report, unless the
context otherwise denotes, references to "we", "us", "our", "Company", "Baron"
and "Baron Energy" are to Baron Energy Inc. (formerly Nevwest Explorations
Corp.).
Baron Energy Inc. was incorporated as Nevwest Explorations Corp. in the State of
Nevada on July 24, 2007 to engage in the acquisition, exploration and
development of natural resource properties. Effective September 2, 2008, we
changed our name from Nevwest Explorations Corp. to Baron Energy Inc. As of
January 31, 2010, we were an exploration stage company with no significant
revenues and a limited operating history. The principal executive offices are
located at 3753 Howard Hughes Parkway, Las Vegas, NV 89169. The telephone and
fax number is (702) 993-7424.
We completed a form SB-2 Registration Statement under the Securities Act of 1933
with the U.S. Securities and Exchange Commission registering 6,000,000 shares at
a price of $0.01 per share. The offering was completed on April 8, 2008 for
total proceeds to the Company of $60,000.
On July 9, 2008 our common shares were approved for trading on the
Over-the-Counter Bulletin Board under the symbol "NVWT". On September 2, 2008
the symbol was changed to "BRON" and on February 24, 2009 the symbol was changed
to "BROED".
On July 31, 2008, we discontinued our business plan to invest in minerals and
changed our business plan to the acquisition, exploration, development and
production of oil and gas.
On September 2, 2008, we effected a two (2) for one (1) forward stock split of
our issued and outstanding common stock. As a result, our authorized capital was
not increased and remained at 75,000,000 shares of common stock with a par value
of $0.001 and our issued and outstanding shares increased from 6,000,000 shares
of common stock to 12,000,000 shares of common stock.
On November 5, 2008, we effected a two (2) for one (1) forward stock split of
our authorized, issued and outstanding common stock; however, this stock split
was not effective until February 24, 2009. As a result, our authorized capital
was increased from 75,000,000 to 150,000,000 shares of common stock with a par
value of $0.001 and our issued and outstanding shares increased from 13,100,000
shares of common stock to 26,200,000 shares of common stock.
On March 4, 2010 pursuant to the Certificate of Change to the Company's Articles
of Incorporation filed with the Secretary of State of Nevada, we effected a two
(2) for one (1) reverse stock split of our issued and outstanding common stock .
As a result of the reverse split, the number of outstanding shares of the
Company's common stock was reduced to 40,050,000 from 80,100,000, and the number
of authorized but unissued shares of the Company's common stock was reduced to
75,000,000 from 150,000,000.
13
On August 29, 2008, we sold 700,000 shares of common stock for $350,000.
On October 16, 2008, we sold 300,000 shares of common stock for $150,000.
On January 29, 2009, we sold 100,000 shares of common stock for $50,000.
On April 6, 2009, we issued 9,000,000 shares of common stock for 100% membership
interest in TMG Partners, LLC valued at $4,500,000.
On April 29, 2009, we sold 100,000 shares of common stock for $50,000.
On October 22, 2009, we sold 50,000 shares of common stock for $25,000.
On December 11, 2009, we sold 150,000 shares of common stock for $30,000.
On January 7, 2010, we sold 100,000 shares of common stock for $20,000.
On January 13, 2010, we sold 50,000 shares of common stock for $10,000.
On January 27, 2010, we sold 300,000 shares of common stock for $60,000.
On January 28, 2010, we sold 500,000 shares of common stock for $100,000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2010 AND 2009
We had no revenues during the three months ended January 31, 2010 and 2009.
For the three months ended January 31, 2010 and 2009, our general and
administrative expenses were $119,230 and $32,065, respectively. The increase is
primarily due to marketing and legal fees incurred during the quarter to assist
with the growth of Baron and the subsequent acquisition of acquisition of
Esconde and Permian, both of which were privately held companies .
SIX MONTHS ENDED JANUARY 31, 2010 AND 2009
We had no revenues during the six months ended January 31, 2010 and 2009.
For the six months ended January 31, 2010 and 2009, our general and
administrative expenses were $163,277 and $93,025, respectively. The increase is
primarily due to marketing and legal fees incurred during the quarter to assist
with the growth of Baron and the subsequent acquisition of acquisition of
Esconde and Permian, both of which were privately held companies.
For the six months ended January 31, 2010 and 2009, our lease operating expenses
were $6,653 and $0, respectively. The increase is primarily due to lease
operating expenses relating to the Green Lease wells. The Green Lease wells are
currently not producing and have been fully impaired.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2010, we had cash of $5,630 and working capital of $90,025.
This compares to cash of $12,217 and working capital of $14,954 at July 31,
2009. As of January 31, 2010, we had a deficit accumulated during the
14
exploration stage of $5,335,096. Baron will need to generate revenues to achieve
profitability. To the extent that increases in its operating expenses precede or
are not subsequently followed by commensurate revenues, or that Baron is unable
to adjust operating expense levels accordingly, the Company's business, results
of operations and financial condition would be materially and adversely
affected. There can be no assurances that the Company can achieve or sustain
profitability or that the Company's operating losses will not increase in the
future. These factors raise substantial doubt regarding Baron's ability to
continue as a going concern.
We are in the process of establishing a sufficient ongoing source of revenues to
cover our operating costs. The ability of the Company to continue as a going
concern is dependent on our ability to fulfill the business plan.
If we experience a shortage of funds prior to generating revenues from
operations we may utilize funds from our director, who has informally agreed to
advance funds to allow us to pay for operating costs, however, he has no formal
commitment, arrangement or legal obligation to advance or loan funds to us.
As part of the merger between Baron Energy, Inc. and the Pertex LP companies,
Pertex management will become the new management team for Baron Energy, Inc.
This highly experienced management team that has worked together for more than
17 years will be responsible for developing the company's vision and business
plan execution, including sourcing of capital, producing property acquisitions,
and day-to-day management of its oil and gas assets. Baron intends to focus its
efforts on the development and exploitation of its South Texas property
primarily through joint ventures with industry partners. In addition the company
will continue taking advantage of low-risk opportunities on its existing acreage
while continuing to consider exploratory opportunities by applying technology
and capital to deeper zones with significant upside potential. In conjunction,
Baron will pursue accretive acquisitions in core areas.
On March 10, 2010, the Company signed a non-binding term sheet for up to a $10
million equity line with Kodiak Capital Group, LLC of New York City, facilitated
by Starlight Investments, LLC ("Starlight"), a Houston based investment bank.
Under the terms of the term sheet, Baron Energy may elect to receive as much as
$10 million from Kodiak in common stock purchases over the next three years,
subject to the parties entering into mutually acceptable investment agreements.
CASH FLOW FROM OPERATING ACTIVITIES
Cash used in operating activities for the six months ended January 31, 2010 and
2009 were $251,587 and $124,160, respectively. The increase is primarily due to
our prepaid marketing agreement signed in January 2010. On January 29, 2010, we
entered into an agreement with a consultant for various investor relations,
public relations, direct marketing and other related services, for a one-year
period. The Company paid $150,000 of cash during January 2010 and issued
2,000,000 shares of common stock subsequent to January 2010. $50,000 of the cash
paid was for a non-refundable deposit and recognized as an expense in the
statement of operations for the six month period ended January 31, 2010.
$100,000 of the cash paid was for future services to be provided by the
consultant, was recognized as a prepaid expense in the balance sheet as of
January 31, 2010 and will be amortized to expense over the requisite service
period.
CASH FLOW FROM INVESTING ACTIVITIES
Cash used in investing activities for the three months ended January 31, 2010
and 2009 were $0 and $414,656, respectively. The decrease is due to $413,500 of
15
cash used for the acquisition of oil and gas properties in the six month period
ended January 31, 2009 and no acquisitions being made in the six month period
ended January 31, 2010.
CASH FLOW FROM FINANCING ACTIVITIES
Cash provided by financing activities for the three months ended January 31,
2010 and 2008 were $245,000 and $489,571, respectively. The decrease is due to
$489,571 and $245,000 proceeds from the sale of our common stock from private
placements for the six month period ended January 31, 2009 and 2010,
respectively.
HEDGING
We did not hedge any oil or natural gas production during the quarters ending
January 31, 2010 or 2009 and have not entered into any such hedges from January
31, 2010 through the date of this filing.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
On January 29, 2010, we entered into an agreement with a consultant for various
investor relations, public relations, direct marketing and other related
services, for a one-year period. The Company paid $150,000 of cash during
January 2010 and issued 2,000,000 shares of common stock subsequent to January
2010. $50,000 of the cash paid was for a non-refundable deposit and recognized
as an expense in the statement of operations for the six month period ended
January 31, 2010. $100,000 of the cash paid was for future services to be
provided by the consultant, was recognized as a prepaid expense in the balance
sheet as of January 31, 2010 and will be amortized to expense over the requisite
service period.
Upon the acquisition of TMG Partners, LLC, the Company assumed an agreement to
acquire certain leases. Under the terms of the agreement, the Company is
committed to fund approximately $1,055,000 for leases; the Company had paid
$955,000 and owed $100,000 of the remaining commitment and is obligated to pay
the remaining upon request.
The Company completed an acquisition, effective on February 22, 2010, of Esconde
Resources, Inc. ("Esconde") and Permian Legend Petroleum, Inc., ("Permian" and
together with Esconde, the "Acquired Entities") pursuant to an Agreement and
Plan of Merger, dated February 19, 2010, by and among the Company, Pertex
Acquisition, Inc., a Texas corporation and wholly-owned subsidiary of the
Company ("Merger Sub") and the Acquired Entities (the "Merger Agreement").
As a result of the Merger Agreement, the Company assumed the following
obligations:
(1) Obligations of Permian under certain debt agreements by and between Permian
and American State Bank of Odessa, Texas ("ASB") dated August 1, 2008, as
amended ("Permian Loan Agreement"); and
(2) Obligations of Esconde under certain debt agreements by and between Esconde
and ASB dated December 15, 2009 ("Esconde Note" and together with the Permian
Loan Agreement, the "Assumed Loans").
On March 4, 2010 the Acquired Entities received notice ("Default Notice") from
ASB that they were in default of the Assumed Loans because amounts were owed
under each of the Assumed Loans, which matured on March 1, 2010. Specifically,
the Acquired Entities were notified that $688,724 plus accrued interest was owed
under the Permian Loan Agreement and $299,282 plus accrued interest was owed
under the Esconde Note.
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In the Default Notice, ASB notified the Company that if all amounts due, plus
accrued interest, late charges and attorney's fees were not paid to ASB within
10 days receipt of the Default Notice, ASB would proceed to foreclose on (1)
with respect to the Permian Loan Agreement, certain oil and gas properties
located in Haskel, Jones, Nolan, Reagan, Runnels and Taylor County, Texas, and
(2) with respect to the Esconde Note, certain oil and gas properties located in
Borden, Garza and Scurry County, Texas. Moreover, ASB asserted that if the
foreclosure process resulted in any deficiency, it would pursue a deficiency
judgment against the Acquired Entities. These properties represent a substantial
portion of the assets of the Acquired Entities. We are currently in negotiations
with ASB for an extension of time to pay all amounts due.
RELATED PARTY TRANSACTIONS
None.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
is based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities and expenses.
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act")) are designed to
ensure that information required to be disclosed in reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and forms
and that such information is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosures.
Under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on the
evaluation, our management concluded that the design and operation of such
disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in our internal control over financial reporting
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our management is not aware of any significant litigation, pending or
threatened, that would have a significant adverse effect on our financial
position or results of operations.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors set forth in our Annual
Report on Form 10-K for the year ended July 31, 2009, as filed with the SEC on
October 29, 2009. The risk factors disclosed in our Annual Report on Form 10-K
for the fiscal year ended July 31, 2009, in addition to the other information
set forth in this quarterly report, could materially affect our business,
financial condition or results of operations. Additional risks and uncertainties
not currently known to us or that we deem to be immaterial could also materially
adversely affect our business, financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 22, 2009, we sold 50,000 shares of common stock for $25,000 for
working capital purposes.
On December 11, 2009, we sold 150,000 shares of common stock for $30,000 for
working capital purposes.
On January 7, 2010, we sold 100,000 shares of common stock for $20,000 for
working capital purposes.
On January 13, 2010, we sold 50,000 shares of common stock for $10,000 for
working capital purposes.
On January 27, 2010, we sold 300,000 shares of common stock for $60,000 for
working capital purposes.
On January 28, 2010, we sold 500,000 shares of common stock for $100,000 for
working capital purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The following exhibits are included with this quarterly filing. Those marked
with an asterisk and required to be filed hereunder, are incorporated by
reference and can be found in their entirety in our Form SB-2 Registration
Statement, filed under SEC File Number 333-146627, at the SEC website at
www.sec.gov:
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation*
3.2 Bylaws*
31.1 Sec. 302 Certification of Principal Executive Officer
31.2 Sec. 302 Certification of Principal Financial Officer
32.1 Sec. 906 Certification of Principal Executive Officer
32.2 Sec. 906 Certification of Principal Financial Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 17, 2010 /s/ Lisa Hamilton
---------------------------------------
By: Lisa Hamilton
(Executive Vice President and
Chief Financial Officer)
20