EXHIBIT 99.1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Baron Energy, Inc.
New Braunfels, Texas
We have audited the accompanying combined balance sheets of Esconde Resources LP
and Permian Legend Petroleum LP (the "Combined Partnerships") as of July 31,
2009 and 2008 and the related combined statements of operations, partners'
deficit and cash flows for the years ended July 31, 2009 and 2008. These
companies are under common ownership and common management. These financial
statements are the responsibility of the Combined Partnerships' management. Our
responsibility is to express an opinion on the combined financial statements
based on our audits.
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 misstatement. The Combined
Partnerships are not required to have, nor were we engaged to perform, an audit
of their internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Combined
Partnerships' internal control over financial reporting. Accordingly, we express
no such opinion. 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the Combined
Partnerships as of July 31, 2009 and 2008, and the results of their operations
and their cash flows for the periods described above, in conformity with
accounting principles generally accepted in the United States.
/s/ GBH CPAs, PC
--------------------------------
GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
February 13, 2012
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ESCONDE RESOURCES LP AND PERMIAN LEGEND PETROLEUM LP
COMBINED BALANCE SHEETS
--------------------------------------------------------------------------------
July 31,
-----------------------------------
2009 2008
------------ ------------
ASSETS:
CURRENT ASSETS
Cash $ 1,182 $ 5,664
Accounts receivable 51,930 156,807
------------ ------------
Total current assets 53,112 162,471
PROPERTY AND EQUIPMENT
Oil and gas properties using the successful efforts method of accounting 1,690,710 3,087,405
Investment in Sierra - related party 216,000 216,000
Restricted cash 50,336 50,770
------------ ------------
TOTAL ASSETS $ 2,010,158 $ 3,516,646
============ ============
LIABILITIES AND PARTNERS' DEFICIT:
CURRENT LIABILITIES:
Accounts payable $ 193,956 $ 202,567
Accrued expenses 385,183 165,533
Accounts payable and accrued liabilities - related parties 427,424 263,508
Notes payable, net of debt discount $17,769 and $41,801 2,735,644 3,653,058
Notes payable - related parties 90,748 24,700
Production payable 109,120 110,565
------------ ------------
Total current liabilities 3,942,075 4,419,931
Asset retirement obligations 279,164 264,585
------------ ------------
TOTAL LIABILITIES 4,221,239 4,684,516
CONTINGENCIES AND COMMITMENTS -- --
PARTNERS' DEFICIT (2,211,081) (1,167,870)
------------ ------------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 2,010,158 $ 3,516,646
============ ============
The accompanying notes are an integral part of these
combined financial statements.
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ESCONDE RESOURCES LP AND PERMIAN LEGEND PETROLEUM LP
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 2009 AND 2008
--------------------------------------------------------------------------------
2009 2008
------------ ------------
OIL AND GAS REVENUES $ 745,301 $ 1,510,810
COSTS AND OPERATING EXPENSES:
Lease operating expenses 701,199 1,059,266
Depreciation, depletion, amortization and accretion 214,521 221,466
Impairment of oil and gas properties 900,668 154,953
General and administrative 154,755 225,912
Gain on the sale of oil and gas properties (473,465) --
------------ ------------
Total costs and operating expenses 1,497,678 1,661,597
------------ ------------
OPERATING LOSS (752,377) (150,787)
------------ ------------
OTHER (INCOME) EXPENSE:
Interest expense 432,434 451,583
Other (income) expense (3,917) 3,587
------------ ------------
Total other (income) expense 428,517 455,170
------------ ------------
NET LOSS $ (1,180,894) $ (605,957)
============ ============
The accompanying notes are an integral part of these
combined financial statements.
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ESCONDE RESOURCES LP AND PERMIAN LEGEND PETROLEUM LP
COMBINED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED JULY 31, 2009 AND 2008
--------------------------------------------------------------------------------
Partnerships'
(Deficit)
------------
Balance at August 1, 2007 $ (645,220)
Contributions 75,000
Partnership units issued as compensation 25,000
Withdrawals (16,693)
Net loss (605,957)
------------
Balance at July 31, 2008 $ (1,167,870)
============
Contributions $ 150,000
Withdrawals (12,317)
Net loss (1,180,894)
------------
Balance at July 31, 2009 $ (2,211,081)
============
The accompanying notes are an integral part of these
combined financial statements.
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ESCONDE RESOURCES LP AND PERMIAN PETROLEUM LEGEND LP
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2009 AND 2008
--------------------------------------------------------------------------------
2009 2008
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,180,894) $ (605,957)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation, depletion, and amortization 185,373 192,854
Accretion of asset retirement obligations 29,148 28,612
Impairment of assets 900,668 154,953
Partnership units issued as compensation -- 25,000
Gain on sale of oil and gas properties (473,465) --
Amortization of debt discount 24,032 31,537
Changes in operating assets and liabilities:
Accounts receivable 104,877 (76,040)
Accounts payable (7,445) (36,693)
Accrued expenses 219,650 108,819
Accounts payable and accrued expenses- related party 163,916 263,508
------------ ------------
Net cash provided by (used in) operating activities (34,140) 86,593
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest received on restricted cash 434 --
Restricted cash deposits -- (50,770)
Proceeds from sale of oil and gas properties 775,000 --
Purchase of oil and gas properties (6,616) (2,099,924)
------------ ------------
Net cash provided by (used in) in investing activities 768,818 (2,150,694)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 19,926 2,350,000
Repayments of notes payable (956,092) (464,368)
Proceeds from notes payable- related party 60,768 2,550
Principal payments on production payable (1,445) (1,851)
Partner contributions 150,000 75,000
Partner distributions (12,317) (16,693)
------------ ------------
Net cash provided by (used in) financing activities (739,160) 1,944,638
------------ ------------
INCREASE IN CASH (4,482) (119,463)
CASH, BEGINNING OF YEAR 5,664 125,127
------------ ------------
CASH, END OF YEAR $ 1,182 $ 5,664
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ -- $ --
============ ============
Interest paid $ 188,709 $ 311,227
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Increase in asset retirement obligations $ -- $ 207,282
============ ============
The accompanying notes are an integral part of these
combined financial statements.
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ESCONDE RESOURCES LP AND PERMIAN LEGEND PETROLEUM LP
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND MERGER
The Combined Partnerships are commonly-controlled, privately-held companies
organized in the State of Texas. The Combined Partnerships own and operate oil
and gas working interests in Texas. On February 22, 2010, Esconde Resources LP
("Esconde LP") was converted into Esconde Resources, Inc. ("Esconde"), a Texas
corporation, and Permian Legend Petroleum LP ("Permian LP") was converted into
Permian Legend Petroleum, Inc. ("Permian"), a Texas corporation.
On February 22, 2010, Pertex Acquisition, Inc. ("Merger Sub"), a Texas
corporation and wholly-owned subsidiary of Baron Energy, Inc. ("Baron"),
completed the acquisition of Esconde and Permian (collectively, the " Acquired
Entities") pursuant to an Agreement and Plan of Merger dated February 19, 2010
(the "Merger Agreement"). As a result of the Merger, operations are now
headquartered in New Braunfels, Texas.
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 Baron (the "Merger").
Under the terms of the Merger Agreement, at the closing of the Merger:
o all of the issued and outstanding shares of common stock of Esconde were
converted into and exchanged for an aggregate 10,000,000 shares of common stock
(20,000,000 Baron shares pre-split) in Baron, par value $0.001 per share. There
were no issued and outstanding options or other convertible securities
convertible into common stock of Esconde.
o all of the issued and outstanding shares of common stock of Permian were
converted into and exchanged for an aggregate 10,000,000 shares of common stock
(20,000,000 Baron shares pre-split) in Baron, par value $0.001 per share. There
were no issued and outstanding options or other convertible securities
convertible into common stock of Permian.
The 20,000,000 shares of Baron common stock (40,000,000 Baron shares pre-split)
issued in the Merger represent a 50% ownership in Baron.
The assets acquired in the Merger included approximately 3,100 gross acres and
oil and gas working interests located in the Permian Basin of west Texas and the
counties of Borden, Garza, Jones, Runnels, Scurry, and Taylor.
The transaction was accounted for as a Reverse Merger. Baron issued 50% of its
shares to acquire all of the shares of Esconde and Permian resulting in a change
in control in which the former holders of the Combined Partnerships became the
controlling shareholders, directors and management of Baron. The Reverse Merger
is being accounted for as a "Reverse Acquisition" in which the Combined
Partnerships are deemed to be the accounting acquirer ("Acquirer") and Baron is
deemed to be the accounting acquiree ("Acquiree"). Consequently, the assets and
liabilities and the historical operations reflected in the financial statements
prior to the Reverse Acquisition will be those of the Combined Partnerships and
are recorded at the historical cost basis of the Combined Partnerships. The
financial statements after completion of the Reverse Acquisition will include
the assets and liabilities of the Combined Partnerships and the Acquiree and the
histori cal operations of the Combined Partnerships and the Acquiree and its
subsidiaries from the closing date of the Reverse Acquisition. In accordance
with ASC 805, the assets and liabilities of the Acquiree at the date of the
acquisition have been recorded at fair value.
Baron continues to be a "smaller reporting company," as defined under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), following the
Reverse Acquisition.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The Combined Financial Statements include the accounts of the Combined
Partnerships which are entities under common control and management. All
transactions and accounts between and among the Combined Partnerships have been
eliminated. The Combined Partnerships have evaluated subsequent events through
February 13, 2012, which is the date the Combined Financial Statements were
available to be issued.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
The Combined Partnerships' financial statements are based on a number of
significant estimates including the selection of the useful lives for property
and equipment, asset retirement obligations and the oil and gas reserve
quantities which are the basis for the calculations of depreciation, depletion,
and impairment of property and equipment. The Combined Partnerships' reserve
quantities are determined by an independent petroleum engineering firm. However,
management emphasizes that estimated reserve quantities are inherently imprecise
and that estimates of more recent discoveries are more imprecise than those for
properties with long production histories. Accordingly, the Combined
Partnerships' estimates are expected to change as future information becomes
available.
Cash and Cash Equivalents
The Combined Partnerships consider all highly liquid investments with an
original maturity of three months or less to be cash equivalents. At July 31,
2009 and 2008, cash and cash equivalents include cash on hand and cash in
depository institutions and commercial banks. FDIC insured these deposits up to
$250,000 during 2009 and 2008.
Restricted Cash
As of July 31, 2009 and 2008, the Company had $50,336 and $50,770, respectively,
of restricted cash in the form of a certificate of deposit which was classified
as a long-term asset. The restricted cash serves as collateral for an
irrevocable documentary blanket letter of credit ("LOC") in favor of the
Railroad Commission of Texas (the "Commission"). The LOC serves as a bond for
the asset retirement obligations associated with Permian LP's oil and gas
properties. The LOC must be renewed annually and continued in effect until the
conditions of the bond have been met or its release is approved by the
Commission or its authorized delegate.
Accounts Receivable
Substantially, all of the Combined Partnerships' accounts receivable consists of
accrued revenues from oil and gas sales for the years ended July 31, 2009 and
2008 sold to third party companies in the oil and gas industry. This
concentration of customers may impact the Combined Partnerships' overall credit
risk, either positively or negatively, in that these entities may be similarly
affected by changes in economic or other conditions affecting the oil and gas
industry. In determining whether or not to require collateral from a purchaser
or joint interest owner, the Combined Partnerships analyze the entity's net
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worth, cash flows, earnings and credit ratings. Historically, the Combined
Partnerships have not required collateral from a purchaser or joint interest
owner since credit losses incurred by the Combined Partnerships on receivables
have not been significant.
Accounts receivable are recorded at invoiced amount and generally do not bear
interest. Any allowance for doubtful accounts is based on management's estimate
of the amount of probable losses due to the inability to collect from customers.
As of July 31, 2009 and 2008, no allowance for doubtful accounts has been
recorded.
Concentration of Credit Risk
Financial instruments that subject the Combined Partnerships to concentration of
cash and credit risk consist of accounts receivable. All of the Combined
Partnerships' cash and cash equivalents are maintained in regional and national
financial institutions. The Combined Partnerships have exposure to credit risk
to the extent that their cash and cash equivalents exceed amounts covered by the
FDIC; however, the Combined Partnerships have not experienced any losses in such
accounts. In management's opinion, the capitalization and operating history of
the financial institutions are such that the likelihood of material loss is
remote.
Sales to two purchasers comprised 37% and 47% of the Combined Partnerships'
total oil and gas revenues for the year ended July 31, 2009 and 33% and 64% of
the Combined Partnerships' total oil and gas revenues for the year ended July
31, 2008. At July 31, 2009, the Combined Partnerships' accounts receivable
balance included a receivable from one purchaser which constituted 80% of the
total balance. The related amounts were collected between August 2009 and
October 2009. At July 31, 2008, the Combined Partnerships' accounts receivable
balance included a receivable from two purchasers which constituted 47% and 52%
of the total balance. The related amounts were collected between August 2008 and
October 2008. The Combined Partnerships believe that, in the event that its
primary customers are unable or unwilling to continue to purchase the Combined
Partnerships' production, there are a substantial number of alternative buyers
for their production at comparable prices.
Oil and Gas Properties
The Combined Partnerships use the successful efforts method of accounting for
oil and gas operations. Under this method of accounting, costs to acquire
mineral interests in oil and gas properties, to drill and equip development
wells, and to drill and equip exploratory wells that find proved reserves are
capitalized. Depletion and depreciation of capitalized costs for producing oil
and gas properties is calculated using the unit-of-production method based on
estimates of proved oil and gas reserves on a field-by-field basis. Depletion
and depreciation expense for the Combined Partnerships' oil and gas properties
were $185,373 and $192,854 for the years ended July 31, 2009 and 2008,
respectively.
Long-lived assets that are held and used by an entity are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When it is determined that
an asset's estimated future net cash flows will not be sufficient to recover its
carrying amount an impairment charge must be recorded to reduce the carrying
amount of the asset to its estimated fair value. Fair value is determined by
reference to the present value of estimated future cash flows of such
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properties. During the years ended July 31, 2009 and 2008, there were
impairments of long-lived assets of $900,668 and $154,953, respectively. All of
the Combined Partnerships' leaseholds and mineral interests are proved.
Asset Retirement Obligation
The Combined Partnerships recognize a liability for the present value of all
legal obligations associated with the retirement of tangible, long-lived assets
and capitalizes an equal amount as a cost of the asset. The cost of the
abandonment obligations, less estimated salvage values, is included in the
computation of depreciation, depletion and amortization.
Revenue Recognition
The Combined Partnerships have working interests in various oil and gas
properties which constitute their primary source of revenue. The Combined
Partnerships recognize oil and gas revenue from their interests in producing
wells as oil and gas is sold from those wells. The Combined Partnerships follow
the "sales method" of accounting for oil and natural gas revenue, so they
recognize revenue on all natural gas or crude oil sold to purchasers in
accordance with their proportionate ownership in the property. When natural gas
sales volumes exceed the Combined Partnerships'entitled share and the
accumulated overproduced balance exceeds the Combined Partnerships' share of the
remaining estimated proved natural gas reserves for a given property, the
Combined Partnerships will record a liability. Historically, sales volumes have
not materially differed from the Combined Partnerships' entitled share of
natural gas production and the Combined Partnerships did not have a material
imbalance position in terms of volumes or values at July 31, 2009 and 2008.
Fair Value of Financial Instruments
The Combined Partnerships' financial instruments consist primarily of cash,
accounts payable, accrued expenses and debt. The carrying amounts of such
financial instruments approximate their respective estimated fair value due to
the short-term maturities and approximate market interest rates of these
instruments.
The Combined Partnerships adopted ASC Topic 820, FAIR VALUE MEASUREMENTS which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The standard provides a consistent
definition of fair value which focuses on an exit price that would be received
upon sale of an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The standard also
prioritizes, within the measurement of fair value, the use of market-based
information over entity-specific information and establishes a three-level
hierarchy for fair value measurements based on the nature of inputs used in the
valuation of an asset or liability as of the measurement date.
The three-level hierarchy for fair value measurements is defined as follows:
* Level 1 - inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets;
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* Level 2 - inputs to the valuation methodology include quoted prices
for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability other than quoted prices,
either directly or indirectly, including inputs in markets that are
not considered to be active; or
* Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement
Recent Accounting Pronouncements
Recent accounting pronouncements that the Combined Partnerships have adopted or
that they will be required to adopt in the future are summarized below.
PROVED OIL AND GAS RESERVES
On January 1, 2009, the Combined Partnerships adopted the accounting guidance
applicable to SEC registrants with respect to Rule 4-10(a) of SEC Regulation S-X
regarding proved oil and gas reserves which are the 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, i.e.,
average price in preceding 12 months. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on escalation
based upon future conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation tests.
The area of a reservoir considered proved includes (A) that portion
delineated by drilling and defined by gas-oil and/or oil-water
contacts, if any; and (B) the immediately adjoining portions not yet
drilled, but which can be reasonably judged as economically productive
on the basis of available geological and engineering data. In the
absence of information on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of the
reservoir.
(ii) Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in
the "proved" classification when successful testing by a pilot
project, or the operation of an installed program in the reservoir,
provides support for the engineering analysis on which the project or
program was based.
(iii)Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs but is classified
separately as "indicated additional reserves"; (B) crude oil, natural
gas, and natural gas liquids, the recovery of which is subject to
reasonable doubt because of uncertainty as to geology, reservoir
characteristics, or economic factors; (C) crude oil, natural gas, and
natural gas liquids, that may occur in undrilled prospects.
MODERNIZATION OF OIL AND GAS REPORTING
In December 2008, the SEC issued the final rule, "MODERNIZATION OF OIL AND GAS
REPORTING ," which adopts revisions to the SEC's oil and natural gas reporting
disclosure requirements and is effective for annual reports on Forms 10-K for
years ending on or after December 31, 2009. Early adoption of the new rules is
prohibited. The new rules are intended to provide investors with a more
meaningful and comprehensive understanding of oil and natural gas reserves to
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help investors evaluate their investments in oil and natural gas companies. The
new rules are also designed to modernize the oil and natural gas disclosure
requirements to align them with current practices and changes in technology. The
new rules include changes to the pricing used to estimate reserves, the ability
to include nontraditional resources in reserves, the use of new technology for
determining reserves and permitting disclosure of probable and possible
reserves.
BUSINESS COMBINATIONS
On January 1, 2009, the Combined Partnerships adopted the accounting guidance
under ASC Topic 805 (ASC 805) on business combinations, (formerly SFAS No. 141
(R), "BUSINESS COMBINATIONS" which replaced SFAS No. 141 "BUSINESS
COMBINATION"). ASC 805 retains the fundamental requirements in SFAS 141,
including that the purchase method be used for all business combinations and for
an acquirer to be identified for each business combination. ASC 805 defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control instead of the date that the consideration is
transferred. ASC 805 requires an acquirer in a business combination, including
business combinations achieved in stages (step acquisition), to recognize the
assets acquired, liabilities assumed, and any non-controlling interest in the
acquiree at the acquisition date, to be measured at their fair values as of that
date, with limited exceptions. It also requires the recognition of assets
acquired and liabilities assumed arising from certain contractual contingencies
as of the acquisition date, measured at their acquisition-date fair values.
Additionally, ASC 805 requires acquisition-related costs to be expensed in the
period in which the costs are incurred and the services are received instead of
including such costs as part of the acquisition price. The adoption of ASC 805
did not have a material impact on the the Combined Partnerships' combined
financial statements. The provisions of ASC 805 will be applied at such time
when measurement of a business acquisition is required.
No other accounting standards or interpretations issued recently are expected to
a have a material impact on the Combined Partnerships' financial position,
operations or cash flows.
NOTE 3 - OIL AND GAS PROPERTIES
ACQUISITION OF OIL AND GAS PROPERTIES
On August 1, 2007 Permian LP acquired various properties located in Jones,
Taylor, Haskell, Nolan, and Runnels Counties, Texas from Greasewood Oil Company,
et al (the "Greasewood Properties") for cash consideration of $2,000,000,
subject to customary post-closing adjustments, of which $1,550,000 was funded
via a loan from American State Bank ("ASB"), $350,000 funded via a loan with
BaseLine Capital, Inc. ("BaseLine"), and the remaining $100,000 paid in cash.
Under the terms of the loan agreement between BaseLine and Permian LP, upon full
payment to BaseLine of any and all principal, interest and other costs under the
loan agreement ("Payout"), BaseLine had the right to a back-in working interest
on the Greasewood Properties, at BaseLine's sole election, of up to 25.00% (the
"Back-In"). On April 27, 2011, Baron (as successor-in-interest to Permian LP)
and BaseLine entered into a First Amended and Restated Loan Agreement (the
"Restated Agreement"). Under the Restated Agreement, BaseLine became entitled to
the Back-In upon the earlier to occur of Pay-Out or October 27, 2011. On
December 1, 2011, BaseLine exercised their right to back-in on our Shaffer, et
al, Shaffer "B," Shaffer "C," and Huddleston leases located in Taylor County,
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Texas. BaseLine has elected to not back-in on the remainder of the Greasewood
Properties and has no future option to do so.
CAPITALIZED COSTS AND ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
2009 2008
------------ ------------
Proved oil and gas properties $ 4,270,970 $ 4,606,840
Unproved oil and gas properties -- --
Accumulated depreciation, depletion
and impairment (2,580,260) (1,519,435)
------------ ------------
$ 1,690,710 $ 3,087,405
============ ============
SALE OF OIL AND GAS PROPERTIES
On November 10, 2008, but effective October 1, 2008, Permian LP sold all of its
interests in three leases located in Nolan County, Texas to Andalucia Oil
Company for total cash consideration of $775,000, The Combined Partnerships
recognized a gain on the sale of $473,465 during the year ended July 31, 2009,
computed as follows:
Proceeds from sale $ 775,000
Less: Transaction costs --
ARO liabilities transferred 14,569
Less: Carrying value of oil and gas properties, net (316,104)
------------
Net gain on sale $ 473,465
============
NOTE 4 - INVESTMENT IN RELATED PARTY ENTITY
Esconde LP held an investment of $216,000 in Sierra Investment Partners LP
("Sierra"), a related party with certain common ownership, at July 31, 2008 and
July 31, 2009 comprised of 230,000 partnership units. Sierra is an oil and
natural gas business.
NOTE 5 - RELATED PARTY TRANSACTIONS
Accounts payable and accrued expenses with related parties for the year ended
July 31, 2009 and 2008 were $427,424 and $263,508, respectively. The accounts
payable and accrued expenses of related parties are:
July 31, 2009 July 31, 2008
------------- -------------
SPI Operations LLC $ 12,272 $ 57,419
Permian Legend LLC 411,908 206,009
Other 3,244 80
------------ ------------
Total $ 427,424 $ 263,508
============ ============
SPI Operations LLC ("SPI") is general partner for Sierra. During 2009 and 2008,
SPI's members included the current management of Baron. SPI served as operator
on certain oil and gas properties owned or previously owned by Esconde LP. The
related party amounts shown above represent SPI billings to Esconde LP for the
costs of operating the properties. As of July 31, 2009, SPI operated two shut-in
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leases on behalf of Esconde LP, the Connell Estate and Connell "B" leases. SPI
and Sierra operate independently from the Combined Partnerships.
Permian Legend LLC ("Permian LLC") is general partner for Permian LP. Permian
LLC served as operator on all oil and gas properties owned by Permian LP. The
related party amounts shown above represent billings to Permian LP for the costs
of operating the properties and management fees. Permian LLC is controlled by
the current management of Baron.
As of July 31, 2009 and 2008, the Combined Partnerships had loans payable to
related parties in the amount of $90,748 and $24,700, respectively. The loans
were issued to provide working capital for operations. The loans bear interest
rates varying from 0% to 4% per year and $13,600 of the loans payable matured on
April 1, 2006 and is in default. The remainder has no maturity date.
Related Party Notes Payable are:
July 31, 2009 July 31, 2008
------------- -------------
1. Esconde Energy LLC $ 550 $ 550
2. Lavaca Energy, LLC 10,080 4,080
3. Pierce-Hamilton Energy Partners LP 61,806 13,270
4. PWH Resources LP 15,592 4,080
5. SJM Family LP 2,720 2,720
------------ ------------
Related Party Notes and Line of
Credit Payable 90,748 24,700
Less: Current Portion (90,748) (24,700)
------------ ------------
Long-Term Portion $ -- $ --
============ ============
1. Loan payable to Esconde Energy LLC ("Esconde LLC") dated October 12,
2007. The loan is due upon demand and has no interest rate. Esconde
LLC is controlled by the current management of Baron.
2. Promissory Note dated December 20, 2005 payable to Lavaca Energy, LLC
("Lavaca") in the amount of $7,500 bearing interest of 4%, maturing on
April 1, 2006 (the "Lavaca Promissory Note"), and other short-term
payable to Lavaca due upon demand and having no interest rate. The
Combined Partnerships are in default on the Lavaca Promissory Note as
of July 31, 2009. On March 11, 2011, Baron and Lavaca executed a debt
settlement letter pursuant to which Lavaca settled all outstanding
principal and accrued interest on the Lavaca Promissory Note for
59,615 common shares of Baron valued at $4,173. Lavaca is controlled
by the current management of Baron.
3. Promissory Note dated December 20, 2005 payable to Pierce-Hamilton
Energy Partners LP ("Pierce-Hamilton") bearing interest of 4%;,
maturing on April 1, 2006 (the "Pierce-Hamilton Promissory Note"), and
F-13
other short-term note payable to Pierce-Hamilton upon demand and
having no interest rate (the "Pierce-Hamilton Demand Note"). . The
Combined Partnerships are in default on the Pierce-Hamilton Promissory
Note. On March 11, 2011, Baron and Pierce-Hamilton executed a debt
settlement letter pursuant to which Pierce-Hamilton settled all
outstanding principal and accrued interest on the Pierce-Hamilton
Promissory Note and the Pierce-Hamilton Demand Note for 789,303 common
shares of Baron valued at $55,251.
4. Promissory Note dated December 20, 2005 payable to PWH Resources LP
("PWH") bearing interest of 4%, maturing on April 1, 2006 (the "PWH
Promissory Note"), and other short-term note payable to PWH due upon
demand and having no interest rate (the "PWH Demand Note"). The
Combined Partnerships are in default as of July 31, 2009 on the PWH
Promissory Note. On March 11, 2011, Baron and PWH executed a debt
settlement letter pursuant to which PWH settled all outstanding
principal and accrued interest on the PWH Promissory Note and the PWH
Demand Note for 232,288 common shares of Baron valued at $16,260. PWH
is a managing member of Esconde Energy.
5. Promissory Note dated December 20, 2005 payable to SJM Family L.P.
("SJM") in the amount of $5,000 bearing interest of 4%; the note
matured on April 1, 2006. The Combined Partnerships are in default on
this note as of July 31, 2009. On March 11, 2011, Baron and SJM
executed a debt settlement letter pursuant to which SJM settled all
outstanding principal and accrued interest on this promissory note for
45,215 common shares of Baron valued at $3,165. SJM is a member of
Esconde Energy.
NOTE 6 - NOTES PAYABLE
Notes payable are as follows:
July 31, 2009 July 31, 2008
------------- -------------
American State Bank ("Esconde Note") $ 172,804 $ 279,002
American State Bank Revolving Line of
Credit ("Revolver") 137,674 145,000
American State Bank ("Permian #1 Note") -- 1,426,539
American State Bank ("Permian #2 Note") -- 250,000
American State Bank ("New Permian Note") 1,003,772 --
BaseLine Capital, Inc. ("BaseLine Note 1") 156,227 158,263
BaseLine Capital, Inc. ("BaseLine Note 2") 272,266 252,113
BaseLine Capital ("BaseLine Note 3") 206,691 356,030
Charles W. Darter, Jr. ("Darter") 425,000 425,000
Jerry E Polis Family Trust ("Polis") 361,210 361,111
------------ ------------
Total Notes and Line of Credit Payable 2,735,644 3,653,058
Less: Current Portion (2,735,644) (3,653,058)
------------ ------------
Long-Term Portion $ -- $ --
============ ============
F-14
AMERICAN STATE BANK
On September 28, 2006, Esconde LP entered into a term note with ASB in the
original amount of $500,000 bearing interest at 1% plus the ASB Rate (the
"Esconde Note"); the Esconde Note had an original maturity of September 28, 2010
and is currently in default. The Esconde Note is secured by certain of the
Combined Partnerships' oil and gas properties and was guaranteed by Esconde
Energy. On March 20, 2009, ASB issued a notice of payment default on the Esconde
Note. Accordingly, as of July 31, 2009, the full outstanding balance of the
Esconde Note was included in the current portion of notes payable.
On September 28, 2006, Esconde LP entered into a revolving line of credit
payable to ASB in the original amount of $150,000 bearing interest at 1% plus
the ASB Bank Rate (the "Revolver"), with an original maturity of September 28,
2007. The Revolver is secured by certain of the Combined Partnerships' oil and
gas properties and guaranteed by Esconde Energy. The Revolver was periodically
extended as it reached maturity. On March 20, 2009, ASB issued a notice of
payment default on the Revolver. Accordingly, as of July 31, 2009, the full
outstanding balance of the Revolver was included in the current portion of notes
payable.
On September 1, 2009, the balance due under the Esconde Note was consolidated
with the Revolver and refinanced under a new term note in the amount of $309,682
bearing interest at 2% plus the ASB Rate, but in no event to be less than 6.0%,
with a maturity date of December 15, 2009 (the "New Esconde Note"). The New
Esconde Note is secured by certain of the Combined Partnerships' oil and gas
properties and guaranteed by Esconde Energy.
On December 15, 2009, the interest rate on the New Esconde Note was increased to
2.5% plus the ASB Rate (but in no event to be less than 6.5%) and the maturity
date extended to March 1, 2010.
On August 1, 2007, Permian LP entered into a term note payable to ASB in the
original amount of $1,600,000 bearing interest at the ASB Rate plus 1.0% (the
"Permian #1 Note"); with a maturity date of August 1, 2008. This note is secured
by a first lien on certain of the Combined Partnerships' oil and gas properties
and guaranteed by Permian LLC and the current management of Baron.
On May 15, 2008, Permian LP entered into a term note payable to ASB in the
original amount of $250,000 bearing interest at the ASB Rate plus 1.0% (the
"Permian #2 Note") with a maturity date of August 1, 2008. This note is secured
by a first lien on certain of the Combined Partnerships' oil and gas properties
and guaranteed by Permian LLC and the current management of Baron.
On August 1, 2008, Permian LP entered into a new term note payable to ASB in the
original amount of $1,675,000 bearing interest at the ASB Rate plus 1.0% which
consolidated the Permian #1 Note and the Permian #2 Note (the "New Permian
Note"). The New Permian Note originally matured on October 15, 2008. This note
is secured by a first lien on certain of the Combined Partnerships' oil and gas
properties and guaranteed by Permian LLC and the current management of Baron.
The note maturity was extended periodically. On May 1, 2009, the maturity date
was extended to July 15, 2009 and the interest rate increased to the ASB Rate
plus 2.0%. On May 26, 2009, Permian LP paid $10,000 to ASB for the extension of
the maturity date to July 15, 2009.
F-15
On October 15, 2009, the maturity date of the New Permian Note was extended from
July 15, 2009 to December 15, 2009 and the interest rate increased to the ASB
Rate plus 2.5%, but in no event to be less than 6.5%.
In conjunction with the extension, Permian LP entered into a new term note with
ASB, in the original amount of $50,000, dated October 15, 2009, bearing interest
at the ASB Rate plus 2.5%, but in no event to be less than 6.5% (the "Second
Term Note"). The note provides for a first lien on certain of the Combined
Partnerships' oil and gas properties and is guaranteed by Permian LLC and the
current management of Baron.
On December 15, 2009, the maturity date of the New Permian Note and Second Term
Note were extended to March 1, 2010.
On March 4, 2010, Baron, as successor-in-interest to the Combined Partnerships,
received notice ("Default Notice") from ASB that Baron was in default of the New
Esconde Note, the New Permian Note and the Second Term Note (collectively, the
"Assumed Loan Documents") because amounts were owed under each of the Assumed
Loan Documents, which matured on March 1, 2010. Specifically, Baron was notified
that $729,724 plus accrued interest was owed under the New Permian Note and
Second Term Note and $271,282 plus accrued interest was owed under the New
Esconde Note.
In the Default Notice, ABS notified Baron 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 New Permian Note and Second Term Note, certain oil and gas
properties located in Haskell, Jones, Nolan, Reagan, Runnels and Taylor County,
Texas, and (2) with respect to the New Esconde Note, certain oil and gas
properties located in Borden, Garza and Scurry County, Texas. Moreover, ABS
asserted that if the foreclosure process resulted in any deficiency, it would
pursue a deficiency judgment against Baron.
On May 1, 2010, the New Esconde Note was combined with the New Permian Note and
the Second Term Note and replaced by two term notes (the "Baron Notes") in the
original amounts of $550,000 and $450,000, both with an interest rate of the ASB
Rate plus 2.5%, never to be less than 6.5%, and a maturity date of September 1,
2010. The Baron Notes are secured by a first lien on Baron's oil and gas
properties in Borden, Garza, Scurry, Jones, Runnels, and Taylor Counties, Texas
and guaranteed by the current management of Baron.
On August 31, 2010, ASB assigned the Baron Notes with principal balances of
$450,000 and $508,334 and the Baron Truck Note with principal balance of $8,580,
as disclosed in Note 11, to Newton Energy, Inc. ("Newton"). These notes were
amended, consolidated, and restated to an amount of $1,006,000 which included
the principal balance of all notes, $5,253 in accrued interest, $22,023 in legal
fees, $10,060 in interest charges by Newton and $1,751 of cash held in an ASB
checking account (the "Newton Note"). The Newton Note has an interest rate of
13.5% and a maturity date of August 25, 2015. Interest only payments of $11,317
are due monthly for the first year. A prepayment penalty totaling $135,810 less
interest received to date is to be applied pro rata against any principal
payments made in the first year. The Company sold certain oil and gas properties
and applied the proceeds as principal payments of $193,500 on December 21, 2010
and January 3, 2011 resulting in penalties of $19,592 and $17,415, respectively.
The Newton Note is secured by a first lien on Baron's oil and gas properties in
Borden, Garza, Scurry, Jones, Runnels, and Taylor Counties, Texas. There are no
guarantees on the Newton Note.
F-16
BASELINE CAPITAL INC.
On September 28, 2006, Esconde LP entered into a promissory note payable to
BaseLine in the amount of $175,000 bearing interest of 12%; maturity on March
28, 2011 ("BaseLine Note 1"). The Combined Partnerships did not pay this note at
maturity, the note is in default, and interest is accruing at its default rate
of 18% per year. Accordingly, as of July 31, 2009, the full outstanding balance
of BaseLine Note 1 was included in the current portion of notes payable.
On September 28, 2006, Esconde LP entered into a promissory note payable to
BaseLine in the amount of $325,000 bearing interest of 12%; maturity on March
28, 2011 ("BaseLine Note 2"). The Combined Partnerships did not pay this note at
maturity, are in default on this note, and interest is accruing at the default
rate of 18% per year. Accordingly, as of July 31, 2009, the full outstanding
balance of the BaseLine Note 2 was included in the current portion of notes
payable.
Per the terms of BaseLine Note 1 and BaseLine Note 2 (collectively the "BaseLine
Esconde Notes"), BaseLine received warrants to purchase a total of 100,000
limited partner units in Esconde LP, exercisable at any time after pay off of
the BaseLine Esconde Notes or in the event of a change of control, at an
exercise price of $0.0001 per unit. The warrants had an estimated fair value of
$99,994 based on the Black-Scholes option pricing model. Esconde LP recorded the
fair value of the warrants as a debt discount to the notes. The Combined
Partnerships are amortizing the debt discount using the effective interest
method over 58 months at an effective interest rate of 12%. The amortization of
the debt discount resulted in additional interest expense of $24,032 and $31,537
during the years ended July 31, 2009 and 2008, respectively.
On February 18, 2010, in consideration for consent to the conversion of Esconde
LP into Esconde, Esconde LP agreed to issue 100,000 partnership units to
affiliates of its debt holder, BaseLine, in exchange for the cancellation of the
warrants. The remaining discount of $17,769 was accelerated and recorded as
interest expense.
On August 1, 2007, Permian LP entered into a promissory note payable to BaseLine
("BaseLine Note 3") in the amount of $500,000 bearing interest of 12% with a
maturity date of August 1, 2010. This note is secured by a second lien on the
Combined Partnerships' oil and gas properties in Jones, Nolan, Reagan, Runnels,
Haskell, and Taylor Counties, Texas (the "Mortgaged Properties") and guaranteed
by Permian LLC. Under the terms of this note, upon full payment, Baseline is
entitled to a 25% back-in working interest on the Mortgaged Properties.
At July 31, 2009, the Combined Partnerships were in default on the Baseline Note
3 with interest accruing at its default rate of 18% per year. Accordingly, as of
July 31, 2009, the full outstanding balance of this note payable was included in
the current portion of notes payable.
On January 5, 2011, BaseLine notified Baron, as successor-in-interest to the
Combined Partnerships, and the senior secured lender, Newton, of its belief that
an event of default under the BaseLine Note 3 had occurred based on a recent
sale of our rights in several oil and gas properties other than those securing
our obligations under BaseLine Note 3 and the associated loan documents.
F-17
On March 16, 2011, Baron was served with a copy of a petition filed by BaseLine
in the District Court of Midland, Texas 238th Judicial District naming Baron and
the senior secured lender, Newton, as defendants (the "Petition"). Under the
Petition, BaseLine demanded a judgment in its favor for its actual damages and
attorneys' fees and court costs, together with any pre-judgment and
post-judgment interest it may be allowed by law.
On April 27, 2011, Baron reached a settlement with BaseLine in which Baron
agreed to pay down $106,691 in principal balance and $43,309 in accrued interest
on the Baseline Note 3, pay BaseLine legal fees of $15,248, pay outstanding
management fees owed to BaseLine in the amount of $9,752 and replace BaseLine
Note 3 with a new promissory note in the amount of $100,000 bearing interest at
8.0% and maturing on May 15, 2015 ("BaseLine Note 4"). BaseLine Note 4 settled
the litigation described above and the case was dismissed. BaseLine Note 4 is
secured by a second lien on the Combined Partnerships' oil and gas properties in
Jones, Runnels, and Taylor Counties, Texas (the "New Mortgaged Properties").
Under the terms of this note, Baseline may elect to back in to a 25% working
interest on some or all of the New Mortgaged Properties (the "Back-In").
BaseLine was required to make this election within sixty days after October 27,
2011. On December 1, 2011, Baseline exercised the Back-In for specific
properties (See Note 3 - Acquisition of Properties and Note 10 - Subsequent
Events).
On May 2, 2011, the Newton Note, with a principal balance of $621,000, was
amended and restated to increase the amount to $797,750 and the Company pledged
its Green Lease, Baylor County, Texas, and its Kirkpatrick 69 and Kirkpatrick
68-1 Leases, Garza County, Texas as additional collateral. The proceeds of
$176,750 from the increase in the loan were used to pay the settlement fees to
BaseLine as discussed above and $1,750 in additional interest charges incurred
for the amended note.
CHARLES W. DARTER
On September 28, 2006, Esconde LP entered into a term note payable to Charles W.
Darter, Jr. ("Darter") in the amount of $425,000 bearing interest at 10% with a
maturity date of October 15, 2007 (the "Darter Note"). As of July 31, 2009 the
note was unpaid. This note was secured by the Combined Partnerships' Kirkpatrick
and Kildugan oil and gas properties located in Garza County, Texas.
On May 29, 2009, the Combined Partnerships received a notice of demand for
payment of the matured note. On September 14, 2009, the Combined Partnerships
received a notice of acceleration and demand. No further action has been taken
by the lender.
The Combined Partnerships are in default on this note and interest is accruing
at the default rate of 18% per year. Accordingly, as of July 31, 2009, the full
outstanding balance of the Darter note payable was included in the current
portion of notes payable.
JERRY E. POLIS FAMILY TRUST
On March 1, 2006, Esconde LP entered into a promissory note payable to the Jerry
E. Polis Family Trust ("Polis") in the amount of $361,111 bearing interest at
12% with a maturity date of August 1, 2009. The Combined Partnerships have not
made payments as due and are in default on this note. Accordingly, as of July
F-18
31, 2009, the full outstanding balance of this note payable was included in the
current portion of notes payable. No actions have been taken by the lender on
the default.
NOTE 7 - PRODUCTION PAYABLE
On April 1, 2006, Esconde LP entered into a production note payable to Polis in
the amount of $125,000 bearing interest at 12%. The principal and accrued
interest is to be paid out of at least half of the monthly net cash flows from
the Hamlett #1 well located in Scurry County, Texas. The Combined Partnerships
have not paid the monthly payments as due and are in default on this note. No
actions have been taken by the lender on the default.
NOTE 8 - ASSET RETIREMENT OBLIGATIONS
The Combined Partnerships record the fair value of a liability for asset
retirement obligations ("ARO") in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
The present value of the estimated asset retirement cost is capitalized as part
of the carrying amount of the long-lived asset and is depreciated over the
useful life of the asset. The Combined Partnerships accrue an abandonment
liability associated with its oil and gas wells when those assets are placed in
service or acquired. The ARO is recorded at its estimated fair value and
accretion is recognized over time as the discounted liability is accreted to its
expected settlement value. Fair value is determined by using the expected future
cash outflows discounted at the Combined Partnerships' credit-adjusted cost of
capital risk-free rate. No market risk premium has been included in the Combined
Partnerships' calculation of the ARO balance.
The following is a description of the changes to the Combined Partnerships'
asset retirement obligations for the years ended July 31, 2009 and 2008.
2009 2008
---------- ----------
Asset retirement obligation at beginning
of the period $ 264,585 $ 17,662
Reduction for sale of oil and gas properties (14,569) --
Liabilities incurred from drilling -- 218,311
Accretion expense 29,148 28,612
---------- ----------
Asset retirement obligation at end of period $ 279,164 $ 264,585
========== ==========
NOTE 9 - CAPITAL AND ALLOCATION OF INCOME (LOSSES)
Neither Esconde LP nor Permian LP requires partner approval for additional
capital contributions. Esconde LP did not obtain additional capital
contributions for the years ended July 31, 2009 and 2008. Permian LP obtained
additional capital contributions for the years ended July 31, 2009 and 2008 of
$150,000 and $75,000, respectively.
During the year ended July 31, 2008, Permian LP issued one partnership unit to
Dutco, L.P. representing a 5% ownership in the partnership for no cash
consideration. The unit was issued for business development assistance. Permian
LP recorded the value of the partnership unit at $25,000 based on the most
recent cash purchase of the partnership units as additional compensation
expense.
F-19
In accordance with the provisions of the limited partnership agreements of
Esconde LP and Permian LP, net capital appreciation or depreciation of the
partnerships is allocated to all partners in proportion to each partner's
opening capital account for each accounting period, as defined in the limited
partnership agreements.
2009 2008
------------ ------------
Net income (loss) $ (1,180,894) $ (605,957)
Permanent Differences - impairment of oil
and gas properties 900,668 154,953
Temporary Differences - depletion expense 54,462 119,027
------------ ------------
Taxable loss to be allocated $ (225,764) $ (331,977)
============ ============
NOTE 10 - COMMITMENTS AND CONTINGENCIES
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceedings or claims, other than those claims
described in Note 6 and Note 7, that we believe will have a material adverse
effect on our business, financial condition or operating results.
Substantially all of the oil and gas properties owned by the Combined
Partnerships is pledged as collateral security on our outstanding notes payable.
As disclosed in Note 6 and Note 7, substantially all of our notes payable are
currently in default and have been classified as current. Except as disclosed
above in Note 6 and Note 7, no claim or action has been made by the holders of
any of the Combined Partnerships' outstanding debt. Baron, as successor in
interest to the Combined Partnerships, may be subject to such claims until it is
able to remedy the status of default in each of the notes payable.
NOTE 11 - SUBSEQUENT EVENTS
Disclosure of material subsequent events of the Combined Partnerships and Baron
are included as Baron's activities represent a continuation of certain of the
activities of the Combined Partnership following the merger.
CONVERSIONS OF PARTNERSHIPS TO CORPORATIONS
On February 21, 2010, Permian LP issued an additional 4.5 partnership units for
a total of 24.5 outstanding partnership units. The additional units were issued
to its Tier 1 limited partners pursuant to the limited partnership agreement.
The units were issued and valued at $562,500 based on the most recent cash sale
of Permian LP partnership units. Permian LP recorded this amount as compensation
expense in 2010 to the Tier 1 limited partners.
On February 22, 2010, Permian LP converted from a limited partnership to Permian
with total authorized shares of 10,000,000 common shares at no par value.
Permian LP converted all of its partnership interests for one common share per
F-20
limited partnership unit. Permian LP had 24.5 partnership units outstanding and
received 24.5 shares of common stock of Permian.
On February 18, 2010, in consideration for consent to the conversion of Esconde
LP into Esconde, Esconde LP issued 100,000 partnership units to affiliates of
its debt holder, BaseLine, in exchange for the cancellation of the outstanding
warrants held by BaseLine. In addition, 963,250 partnership units of Esconde LP
were returned to its treasury and canceled. At February 21, 2010, Esconde LP had
2,470,083 partnership units outstanding.
On February 22, 2010, Esconde LP converted from a limited partnership to Esconde
with total authorized shares of 10,000,000 common shares at no par value.
Esconde LP converted all of its partnership interests for one common share per
limited partnership unit. Esconde LP had 2,470,083 partnership units outstanding
and received 2,470,083 shares of common stock of Esconde.
OBLIGATIONS ASSUMED IN CONNECTION WITH MERGER WITH BARON
As a result of the Merger Agreement, Baron assumed the following obligations:
(1) The obligations in the amount of $729,724 of Permian LP under the Loan
Agreement between Permian LP and ASB dated as of August 1, 2008, as amended (the
"Permian Loan Agreement"); and
(2) The obligations in the amount of $271,282 of Esconde LP under the First
Modification and Amendment of Term Note of ASB dated December 15, 2009 (the
"Esconde Loan Agreement" and, together with the Permian Loan Agreement, the
"Assumed Loan Documents").
See Note 6 for subsequent events related to the Assumed Loan Documents.
ACQUISITIONS OF OIL AND GAS PROPERTIES
On May 4, 2011, Baron and Pronto Limited ("Pronto") entered into an Assignment
and Bill of Sale, effective as of May 1, 2011 (the "Bill of Sale"). Pursuant to
the Bill of Sale, Baron purchased all of Pronto's working interests and a 75%
net revenue interest in the Kirkpatrick "69" Lease, and all of Pronto's
interests in the Salt Water Disposal Agreement relating to the Kirkpatrick 68-1
well, both of which are located in Garza County, Texas. Baron paid Pronto a
total of $59,000 for the assets, consisting of $35,000 in cash and 300,000
shares of common stock valued at $24,000 based on the closing stock price on
date of grant.
SALES OF OIL AND GAS INTERESTS
On October 27, 2009, and effective October 1, 2009, Permian LP sold all of its
interests in two leases located in Haskell County, Texas to SPA PETCO OSU LLC
for a total cash consideration of $500,000. The Combined Partnerships recognized
a gain on the sale of $361,526 during the six months ended January 31, 2010
computed as follows:
F-21
Gross Proceeds from sale $ 500,000
Less: Transaction costs --
Carrying value of oil and gas properties (226,749)
Extinguishment of asset retirement obligation liabilities 88,275
---------
Net gain on sale $ 361,526
=========
Simultaneously, BaseLine exercised the Back-In in the two leases. Accordingly,
Permian LP recorded the Back-In as additional interest expense on the note
payable to BaseLine and paid BaseLine $125,000 of the proceeds for the working
interests. Permian LP received $375,000 in net cash proceeds which was used to
repay the New Permian Note.
On December 21, 2010, Baron executed two identical Assignments and Bills of Sale
(collectively, the "Assignments") with each of the McCabe Family Trust
("McCabe") and the Rochford Living Trust ("Rochford" and together with McCabe,
the "Trusts") for all of Baron's non-operated working interests in oil and gas
leases in Borden and Garza Counties, Texas and certain non-operated working
interests in oil and gas leases in Scurry County, Texas (collectively, the
"Working Interests"). In addition to the Working Interests, the Trusts also
acquired all of Baron's right, title and interest in all contracts, agreements,
real and personal property, easements, equipment, fixtures, licenses, approvals,
permits, hydrocarbons, and other minerals associated with, produced from, and/or
directly related to the Working Interests ("Purchased Property"). The Trusts
paid Baron $1.18 million in cash for the Purchased Property. $387,000 of the
proceeds were utilized to partially repay the Newton Note. The Working Interests
had been previously substantially impaired. Accordingly, Baron recorded a gain
of approximately $800,000 on the sale.
Gross Proceeds from sale $ 1,180,000
Less: Transaction costs (57,200)
Carrying value of oil and gas properties (341,511)
Extinguishment of asset retirement obligation liabilities 18,611
-----------
Net gain on sale $ 799,900
===========
On December 6, 2011, and effective December 1, 2011, and pursuant to the terms
of BaseLine Note 4, BaseLine elected to back-in to a 25% working interest in our
Ashton Lease, Runnels County, Texas, and our Huddleston, Shaffer, et al, Shaffer
"B," and Shaffer "C" Leases, in Taylor County, Texas.
PARTNERSHIP DISTRIBUTIONS OF SIERRA INVESTMENT
On February 18, 2010, immediately prior to the Merger, Esconde LP distributed
all of its 230,000 partnership units in Sierra to its individual partnership
unit holders.
SHARE PAYMENTS
On March 3, 2010, Baron issued 117,650 shares of common stock, valued at
$40,000, based on the closing stock price on date of grant, to Kodiak Capital
Group, LLC as its commitment to enter into a term sheet for an equity line of
credit. The Kodiak Term Sheet was terminated effective July 15, 2010.
F-22
On March 8, 2010, Baron issued 10,000 shares of common stock to Southwest
Investment Association, Inc. in lieu of a cash payment of $2,500 for the
registration fee to make a presentation at a conference.
On April 22, 2010, Baron issued 1,000,000 shares of common stock to a third
party for consulting services valued at $250,000 based on the closing stock
price on date of grant.
On May 11, 2010, Baron issued 10,000 shares of common stock to Southwest
Investment Association, Inc. in lieu of a cash payment of $2,500 for the
registration to make a presentation at a conference.
On May 24, 2010, Baron issued 300,000 shares of common stock in payment of
$75,000 in accounts payable to a vendor.
Under the terms of the Darter Loan Agreement and Esconde Loan Agreement, the
consent of subordinated lenders Darter and Baseline was required in connection
with the Baron Notes. In order to obtain the consent of Darter, on June 15, 2010
Baron issued Darter 250,000 shares of common stock valued at $50,000 based on
the closing price of the stock on the date of grant and recorded the payment for
the modification as interest expense. In order to obtain Baseline's consent, on
June 15, 2010 Baron issued the following affiliates of Baseline an aggregate of
557,435 shares of common stock valued at $111,487 based on the closing price of
the stock the date of grant and Baron recorded the payment for the modification
as interest expense.
Name Number of Shares Value
---- ---------------- --------
Karl Reiter 27,872 $ 5,574
Jerry E. Polis Family Trust 83,615 16,723
Jerry Ehrens 83,615 16,723
Davric Corporation 362,333 72,467
-------- --------
Total 557,435 $111,487
======== ========
On June 15, 2010, Baron issued 150,000 shares of common stock to members of its
Advisory Board valued at $30,000 based on the closing price of the stock on the
date of grant.
On July 19, 2010, Baron issued 10,000 shares of common stock to Southwest
Investment Association, Inc. in lieu of a cash payment of $3,000 for the
registration fee to make a presentation at a conference.
On August 1, 2010, Baron issued 175,000 shares of common stock to third parties
for consulting services valued at $19,250 based on the closing price of the
stock on date of grant.
On August 16, 2010, Baron issued 50,000 shares of common stock to a third party
for consulting services valued at $6,000 based on the closing price of the stock
on date of grant.
On September 1, 2010, Baron issued 420,168 shares of common stock to the
Company's Chairman, President, and CEO, Ronnie L. Steinocher in lieu of a cash
payment of $50,000 in compensation valued at $50,000 based on the closing stock
price on date of grant.
F-23
On November 1, 2010, Baron issued 175,000 shares of common stock to third
parties for consulting services valued at $10,500 based on the closing price of
the stock on date of grant.
On November 15, 2010, Baron issued 85,714 shares of common stock to a third
party for consulting services valued at $6,000 based on the closing price of the
stock on date of grant.
On December 31, 2010, Baron issued 1,000,000 shares of common stock to the
Company's Chairman, President, and CEO, Ronnie L. Steinocher in lieu of a cash
payment of $50,000 in compensation based on the closing price of our common
stock for the five most recent trading days prior to December 31, 2010.
On January 1, 2011, Baron issued 200,000 shares of common stock to third parties
for consulting services valued at $16,000 based on the closing price of the
stock on date of grant.
On February 1, 2011 Baron issued 175,000 shares of common stock to third parties
for consulting services valued at $14,000 based on the closing price of the
stock on date of grant.
On February 22, 2011, Baron and Sunrise Securities Corp. ("Sunrise") executed an
engagement letter agreement (the "Sunrise Agreement") pursuant to which Sunrise
would provide financial advisory services in connection with: (1) debt and
equity financings; (2) corporate restructuring and acquisitions; and (3)
merger/tender offers with targeted acquisition(s). The Company granted Sunrise
1,250,000 warrants to purchase one share of Baron's common stock. Baron valued
the warrants at $107,257 using the Black-Scholes model.
On April 18, 2011, Baron issued 868,056 shares of common stock to its Chairman,
President, and CEO, Ronnie L. Steinocher in lieu of $75,000 of cash
compensation.
On May 1, 2011, Baron issued 175,000 shares of common stock to third parties for
consulting services valued at $14,000 based on the closing price of the stock on
date of grant.
On May 9, 2011, Baron issued 86,418 shares of common stock, in reimbursement to
a third party for costs associated with a conference valued at $5,617 based on
the closing stock price on date of grant.
On May 9, 2011, Baron issued 226,923 shares of common stock in payment of
$14,750 in accounts payable to a vendor.
On June 29, 2011, Baron issued 307,692 shares of common stock in payment of
$20,000 in accounts payable to a vendor.
On June 30, 2011, Baron issued 2,083,333 shares of common stock to its Executive
Vice President and CFO, Lisa P. Hamilton, in lieu of $150,000 of cash
compensation valued at $150,000 based on the closing stock price on date of
grant.
On June 30, 2011, Baron issued 1,041,667 shares of common stock to its President
and CEO, Ronnie L. Steinocher, in lieu of $75,000 of cash compensation valued at
$75,000 based on the closing stock price on date of grant.
F-24
On July 11, 2011, Baron issued 1,041,667 shares of common stock to its Chairman,
President, and CEO, Ronnie L. Steinocher in lieu of $75,000 of cash compensation
valued at $75,000 based on the closing stock price on date of grant.
On July 11, 2011, Baron issued 2,083,333 shares of common stock to its Executive
Vice President and CFO, Lisa P. Hamilton in lieu of $150,000 of cash
compensation valued at $150,000 based on the closing stock price on date of
grant.
On September 27, 2011, Baron issued 200,000 shares of its common stock to third
parties for consulting services valued at $10,000 based on the closing price of
the stock on date of grant.
On September 30, 2011, Baron issued 1,500,000 shares of its common stock to its
Chairman, President, and CEO, Ronnie L. Steinocher in lieu of $75,000 of cash
compensation valued at $75,000 based on the closing stock price on date of
grant.
On September 30, 2011, Baron issued 1,500,000 shares of its common stock to its
Executive Vice President and CFO, Lisa P. Hamilton in lieu of $75,000 of cash
compensation valued at $75,000 based on the closing stock price on date of
grant.
On November 18, 2011, Baron issued 10,000 shares of common stock to Southwest
Investment Association, Inc. in lieu of a cash payment of $3,000 for the
registration fee to present at a conference.
On December 15, 2011, Baron issued 250,000 shares of its common stock to a third
party for consulting services valued at $7,500 based on the closing price of the
stock on date of grant.
On December 31, 2011, Baron issued 1,668,791 shares of its common stock to its
Chairman, President, and CEO, Ronnie L. Steinocher in lieu of $57,250 of cash
compensation valued at $57,250 based on the closing stock price on date of
grant.
On December 31, 2011, Baron issued 1,474,926 shares of its common stock to its
Executive Vice President and CFO, Lisa P. Hamilton in lieu of $50,000 of cash
compensation valued at $50,000 based on the closing stock price on date of
grant.
SHARES ISSUED FOR CASH
On March 22, 2010, Baron issued 100,000 shares of common stock for cash proceeds
of $23,500, net of commissions of approximately $1,500.
On April 27, 2010, Baron issued 100,000 shares of common stock for cash proceeds
of $25,000.
On May 5, 2010, Baron issued 100,000 shares of common stock for cash proceeds of
$25,000.
On May 11, 2010, Baron issued 200,000 shares of common stock for cash proceeds
of $50,000.
F-25
SETTLEMENT OF DEBT
On March 11, 2011, Baron issued 59,615 shares of common stock valued at $4,173
based on the closing stock price on date of grant to Lavaca in settlement of all
outstanding principal and interest of $4,173 owed to Lavaca under a promissory
note dated December 20, 2005.
On March 11, 2011, Baron issued 232,288 shares of common stock valued at $17,125
based on the closing stock price on date of grant to PWH in settlement of all
outstanding principal and interest of $17,125 owed to PWH under: 1.) a
promissory note in the original amount of $7,500 dated December 20, 2005 and 2.)
a loan in the original amount of $11,512 made on April 13, 2009.
On March 11, 2011, Baron issued 45,215 shares of its common stock valued at
$3,165 based on the closing stock price on date of grant to SJM in settlement of
all outstanding principal and interest of $3,165 owed to SJM under a promissory
note dated December 20, 2005.
On March 11, 2011, Baron issued 789,303 shares of common stock valued at $60,768
based on the closing stock price on date of grant to Pierce-Hamilton in
settlement of all outstanding principal and interest of $68,291 owed to
Pierce-Hamilton under (1) a promissory note in the original amount of $5,000
dated December 20, 2005 and (2) several loans in the aggregate outstanding
amount of $65,126
ADDITIONAL FINANCING
On June 23, 2010, Baron assumed an automobile loan in the amount of $9,886
bearing interest at 9.25% (the "Baron Truck Note"). This loan was originally
between ASB and Permian LLC on a vehicle used to service Permian LP's oil and
gas properties. The note matured on August 13, 2007. On August 31, 2010,
proceeds from the Newton Note were utilized to pay this note off in its
entirety.
NOTE 12 - SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited)
In December 2008, the Securities and Exchange Commission ("SEC") announced
revisions to its regulations on oil and gas reporting. In January 2010, the
Financial Accounting Standards Board issued an accounting standards update which
was intended to harmonize the accounting literature with the SEC's new
regulations. The revised regulations were applied in estimating and reporting
our reserves as of July 31, 2009 and 2008.
The estimates of proved oil and gas reserves utilized in the preparation of the
combined financial statements were prepared by W. P. Von Gonten, independent
petroleum engineers.
Future cash inflows for 2009 were computed by applying average price for the
year to the year-end quantities of proved reserves. The 2009 average price for
the year was calculated using the 12-month period prior to the ending date of
the period covered by the report, determined as an un-weighted arithmetic
average of the first-day-of-the-month price for each month within such period.
Future cash inflows for 2008 were computed by the year end spot price to the
year-end quantities of proved reserves. The difference in average versus year
end pricing for 2009 versus 2008, respectively, is reflected as a component of
change in prices in the table below. Future development, abandonment and
production costs were computed by estimating the expenditures to be incurred in
F-26
developing and producing proved oil and gas reserves at the end of the year,
based on year-end costs. Future income taxes were computed by applying statutory
tax rates to the estimated net pre-tax cash flows after consideration of tax
basis and tax credits and carry-forwards. All of the Combined Partnerships'
reserves are located in the United States. For information about the Combined
Partnerships' results of operations from oil and gas producing activities, see
the combined statements of operations.
There are numerous uncertainties inherent in estimating quantities of proved
reserves, projecting future rates of production and projecting the timing of
development expenditures, including many factors beyond our control. The reserve
data represents only estimates. Reservoir engineering is a subjective process of
estimating underground accumulations of natural gas and oil that cannot be
measured in an exact manner. The accuracy of any reserve estimate is a function
of the quality of available data and of engineering and geological
interpretations and judgment. All estimates of proved reserves are determined
according to the rules prescribed by the SEC. These rules indicate that the
standard of "reasonable certainty" be applied to the proved reserve estimates.
This concept of reasonable certainty implies that as more technical data becomes
available, a positive, or upward, revision is more likely than a negative, or
downward, revision. Estimates are subject to revision based upon a number of
factors, including reservoir performance, prices, economic conditions and
government restrictions. In addition, results of drilling, testing and
production subsequent to the date of an estimate may justify revision of that
estimate. Reserve estimates are often different from the quantities of natural
gas and oil that are ultimately recovered. The meaningfulness of reserve
estimates is highly dependent on the accuracy of the assumptions on which they
were based. In general, the volume of production from natural gas and oil
properties we own declines as reserves are depleted. Except to the extent we
conduct successful development activities or acquire additional properties
containing proved reserves, or both, our proved reserves will decline as
reserves are produced. There have been no major discoveries or other events,
favorable or adverse, that may be considered to have caused a significant change
in the estimated proved reserves since July 31, 2009. The Combined Partnerships
emphasize that reserve estimates are inherently imprecise. Accordingly, the
estimates are expected to change as more current information becomes available.
In addition, a portion of the Combined Partnerships' proved reserves are proved
developed non-producing and proved undeveloped, which increases the imprecision
inherent in estimating reserves which may ultimately be produced.
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
The following table sets forth proved oil and gas reserves of the Combined
Partnerships, together with the changes therein, proved developed reserves and
proved undeveloped reserves for the years ended July 2009 and 2008. Units of oil
are in barrels (Bbls) and units of gas are in thousands of cubic feet (Mcf). Gas
is converted to barrels of oil equivalent (Boe) using a ratio of six Mcf of gas
per Bbl of oil.
F-27
2009 2008
--------------------- ---------------------
Oil Gas Oil Gas
(Bbl) (Mcf) (Bbl) (Mcf)
-------- -------- -------- --------
Proved reserves:
Beginning of period 296,541 69,808 80,492 75,085
Revisions (116,520) (31,096) (27,135) 103
Extensions and discoveries -- -- -- --
Sales of minerals-in-place -- -- 259,415 --
Purchases of minerals-in-place (47,323) -- -- --
Production (10,598) (4,462) (16,231) (5,380)
-------- -------- -------- --------
End of period 122,100 34,250 296,541 69,808
======== ======== ======== ========
Proved developed reserves:
Beginning of period 296,541 69,808 80,492 75,085
End of period 122,100 34,250 296,541 69,808
Proved undeveloped reserves:
Beginning of period -- -- -- --
End of period -- -- -- --
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The standardized measure of discounted future net cash flows, in management's
opinion, should be examined with caution. The basis for this table is the
reserve studies prepared by independent petroleum engineering consultants, which
contain imprecise estimates of quantities and rates of production of reserves.
Revisions of previous year estimates can have a significant impact on these
results. Also, exploration costs in one year may lead to significant discoveries
in later years and may significantly change previous estimates of proved
reserves and their valuation. Therefore, the standardized measure of discounted
future net cash flow is not necessarily indicative of the fair value of the
Combined Partnerships' proved oil and natural gas properties.
Future income tax expense was computed by applying statutory rates less the
effects of tax credits for each period presented to the difference between
pre-tax net cash flows relating to the Combined Partnerships' proved reserves
and the tax basis of proved properties and available net operating loss and
percentage depletion carryovers.
The following table sets forth the changes in the standardized measure of future
net cash flows discounted at 10% per annum relating to proved reserves for the
years ended July 31, 2009 and 2008:
2009 2008
------------ ------------
Future cash inflows $ 9,711,614 $ 41,355,165
Future costs:
Production (3,954,036) (10,967,142)
Development -- --
Income taxes -- --
------------ ------------
Future net cash inflows 5,757,578 30,388,023
10% discount factor (2,871,065) (16,774,283)
------------ ------------
Standardized measure of discounted
net cash flows $ 2,886,513 $ 13,613,740
============ ============
F-28
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES
The following table sets forth the changes in the future net cash inflows
discounted at 10% per annum:
2009 2008
------------ ------------
Beginning of period $ 13,613,740 $ 1,328,899
Sales of oil and natural gas produced,
net of production costs (44,102) (451,544)
Extensions and discoveries -- --
Net change of prices and production costs (7,240,980) 1,247,687
Change in future development costs -- --
Previous estimated development costs incurred -- --
Revisions of previous quantity estimates (2,510,838) (1,040,233)
Accretion of discount 1,361,374 132,390
Change in income taxes -- --
Purchases of reserves in place (2,292,681) 12,396,541
------------ ------------
End of period $ 2,886,513 $ 13,613,740
============ ============
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
The estimated present value of future cash flows relating to proved reserves is
extremely sensitive to prices used at any measurement period. The prices used
for each commodity for the year ended July 31, 2009 and 2008, as adjusted, were
as follows:
As of July 31, Oil Gas
-------------- ------------ ------------
2009 (average price) $ 69.26 $ 2.97
2008 end of year price $ 131.79 $ 5.50
The following table sets forth the results of operations for producing
activities for the years ended July 31, 2009 and 2008:
2009 2008
------------ ------------
Revenues $ 745,301 $ 1,510,810
Production costs (701,199) (1,059,266)
Depreciation, depletion, amortization
and impairment (1,115,189) (376,419)
Income taxes -- --
------------ ------------
Results of operations from producing
activities (excluding corporate overhead
and interest costs) $ (1,071,087) $ 75,125
============ ============
F-29
CAPITALIZED COSTS AND ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
2009 2008
------------ ------------
Proved oil and gas properties $ 4,202,330 $ 4,606,840
Unproved oil and gas properties -- --
Accumulated depreciation, depletion
and impairment (2,511,620) (1,519,435)
------------ ------------
$ 1,690,710 $ 3,087,405
============ ============
F-30