Code of Ethics
11-Jan-2010
Annual Report
Item 7 Management's Discussion and Analysis or Plan of Operations
Introduction
The following discussion is intended to facilitate an understanding of our business and results of operations and includes forward-looking statements that reflect our plans, estimates and beliefs. It should be read in conjunction with our audited consolidated financial statements and the accompanying notes to the consolidated financial statements included herein. Our actual results could differ materially from those discussed in these forward-looking statements.
The Company has never earned a profit, and has incurred an accumulated deficit of $13,306,299 as of September 30, 2009. As of September 30, 2006, the Company had raised $1,240,000 in equity. The Company has used these funds to purchase or place deposits on three oil and gas fields to begin its operations as an oil and gas exploration and production company. Revenues derived from the planned production and sale of oil will be based on the evaluation and development of fields. If our development plan is successful, it is estimated it will take approximately one year to reach production levels to sufficiently capitalize the Company on an ongoing basis. During this initial ramp up period, the Company believes it will need to raise additional funds to fully develop its fields, purchase equipment and meet general administrative expenses. The Company may seek both debt and equity financing. The Company currently has in excess of forty nine wells located on the two fields located in Texas. Each of the wells will need to be reworked to establish production at a cost of approximately $7,000 to $10,000 per well. Initial production from each well is estimated to be between two to five barrels per day. Once initial production has been established the Company intends to begin a water flood program that injects water into the oil producing zone through injector wells. The water then forces the oil towards the producing well and, if successful, may increase production of each well up to an estimated four to seven barrels per day per well. If the Company is able to produce its wells upon the re-completion the Company revenues will exceed current operating expenses if 40 barrels of oil is produced and the price of oil remains above $55.00 per barrel. The Company's success is dependent on if and how quickly it can reach these levels of production. The Company plans to use all revenues for general corporate purposes as well as, future expansion of its current oil producing properties and the acquisition of other oil and gas properties. There is no certainty that the Company can achieve profitable levels of production or that it will be able to raise additional capital through any means.
Results of Operations
Year Ended September 30, 2009 Compared With Year Ended September 30, 2008
Revenues from Operations- Revenues for the year ended September 30, 2009 and September 30, 2008 were $6,904 and $9,308 respectively. On December 5, 2004, the Company began to structure itself into an oil and gas production and exploration company. The Company has two oil and gas leases in the counties of Eastland and Callahan, Texas and has begun development of oil and gas. The company received its first revenues from oil and gas operations in March, 2008. In the next fiscal year, it is the Company's intent to increase production by placing additional wells into operation. Since it ceased its former business operations, the Company has devoted its efforts to research prospective leases and business combinations and secure financing.
Expenses from Continuing Operations - The Company incurred operating expenses of $1,155,973 for the fiscal year ended September 30,2009; an increase of $387,442 compared to $768,531 for the fiscal year ended September 30, 2008. The significant increase is primarily attributed to impairment on unproved oil and gas properties of $384,088 resulting from management's assessment of the recoverability of capitalized costs based on projected net future cash flows. Outside consultants expenses decreased by $33,180 to $13,795 for the year ended September 30, 2009. The decrease in outside consulting expense was partially offset by higher payroll compensation of $29,140. Higher stock based compensation in 2009 resulted in an unfavorable $124,000 variance when compared to the same period the prior year. Professional fees for the year ended September 30, 2009 were $11,142 lower than the same period the prior year. The lower professional fees resulted from lower marketing expense of $36,000 and lower engineering fees $12,475 offset by higher legal fees of $41,834.
Net Loss - For the fiscal year ended September 30, 2009 the Company incurred a loss of $1,276,127compared to a loss of $676,123 for the fiscal year ended September 30, 2008, a loss increase of $600,004. The major reason for the Company having a higher net loss during the fiscal year ended September 30, 2009 can be attributed to an impairment loss on unproved oil and gas properties as noted in expenses for continuing operations above. In addition, the Company having reached a settlement agreement on a legal claim raised by The Investor Relation Group Inc during the year ended September 30, 2008 resulting in the Company recognizing a gain of $204,000 in 2008.
Net Operating Loss Carry forward for Tax Purposes
The Company has tax net operating loss carry forwards totaling approximately $4,300,000, expiring in 2018 through 2029. Approximately $1,200,000 of net operating losses was incurred prior to December 12, 2002 at which date MA&N acquired 51% of the Company and are consequently subject to certain limitation described in section 382 of the Internal Revenue Code. The Company estimates that, due to the limitations and expiration dates, only $424,000 of the net operating losses incurred prior to December 12, 2002 will be available to offset future taxable income.
There can be no assurance that these deferred tax assets can ever be used. A deferred tax asset can be used only if there is future taxable income, as to which there can be no assurance in the case of the Company
Liquidity
At September 30, 2009 the company had a cash balance of $6,588. As of September 30, 2008 the company had a cash balance of $3,558 and a receivable of $1,281. This is a result of work that has been completed in the oil & gas fields and the purchase of the fields. Property and equipment was $771,752 as of September 30, 2009 compared to $1,097,783 as of September 30, 2008, a decrease of $326,031 resulting from an impairment on unproved properties of $384,088 offset by cost to refurbish wells totaling $58,058. The investment in the oil and gas fields has caused the Company a liquidity crisis. The Company has been able to borrow money from William Shrewsbury primarily to resolve the Company's liquidity needs. The Company completed its testing required by the Texas Railroad Commission as of December 28, 2007. This will allow the Company to increase production on the oil wells on the Parks lease. While the Company anticipates generating greater revenue beginning in the second quarter of 2010 the amount of production will not be sufficient to meet all of the Company's liquidity needs
Historically the Company has lacked liquidity, a result of insufficient financing alternatives available to the Company and the lack of a business strategy that produced significant revenues. Since MA&N took a controlling interest in the Company in December 2002, Mr. Neuhaus has claimed that he provided loans for operating purposes to the Company in the amount of $1,199,886 for operating purposes as of September 30, 2009. Mr. Shrewsbury has also provided the company with a short term loan of $289,997 as well as advances in the amount of $16,050. As of September 30, 2009, the Company has a recorded liability of $62,719 owed to Dexter & Dexter, Attorneys at Law for attorneys' fees and the sum of $155,077 to Jose Fuentes as payment for service.
During the 2007 fiscal year Mark Neuhaus caused the Company to issue him a note for $1,199,885 for advances he made on behalf of the Company and which the Company disputes. This disputed obligation is set forth in a convertible promissory note which pays interest at 8% per annum effective September 28, 2007. The conversion price for common stock is twenty-eight cents per share. The note is for two years and provides that it may be converted at any time during that period.
Based on current expectations, the Company will need to find additional sources of financing to meet our general corporate needs as well as the large capital requirements necessary for the production of the oil and gas in the wells we currently operate and lease, and the acquisition of additional oil and gas producing properties.
The Company currently requires operating capital of approximately $30,000 per month to meet current obligations. At this time the Company has no material revenue and is unable to meet its current obligations. In the past the Company has been able to raise capital from its shareholders/officers through stock-based compensation and advances. The Company will require the officers of the Company to continue to receive stock-based compensation and the Company will need to borrow or raise sufficient equity capitalization to meet its current obligations. In addition the Company will need to raise approximately $200,000 in working capital to complete the refurbishment and development of the leases it currently owns. If the Company is unable to raise sufficient capital to refurbish and develop its fields, it will need to find working interest partners to assist in the development of its oil and gas leases. The Company's primary challenge is to generate higher revenue from its oil and gas leases.
